Financial Environment Summary

Financial Environment Summary

The financial structure

The financial management for not-for-profit organizations, government organizations, and for-profit organizations has a lot of differences and similarities. For-profit-organizations focus on profitability, not for profit organizations focuses on enhancing shareholder value while providing value in the healthcare system. On the other hand, government organizations’ financial management focuses on providing value for the public good and promoting initiatives that are good for the public. A not-for-profit organization, however, does not enjoy flexibility in its financial management plan because it does not engage in exchange transactions like it’s for-profit counterparts. The most important factor is ensuring that the donated resources are used optimally, unlike the for-profit, which receives payment for valuable healthcare services provided.

For government organizations, they must ensure that tax payer’s money is managed optimally towards public good health outcomes that affect the health system on a larger scale. The financial management is more flexible and budgeted within government approximations. For example, the Center for Disease control plays a significant role in tacking and addressing regional health challenges of a broader scale and promoting research. Therefore financial management basically aims at meeting more significant needs. Then there is the issue of taxation. The for-profit hospitals are regularly taxed by local governments while not for profit, and federal agencies are not taxed because they provide services for the public good. In terms of accountability, the for-profit organizations are accountable to the shareholder while the not for profits are accountable to the general public. On the other hand, government organizations are accountable to the federal government and the public.

Policies are unique to the financial environment

The financial policies for the for-profit-organizations are always about profit maximization and cost reduction. The financial resources are always limited, and the business operates in a highly regulated environment. The financial policies account for taxation, reducing costs, and addressing issues such as risk management. The organization is also business-driven, and it strategizes its financial plan towards gaining a competitive advantage over the competition. At the same time, the organization must invest in quality public relations as a risk management strategy and quality care to mitigate unforeseen risks. The organization has high costs of operation due to investment in technology payment of taxes, utilities, and property leases. However, at the same time profits are usually higher than their counterparts.

For the Not for profit organization, they enjoy more flexible budgets as long as they account for the costs of operations. Moreover, the organization is service-driven, meaning that it is not focused on profits. In addition, the organization enjoys a smoother regulatory financial environment and low risks and less pressure to meet financial obligations for survival. This allows the organization to focus on offering cost-efficient services. Government organization’s financial management policies are based on presenting the next financial year budget estimates to Congress for funding. The budgets are highly flexible, depending on the health emergency and the need for research into a public health issue. The service-driven culture makes sit tax-exempt, which reduces its costs of operation substantially.

Financial management practices in the environment

Budgeting and efficient financial management is a common practice for the for-profit organization. The budgeting process must be approved by the administration to meet the stringent needs of the firm and achieve profitability. On the other hand, Program costs are flexible and are carried out on a need basis because financial resources are scarce. The organization strives to reduce the costs of operation for sustainability.  Cashflow is a strategic tool that matters and thus must be monitored actively to ensure the organization achieves its long term goals. The organization also has a wider funding source to ensure that the organization is sustainable and survives unforeseen shocks in the operating environment. In terms of financial responsibility, the organization must ensure that costs are widely distributed, risks are aggressively addressed, and shareholders are given timely information about their investments.

Not for profit organizations must ensure that they provide a less flexible budget because the auditing process is rigorous and complicated. Many at times, the organization may receive donations that are difficult to tax, such as gifts and concessions. The government requires traceability of all funds irrespective of whether they are donor money or not, which necessitates high transparency. Secondly, the nonprofits always have to strive to meet donor requirements before they access the next funding. Because they are service driven, they are audited in a strict manner to meet donor needs and public expectations, the budgeting process is inflexible because most of the money must be fundraised in order to cater for unforeseen costs. The government organizations’ budgeting process is fairly straightforward, with low operating risks and a highly bureaucratic auditing environment. As long as the organization meets budgeting requirements and audit needs, then the organization is free to access taxpayer resources.

Why effective financial management is more difficult in health care

Effective financial management is more difficult in the financial sector because the industry is strongly regulated, and organizations have to meet regulation and ethical standards at the same time. At the same time, insurance companies and governments may reimburse the hospitals on time if they do not meet strict regulatory requirements. Therefore maintaining health and flexibility becomes a challenge for most organizations because costs are high, and the population is ever-growing old. The pressure to invest in technology and enrich consumer needs makes it extremely difficult to manage because of the risks involved. The organizations are facing low revenues because most of the income comes from outpatient care, while the cash cow is facility-based care. This affects their ability to earn optimally. The increasing costs of staff and technology are making it difficult to reduce costs and compete at the same time. Raw materials, costs of drugs, and increased reliance and volatility of technology costs are posing a big threat to the organization. Another issue is the costs associated with delays in reimbursements from insurance companies. This affects financial cash flow and efficiency. For nonprofit organizations, cash flow issues rely too much on fundraising capabilities, which affect operational efficiency. For governmental organizations, managing budgeted costs are difficult if emergencies occur, and there is a need to increase funds for certain programs drastically. At times some programs may be halted to focus more on a more urgent health threat.

References

Cheney. (2017). Top 5 Differences Between NFPs and For-Profit Hospitals. HealthLeaders Media. https://www.healthleadersmedia.com/finance/top-5-differences-between-nfps-and-profit-hospitals

Price. (2018, May 16). For-Profit Healthcare vs. Not-for-Profit Healthcare Organizations. BoardEffect. https://www.boardeffect.com/blog/for-profit-vs-not-for-profit-healthcare/