Mil waukee Surgical Supplies 1

Assignment #5 Milwaukee Surgical Supplies Sheila Olayokun HSA 525 Health Financial Management Professor Laura L. Forbes December 11, 2011

Mil waukee Surgical Supplies 2

Calculate the firm's average collection period. Take the weighted sum of days sales is outstanding. 30% customer pay on 10th day, 40% on 30th day and 30% on 40th days = (10*30%+30*40%+40*30%) =27 days Calculate the firm's current receivables balance. Average collection period = 27 days (calculated in part a) Sales = 1200000 (given in question) Current receivables =average collection period *Sales / 360 = 27*1200000/360 =$90,000 Calculate the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the 30th day. Average collection period (new) =(10*30%+30*70%)=24 days Sales = 1200000 (given in question) New receivables =average collection period (new) *Sales / 360 New receivables = 24*1200000/360=$80,000 Assuming the cost to the firm to carry receivables is 8% per annum; calculate the annual savings resulting from the toughened credit policy. (Assume the entire amount of receivables had to be financed.) = (90000-80000)*8% =$800

What is the primary difference between financial statement analysis and operating indicator analysis and why are both types useful to health services managers? Operating indicator analysis goes one step beyond financial statement analysis in that the operating indicator analysis examines operating variables with the goal of explaining a

Mil waukee Surgical Supplies 3

businesss financial condition (Gapenski, 2008). Like the financial ratios, operating indicators are typically into major categories to make interpretation easier. Financial statements play an important role in setting the framework of managerial decisions operating indicator analysis are quantifiable measurements that help an organization define and measure progress toward organizational goals that have been defined and agreed upon by management (Financial Statement Analysis). Operating indicator analysis in health care is part of the health service manager's quality and risk management plans (Blue). Plans are chosen based on the operating indicator analysis based on several factors such as regulatory and accrediting body initiatives and recommendations as well as identified organizational improvement areas. Describe the mechanics of the market multiple approach to business valuation. The market multiples approach is a valuation theory based on the idea that similar assets sell at similar prices (Financial Modeling Guide, 2010). When firms are comparable the multiples approach is used to determine the value of one firm based on the value of the other. This approach is commonly used by business owners, buyers and their professional advisors to decide how much money the business is worth. It offers the view of business market value enabling business owners to compare their business to similar businesses that have actually sold. If there is a relevant comparison individual business owners can get valuable insights about the kind of price your business would be sold for. Market multiple methods use a proxy for value, such as revenues. The value of the proxy is then multiplied by a market multiple value derived from data at other businesses (Gapenski, 2008). With the discounted cash flow approach, the basic premise is that the value of any business depends on cash flows produced by the business (Gapenski, 2008). The market

Mil waukee Surgical Supplies 4

multiple approach is more ad hoc in applying this premise, while the discounted cash flow approach is more precise.

References:

Mil waukee Surgical Supplies 5

Blue, W. (n.d.). How to Understand Key Performance Indicators in Health Care. Retrieved December 11, 2011, from eHow: http://www.ehow.com/how_6180543_understand-performanceindicators-health-care.html Financial Modeling Guide. (2010). Retrieved December 11, 2011, from Financial Valuation Concepts Market Multiples Analysis: http://www.financialmodelingguide.com/valuationconcepts/multiples-analysis/ Financial Statement Analysis. (n.d.). Retrieved December 11, 2011, from Accounting for Management: http://www.accountingformanagement.com/accounting_ratios.htm Gapenski, L (2008). Healthcare Finance: Introduction to Accounting and Financial Management. (4th Edition).