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Audited Analysis of Patton-Fuller, Research Paper Example

Pages: 1

Words: 625

Research Paper

Although the CEO of Patton-Fuller Community Hospital gave an upbeat appraisal of the hospital’s performance in 2009, the financial statements suggest such optimism may not be warranted.

The CEO is right to point out that revenues grew 9% year-on-year in 2009, largely on the back of increases in net patient revenues.  However, he is less than honest in implying that most expenses only grew 3% year-on-year.  Indeed, there are a total of 5 different cost categories that all grew in excess of 3%; thus, while the average increase in expenses (year-on-year) was only 3%, there were a total of five categories meaning that expenses grew roughly 6% in 2009- making the financial picture less optimistic.

The CEO is also correct to say that profitability (defined as revenues-expenses) swung from the red to the black and improved in the amount of 16 million dollars.  However, a closer look at the numbers show that the hospital lost nearly 15 million dollars in 2008 and barely broke even in 2009.  Thus, the CEO’s reasoning for a “profitable” year is somewhat specious if not profoundly dishonest in that the hospital roughly broke even in 2009.

Turning the discussion to the balance sheet, one can see causes for the hospital’s performance in 2009.  Concerning the assets, there are three developments worth noting.  First, the tremendous increase in patient accounts receivable is disturbing: The percentage of unpaid bills rose nearly 56% from 2008-2009.  This trend is disturbing because these accounts represent potential revenue; in addition, the hospital will not likely recover 100% of accounts receivable, equal to providing services for free. The CFO explained that the uptick in unpaid care is a function of slower payments by managed care companies and other payers.  This is likely not good news: As the hospital will be exposed to higher volatility in cash flow moving forward due to the emerging payer mix.

Second, the hospital nearly doubled its expenditure on inventory in 2009 from 8.3 million in 2008 to 18.4 million in 2009.  While this substantial investment might be warranted, particularly in a difficult economic environment where deflation and suppliers willingness to sell below cost, the hospital may have received excess value for their investment. However, it’s not clear what strategic development (i.e., predicted take-up in consumer utilization) caused this investment increase besides the fact that vendors sold below price.

Third, the hospital undertook a substantial fixed investment campaign in 2009 increasing investment roughly 42% or 72.5 million dollars to purchase new equipment.  The source of the investment likely came from two areas: 1) Cash and cash equivalent- Cash and cash equivalent decreased roughly $20 million from 2008 to 2009; 2) Borrowing- The Hospital’s long-term debt account increased roughly $241 million from 2008-2009.  The sharp uptick in long-term borrowing is worrying: The Hospital essentially doubled the size of its long-term debt in order to purchase equipment at a discount.  While this is an interesting reason, it would be more savvy to include strategic reasons why the Hospital needed to borrow so much, granted that interest rates were likely lower than average- gearing up the Hospital’s balance sheet during a recession needs more explanation.

Overall, there are many worrying trends illustrated in Patton’s financials.  Although the hospital rebounded from a 2008 performance to claim a symbolic positive operating profit, the Hospital undertook an aggressive capital financing campaign in the midst of an economic recession, gearing up the Hospital’s balance sheet to pay for it.  Indeed, perhaps the most statement occurs when the CEO states “The bonuses for the CEO and CFO were also paid, based on the hospital’s improved financial performance.”  It’s not clear what is being referred to here, but more extensive research should be done to ensure that the cash to pay out bonuses was not garnered from loans.

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