Question

As a healthcare manager, reflect on how you think financial statement analysis and operating indicator analysis would be useful. What do you think are some of the problems or challenges inherent in financial statement analysis?

Answer 1

As a healthcare manager I would say both analyses are important.

Financial statement analysis is used to assess the financial standings and how the company has been performing over a period of time. This is important because investors and donors have interest on how the business they have invested in is performing and the only way to understand it is through financial statement analysis.

Operating indicator analysis is useful because it helps healthcare managers explain the financial condition of the business at a given time. It also helps managers to better understand the risk associated with the business when implementing organization strategies to better the financial conditions in the future.

The problems or challenges inherent in financial statement analysis are:

1) Historical Cost - Transactions are initially recorded at their cost. This is a concern when reviewing the balance sheet, where the values of assets and liabilities may change over time. Some items, such as marketable securities, are altered to match changes in their market values, but other items, such as fixed assets, do not change. Thus, the balance sheet could be misleading if a large part of the amount presented is based on historical costs.

2) Effects of Inflation- If the inflation rate is relatively high, the amounts associated with assets and liabilities in the balance sheet will appear excessively low, since they are not being adjusted for inflation. This mostly applies to long-term assets.

3) When a company is operating a number of businesses; it is difficult to evaluate the performance of each of the businesses, especially if the businesses are diverse. There are no fixed parameters to judge the performance of each of them.

4) Financial Statement Analysis is not always accurate in analyzing the strengths or weaknesses of many of the company’s intangible resources.

5) No information about future - The information in a set of financial statements provides information about either historical results or the financial status of a business as of a specific date. The statements do not necessarily provide any value in predicting what will happen in the future. For example, a business could report excellent results in one month, and no sales at all in the next month, because a contract on which it was relying has ended.