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Cash Flow and Balance Sheet

Question 1: Discuss the most important headings in a balance sheet and what the summary numbers mean.

Answer to question 1:

A balance sheet of an organisation is a significant part of its financial statements. It is clearly an evaluated result of its financial position consisting of its assets and liabilities. Thus, after the end of the financial year, it reflects what an organisation is left with after it disposed off its assets and repaid all its obligations. (Business Plan Hut, 2015)

The broad headings of the balance sheet are as follows:- (Wilson, 2010)

1. Assets: These are categorised into two parts-current assets as well as non-current assets. Current assets are those items that can easily convert into liquid cash. It is often kept for a shorter period of time, generally at most 12 months. These include accounts receivables, short-term investments, cash held at bank, cash held in hand, inventories, etc. Non-current assets are fixed assets required for capital investment and survival of the organisation through its income generating products. These include building improvements, furniture, purchase of plant and equipment, any other office appliances, etc.

2. Liabilities: these are again of two types-current liabilities and non-current liabilities. Current liabilities also known as short-term liabilities are those obligations which an organisation has to repay within 12 months. These include Accounts Payable, overdrafts and other short-term loans. Non-current liabilities on the other hand a long term and include loans repayable after 12 months, etc.

3. Owner's equity: This is the residue of the business profits that belong to the investors after the payment of all its liabilities and over dues. This is reached after deducting total liabilities of the organisation from its total assets. This critically determines the success or failure of the operations of the company.

The summary total is the total assets belonging to the company or the total liabilities as well as owner's equity which an organisation owes.

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Question 2: Explain 4-5 reasons why cash flow is important to a health care organization.

Answer to question 2:

Cash, whether held in hand or at bank, is a very critical asset for any organisation. Speaking of healthcare organisations in specific, caste plays a significant role in its day-to-day activities and also for long-term purposes. (Cole-Ingait, 2017)Following are the main reasons why cash flow is important for healthcare organisations-

1. The cash flow of the organisation including its income and expenses ensures that the organisation determines its future investments whether in assets like land and building for opening a new health care centre or in ambulances or new technological developments. Increase in cash flow can help the entity to finance its expansion and growth opportunities while on the contrary, its decrease can curtail its innovative moves. This assists largely in long term planning for the organisation and its longevity.

2. Cash flow allows the organisation in smooth running of its operational activities and several day to day dynamics. Idle cash is needed everywhere from being to doctors, buying medicines for its patients, paying daily wages and salaries to its workforce, etc.

3. Cash flow ensures that the company meets its financing needs on an immediate basis. Borrowed funds can be paid on timely basis without affecting the goodwill in the industry. It can enable them to pay dividends to their investors and allow help sometimes in re-investing the left over profits back into the business for its growth.

4. Cash flow ensures creation of adequate liquidity in the organisation. Liquidity enables to judge whether the organisation has enough assets to meet its obligations arising within six months or less. Thus, an effective cash management allows an organisation to have ample cash flow to ensure it can survive the daily expenses well and taking into account its long term goals.

Hence, it can be concluded that the cash flow is a proof of the organisation's operational performance and its investment portfolio. To serve these needs, a healthcare organisation positions its system accordingly to take the best advantage of the potential opportunities.

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