Speaker 1: Hello everyone. So today we are going to resume discussion about financial management in health care. And you have to keep in mind that when we say financial management in health care, we are talking about one of the most important parts of health care management. So financial management in health care involves all of the steps that are taken to guarantee a health care organization can actually continue to operate. And the primary role of financial management is actually reducing risk and managing financing to reach a health care organization's goals. And this is going to be very important for the survival and the success of the organization. So today we are going to be trying to explore some important concepts and techniques for financial management in health care. The context of health care is a little bit special, and this is actually going to make financial management a little bit different from other industries. So financial management in health care involves evaluation, planning, and long term investment. However, the complexity, riskiness, and urgency of health care are important facets to keep in mind while making financial decisions. First concept that is important is actually understanding that assessing risk is very important for the success of any organization and specifically for health care organizations. The factors that actually influence business risk for organizations demand variability, sales price variability and fluctuations, operating flexibility and the ability to adapt and respond to fluctuating and changing market conditions. Also the liability exposure uncertainty, operating leverage, and of course we should not forget input cost variability. So when it comes to the capacity increase and current market expansion, we have to keep in mind that expenditures that are actually made to increase capacity or to expand in markets that are already served is going to be always an important feature of assessing and evaluating the riskiness of the estimated cash flow. Of course, risk is going to be approached differently by different people, by different investors and managers. So the attitude towards risk is something that we need to understand. So we have to actually keep in mind that investors are going to be having three main attitudes towards risk. So they can be risk neutral, they can be risk averse, or they can be risk seeking. So risk neutral means that they are indifferent between two alternatives with different risks. Risk averse means that they are going to prefer a guaranteed outcome. And finally, risk seeking, this means that they are comfortable to take a higher level of risk in order to be able to earn a higher return. And this can sometimes mean they will never or they will not gain anything. So they will end up with nothing. So this means that they are willing to take higher levels of risks if there is a potential or any opportunity for having higher gains. Generally and virtually all investors are risk averse. They don't want to take risk. They prefer a guaranteed outcome. So if we are given two investment alternatives with similar returns, but with different levels of risk, generally speaking, investors will end actually by choosing or favoring the lower risk option. This actually means that higher risk investments require higher rates of return. It is risk aversion that actually makes risk concepts so important to financial decision making and very crucial for the right financial management decisions. There are many risk assessment techniques in this context. Generally we will see that the most used ones are these three techniques. These are the most commonly used to measure the projects or the organization's endeavors, standalone risks. So we have the sensitivity analysis, we have the scenario analysis, and finally we have the Monte Carlo simulation. Of course, risk measurement and incorporation is very imprecise and very inexact generally. It can be a little bit more precise in certain conditions for certain organizations, but in general it's quite an imprecise process. If we want to focus on the Monte Carlo simulation quickly as an example of the techniques that can be used, this simulation is a computerized version of scenario analysis that describes uncertainty in terms of continuous probability distributions which have an infinite number of outcomes. So the software here is going to select values for each uncertain variable based on its specified probability distribution. Cash flow estimation is another important tool for healthcare organizations and it's actually used to evaluate and assess their financial health. So we can even stipulate that cash flow estimation is actually the most critical and most difficult part of the capital budgeting process. So capital budgeting processes should consider cost-benefit data in terms of cash flows and healthcare organizations can actually use a series of considerations and checklists to create a solution that is actually a good fit for their needs. Capital statement analysis involves several techniques including ratio analysis. There are four main types of ratios that are employed in such analysis. So we have first of all profitability. Is the organization actually generating sufficient profits? The second ratio is liquidity and here we are asking ourselves can the business meet its cash obligations when they are actually due? The third ratio analysis type is debt management and we can ask questions like does the business use the right combination of debt and equity? The fourth financial ratio analysis type is asset management and here we ask does the business have enough assets for the volume of services it provides? And of course when we say volume of services we want also to keep the quality of services. Okay let's move on to supply chain management and of course supply chain management is another important concept to talk about. So the management of inventory including purchasing, transportation, storage and use or disposal is actually called supply chain management. Inventories consist of base stocks and safety stocks. Basically we can assume that healthcare supply chains are under pressure to reduce costs because of digital transformation, fluctuating consumer needs or customer needs and new competition. This is why we can say that the goal of supply chain management is actually to meet operational requirements and needs at the lowest costs. Supply chain management or inventory management is not as important for providers as it is for manufacturers, for wholesalers, for vendors or retailers. So some techniques that are used by providers in the context of supply chain management are going to be just-in-time stock list systems and also point-of-service distribution systems. Some providers actually have contracts with suppliers that are priced based on the amount of medical care provided or on a capitation basis. Mergers in healthcare, so healthcare mergers and acquisitions involve combining two or more healthcare companies, hospitals or other organizations. They can have a significant impact on the industry by actually creating operational and strategic benefits. However, hospital mergers can also increase costs and reduce competition. Perhaps the best motive for mergers, acquisitions and other corporate audiences is synergy. Synergy means that the value of the whole exceeds the sum of the parts. And again, this is something that you have to keep in mind. Of course, synergy is going to be not my way or your way. It's going to be our way, a new improved way of doing things. There are some good synergistic justifications for mergers like overall synergy, like operating economies, like financial economies, like differential managerial efficiency and like increased market power and market shares. On the other hand, we have some questionable, rather bad justifications for mergers that are still used, but they are not very good justifications to carry on with mergers. First of all, we have the availability of excess cash. Secondly, the purchase of assets at below replacement cost. We have also diversification, personal incentives and breakup value. Another important technique that is quite valuable is the DuPont analysis. So DuPont analysis is a financial evaluation approach that uses ratios to expand the profitability ratio of return on equity into a more detailed and comprehensive measure. It is actually used and employed in the healthcare industry in order to evaluate the quality of earnings and inform investors' decisions regarding their equity. In other words, we can say that DuPont analysis actually summarizes and highlights an organization's financial condition. It is based on the possibility of expressing return on equity as the product of three ratios that are total margin, total assessment turnover and equity multiplier. Some other important concepts we have, benchmarking, cannibalization and linear regression. So benchmarking is actually used in all the industries in different ways and with different objectives. So it's actually a technique that is used for comparing ratios against selected standards, such as the averages that are calculated for the industry and the standards that are used for the industry. So financial benchmarking is the practice of running financial analysis and comparing the results to other firms, to other organizations in order to be able to assess the competitiveness of the organization, the efficiency of the organization and the productivity of the organization. Cannibalization, on the other hand, is any negative effect that is caused by a project, a product or a service on other projects, products or services within the same organization. So we can say again that cannibalization refers to the loss of sales or the loss of market share or the loss of needed resources of an existing project when a new project is actually launched or introduced by the same organization. Finally, another important method or tool that is used a lot in financial management, it's actually linear regression and linear regression is a statistical model or method that is used to evaluate and assess the relationship between a dependent variable and an independent variable. It is commonly actually used and employed in the real world for casting and predicting and for financial analysis. So this is it for today. Thank you for attending. If you have any questions, feel free to post them down in the comments and let me know if you need any other type of content that is similar to the one that we discussed today. Thank you again and Carpe Diem.