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HCM Financial Management (lectures)
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Lecture notes of the course: financial management. Master Healthcare Management.
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Financial Management 2022 lectures – Joyce RommensPlenary 1: Course Kick-off & Framework Financial Analysis
Course objectives:
- Analyse 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 (e.g., management control system, investment
etc.)
- Substantiate a decision in healthcare management, considering the financial consequences. critically assess or
defend a decision with financial consequences in healthcare.
This week:
- Financial Ratio Analysis
- Analyse financial ‘health’
- Analyse financial consequences of a managerial decision
- Choose a direction for improvement suggestions; which is feasible, desirable?
Introduction of the role of financial analyses:
- Analyse the financial health of an organisation and make improvement suggestions
- Give advice on a decision with financial consequences
Walsh p5: The approach taken in this book is to ignore many ratios initially to concentrate on the few
that are vital. These few, perhaps 20 in all, will be examined in depth. The reason for their
importance, their method of calculation, the standards we should expect from them and, finally,
their interrelationships will be explored.
Ratios are the guiding stars 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. (See: Walsh p4)
- Help to understand events that occur in organisations
- Understanding is necessary for management, steering and decision making
- Meander & St. Jansdal face challenges: every scenario has consequences ® the
consequences can be assessed by applying financial ratio analysis
Ratios are used similarly to how doctors use diagnostics to assess health conditions: a T-cell count if
she expects an immunodeficiency disorder.
Just like a doctor…
- A manager needs to know what she’s looking for, random calculations are useless (you need
a benchmark)
- Ratios require a norm/standard
- Medical norms differ per age/gender/etc.
- Ratios interpretation differ per sector/environment
- Just like medical diagnostics, a simple measure does not suffice
- Interrelations
Sources of raw information: balance sheet, profit and loss statement, and cashflow statement.
Annual report – balance sheet
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. (See: Walsh p11)
® You can compare the snapshots taken on different moments in time.
® Shows what you have and the funds to finance those.
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, Financial Management 2022 lectures – Joyce Rommens
Annual report – income statement/P&L (profit and loss account)
- The P&L measures the gains or losses from both normal and abnormal operations over a
period
- It measures total revenues and deducts total cost
- Not a photo, but rather a film covering a period (not only beginning and end but also all the
profits and losses in between)
- Gains and losses, revenue, and costs ≠ cash in and cash out!
® Profit and loss does not seem fit for healthcare organisations, because they’re not going for profit
necessarily.
Annual report – the cashflow statement
- Statement on cash inflows and outflows over een period
- It’s about cash, not revenue/costs, or profit/loss
- Film-like; overview of a period
Plenary 2: Framework Management Control System/ Performance Measurement
System
This week:
- Management Control Systems
- Create an environment where proper decisions are made
- Support, inform, empower, and steer employees/management
- Ultimately, create goal alignment
Controlling is not only negative. It shouldn’t be a marionet.
We want to create an environment where people lower in the organisation can make decisions that
are in line with the objectives of the organisation. How do you align people in the organisation to
contribute?
Financial management = planning, organizing, directing, and controlling the organization’s financial
activities in an efficient and effective way such that the organization’s objectives are met.
- There are multiple objectives (it is not good enough to just be profitable or just cure enough
patients)
- The organisations are complex (a lot of expertise, complicated problems, uncertainties)
® Divisionalise and assign possibilities (hire experts that know their field, give them the
responsibility to make certain decisions, but they must be monitored/controlled)
Organisational behaviour and management control are the same but different. Shared:
- Performance is multifaceted (there is not one way of performing well ® many things are
important at the same time with no hierarchy)
- Employees are key for success
Agency theory
- A world of two-person explicit or implicit contracts
- The principal (owner) delegated decision making authority to
- The agent (manager) who performs services (the person actually doing the job)
- The agent is a utility maximiser (we assume this: he does what fits him best)
- Motivation of the agent is solely by self interest
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, Financial Management 2022 lectures – Joyce Rommens
Self-interest
- All agents act in their own self-interest
- Financial compensation
- Leisure time
- Pleasant working conditions
- Leisure is the opposite to effort
- Managers prefer leisure – work aversion
- Withholding effort is called shirking
- Principals (owners) are only interested in financial returns
Asymmetric information
- The principal cannot easily monitor the agent’s actions
- The agent knows more than the principal about the task – private information
- Diverging preferences may lead the agent to manipulate information – moral hazard
Zimmerman’s three-legged stool. To realise organisational objectives, we must:
1. Allocate decision rights (who is responsible for what) (responsibility accounting)
2. Measure and evaluate performance (budgeting, PMS)
3. Incentivize performance (motivating, rewarding)
® Balance is critical.
Control mechanisms:
- Monitoring
- Limiting actions that benefit the agent at the expense of the principal
- E.g., financial control system and auditing
- Very difficult to monitor complex tasks
- Incentive contracts
- Should make the agent work in the principal’s best interest – goal congruence
Decentralisation
- Delegation of decision-making authority to lower levels in the organisation
- Provision of sufficient material and formal resources to execute that authority
- Assignment of accountability and responsibility for the quality of decision making to the
manager, who’s charged with achieving certain agreed-upon results or efforts
Advantages of decentralisation:
- Improvement of quality of decision making of higher-level managers
- Improvement of quality decision making of lower-level managers
- Increased economies of scale and specialisation
- Management development
Challenges of decentralisation. Decentralised managers do not automatically:
- Understand organisational goals and strategies, nor how they can contribute
- Agree with organisational goals and strategies
- Have the resources needed to act with organisational goals and strategies
How can performance be measured? It is multidimensional and interrelated. Is there one measure to
rule them all?
Contra principa negantem disputari non potest
- People are risk and work averse, and need an incentive to provide effort (agency reasoning)
- Reward something and get more of the behaviour you want
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, Financial Management 2022 lectures – Joyce Rommens
- Sanction something and get less of the behaviour you don’t want
® Ultimately, you want effort from the employees. However, it is difficult to reward the provision of
effort.
- Financial incentives (not so much in healthcare)
- Career-related incentives
- Intangible incentives (employee of the month)
Purpose of incentives:
- Align individual self-interests with those of the organisation
- ‘Nudge’ decision making toward organisational goals
- Unleash creativity and problem-solving
Management control is in essence not that hard, but it is delicate. There should be balance. It is not
like plug-and-play. It is related to organisational behaviour.
If you reward doctors for every treatment, pay-for-treatment, can go wrong. If it is against the best
interest of doctors, it might go wrong.
It is about designing a system that reduces the risk of some people going wrong some of the time
with huge implications for the organisation or patients.
The risk of not delegating is going bankrupt.
Plenary 4: Framework advice
What is advice? (Bonaccio & Dalal, 2006) (Bonaccio, 2010)
- Specific recommendation what a decision-maker should do
- Prescriptive (rules out a lot of alternatives)
- Recommendation against one (or more) alternatives
- Prescriptive (rules out one alternative)
- Provision of information concerning one (or more) alternatives without explicit
recommendation
- Descriptive (information support)
- Guidance on how to make decisions
- Process focus, no evaluative summary, decision-support
Social context of decisions (Bonaccio & Dalal, 2006)
- “Decisions are often made by individuals after consulting with, and being influenced by,
others.”
- “Individuals do not make decisions in isolation.”
Why do decision-makers seek and attend advice? (Bonaccio & Dalal, 2006)
- New perspectives (new information, new alternatives)
- Increase accuracy of the decision
- Share accountability for decisions’ outcome
- Social pressure of not rejecting freely offered advice
Bonaccio & Dalal (2006)’s framework of advice
Input Process Output
- Individual (accuracy, - Interaction between - Advice utilization (or
confidence) advisor and decision- discounting)
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