Memorandum: Understanding the Financial Statements of [Hospital Name]

To: Board of Directors

From: [Your Name], Director of Finance

Date: [Current Date]

Subject: Explanation of Financial Statements for Upcoming Meeting

This memo provides a brief overview of the four key financial statements we will be reviewing at our upcoming meeting. Understanding these statements is crucial to evaluating the hospital’s financial health and making informed decisions about its future.

I. Balance Sheet

• Purpose: The balance sheet is a snapshot of the hospital’s financial position at a specific point in time. It shows what the hospital owns (assets), what it owes (liabilities), and the difference between the two (equity).

• Main Components:

  • Assets:

    • Current Assets: Cash, accounts receivable, inventory, and other assets expected to be converted to cash within one year.

    • Fixed Assets: Property, plant, and equipment (PP&E), such as buildings, medical equipment, and land.

  • Liabilities:

    • Current Liabilities: Accounts payable, salaries payable, and other obligations due within one year.

    • Long-Term Liabilities: Bonds, mortgages, and other debts due in more than one year.

  • Equity: The owners’ stake in the hospital. For a not-for-profit hospital, equity is often referred to as “net assets” and represents the difference between assets and liabilities.

II. Income Statement

• Purpose: The income statement, also called the profit and loss (P&L) statement, shows the hospital’s financial performance over a period of time, typically a year or a quarter. It summarizes revenues and expenses to determine the hospital’s net income or loss.

• Main Components:

  • Revenue: The income generated from patient services, such as inpatient care, outpatient services, and ancillary services.

  • Expenses: Costs incurred in providing services, including salaries, supplies, utilities, and depreciation.

  • Net Income (or Loss): The difference between revenue and expenses. A positive net income represents a profit, while a negative net income represents a loss.

III. Statement of Cash Flows

• Purpose: The statement of cash flows shows the movement of cash in and out of the hospital over a period of time. It classifies cash flows into three categories:

  • Operating Activities: Cash flows related to the hospital’s core operations, such as patient services and administrative expenses.

  • Investing Activities: Cash flows related to the purchase and sale of long-term assets, such as property, plant, and equipment.

  • Financing Activities: Cash flows related to debt financing, equity investments, and dividends.

IV. Statement of Changes in Net Assets

• Purpose: The statement of changes in net assets, specific to not-for-profit organizations, shows the changes in the hospital’s equity (net assets) over a period of time.

• Main Components:

  • Beginning Net Assets: The hospital’s net assets at the beginning of the period.

  • Changes in Net Assets: Increases in net assets from operations, investments, donations, or other sources, and decreases from expenses, debt repayments, or other uses of funds.

  • Ending Net Assets: The hospital’s net assets at the end of the period.

Conclusion

These financial statements provide a comprehensive overview of the hospital’s financial position, performance, and cash flow. They are essential tools for making sound decisions about resource allocation, strategic planning, and ensuring the long-term financial sustainability of the hospital.

Note: This memo is a brief overview. The specific format and details of the financial statements can vary depending on the hospital’s accounting practices and reporting requirements. The CFO will provide more detailed information and analysis during the board meeting.