Welcome to our online course, Financial Acumen for non-financial managers. My name is Richard Lambert, and I'm the Millers Girard Professor of Accounting at the Wharton School of the University of Pennsylvania. And I'm Chris Ittner, Ernst and Young Professor of Accounting, and chair of the accounting department at the Wharton School. And Rick's Boss. We've taught a variety of accounting courses of the past 30 years to business students and executives. One of the things we've seen in these courses is the increasing number of students we get, who are healthcare professionals, doctors, pharmacists, dentists et cetera. This is why we've developed this course. These are people who've seen the need to add financial skills to the medical expertise who've developed over their careers, because they believe this will make them more effective doctors, managers, administrators, and policy makers. Simply put, our objective is to try to help you become a more informed user of financial information. Our objective is not to teach you how to become an accountant, or how to do your taxes, but instead, on how to use this information in your job. How do the decisions that you made translate into financial performance, and what do you look at to see if your decisions are playing out as you intended or hoped? Moreover, as you progress upwards in your career you often eventually become accountable for the financial consequences of the things that you do within your organization. How are those measured? This is where these mysterious things called financial statements come in. One of our objectives is to simply make those less mysterious. By the end of the course, you're going to be able to look at financial reports and see what's in them, and just as importantly, also see what's not in them, or perhaps not in them yet. This will be helpful in trying to figure out where you're doing well, and where you're not doing so well, where you can improve. Another thing this will happen is that you'll become more effective in championing your own ideas and strategies within your organization. At some point, this discussion always gets to, what's this going to do to the numbers? The more you're able to express your ideas in financial terms, the more you'll be able to participate in those high level discussions, and the more effectively, you can contribute to your organization's goals. In particular, you need a way to express those strategies in terms of the future activities, transactions, and events that have to happen to make your strategy work so that you can forecast the future profitability of those strategies. You'll need to develop performance targets some of which might also be non-financial, to assess how well you're progressing towards fulfilling those strategies. So, let's be more specific. We're going to start out by looking at what financial statements are? We'll talk about the statements that firms put together to report to their shareholders or owners. To provide some context, we'll look at the financial reporting environment and the oversight by the board of directors, and auditors, and the government, that's part of the financial reporting process. Then we'll dive deeper into the three primary financial statement. The balance sheet, the income statement, and the cash flow statement. We'll also talk about how these three statements are related to each other. We'll start with the balance sheet. The balance sheet keeps track of the important resources the company has acquired to help it provides goods and services to customers and patients. As we'll see, some of these resources are easy to keep track of but not all are. In particular, many so-called intangible assets are not well captured on a balance sheet. These intangible assets are often especially important in high tech or knowledge intensive businesses. The balance sheet also keeps track of information about the amounts that you owe to other parties, liabilities and debt, and keeps track of the net worth or owners equity of the firm. Then we'll look at the income statement. Which measures the profitability of the firm. What is profit and how is it different than cash flow? For example, it's important to distinguish between the money you get from selling services to customers, versus money that you get from borrowing, versus money that you get from issuing new shares to owners. All three are cash but the latter two aren't profits. Profits are revenues minus expenses, but, what are you allowed to count as revenue? Signing a contract isn't enough, getting paid by the customer isn't enough either. So, how does that work? Which expenses do we match to the revenues to calculate profits? This is especially hard to do when you're spending money in one period, but the benefits don't occur until far into the future, such as with R and D. We're also going to develop a set of tools for doing financial statement analysis. This will allow us to dive deeper into developing measures of risk and liquidity that is, are we in danger of not being able to pay our bills, and profitability measures. This is going to help us figure out what the underlying drivers of performance actually are. Ultimately, the goal is to improve your organization's financial performance by identifying the expenditures offering the biggest bang for the buck, and then measuring the extent to which you're achieving the expected financial results. The financial statements covered in Rick's sessions are some of the primary tools for conducting these analyses. But in many cases, some of the most important investments that need to be made to create long term financial values do not show up in current financial statements, or even reduce the short term profits reported in the accounting statements. This is why most health care organizations also attract non-financial measures that are believed to be leading indicators of future financial performance. Lots of hospitals measure things like market share, employee turnover, and absenteeism, and patient satisfaction. With the expectation that improvements in these measures will lead to higher profits. For example, if patients are not satisfied they may eventually find other health care providers to meet their needs. Physician satisfaction is also important, because a hospital's financial performance is often driven by its ability to attract quality medical staff and create referrals from primary care providers. But how much money are you willing to pay to satisfy patients and physicians? Does it make financial sense to try and make them 100 percent satisfied? Might be a nice goal, but if it's incredibly costly to satisfy every patient all the time 100 percent satisfaction may make no financial sense. And what dimensions of satisfaction make patients and physicians stay with your practice? For example, are patients more interested in your facilities, the ease of scheduling appointments wait times, the amount of time spent with physicians, in my case finding a parking spot. If ease of scheduling is more important than wait times, then investments and scheduling systems are likely to have a higher long term financial payback. By knowing how different non-financial measures are linked financial outcomes, health care providers are in a better position to make investments in the areas offering the greatest financial payback, and choosing non-financial performance measures that are actually leading indicators of future financial performance. My accounting analytics module provides an analytic framework, for linking non-financial performance measures to financial performance. The results from these analyses can then be used to identify which of your non-financial performance measures offer the greatest potential payback. To set performance targets for these measures that make economic sense, and allocate resources to the non-financial dimensions that contribute most to financial value creation. So to wrap things up for now, we've developed the course to help healthcare professionals add an important set of skills to their toolkit, namely; how to think about decisions and strategies in financial terms, how we measure things financially, and to emphasize the healthcare orientation of the course, we'll actually look at real financial statements from two large health-care oriented companies. One is a firm that owns dozens of hospitals and other health care centers, and the other is a large non US pharmaceutical firm. But it's also vital to recognize that the total impact of decisions may not show up in conventional financial performance measures until far into the future. This is where non-financial measures can be of great value. They can give you quicker feedback regarding the progress you're making toward your objectives and goals. But it's also important to think about and to the extent that you can validate that these measures are actually related to the ultimate financial outcomes. We're going to cover a lot of important ground here for recourse. If you put in the time and study as we go through the material, we're confident you'll learn a lot. We hope you'll find it useful and relevant as your career continue to progress. We're looking forward to interacting with you in the course. Good luck. And we wish you much success.
