Financial Information And Decision Making In Health And Social Care Organizations

Uses of financial information in health and social care organization

With the increasing complexity, each and every organization has been facing the finance and funding issue in their business. It is analyzed that the main issue in business process system of organization is related to arrangement of finance and deploying the funds for the particular project. In this report, finance and funding issue in the health and social care organization has been taken into consideration. In order to make the effective financial decision, each and every company needs to collect the required financial information with a view to arrange and deploy the capital for the particular undertaken project. In the first part, use of financial information in the health and social care organization has been taken and after that ratio analysis financial tool have been used to assess the financial performance of company. This will help reader to evaluate whether company has performed well in market and not. In the end, investment assessment tool have been used to assess the financial performance of company and how well company has managed its business in long run.

Main uses of the financial information in the health and social care organization

There are several data which could be used by students to take the financial decisions such as balance sheet, accounts, financial books, profit and loss account, financial budget and job sheet. This financial information is used to assess the financial situation of health and social organization to make the profitable business and selecting the particular project in long run. However, financial information is used by managers, investors, shareholders, creditors and government regulatory agencies to make the effective financial decisions. There are several uses of the financial information which could be used by these stakeholders as per their individual uses. The main responsibility of the financial manager is to analysis the project investment decisions and how well company could use financial information to make the effective decisions. Financial manager uses the financial information to assess the available financial capital, blockage of funds and capital required to fund the particular project.  Financial manager needs to assess the need of the shareholders who have invested and ready to invest their capital in the health and social care organization. By using the financial information, financial manager could easily determine require whether the invested capital would create value on the invested or not. In addition to this, financial managers also need to consider the point of view of investors. They invest their capital and assess the viability of the investing company so that they could predict the future amount of dividend on their investment. Financial manager could use financial information to determine whether company is providing the required amount of capital in market.  In addition to this, financial managers use this information while applying for the loan capital from financial institutions and banks- These are the entities which offer loans to company. They use the financial information to determine the credit worthiness of company for the loan. Therefore, it could be inferred that company could use these financial information to strengthen the business functioning and creating value on the investment.

Calculation and interpretation of financial ratios

Financial analysis of health and social care organization

This ratio is divided into several parts to analysis the liquidity, profitability, solvency, market based ratio and efficiency ratio (Baños-Caballero, García-Teruel, and Martínez-Solano, 2014). 

Liquidity ratio

This ratio is divided into two specific parts such as current ratio and quick ratio. The current ratio of company is used to evaluate the financial performance of company and its blocked capital in its operating activities.

Current ratio

This ratio measures company’s ability to pay all the short term and undertaken long term liabilities (Ehiedu, 2014).

Description	Formula	Health and Social care organization (AUD $M)
		2016 (£)	2017 (£)
Current ratio	Current assets/current liabilities	1.50	2.29
Quick Ratio	Current assets-Inventory/current liabilities	1.00	1.57

This ratio shows that company has increased its overall current ratio to 2.29 points in 2017 which is .79 points higher. It has increased due to increased investment.

Quick ratio

This ratio shows company’s immediate ability of company to its short term and long term debts out of quick assets. It includes all the current assets except inventories and prepaid expenses. Company has increased its quick ratio to 1.57 points in 2017 which is .57 higher as compared to last year data. It reflects that company has increased its receivables and cash amount in its business (Flannery, 2016).

Profitability ratio

This ratio measures company’s ability to earn profit out of its revenue. It measures how well company has created earning out of its available sales.

Net profit ratio

This ratio divulges company’s ability to earn net profit out of its total turnover. With the changes in time, company has increased its overall net profit to 4% which is 1% higher since last one year. It divulges that company has been consistently growing in market and creating value on its investment (McKercher, Mak, and Wong, 2014).  

Return on equity

This ratio shows how well company has been paying return to its shareholders for the amount of money invested in business

Description	Formula	Health and Social care organization (AUD $M)
		2016 (£)	2017 (£)
Net profit Margin	Net profit/revenues	3%	4%
Return on equity	Net profit/Equity	18%	28%
Earnings per share	Net profit/ Share outstanding	0.50	0.25

The return on equity of company has increased to 28% in 2017 which is 10% higher as compared to last year. It divulges that company has increased its profit earning capacity and delivered more return to its shareholders for their investment. It is analyzed that company has increased their return on equity and it will attract more investors in market (Mwangi,. and Murigu, 2015). 

Earnings per share

The earning per share of company is based on the price earnings ratio and market price of company. The earning per share has decreased with the increase in the capital of the Organizaiton. It has decreased its earning per share  to .25 points in 2017 which is 50% low when it is compared with the last year data.  (Brigham, and Ehrhardt, 2013).

Recommendation for financial manager

Efficiency ratio

This ratio reflects company’s ability to deploy funds in its business. It shows how well company has managed its capital in the business (Bruno, and  Shin, 2015).

Receivable turnover ratio

This ratio reflects how well company has managed its capital in its business. The receivable turnover ratio has increased receivable turnover ratio to 27.59 points as compared to last year data. It has increased its receivable turnover ratio by 14 points in 2017 as compared to last year data. It will eventually increase the overall costing of the capital blocked in organization (Buckley, Chen, Clegg, and Voss, 2018). 

Description	Formula	Health and Social care organization (AUD $M)
		2016 (£)	2017 (£)
Receivable turnover	Receivables/ Total sales*365	13.77	27.59
Inventory turnover	Inventory / cost of goods sold *365	19.73	29.92
Accounts Payable ratio	Payables/ Total sales*365	27.55	29.71

Inventory turnover ratio

This ratio has shown how well company has managed its capital while blocking funds in inventories. It is analyzed that company has increased its overall inventories ratio to 29.92 points in 2017 which is 10 points higher as compared to last year data. It has increased with the increase in the inventories and less invested capital in the cost of goods sold of company (Burnside, Eichenbaum, and Rebelo, 2016).

Account payable ratio

It divulges company’s ability to manage the accounts payable in its business which should be higher if company wants to lower down the cost of capital of its business. The account payable turnover ratio of company has increased to 29.71 points which is 2 points higher as compared to last year data.

Market based ratio

These ratios showcase how well company has created market value from its invested capital.

Price earnings ratio

This ratio reflects how well company has increased its price earnings ratio to 50.60 points in 2017 which is 50% higher as compared to last year data (Burtonshaw-Gunn, 2017).

Description	Formula	Health and Social care organization (AUD $M)
		2016 (£)	2017 (£)
Price / earnings ratio	Market value per share / earnings per share	25.50	50.60
Dividend yield ratio	dividend / current share price	0.56	1.10

Dividend ratio

This ratio reflects how well company has increased the value of the investment. Company has increased the dividend ratio to 1.1 points in 2017 which is .50 points higher as compared to last year data (El Ghoul, Guedhami, Kim,. and Park, 2018).

Solvency ratio

This ratio is used to analysis the financial structure and solvency ratio of company.  It is accompanied with the debt to equity and interest coverage ratio (Fazzini, 2018).

Description	Formula	Health and Social care organization (AUD $M)
		2016 (£)	2017 (£)
Times interest earned	EBIT / Interest expenses	3.6	3.1
Debt to Equity Ratio	Debt/ Equity	1.40	3.08

Debt to equity ratio- This ratio measures company’s debt and equity capital of the organization. It is analyzed that company measures debts and equity portion in the business. Company has increased the debt capital in its capital structure which has eventually increased its debt to equity capital. It is analyzed that company increased debt portion will also increase overall capital gearing ratio and financial leverage of company (Gete, and Melkadze, 2018).

Different financial techniques and tools for decision making

Interest coverage ratio- It divulges how well company has covered its fixed interest expenses out of its available earning. With the increasing interest coverage ratio, company has decreased its interest coverage. It is analyzed that company has decreased its EBIT interest payment due to the increase interest payment. Company has lower down its interest coverage ratio as company has increased its interest payment which will eventually increase its overall financial leverage (Hopkin, 2018).

Therefore, it could be inferred that company has increased its overall profit but at the same time it has to lower down its overall financial leverage. Company might fact high financial risk in future when it fails to earn profit in its business.

Use of financial tools to make investment decisions

With the ramified economic condition, every organization needs to make the effective use of financial tools to make investment decisions. There are capital budgeting tools which are used to analysis the project such as net present value, internal rate of return, situational and sensitivity analysis and du pont analysis which could be used by organization while selecting particular projects.

Decision matrix- This decision matrix is used evaluate all the options of the decisions. It creates tables with all the options in the first column and used to determine the best available options out of all (Hoskin, Fizzell, and Cherry, 2014).

T-chart- It is used to measure weighing of the plusses and related minuses of the options and ensures all the positive and negative parts of the undertaken projects.

Decision tree- It is the graph model which could be used by health care organization to analysis the outcomes of the undertaken project. This decision tree is prepared to measure the undertake project and prepared decision of the project.

Pareto analysis- This is used when large number of the decisions are made to identify the best possible outcomes for the organization.  Ideally, it is used when company wants to create value on the investment and strengthen the existing value of the business.

Cost-benefit analysis- It is the analysis method which is used to measure the cost and benefit associated with the project. It is used to analysis the cost and benefits comes from the undertaken project (Li, et al. 2018). This is the most profitable analysis tool which assists organization to determine whether the undertaken project will be beneficial for the organization. It establishes the relation between the cost and benefits of the undertaken projects.

PEST analysis- This is the analysis tool which is used to measure all external factors of the business such as political, social, technological while making the effective decisions in project. After using this analysis, project manager could easily determine whether the other external factors could positively and negatively impact the business functioning of organization.

Net present value- It is the capital budgeting tool which reflects the differences between the present value of the cash inflow and present value of cash outflow. This ratio is used to determine the best project which could increase the overall output of the invested capital (Lumby, and Jones,  2015).

Profitability index- The profitability index is used to gauge the output of the project selected in the organization. The health and care organization could use this profitability index to measure the output and how well it could use its capital to create value in its investment (Mohanram,  Saiy,  and Vyas, 2018)

Du pont analysis- It is the fundamental performance measurement frameworks used to decompose the different drivers of the return on equity. This technique is used to analysis the return on equity and net profit earned by health and care organization (Wahlen, Baginski, and Bradshaw, 2014). 

Sensitivity analysis- This analysis measures the changes in the business factors and economic factors and then on the basis of changing factors of the business (Weygandt, Kimmel, and Kieso, 2015).

After analyzing all the investment analysis tools, it could be inferred that health care organization could take effective decisions while accepting the project. Company could use these financial analysis tools to increase its overall output and project efficiency of the undertaken projects (Zietlow, Hankin, Seidner, and O’Brien, 2018).

Conclusion 

The health and social care organization needs to analysis all the internal and external factors before accepting the particular project. The main investment analysis tool is net present value and investment tree decisions which could be used to determine which project will give higher project output. It is further observed that cost-benefit analysis will help health and care organization to determine the cost and benefit of all the particular projects and which one will give the best output. Now in the end, after analyzing financial performance of company by using ratio analysis, it could be inferred that company needs to lower down its debt capital in its business to strengthen its financial position. It firstly has to focus on creating value on the investment. This above tool will assist company to increase the overall output by selecting the particular project.  

References

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