Financials & Why They Matter!

Transcription

1 Financials & Why They Matter! Sharon K. Colling CNHA, CALA, CSW, FACHCA NALA Assisted Living Administrator Training Speaker Disclosure: I have a commercial interest in the following organizations: 1. Lantern Health Services (President/CEO) LHS provides facility management, consulting and development services for skilled nursing and assisted living facilities, CCRCs and senior housing communities. I have an Organizational Relationship with: 1. National Association of Long Term Care Administrator Boards (NAB): Exam Item Writer, NCERS Reviewer 2. American College of Health Care Administrators (ACHCA): Exam Item Writer, Board & Committee Member 1

2 Goals for Today Understand accounting lingo & jargon. Understand basic accounting rules. Understand the three basic accounting statements and the chart of accounts. Explain the structure and purpose of each statement. Goals for Today Explain the underlying equation of each statement. Be able to use financial statements to help make competent business decisions. Incorporate sound accounting practices into daily use. 2

3 Accounting Jargon What is Accounting? Accounting is a communication system that processes, measures, and communicates financial information about an enterprise. Accounting Jargon The Purpose of Financial Accounting is to: Record Summarize, and Report ALL transactions of the company. 3

4 What Accounting Looks Like Business Activities (Transactional) Decision Makers DATA Measurement Accomplished by recording data ACCOUNTING Processing Accomplished by storage and preparation of data INFORMATION Communication Accomplished by accurate, timely reporting Key Terms Transaction: An act that creates an exchange of something for something else Provide a service or goods to a customer in exchange for cash Purchase a delivery truck; pay cash for the truck Pay an employee for work Take change from a resident for purchase of two stamps Pay the utility company for providing electricity Receive money from the bank and agree to pay it back later 4

5 Key Terms Transaction: Most often, the exchange is giving or receiving cash either now or in the future. Key Terms Record: Entering each and every transaction into a system to show what is increasing and decreasing. Accounts: The categories of items with descriptive names. 5

6 Key Terms Summarize: The net impact of the increases & decreases for each account The total of the accounts will be: 1. What you have 2. What you owe 3. What you have earned from providing goods & services, and 4. What it costs you to provide those goods and services. Key Terms Report: Also known as: Statement Standardized formats to provide useful information to investors and creditors regarding: 1. Resources (assets/have) 2. Obligations (liabilities/owe), and 3. Cash flows.. 6

7 Reports go to: Key Terms Internal Users: Managers who plan, organize, and run the company You External Users: Investors who invest in the company Creditors who loan money to the company Key Terms Cash Accounting & Accrual Accounting: The two principal methods of keeping track of a business s income and expenses These methods differ on the timing of when transactions (sales, purchases, etc) are booked. Most healthcare entities use accrual accounting (due to Medicaid and Medicare regulations). 7

8 Key Terms Cash Accounting: Income is not counted until cash or check is actually received. Expenses are not counted until they are actually paid. The most common method for small businesses Extremely uncommon in healthcare (due to Medicaid and Medicare reimbursement regulations) Key Terms Accrual Accounting: Income is counted/recorded when the service or sale occurs and/or is completed. Expenses are counted/recorded when the goods or services are received and/or completely finished, regardless of when the actual money is received or paid. The company does not wait until deposits are received or payments cashed to record the transaction. 8

9 Key Terms Accrual Accounting: The accrual method MUST be used if: A company has sales over $5 million per year, or A company stocks inventory that is sold to the public and the gross receipts are in excess of $1 million dollars per year. Most common method in healthcare due to government reimbursement mechanisms. Key Terms Generally Accepted Accounting Principles: Commonly referred to as GAAP (pronounced gap ) Standards of practice guidelines set by 3 main accounting entities in consultation with accountants Provides guidance on: What types of financial information must be provided What format to use to provide information How to measure assets, liabilities, revenues and expenses When and how to use footnotes on financial statements. 9

10 Purpose of GAAP: Key Terms 1. To provide consistency and transparency among financial statements of comparable businesses. 2. To assist investors and creditors in their interpretation of a company s financial data and overall viability. Key Terms Book Value: Cost of a depreciable asset less accumulated depreciation. Operating Profit: Gross profit from sales less operating expenses Net Profit: Income less expense before taxes and dividends Dividends: Earnings distributed to stockholders 10

11 Key Terms Lien: Claim or charge on a specific property for payment of a debt or obligation Liquidity: Identifies how quickly an asset can be converted into cash Equity/Retained Earnings: Accumulated net profit less dividends distributed to stockholders/owners. Revenues that remain after all expenses, taxes and dividends are paid. Key Terms Internal Controls: Procedures and actions taken to: 1. Protect assets against theft 2. Ensure compliance with policy and procedure 3. Evaluate performance and efficiency 4. Ensure accurate, reliable data for accounting reports. 11

12 3 Types of Assets: Key Terms 1. Current Assets: Things that are easily convertible to cash within one year 2. Fixed Assets: Building, Equipment, etc. 3. Intangible Assets: Copyrights, patents, goodwill Key Terms 2 Types of Expenses: 1. Fixed: Those that remain constant regardless of the volume of business Examples: Depreciation, Property Taxes, Insurance 2. Variable: Those that change in direct proportion to the volume of services Examples: Food, Supplies, Materials, Labor, Utilities (some) 12

13 Key Terms Debits & Credits: *Account Type Debit Credit Assets Increase Decrease Liabilities Decrease Increase Income Decrease Increase Expenses Increase Decrease *Notice that for every increase in one account, there is an equal and opposite decrease in another. Basic Accounting-Work Flow Accounting systems are made up of the following: Accounts: Categorizes activities (groups them) Chart of Accounts: The Table of Contents of all accounts. Transaction Recording: Every transaction, every time, with a source document, even for a stamp. Journal Entry: Create a template or instructions (Using Accrual Accounting or Cash Accounting?) 13

14 Basic Accounting Work Flow Accounting systems are made up of the following: Bank Reconciliation: Must be done every month Trial Balance: Listing of all accounts with balances as of one point in time Correction of Errors and Omissions: These will be found on Trial Balance. Basic Accounting Work Flow Accounting systems are made up of the following: Check Register: Account for all missing or voided checks Prepare Financial Statements: Complete by 15 th of month Always give copy to Board or Supervisor Prepare for variance analysis More on Financials in a while Analyze those financials!! They provide a wealth of information. 14

15 Accounting Meeting Deadlines Establish deadlines; Ensure buy in from all. Post Resident Statements before Accounts Receivable closing. Ensure timely distribution of statements to residents. Meet end of payroll pay periods and tax filings. Timely post and close of Accounts Payable. Reconcile all Balance Sheet Accounts. Complete and distribute financial statements on time. Keep a copy of distributed financials for your records. Key Terms Professional Accountant Reports: Vary by amount of CPA oversight and verification 1. Compilation (least) 2. Review (moderate) 3. Audit (maximum) Facilities that are government owned (city/county/state/va) are usually required to have an annual audit. Similarly, facilities with federal loans (eg., HUD) are often required to have an annual audit. 15

16 Key Terms Reports or Statements: 3 Primary Financial Statements Used: 1. Income Statement Also called Profit & Loss Statement or P&L 2. Balance Sheet 3. Statement of Cash Flows Also called Cash Flow Statement ** A Chart of Accounts (CoA) is used as the building blocks of the Financial Statements. 16

17 Chart of Accounts The Table of Contents to the financial statements. Take time to study it and become comfortable with it. Recommend putting copy in plastic sleeve for ease of use. Post revenues and expenses where you budgeted them. Example: If postage has its own account, post to that account and don t dump it into the supplies or misc. expense. Financial Reports: Income Statement Purpose: To show how much the company earned during a specific period of time (monthly, quarterly, annually) This is what has been earned from providing goods and services, less what it costs to provide those goods and services. 17

18 Why Prepare a Profit & Loss? To analyze all income and expense categories To get a better understanding of your income and costs To recognize areas that need more analysis, and take action To compare results with budget and previous periods and industry performance Financial Reports: Income Statement Format: List revenues first, then expenses underneath. Revenues less Expenses = Net Income/Loss. (thus, the name Profit & Loss or P&L ) See Handout Example. 18

19 3 Elements of a Income Statement Revenue: Are goods or services provided to a customer. The goods or services are provided in exchange for an asset (money). A Receivable is an asset. This is the amount the customer is expected to pay for services received but not yet paid. A revenue occurs when the good/service is provided to the customer regardless of whether the customer has paid or not. 3 Elements of a Income Statement Expense: Goods or services used by the company that it will have to pay for. (e.g., staff pay, utilities, advertising, interest, taxes, etc.) In other words, using an asset of the company to provide goods or services. The cost of providing goods and services to our customers. The expense occurs when the company receives the service or the asset is used up, not when the company pays for the goods or services. 19

20 3 Elements of a Income Statement Gains/Losses: Occur from selling an asset (determined by what was originally paid for it) Loss Get less than what was originally paid for it Gain Get more than what was originally paid for it Financial Reports: Balance Sheet Purpose: To show what the company HAS and what it OWES on a certain date, along with the amount of ownership interest. A Snapshot in Time Formula: Assets = Liabilities + Owner s Equity Known as The Accounting Equation. It MUST stay in balance. Total assets must ALWAYS equal total liabilities plus owner s equity. 20

21 1. Asset: 3 Elements of a Balance Sheet Something that a company has, owns, or controls A Receivable is an asset. Has probable future economic benefit Results from a past transaction/something that has already occurred The economic benefit is using the asset to generate future cash flows or the asset itself will be converted to cash. What the company HAS 21

22 3 Elements of a Balance Sheet 2. Liability: The company s debts and obligations A Payable indicates money owed. Results from a past transaction The company will give up an asset to pay an obligation. What the company OWES 22

23 3 Elements of a Balance Sheet 3. Equity. Also known as Stockholder s Equity Shows what occurred that impacted the owners of the company during a specific period of time. A record of earnings kept in the company and/or financing provided by the owners. Technically, owner contributions to the company minus dividends paid to owners, plus profits and less losses (called Net Income) Formula: Co. Assets minus Co. Liabilities = Owners Equity 23

24 Financial Reports: Cash Flow Stmt Purpose: To show how much cash was generated from day to day operations and what the cash was used for. It also shows where nonroutine cash came from and how much was received. Basically, it shows the source of all cash and where it went. Note: Cash and income are NOT the same. Why Prepare a Cash Flow Statement? Provides helpful warning signals Shows if business is running out of money Identify sources of cash inflow and where cash is used Helps to maintain a proper matching between cash inflows and outflows Shows capital purchases as money out 24

25 Financial Reports: Cash Flow Stmt There are 3 types of Cash Flows that are captured on the Cash Flow Statement: 1. Operating Activities Net Income, Current Assets and Current Liabilities Current, in accounting lingo, means less than one year. 2. Investing Activities Long term Assets (i.e., in use more than one year) 3. Financing Activities Long term Liabilities (will pay later than 1 year); receipts and payments to/from shareholders. Financial Reports: Miscellaneous Every statement should have a heading with the company name and the date or time period covered. If not prepared by a qualified financial expert (CPA, etc), recommend a qualifier on the statement such as Unaudited Statements For Internal Management Use Only 25

26 Final Points: Financial Statements Financial statements produced regularly and correctly give key information to continually improve your business. Bookkeeping plays a critical role in managing business efficiently and effective. A proper accounting software can assist businesses with bookkeeping and maintaining a proper set of books of accounts. 26

27 Final Points: Financial Statements Understanding the key financial statements are important to manage finances of your business Understanding your figures, or financial literacy, is an essential skill for a successful administrator. Utilize your facility resources: Accounting Software, Accountant, Benchmarking Services Important Comparisons Typical Income Statements have comparison abilities by department. Recommended monthly comparisons include: Current Month to Last Month Current Month to Budget Current Month/Year to Date (YTD) with Last Month/YTD Current Month to Benchmark Statistics (hours/days) must also be available. 27

28 Segregation of Duties Purpose: To create a system of checks and balances Each task, two people Program integrity Risk management Corporate compliance Facility fiduciary responsibility Individual safeguards Segregation of Duties 4 Categories of Business Critical Tasks: 1. Authorization 2. Custody 3. Recordkeeping 4. Reconciliation No system is perfect, so checks and balances are required. 28

29 Examples: Segregation of Duties Requiring 2 signatures on a check Have the bank statement sent directly to an individual who does not prepare the bank reconciliation. Do not combine the following roles: Depositing cash and reconciling bank statements Approving time cards and access to paychecks. Receiving checks and approving bad debt write offs Balance Sheet - Managing Cash Understanding your cash needs through the use of a cash budget is critical. Analyze: Billing cycle When are statements sent out? How long does it take PP residents to send payment? Auto withdrawals or credit cards? When is Medicaid billed and when do they pay? 29

30 Balance Sheet - Managing Cash Also Analyze: Budgeted costs Seasonal /Periodic expenses (utilities, taxes, quarterly or annual fees) Timing of capital purchases (e.g., van) Balance Sheet - Managing Collections A/R Aging: Process wherein accounts receivable are scheduled, listed, or arranged based upon elapsed time from date of service or transaction. AR is an asset on the Balance Sheet but it is ONLY of value if it is converted to cash. Manage the AR don t let it manage you! Plan of Attack: Have a process in place to identify and act on accounts after they ve reached a certain aging level. 30

31 Capitalization Policy Should an expense be found on the income statement or balance sheet? It depends... Capitalization Policy: The facility policy that identifies a pre determined thresh hold for capitalizing or expensing an item Example: With a $5,000 capitalization policy Capitalize: Any individual items that cost over $5,000 and depreciate it over its useful life. Expense any individual items under $5,000, which will place 100% of cost in the month the cost was incurred. Will decrease net profit and decrease depreciation expense. Labor Is the largest percent of total budget Staffing Levels: Should fluctuate with census and acuity levels Hours per resident day Components of Labor: Hourly vs Salaried Shift schedule: 4, 6, 8, 12 hours/day; Overtime: Regularly scheduled hours/week? Pay rates and pay scales Benefits: PTO, Health Insurance, etc. 31

32 Labor Is the largest percent of total budget Components of Labor: Hidden costs of labor: EE Taxes FICA, FUTA/SUI, etc. Insurance Health, Work Comp, Liability Why It Matters! Occupancy Managing Revenues Managing Expenses Budgeting Facility Viability Personal and Professional Success 32

33 Occupancy A full census hides a lot of sins! Continuously Evaluate: Payor Mix Private Pay & MD Waiver Census Acuity Contracted Special Rates LTC Insurance Outpatient Services Medicaid Waiver Specifics To qualify for the Aged & Disabled Medicaid Waiver, persons must: Be eligible for Medicaid Meet nursing facility level of care (LOC) Wish to live in their own home or community Can be served safely outside of a nursing facility. 33

34 Medicaid Waiver Program Participation Contact the Area Agency on Aging which serves your county. Ask for the Waiver Resource Developer All providers must meet general standards and have detailed standards for the services they wish to provide (housing, chore service, adult day, respite care). Rates are set by DHHS on an annual basis. Other services through AD Waiver are set by DHHS or are locally negotiated. Contact the local Waiver Resource Developer for more information. Managing Expenses Labor Controls Food Controls Process Considerations: Controls Vendor Contracts Approval of Expenses Timely submission of invoices And so much more 34

35 Managing Accounts Payable Distribute invoices to dept. managers, who may complete spend down sheets. (DH) Cross check invoices to packing slips or orders made. (DH) Ensure the accuracy of the invoice to the product received. (DH) Approve the invoice for payment. (DH) Code the invoice to the appropriate account. (DH or BO) Managing Accounts Payable Code, date, initial and file every invoice & supporting information. (BO) Approve invoices to be submitted, ask any questions prior to payment, check for capital purchases, MSDS, new products or vendors. Initial every invoice, do not use signature stamp, utilize two signatures on check or per facility policy, be diligent to A/P aging schedule, ensure checks are not being held, and that filing of invoices after payment occurs timely. (ALA) 35

36 Managing Revenues Process Considerations: Resident Billing Statements: Timeliness, Ease of Use, Due Date, etc. Timely Collections Deposits Write off s Bad Debt Collection Have a plan. Have protocols in place. Involve the resident in the possible solution. Do not make them feel defensive. Never threaten to do something that you will not follow through one (such as taking them to court, discharging, etc). Do this once and credibility will be shot. Consider a promissory note or post dated check for payment Have a face to face meeting rather than a phone call or letter. Is usually more effective. 36

37 Bad Debt Collection Keep a positive attitude. Speak assertively, but be understanding. When they do pay, be certain to THANK THEM! Budgeting Helpful Questions to Ask. Is your campus competitively priced for the market? Will new providers enter your market area in the next year? If so, how will that impact your campus? What is your reputation in the market? How does this affect your market share? Will staffing levels need to change to accommodate new service offering? Are wage scales competitive in the market area? Should services be provided by employees or outside contractors? 37

38 Budgeting Questions for Department Managers What do we want to do differently? What expense line items need to change? What effect will that have on monthly or YTD? What opportunities does the department have to add revenue to the department? What will need to be spent to accomplish the revenue opportunities? Steps to Creating A Budget Create a budget schedule that communicates clear deadlines Compile summaries of current YTD data & forecast the remaining part of year. Discuss with owners expected/targeted profit margins for the coming year. Conduct a Market Study Review of competitors rental pricing, wage scales, and occupancy rates. 38

39 Steps to Creating a Budget Begin to Develop the Formal Plan Marketing and pricing plans Staffing and EE compensation plans Operating plans Develop Detailed Department Budgets Staffing levels Salaries and Benefits Operations Review Draft Budget Department Specific Owner/Management Obtain Final Review and Approval Budgeting Time Frame Know when facility fiscal year ends; it may be: January 1 July 1 September 1 October 1 Begin 4 months prior to end of fiscal year, and Don t be surprised if it takes up to that 4 months timeframe to complete all phases of budget work. 39

40 Goals for Today Explain the underlying equation of each statement. Be able to use financial statements to help make competent business decisions. Incorporate sound accounting practices into daily use. Goals for Today Understand accounting lingo & jargon. Understand basic accounting rules. Understand the three basic accounting statements and the chart of accounts. Explain the structure and purpose of each statement 40

41 Thank you for your time today! I wish you the very best in your long term care career. My contact info is: Sharon K Colling Lantern Health Services N 152 nd Ct. Waverly, NE Office: Fax: Cell: scolling@lanternhs.com 41