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Financial Management - Lecture notes and Key Management Ratios summary
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Summary of the lectures and of chapter 1-11, 19 and apx EBITDA of the Key Management Ratios book.
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FINANCIAL MANAGEMENTWEEK 1 – INTRODUCTION OF THE COURSE
Course objectives:
- Analyze the financial health of an organization and make improvement suggestions tailored
to the context.
- Advice on a decision with financial consequences in a specific case.
- Substantiate a decision in healthcare management, taking into account the financial
consequences.
- Critically assess or defend a decision with financial consequences in healthcare.
The Meander group case will be the running case in the working group. Read this at the beginning of
the course and it will pay off. It will also come back in the individual exam. The St Jansdal Hospital
case is related to the group project.
Ratios are the guiding starts for the management of organizations. They provide their targets and
standards. They are helpful to managers in directing towards long-term strategies and effective
short-term decision-making. Ratios are used similarly to how doctors use diagnostics to assess health
conditions.
Random calculations are useless, you need to know what you are looking for. Ratio’s require a norm
or a standard. Medical norms differ per age/gender/etc. Ratio’s interpretation differ per sector or
environment. Just like medical diagnostics, a simple measure does not suffice. You need to
benchmark numbers against something. Everything is interrelated.
When you buy a car you gain a car but you spend money. That’s 500 dollars out of your pocket but
you get a car. Your possessions go up with a car worth 500. Your liquidity however goes down with
500. Are you better off with a car? No that does not matter, you just traded one thing for another
with the same worth.
What if I buy a car that’s purple? They are slightly more expensive, 600 euros, but are the same car.
The fact that you pay 600 euros for it does not mean that it’s worth 500. In this case you overpaid
because it’s purple, your liquidity and possessions do not go down or up with the same number.
Annual reports are your source of ‘raw’ information. It has a balance sheet, profit and loss statement
and a cashflow statement. A balance sheet is an instant snapshot of the assets used and of the funds
related to those assets. It is a static document relating to one point in time. We therefore take
repeated snapshots at fixed intervals – months, quarters, years – to see how the assets and funds
change with the passage of time.
The P&L measures the gains or losses from both normal and abnormal operations over a period of
time. It measures total revenues and deducts total cost. Not a photo, but rather a film covering a
period of time. Gains and losses or revenue and costs are not the same as cash in and cash out.
Buying a car for 500 euros is not losing 100 euros.
The cashflow statement is a statement on cash inflows and outflows over a period of time. It’s about
cash, not revenue/costs or profit/loss. It is film-like, overview of a period. For example with startups,
where there is mostly investing and no real money being made.
Recap
- Ratios help to understand events that occur in organizations.
- Understanding is necessary for management – steering and decisionmaking.
,- Meander and St Jansdal face challenges: every scenario has consequences. The
consequences can be assessed by applying financial ratio analysis.
- Ratio analysis may be difficult, but it isn’t complex.
, WEEK 2 – FRAMEWORK MANAGEMENT CONTROL SYSTEM/ PERFORMANCE MEASUREMENT
SYSTEM
Despite loving your job, people do need some type of management control. Control should not be a
puppet on a string. There are positive aspects to management control.
Last week
- Financial Ratio Analysis
- Analyze financial ‘health’
- Analyze financial consequences of a managerial decision
- Choose a direction for improvement suggestions; which is feasible, desirable?
This week
- Management Control Systems
- Create an environment where proper decisions are made
- Support, inform, empower and steer employees/management
- Ultimately: create goal alignment
Financial management is planning, organizing, directing and controlling the organization’s financial
activities in an efficient and effective way such that the organization’s objectives are met. Problems
arise from the fact that there are multiple objectives. These objectives may interfere. The
organizations are also complex. There is a lot of expertise and know-how. Also, uncertainties and
unpredictabilities. We try to address these complexities by hiring experts that know their field really
well and give them the responsibility to make certain decisions.
Multifaceted means that we want good care but we also want to be a responsible player in society
and transparent. We want to provide value-based health care but also do other things that are all
important at the same time.
OB and management control:
- Performance is multifaceted
- Employees are key for success
Agency theory is not very popular. It is classical and may be perceived as a bit negative. What agency
theory does is giving you a framework that is good at highlighting the risks of organizations. You
should see a collaboration of two people as a contract. A contract can be implicit or explicit. The
principal (owner) delegates decision-making authority to the agent (manager) who performs
services. The agent is utility maximizer. Motivation is solely by self interest. There is a risk you may
run of, since you’re only working in self interest.
Self interest means that all agents act in their own self-interest.
- Financial compensation
- Leisure time
- Pleasant working conditions
Leisure is the opposite to effort. Managers prefer leisure to work. Withholding effort is called
shirking. Principals (owners) are only interested in financial returns.
How do we get away with this? There is asymmetric information. The principal cannot easily monitor
the agent’s actions. The agent knows more than the principal about the task, which is called private
information. Diverging preferences may lead the agent to manipulate information, which is called
moral hazard.
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