I am looking for the industry standard for financial ratio calculations. What is the average amount of time to calculate accounts receivable (A/R) days and days cash-on-hand? Per HFMA’s Principles & Practices Board statement 16 for A/R days, we should use an average daily revenue of three months for the denominator. Should the days cash on hand calculation be consistent with this three-month average or should there be a different period of time used?
Answer 1: Financial ratios measure performance in four broad categories: profitability, liquidity, capital structure, and activity. The formulas used by internal and external stakeholders are not necessarily the same. An internal user of A/R days (the proper name of the ratio is “days net revenue in net accounts receivable”), with access to daily and monthly internal data, can calculate average daily revenue (the denominator in the days in A/R formula) using a three-month rolling average of net revenue. However, an external user, such as a lender or credit rating agency, will be interested in a longer time horizon and rely primarily on the annual audited financial statements and thus use a 365-day average.
This is true of days cash on hand as well, the other prominent liquidity ratio. An internal user can calculate average daily cash used for operations (average daily operating expenses – depreciation) using a shorter interval than an external user. Also, days in A/R can fluctuate seasonally, whereas days cash on hand tend to be larger and more stable over time. Of course, if outside users have access to monthly financial statements, they might well calculate the two liquidity ratios using the same formula as internal users.
This question was answered by: Christoph Stauder, president, Stauder Consulting, LLC, Beaverton, Ore., and a member of HFMA’s Oregon Chapter.
Answer 2: In my experience with respect to debt covenants, banks typically like to measure days cash on hand semi-annually.
This question was answered by: Michael Neuman, FHFMA, senior vice president of finance/CFO, Kennedy-Krieger Institute, Cantonsville, Md., and a member of HFMA’s Maryland Chapter.
Answer 3: The answer would depend on the purpose of the days cash on hand calculation. If it’s to comply with debt covenants (i.e., bank, bond issue, etc.), the exact formula and applicable time period are defined in the loan documents/master trust indenture. If the calculation is for rating agencies, typically it’s based on unrestricted reserves/operating expenses minus depreciation and amortization/365.
This question was answered by Pierre Bogacz, managing director and co-founder, HFA Partners, LLC, Tampa, Fla., and a member of HFMA’s Florida Chapter.
Answer 4: Please see the web page HFMA’s Key Hospital Financial Statistics and Ratio Medians.
This question was answered by: Caswell Samms, network CFO, Lincoln Medical Center and Harlem Hospital, New York City.
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