Health Financial Management

Operating indicator analysis helps in identifying the factors that contributed to the assessed financial condition. Therefore the primary difference between the financial statement analysis and operating indicator analysis is that financial statement analysis focuses on the information in a business’s financial statements with the goal of assessing financial condition, whereas operating indicator analysis focuses on operating data ( not found in financial statements) with the goal of explaining financial performance.

Both types of analysis are useful for health services managers, because managers can use financial statement analysis to assess current condition and to plan for the future, and through operating indicator analysis, managers are better able to identify and implement strategies that ensure a sound financial condition in future. 6)Describe the mechanics of the market multiple approach to business valuation. Sol) Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.

Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes.

A discounted cash flow valuation (DCF) is theoretically the soundest approach to value assets or businesses in a financial modeling and analysis exercise. However, market multiple analysis, an alternate approach is widely used in practice, especially to value companies with high growth potential but limited operating track record. Market multiple analysis approach is based on the concept that similar assets should sell at similar prices.

A company/business would be an appropriate comparable if it shares a similar risk and growth profile as the company/business being valued. Market multiple analysis approach is easy to apply and is widely used, but suffer from several serious limitations. The five steps of the market multiple analysis approach are: 1)Identify comparable companies: Criteria such as growth, technology, clientele, size and leverage are used to identify comparable. Comparable companies should, as far as possible, have financial ratios similar to each other and to the company being valued. )Calculate key ratios for comparable companies: The ratio can be expressed as: V/x, where V= value of the firm or firm’s equity, and x is some financial variable such as earnings, cash flow, book value, sales or even some physical characteristic. V/x is calculated across the comparable companies for several choices of x. 3)Average the key ratios: Discard the outliers and average the ratios of other comparable companies to calculate the average ratio that should be applied to the company being valued. Such average ratios should be calculated for each financial variable that is used for valuation. )Apply average ratio to obtain indicative value: Apply average ratios obtained in Step 3 to the absolute data of the company being valued, to arrive at the indicative value based on each financial parameter. Then determine the valuation range based on these indicative values.