What Is the Importance of Financial Ratios in Health Care Organizations?

Tracking and analyzing financial ratios is a critical practice for health care organizations. The ratios show where operating costs are moving; they help manage cash flow and provide a great baseline for analyzing profitability. Financial ratio tracking is effective for everything from a small private practice to large hospital systems. Several key ratios are essential for tracking while many small, detailed operational ratios often go unnoticed. The level of precision tracking is dependent upon implementing an efficient process for tracking minute details on a consistent basis.

Analyzing debt-to-capitalization ratios indicates the strength and long-term value of a health care organization. The ratio is important for investors and risk analysis. Health care organizations with heavy long-term debt loads, and low available capital and asset values present a risky business model. Management can use this ratio to locate opportunities for new capital expansions, debt reduction and strategic asset management that will increase the sustainability and long-term profit potential for the organization.

Excellent cash flow management is critical to operational success in the health care industry. Long billing cycles means reimbursement from medicare, medicaid, government programs, non-profit coverage programs and insurance companies requires long wait times. Cash flow ratios are also important for meeting monthly payments to lenders while meeting operational and overhead costs. A temporary line of credit can factor into cash flow ratios as an emergency line for shortfalls but calculating the ratio of cash available against the operational costs will ensure that daily needs are being met, despite long billing cycles. One method of tracking this ratio is against the number of days of cash on hand. This is the number of days an organization can run effectively with the immediate cash on hand.

Tracking detailed operational ratios helps model revenue based on key indicators like average length of stay and common occupancy rates. The variables for treatments and procedures are less predictable, but an organization can calculate baseline costs for bed fees and basic services that happen, regardless of conditions, treatments and procedures. Operational revenue models combine with ratios for accounts receivable and average payment times to manage cash flow against recurring overhead.

Managing cash flow ratios and expenses is important but determining operating margins is the end game for profitability. Margin ratios are used to analyze the profit generated from each product and procedure. Profitability is necessary to survive and grow the total market share for an organization.