Reviewing an ambulatory surgery center's cash flow statement is a quick and easy way to check a center's financial health, says Matt Lau, director of financial analysis at Regent Surgical Health. Non-MBAs, such as physician-investors, should take advantage of this tool if they are not already doing so, he says. With a little help, they can easily determine how cash is generated and how it is spent. Mr. Lau reviews the three main sections of the cash flow statement.
1. Operating activities section. This section shows the amount of cash coming in from insurers and self-paying patients, balanced by how much cash is going out for operating activities. "It's actually quite straightforward," Mr. Lau says. "If the number is consistently positive, then the ASC's day-to-day operations are self-sustaining."
The facility is creating enough positive cash flow to pay its bills and then some. But if cash flow is consistently negative, "it could spell trouble," he says. The ASC will run out of cash unless something is done to change the direction of the operation.
2. Investing section. In this section, which tracks investments in expansion and new equipment, a negative number can, in some cases, be a good thing. "A high negative number could mean the center is expanding into a new specialty and is buying all the equipment necessary for that to be done," Mr. Lau says. "Once the specialty is up and running, new revenues and profits are expected."
Conversely, a large positive number in the investing section could be a bad sign, he says. It could mean that all the center's orthopedic surgeons have left and the center is making money on selling off their equipment.
3. Financing section. By looking at this section, "you will, for one thing, be able to see how much of the cash is being sucked up in the form of these debt payments," Mr. Lau says. The financing section shows how much cash the center borrowed during the measured period, how much cash is going to paying back debt and how much cash is being distributed to owners.
Mr. Lau says a large cash loan could be good if the money is going to an investment to bring in new case volume, but it is bad news if that loan will not enhance volume. Furthermore, a loan might be welcome if it is obtained on favorable terms, with payments stretched out over a long period at a low interest rate.
"Then the monthly debt payments would not put a big strain on the cash position of the business," he says. However, if terms are unfavorable, with a high interest rate and a shorter repayment schedule, then these debt payments could put a significant strain on the center's cash. "This might possibly even affect the center's ability to pay its other vendors," he says.
The third figure to watch for in the financing section is distributions to owners. "If the figure is high, it is very positive sign," Mr. Lau says. "It means the center is attractive to new potential investors."
Learn more about Regent Surgical Health.
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