Healthcare Industry

Healthcare Industry

Key Financial Drivers

One of the sole aims for any firm is to increase its profits and achieve long term growth and stability. Firms in all industries seek to achieve this through several ways. One of the ways to attain growth, when all others options fail, is to merge with another firm in the same industry. This is often the last resort for any firm as there are various challenges which a firm will face once it merges with another. In the recent past, we have seen a growing trend amongst health care organizations to merge with other firms (PWC, 2013)There are several factors behind a healthcare organizations' decision to merge. Most of those factors are financial related. The key financial drivers that will cause organizations to merge are; cost reduction, increase in revenue, reduction in Medicaid aids. We all know that an increase in operations let firms achieve economies of scale. It is much different for healthcare organizations to expand due to the nature of the industry they operate in. You need to bring lots of technology and human capital to expand. Failing to do so, firms seek to merge with other existent firms to increase their operations. The benefits from expansion and the resulting economies of the scale are numerous. Economies of scale let these otherwise struggling firms to reduce costs and operate more efficiently. Another reason for these organizations to merge is due to the prospects of revenue enhancement. Firms when merged operate as one single entity and their revenues are also merged. This increases the financial stability of firms from a revenue seeking perspective. Lastly, the reduction in Medicaid aids for many small organizations have also prompted these organizations to seek mergers (Fierce Healthcare, 2012).

Evaluation Criteria

There are several ways to determine the effect of a merger among two healthcare organizations. Most financial analysts rely on the financial statements of the organization to evaluate the financial performance. They use statements such as Income Statement, balance sheet, cash flow statements. Within each statement, there are several indicators which can help us in evaluating a financial performance of a post-merger organization. Financial analysts start with the basic first. They assess the change in revenues and profits. A positive change in the gross and net profit margin is a better indicator. This tells them if the post-merger organization was successful in achieving economies of scale. If there is a substantial reduction in the costs per revenues, analyst can believe that the impact of post-merger is positive. They also check entries in the balance sheet such as current assets and current liabilities. The relationship between the two reveals if the organization has improved its liquidity or not. Liquidity factors are often the leading reasons behind a firm's decision to merge (Fangming and Huainan, 2009). Financial analysts also assess the cash flow statements in a post-merger organization to evaluate the financial performance. They check all the relevant key performance indicators (KPI). KPI's of cash flow statements reveal if the company is making ...