Financial Planning and Analysis
This domain tests ratio construction, trend and common-size analysis, projection mechanics, and the judgment to translate numbers into a narrative a board or lender will accept.
Core ratio families
Liquidity: current ratio, quick ratio, days cash on hand. Profitability: operating margin (operating income ÷ net patient service revenue), total margin (excess of revenue over expenses ÷ total revenue), and return on net assets. Capital structure: debt to capitalization, debt service coverage, average age of plant. Activity: days in A/R, days in inventory, asset turnover. Compute on a consistent basis - mixing fiscal years, or including restricted assets in liquidity, overstates strength.
Projections and benchmarking
Build pro formas from drivers: volume, rate, payer mix, labor cost, and capital spending. Tie the balance sheet and cash flow statement to the income statement so the model balances. Benchmark against peer medians by bed size and region using cost report or rating agency data; a single ratio rarely tells a story, but a pattern - thin margin, 90 days cash, 2.5x coverage - does.
Worked example
Net patient revenue $200M; operating income $8M; nonoperating income $2M; total expenses $190M; depreciation $10M; cash and investments $45M; interest $2M; principal $6M. Operating margin = 8 ÷ 200 = 4.0%. Total margin = (8 + 2) ÷ 200 = 5.0%. Daily cash expenses = (190 − 10) ÷ 365 = $493,151, so days cash on hand = 45,000,000 ÷ 493,151 = 91.2 days. Debt service coverage = (8 + 10 + 2) ÷ (6 + 2) = 2.5x. Each figure is defensible alone; together they describe an organization with an adequate margin but thin liquidity and coverage - the story a rating presentation must address.
Traps
- Reporting total margin as operating margin by folding in investment gains.
- Annualizing a six-month period without adjusting for seasonality.
- Comparing your ratio to a national median without matching bed size, acuity, or payer mix.
- Ignoring a large one-time settlement or stimulus receipt embedded in the base year.