Summary
Summary HCM Financial Management (literature Walsch)
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A summary of the mandatory literature of the book by Walsch for the course: financial management. Master Healthcare Management.
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Key Management Ratios (Walsh) – Joyce RommensChapter 1: Background
Business ratios are the guiding stars for the management of enterprises; they provide their targets
and standards. They are helpful to managers in directing them towards the most beneficial long-term
strategies as well as towards effective short-term decision-making. The manager will, of course,
understand that the financial numbers are only a reflection of what is actually happening and that it
is the reality not the ratios that must be managed.
The big issues in business are: assets, profits, growth, and cash flow. These four variables have
interconnecting links. There is a balance that can be maintained between them and, from this
balance, will come corporate value. It is corporate value that is the reason for most business activity
and, for this reason, this book focuses on the business ratios that determine corporate value.
Chapter 2: Financial statements
In finance, there are three documents from which we obtain raw data for our analysis:
- The balance sheet
- Instant ‘snapshot’ of assets used by the company
and of the funds that are related to those assets
- Relating to one point in time
- Repeated snapshots give overview how the assets
and funds change within the passage of time
- A balance sheet of a given mass of assets must
produce a minimum level of profit to be efficient
- The profit and loss account
- Measures total income and deducts total cost over a period of time
- The cash flow statement
- Cash flows into the company when cheques are received, and it flows out when
cheques are issued
- It depends on the two balance sheets and the profit and loss account
The balance sheet
Traditionally, the balance sheet consisted of two columns: liabilities/funds and assets.
- The assets column contains a list of items of value by the business
- It is at their present cost to the company
- The liabilities lists amounts due to parties external to the company, including the owners
The amounts in these columns of course add up to the same total because the company must
identify exactly where funds were obtained from to acquire the assets. All cash brought into the
business is a source of funds, while all cash paid out is a use of funds.
Fixed assets (FA):
- A more accurate description would be ‘long-investment’
- Three headings:
- Intangibles (no physical presence) ® goodwill
- Net fixed assets (large, expensive, long-lasting, physical items
required for the operations of the business e.g., land,
machinery, and office and transport equipment) ® take
original cost and deduct accumulated depreciation
- Investments (long-term holdings of shares in other companies for trading purposes)
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, Key Management Ratios (Walsh) – Joyce Rommens
Current assets (CA):
- All short-term assets in the company
- They will normally convert back into cash quickly (less than 12 months)
- Four headings:
- Inventories (stocks) ® raw materials, work-in-progress, finished goods, maintenance
spares
- Accounts receivable (trade debtors)
- Cash (usually low, if high, there is a very specific reason, such as a planned
acquisition)
- Miscellaneous current assets ® all other, e.g., payment to suppliers
It is important to note that the balance sheet does not attempt to reflect the market value of either
the separate assets or the total company.
Current liabilities (CL):
- Strong parallel relationship with current assets
- All short-term liabilities to be paid within one year:
- Accounts payable (creditors): amounts due to suppliers arising
from normal business
- Short term loans: bank overdrafts and all other interest-bearing
short-term debt
- Miscellaneous: e.g., accrued payments, interest, current tax, and dividends due
Long-term loans (LTL):
- More than one year
- Mortgages, debentures, term loans, bonds
Owners’ funds (OF):
- Most exciting section of the balance sheet: all claims by the owners on the business
- The total in the box is the figure that matters
- Three major subdivisions:
- Issued common stock ® nominal/book/market value
- Capital reserves ® surpluses from sources other than normal trading that belong to
the ordinary of common shareholder (cannot easily be paid out as dividends)
- Revenue reserves ® surpluses generated by trading (while they’re available for
distribution as dividends they’re not very often used for that; they tend to become
part of the permanent capital of the company)
Chapter 3: Balance sheet terms
The four terms used in the balance sheet are very simple but important:
1. Total assets
- Total assets (TA) = fixed assets (FA) + current assets (CA).
- Total assets (TA) = current liabilities (CL) + long-term loans
(LTL) + owners’ funds (OF)
2. Capital employed
- Capital employed (CE) = fixed assets (FA) + current assets (CA)
– current liabilities (CL)
- Capital employed (CE) = long-term loans (LTL) + owners’ funds
(OF)
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, Key Management Ratios (Walsh) – Joyce Rommens
- Only includes the long-term funds sections of the balance sheet
- It represents the long-term foundation funds of the company
3. Net worth
- = owners’ funds
- The value attributable to the owners in a company is determined
by the value of all the assets minus all external liabilities, both
short and long
- The shareholders’ stake in the company is the sum of the assets
minus loans outstanding to third parties
4. Working capital
- Working capital (WC) = current assets (CA) – current liabilities
(CL)
- Represents the amount of day-to-day operating liquidity
available to a business
- Operating liquidity is used to describe cash and near-cash assets
available to meet ongoing cash needs
- A company can be very rich in assets, but short of liquidity if
these assets cannot be readily converted into cash
Chapter 4: Profit and loss account
The function of a profit and loss account is to identify the total revenue earned and the total costs
incurred over that period. The difference between these two values is operating/trading profit.
Total revenue earned is generally the amount of invoiced. However, if we receive cash today for a
contract to supply a service over the next three years, when should we take that into our accounts as
revenue?
Total costs incurred:
- Those costs that relate directly to the revenue, for example, the direct cost of goods sold
- Those costs that relate to the time period covered by the accounts, such as staff salaries for
the period
The distinction between profit and cash flow is a common cause of con- fusion. The profit and loss
account as such is not concerned with cash flow. This is covered by a separate statement. For
instance:
- Employees’ pay incurred but not yet paid must be charged as cost even though there has
been no cash flow. On the other hand, payments to suppliers for goods received are not
costs, simply cash flow. Costs are incurred when goods are consumed, not when they are
purchased or paid for.
- Cash spent on the purchase of assets is not a cost, but the corresponding depreciation over
the following years is.
- A loan repayment is not a cost because an asset (cash) and a liability (loan) are both reduced
by the same amount, so there is no loss in value by this transaction.
Timing adjustments: revenue and costs occurring in a
period must be adjusted with adjoining periods to ensure
that each period is credited and charged only with what is
appropriate.
All the assets used in the business have played a part in
generating the operating profit to which we give the term
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