Chapter 1 Transcript1

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1 PHPM569: Fundamentals of Health Budgeting & Financial Management Chapter 1 Introduction to Financial Management Transcript Slide 1 Welcome to the Chapter 1 lecture of Fundamentals of Budgeting and Financial Management. This lecture will help summarize some of the information in Chapter 1 but should not be considered a replacement for reading Chapter 1. Slide 2 You will hear the words effectiveness and efficiency many times throughout the course. Effectiveness measures whether or not the organization is meeting its mission. Efficiency, on the other hand, answers the question: did the organization do this without over utilizing resources? If the mission was accomplished but it cost a fortune, the organization will not survive. NPOs need to carefully monitor both effectiveness and efficiency. Slide 3 What is financial management? It is the subset of management that provides important information for decision-making. Decision-making without considering resources is dangerous. As mentioned in the course introduction, it is important for managers to have a fundamental understanding of budgeting and finance, otherwise they may not really be controlling the destiny of the organization. Finance focuses on inflows and outflows, also known as or sources and uses of resources. It also includes accounting , which can be broken down into two subcategories. The first subcategory is managerial accounting, which is all about planning for improved results. This is accomplished primarily through budgeting. The second subcategory is financial, which is a system for reporting financial results. The important thing to remember here is that managerial accounting deals with a prospective view (budget forecasting) while the financial aspect of accounting deals with a retrospective view (reporting what happened). Slide 4 Does the U.S. have a free market, where unencumbered supply and demand dictates goods and services and pricing? Well, not entirely. The U.S. has a mixed market economy with free market elements. This is also known as an imperfect market. The government plays a role in distributing resources to help stabilize the economy. We saw that recently with the Public Health Emergency. The government intervened to help fast track vaccine development, provide business loans, many
2 PHPM569: Fundamentals of Health Budgeting & Financial Management of which are being forgiven and sent out stimulus checks. This would not be done in a pure free market. But the government helps in other ways on a more regular basis, such as funding social programs. But it is more than that. For example the government funds our local parks. Most local parks are used by the public at no cost but someone has to pay for the upkeep. Slide 5 The government intervenes when the market results in unintended consequences. They subsidize pricing when there is no competition such as funding utilities, in rural or hard-to-reach areas. This ensures prices are not significantly higher there. They also levy “sin” taxes like those found in gambling, alcohol and tobacco products. Finally the government is also involved in creating warning labels that are seen on many products. Some say these activities are designed to try protect us from ourselves. Slide 6 Where does the government get its money? Well primarily through taxes. Types of taxes include sales tax, income tax, property tax and payroll tax. These are federal, state and local taxes. For example, sales tax, income tax and property taxes are state and local. Income taxes and payroll taxes are federal. Taxes can cause behavior changes through tax credits and changes in the tax system. For example, if we went to a flat tax system people would not be able to take advantage of all of the credits or write offs so spending habits could change. An example could be charitable donations to NPOs. The government also gets money from user fees such as the Department of Motor Vehicles, national parks, various business licenses etc. Slide 7 It is important to understand the difference between for-profit and nonprofit organizations. For- profit organizations focus on generating wealth for stockholders and owners while nonprofit organizations focus on accomplishing a mission while also staying solvent. It is important to note that some for-profit organizations serve a mission as well. These include hospitals, schools and prisons. These organizations must carefully balance their priorities. Slide 8 Healthcare organizations include both for-profit and not-for-profit organizations. Here you can see again a government presence as they pay for health services through Medicare, Medicaid, the VA and Active Military. At this time, the largest single payer of health services is still private insurance, but that percentage has been going down. You can see where most health care dollars are spent.
3 PHPM569: Fundamentals of Health Budgeting & Financial Management Slide 9 Governmental organizations include federal, state and local governments. We already covered fund sources for these organizations. But there is some terminology I would like to bring to your attention. Revenue for the government is many times referred to as Receipts. Non-governmental organizations refer to it as Income or Revenue. Governmental organizations refer to expenses as expenditures, whereas other organizations use the word Expenses, although you will sometimes hear the word expenditures used outside of government agencies. The terminology is different because the government uses a different type of accounting system, Differences between receipts/revenues and expenditures/expenses are surpluses (if they are positive) or deficits (if they are negative.) In this course we will also be learning about other terms used One last nuance with the government is their use of the term “Off the books.” This refers to money the government holds in trust for others. An example of this is social security. The government holds that money for retirees and the question/controversy (?) is whether that money should be counted in government financial reporting. Slide 10 You might be interested to know that the federal government does not have a balanced-budget requirement; however, 49 of the 50 states have some form of balanced-budget amendment in their constitutions or statutes. The exception to this is Vermont. Language is varied, and many feel that technically Wyoming, North Dakota and Alaska do not have specific balanced-budget requirements. Oregon, on the other hand, has a provision that state reserves greater than 2% must be returned to taxpayers. This is called the “Kicker” provision. Slide 11 As I just mentioned, the federal government does not have a balanced budget requirement. This brings us to the national debt! Some do not feel the national debt is a problem. They believe the national debt allows the government to provide services to be paid by future generations. All generations have borne the debt of former generations. Is it really a burden? We all live with debt and as our resources grow, so does our debt. Others believe that the huge interest payments limit the amount of money available for other initiatives, which ultimately slows growth. Who owns the debt? If the United States does, do we owe money to ourselves? If another country owns it, what are the consequences? In recent years the U.S. national debt has grown significantly and some of our debt is owed to other countries. Slide 12
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4 PHPM569: Fundamentals of Health Budgeting & Financial Management Please use the link provided to check out the national debt clock. It is important for you to get an idea of our debt and its components. It is controversial whether or not we should pay off the national debt, and if we do, what is the best plan to move forward? How do we do it without harming the economy? Should it be paid off within a specific time frame? Slide 13 Here is some interesting information regarding the consumer debt in the United States. It poses the question: are we as individuals getting pretty comfortable with debt these days? And does this color our perspective on whether the national debt should be paid off? Slide 14 Here is some information on NPOs. Individuals are the largest contributors to charities and religious organizations are the largest recipient. Not-for-profit organizations are exempt from most forms of taxation at the federal, state and local levels but NPOs are taxed in a few ways. They have to pay payroll taxes, possibly property taxes and if they have revenue generating activities that are not specifically tied to their mission, they could be taxed on those activities. For example, this could apply to a hospital cafeteria that is used by the community. Slide 15 Let’s talk a little bit about fundraising. Although people will donate more if solicited, this can be overdone. Donors get irritated when they are contacted too often. Contributions come from many sources. They come in several different forms as well. The first category is unrestricted funds, which are desired by most NPOs. These funds can be used to help fund operations, and decisions as to their use can be left to the discretion of the NPO. Obviously, these funds should never be misused. The second category is temporarily restricted funds. These are used for a single purpose as determined by the donor. Once the purpose is fulfilled any surplus can often become unrestricted. Finally, there are permanently restricted funds, which can only be used for a specific purpose unless the donor changes his or her mind. Organizations can also receive operating and capital contributions, and there are differences between the two. We will be exploring all of these categories a little later in the course. Slide 16 We end this presentation, with two fundamental questions. Should Public Service Organizations worry about financial management? And, should they earn a profit? Why or why not?
5 PHPM569: Fundamentals of Health Budgeting & Financial Management Slide 17 Should NPOs be concerned about financial management? Should they earn a profit? Yes and yes. NPOs must watch their finances to keep their doors open and their mission viable. Profits are used to accomplish goals, to buy equipment, to buffer against bad years and cycles and for the growth of the organization, but do we call it a profit? Although the word profit is sometimes used by NPOs, it is my opinion that we should not use the word profit. After all we are discussing non-profit organizations. It is preferable to use other words such as surplus, balance and reserve. Using the word profit with non-profit organizations can give a false impression about the organization at the very least. Further, as the IRS continues to look at NPOs to make sure they are not behaving like for-profit organizations, why would we use the word “profit” and provide additional fodder? Slide 18 This ends the Chapter 1 lecture. Please also read Chapter 1 in your textbook to more fully explore these concepts.