March 29, 2012
Instructor: Karla Vincent
Concepts of Ratio and Ratio Analysis
A simple definition of ratio is given in Chapter 7 of the book Financial Managers for Nurse Managers and Executives by S. A. Finkler. "A ratio is an examination of the relationship between two numbers. This is accomplished by dividing one number by another. Sometimes the result is multiplied by 100% to convert it into a percentage. A number of examples are given below. The comparison often yields insights that otherwise would not be gained (Finkler, 2007). Also, W. O. Cleverly provides interesting definitions on ratio and ratio analysis. In the glossary of terms of his book Essentials of Health Care Finance, he defined ratio analysis as follows: Ratio analysis: "An approach to analyzing the financial condition of an organization based on ratios calculated from line items found in the financial statements. There are four major categories of ratios: liquidity, profitability, capitalization, and activity" (Cleverly, 2011).
Advantages of using ratios
As stated above, a ratio is the relationship between two numbers, usually obtained from the financial information of the organization, among the advantages of the use of ratios are:
1. Easy calculations.
2. Its expression is simple. It does not have units and is expressed in percentages (%), enabling a better understanding of the values obtained.
3. The possibility of linking two indicators of interesting data, derived from the financial management of the organization, providing new views on this management.
4. The possibility of comparing the ratio values in similar periods of time or between two or more organizations or the ratio analysis of the organization, reviewing the way changes occur over time.
Major classes of financial statementet ratios The five major classes of financial statement ratios are common size, liquidity, solvency, efficiency, and profitability (Finkler, 2007). Other authors as J. Tennent explains in the first place that of the Occupancy Ratio, which is the most useful one for hospitals because it gives an idea of the "occupancy level" of this kind of health center.
Occupancy Ratio The occupancy ratio, one of the most ordinary ratios, is not estimated from financial statements, this is a crucial information for reviewing the efficiency level of a hospital. The total occupied beds divide by total beds multiple by 100%. “This report may be the responsibility of the financial analyst, but it is also up to the managers who are going to read and use them to provide feedback on how they can be improved” (Tennent, 2008). Total occupied beds
Occupancy Rate = ----------------------------------- x 100 % Total beds For example, in the case of a hospital of 200 beds with 140 occupied beds in a given specific day, the occupancy ratio will be 70% that very day. Though, it is true that this ratio is not directly obtained from financial information, it is a basic information to be considered by the hospital leading staff. As it can be seen, the range of values is between 0% and 100%. In the previous example, there is no point in just considering the numerator (140) in the previous example, because it may lose its relative value, because if the hospital had 280 beds, the occupancy rate will be 50% (half of the empty beds). Daily occupancy rate could provide an idea of the management and use of the hospital capacities and has major associated decisions as it happens in the simulation made in Week Two of this course with the fictitious hospital Elijah Heart Center of 140 beds where one of the possible options to lower costs were “reducing patients’ length of stay”. The Occupancy Ratio can be estimated in other health…