Measure Performance with the Financial Flexibility Index

Every hospital chief financial officer is confronted with that question daily, weekly, monthly and annually. The perception of what constitutes financial performance depends upon the person asking the question. It could be profitability, cash position, cash reserves for future endeavors, degree of current debt leverage, meeting current financial obligations or investing in the facility and modern medical technology. All of these perspectives are valid, but they need to be taken in aggregate to properly address the question.

By definition, the Financial Flexibility Index is a composite measure of seven financial ratios (standardized around 1995 norms). The index is published in the 2010 Ingenix Almanac of Hospital Financial and Operating Indicators. The Financial Flexibility Index results from an assumption about the importance of funds flow in a business entity. Firms that are likely to thrive can better control the relationship between source of funds and uses of funds and increase the difference between them. The seven ratios that comprise the index are all measures of various dimensions of the funds flow construct.

The Financial Flexibility Index is the sum of the following indicators:

  • (Total Margin -4.7)/4.7)
    (ROI PLA – 10)/10
  • (Replacement Viability – 15.5)/15.5)
  • (Equity Financing – 52)/52)
  • (Days Cash on Hand Short Term – 18)/18
  • (Cash Flow to Total Debt – 17)/17
  • (7.5 – Average Age of Plant)/7.5

Increasing values are favorable.

Applying the Financial Flexibility Index positions the CFO to address the question of financial performance from both a comprehensive and objective position. The index can be utilized on an annual basis and compared to previous fiscal years as well as peer groups. It also accommodates monitoring of financial performance throughout the year based on interim financial reports, on a rolling 12-month basis, versus budget or tracking actual performance against the hospital strategic plan