Introduction to Financial Analysis

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Introduction to Financial Analysis

A financial analysis is critical before buying testing systems equipment. It allows the financial decision makers to make critical informed decisions. The key components of the financial analysis are to perform a cost analysis that includes an operation cost study, the break-even point, operating leverage, and return on investment indicators. It is best to determine the operating cost of current testing practices and the operating costs of each prospective instrument being considered. The vendors can be helpful in providing some of the data needed for a study, but should not be counted on to provide an unbiased cost analysis. Operating leverage is an important measure of risk of the purchase. The break-even point is an important indicator of when a test pays for itself and becomes profitable. Payback, net present value, and internal rate of return are return on investment indicators that reveal financial feasibility for a purchase.
The majority of hospitals are paid primarily through managed care systems. In a managed care setting, such as a health management organization (HMO) or patient provider service organization (PPO), that includes patient care services (including lab) as part of a prepaid patient payment plan, profitability is most likely not a factor. Since revenue is included in the patient payment plan, the major considerations in capital equipment acquisition will relate to the initial cost and operating cost of the instrument. Further, will the new instrument improve the efficiency and quality in patient care resulting in better outcomes and less time spent in the hospital? Some hospitals have extensive outpatient services that are based on fee for service. In this case, determining the financial indicators such as break-even point, operating leverage, payback, net present value, and internal rate of return would be helpful.