According to Gibson (2011), “financial statement analysis involves the identification of the following items for a company’s financial statements over a series of reporting periods” (p. 45). This analysis attempts to reflect on the financial statement analysis as a tool for aiding the making of informed decisions on the nature, structure, and form of capital capacity, operative profitability, and investor confidence within a healthcare firm. Besides, the analysis reviews the weaknesses of using financial statement analysis as a means of ensuring the financial sustainability of a healthcare firm. In addition, the paper presents other ways of assessing financial statement sustainability.
Strengths and weaknesses of financial statement analysis: healthcare firm environment
Financial statement analysis offers the ability to monitor financial performance over time in a healthcare firm since it highlights the financial standing of the firm through benchmarking different critical financial performance indicators. Besides, it offers the healthcare firm the ability to predict future financial performance based on past performance trends and the current performance. As a result, the firm will be in a position to predict the future financial standing in the healthcare environment through reviewing the performance of different indicators of financial sustainability. It enables the health institution to determine financial performance as a prerequisite for future planning. Moreover, by reviewing financial statements, a healthcare firm may be in a position to compare the performance of various healthcare institutions within the same industry as a strategy for tracking the current position of the firm in terms of competitiveness and general wellbeing of the business. In addition, financial statement analysis gives the firm the ability to seek external funding sources for growth and performance sustainability (Ormiston, 2006).
Despite the above strengths, financial statement analysis might not give a clear picture of financial performance sustainability since it is only focused on the financial health of the institution as opposed to other aspects of running the business that might give a clear picture such as the level of customer satisfaction and market swings. Besides, there are a series of healthcare business aspects that are impossible to quantify in monetary terms. These aspects are excluded from the financial analysis making it inadequate in ensuring financial sustainability. Since the market dynamics and patterns are not static, decisions made based on the financial health of a health institution might be misleading, especially when the actions are meant to address long terms business needs in the dynamic healthcare environment. In most cases, the data available in the financial statements capture the market performance at the given period. When there are swings in the market dynamics, the values might change positively or negatively (Wainwright, 2012). Therefore, making decisions on the assumptions in the financial statements might not give a clear indication of the performance and sustainability of the healthcare firm.
Other ways of accessing financial sustainability
The alternative way of accessing the financial sustainability of a healthcare firm is the use of economic value assessment (EVA). Reflectively, the “economic value analysis is a wealth metric that companies use as opposed to accounting income or profit” (Subramanyam, 2013, p. 27). This tool reviews the economic benefits and costs of running the business to create a clear focus on the net benefits as a sustainability indicator. Besides, this tool focuses on the financial and economic flows in the firm to ensure that the net benefits are equated to the cost of providing these benefits. Therefore, the higher the value of the net benefits, the higher the financial sustainability of the firm.
Gibson, C.H. (2011). Financial reporting and analysis. San Diego, CA: Cengage Learning Publishing Company.
Ormiston, F. (2006). Understanding financial statements. New York, NY: Cram 101 Incorporated.
Subramanyam, J. (2013). Financial statement analysis. New York, NY: McGraw- Hill Education. Print.
Wainwright, S. (2012). Principles of accounting. San Diego, CA: Bridgepoint Education, Inc.