Session Long Project

The board of directors of Trinity Hospital is working on a five-year strategic plan for the facility. One of the strategic goals is to build a new $1 million cancer research wing in five years. The group is concerned that current economic conditions might reduce revenues over the next five years and they are uncertain about the fate of the construction project. You are part of team tasked with conducting a capital budgeting analysis. The cost of capital is 10%.

Trinity Hospital reported 1.5 million in revenue in 2010 and 1.3 million in 2011. The hospital’s equity is $2 million. The hospital estimates delayed third-party payments in 2011 of $500 thousand. The hospital expects to receive $250 thousand in grants in 2011.

The hospital has current liabilities include operating costs of $1 million in 2010 and $1.2 million in 2011. In addition, the hospital retired $150 thousand of debt in 2010 and 2011. The hospital funded the employee pension plan with matching funds of $150 thousand in both 2010 and 2011. Malpractice costs were $150 thousand in 2010 and 2011. Depreciation expenses of $100 thousand in 2010 and $105 thousand in 2011. The hospital is a nonprofit facility so firm incurs no tax liabilities.

INCOME WORKSHEET

ASSETS

LIABILITIES

2010

2011

2010

2011

OPERATING

1,000,000

1,200,000

DEBT RETIREMENT

150,000

150,000

RETIREMENT

150,000

150,000

DEPRECIATION

100,000

105,000

REVENUE

1,500,000

1,300,000

EQUITY

1,000,000

1,000,000

DELAYED PAYMENTS

500,000

GRANTS

250,000

TOTAL

2,500,000

3,050,000

1,400,000

1,605,000

NET PROFIT

ASSETS

2010

2011

NET PROFIT

$2,360,000

$1,445,000

TASKS

1. Create a balance sheet based on the information provided above

2. Discuss the financial trend(s) you believe hospital administration should note in their planning. Are profits trending up or down?

3. Submit your balance sheet and discussion as a WORD document.

SLP assignment expectations:

Expectations

1. Use the information in the modular background readings as well as resources you find through Proquest or other online sources. Bookmark online financial calculators to assist with the computations or construct EXCEL spreadsheets.

2. Please be sure to cite all sources and provide a reference list at the end of the paper.

3. Submit the paper as a WORD document through the link provided for the assignment.

4. Length: 2-3 pages typed and double-spaced

Financial statements are the primary medium for reporting the financial standing of organizations in terms of the “bottom line.” Financial statements provide information categorized as assets or liabilities. Financial statements come in four primary forms: Balance sheets; income statements; cash flow statements; and statements of shareholders’ equity.

Balance Sheets

Balance sheets provide a snapshot of the firm’s financial health Balance sheets compare a company’s assets to its liabilities. The assets include all revenue streams. The liabilities should include all of the costs and debt incurred by the organization. Some costs are directly related to services while others may be indirect such as funding pensions and servicing long-term debt.

Once listed, the data provides valuable information. For instance, the current ratio or working capital is determined by dividing current assets by the current liabilities. The current ratio provides an indication of the firm’s ability to pay short-term obligations. A low current ratio in relation to industry averages indicates the firm may have liquidity problems. A high current ratio in comparison with industry averages suggests the firm may be too conservative in fund management and is missing growth opportunities.

Another important calculation enabled with balance sheets is a determination of leverage. Leverage is the ratio of debt to total equity or firm value. Leverage is calculated by dividing total debt by total equity. A high percentage indicates the firm is financing too much of its value.

(Conduct an Internet search for a sample income statement to see the construction of the instrument)

Income Statements

Income statements report the amount of revenue gained by a company over a specified period of time. The instrument reveals the “bottom line” of the company’s net earnings and losses. An income also reports the earnings per share that is due shareholders.

An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.

The income statement lists company assets. Assets include revenue from sales and revenue from investments or other sources. The costs of achieving the revenue such as marketing must be subtracted from the revenue total and the result is the “gross profit.”

The operating expenses are costs make up the second part of the income statement. Expenses include salaries, production costs, facilities costs, etc. Operating expenses are deducted as part of the production costs. Depreciation of equipment must be deducted from the gross profit.

The deduction of operating expenses from the gross profit results in the “income from operations.” The next step is to introduce the income from or the costs of interest. Interest income is added and interest costs are deducted from operating income.

The final step is to calculate and deduct taxes from the operating income. The result is the net profit or loss for the business. Earnings per share (EPS) is calculated based on the net profit or net loss.

(A sample income statement can be found through an Internet search)

Cash Flow Statements

Cash flow statements track the inflow and outflow of cash. A cash flow statement indicates how much money a company has to pay expenses and to invest in research, expansion, or the acquisition of other assets. A cash flow statement adjusts the balance sheet based on increases or decreases in revenue during a specified time period. Cash flow statements divide revenues into three types: (a) operating activities; (b) investments; and (c) financing.

(A sample cash flow statement can be found on the Internet)

PROJECTIONS AND STRATEGIC PLANNING

All of the financial forms mentioned in the lesson can assist strategic planning. Strategic planning is an essential component in maintaining a profitable business. However, the implementation of a strategic plan will depend upon the financial strength of the company. How much cash is available to invest? What will be the cost of capital to expand? How will the strategic plan affect the “bottom line”?

The first step in strategic planning is to engage in financial planning. Financial planning begins with setting financial goals for the company. The financial goals need to align with the company’s strategic goals and plans.

The ability to meet these goals depends on financial performance over the duration of the strategic plan. The best that managers can do is to rely on projections of future revenues and costs. The projections can take into account recent financial performance and trends and should include anticipated increases in costs such as through rising labor costs and purchasing equipment.

The successful execution of a financial plan requires two commitments on the part of management. First, management must monitor financial performance. Projections may need to be revised over time. Second, management needs to invest the necessary resources to correctly interpret and use the information provided through the various financial statements.

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