Basic Understanding of Financial Statements
Dr. Kate Rohr
Continuing from the previous article, remember two important points:
- The purpose of financial statements is to enable an understanding of the financial health of a business entity.
- MCDH uses the Accrual Method of financial accounting
The purpose of this article is to provide a basic understanding of the “Statement of Revenue and Expenses”. In some organizations this is referred to as a “Profit and Loss” statement. Basically, it is a tool that helps determine if a business entity is earning a profit or incurring a financial loss within a given period of time. At MCDH this is presented on a monthly (current month) and yearly (YTD) basis. It is created by first listing and totaling sources of revenue (income) and then listing and totaling all the expenses. The profit for a given period is then determined by subtracting total expenses from total revenue (income). The result is reported as NET INCOME or LOSS.
Although the basic concept is simple, there is “devil in the details”. The first complicating factor is that most complex businesses like MCDH divide the statement into two sections. The first section is the “OPERATING” revenue and expenses and the second section is “NON-OPERATING”. This separation is logical in that the OPERATING section includes only those items which respond to the daily ebb and flow of the business and which theoretically can be modulated by short term business decisions. It is also referred to as earnings before interest and taxes (EBIT). At MCDH this includes such items as income from clinic visits, hospital admissions, lab tests, etc. The NON-OPERATING income includes gains/losses from activities not related to the general activities of the business, such as income from investments, sales of property, one time donations or other large onetime events not responsive to the basic business activities and decisions.
The second factor that often confuses people not accustomed to reading this type of report is that when “Revenue and Expenses” are reported in an accrual system, the numbers do not represent actual cash. Instead, the results represent the cash it is reasonable to expect will be “realized” (i.e. actually be received) at some future date.
In summary, the “Statement of Revenue and Expenses” is a report of the monthly and yearly income and expenses divided into categories which indicate the ongoing business activities and whether certain activities are making a profit or losing money. In the case of MCDH this is the EXPECTED loss or profit. The next article will look at individual categories in the MCDH statement and what each tells us about the financial trends and challenges the hospital faces.
Editor’s Note: This is the second article by Dr. Rohr to assist the community in understanding the extremely complex MCDH financial documents. This is especially critical given the desire to submit a new tax measure to support the hospital. Given that 2 Board Members appear to be deaf to community concerns and the outcry to involve us in the decision making process, we must be educated and vigilant!