The Healthcare Breakdown No. 005 - Breaking down cash flow part I, brought to you by Advent... kinda
The Healthcare Breakdown
Breaking down topics in business, so you can take back the business of healthcare
What we’re breaking down: Cash Flowwwwwwwwww Part I: The Basics – wait, didn’t we do this already?
What you’ll learn: What it is, the three sections, and how we get there. Okay, now that seems a little different…
Why it matters: Businesses run on cash, not IOUs, understanding the flow is critical
Read time: 1.5 seconds - 3 days
Welcome to the 3-part series on cash flow. If you’re a regular here, you’re probably asking, didn’t we do this already?
Well, yes, sort of.
Last week I broke down the Ascension’s income of ($1.8B) vs its cash from operations of +$1.8B. A doozy I know.
Since I’m a vagabond and don’t have a proper website, reply to this email with “Ascension,” and I will send you that email if you’re interested.
But there is more to cash flow and more to understand on a company’s Statement of Cash Flows.
That brings us here, to PART I – Cash Flow Basics.
Per usual this ain’t a classroom. You may not even be in any kind of room right now. So, let’s look at a real cash flow, frommmmmm…. (I write these in real time if you can’t tell and am actually deciding as I ramble, what company to look at…)….
I pick, AdventHealth!
Why? Because they do this crazy thing (I think so anyways), that hospital execs will wag their finger at me and say, “that’s totally normal, if you knew anything about hospital finance you wouldn’t be saying all this… What do you know???”
Woah, that escalated quickly. Back to the point.
AdventHealth’s statement of cash flow:
We should probably back up a little.
See to get to cash flow, you need to start at income. The purpose of the statement of cashflow is to show the movement of cash in and out of the business. It’s a reconciliation of real cash to what is reported on the income statement, plus some below the line stuff.
This is our starting point:
You can see the income reported in 2022 is ($838M).
Then you go below the line, which is just some additional movements from assets that changes the final income number. It’s usually not a very big swing and in this case brings our real starting point to ($833M).
Great, back to the cash flow statement. There are 3 buckets on the statement:
Cash from or used in operating activities
Cash from or used in investing activities
Cash from or used in financing activities
Here’s the simple breakdown of each bucket:
Operating activities are the day-to-day things that are part of the core business.
Investing activities are any investments made or gains from sale of investments from things like stocks and property and all associated costs.
Financing activities have everything to do with raising money, borrowing money, or repaying money from early financing activities.
What you are looking at is an overview of the cash flow, in and out of the business from a high level across all cash activities. From operations, investing, and financing.
In the simplest terms, think about it like when you look at your bank statement at the end of the month, with much disdain and disappointment.
You have a starting amount, then all the things you bought, returned, got money back on, borrowed, etc. are shown until you get an ending balance.
Same thing basically. Companies just want to confuse you to make it harder to understand and make it seem like you need an MBA or something to figure it out. You pretty much do it every time Amex makes you cry at the end of the billing cycle.
Let’s break this sucker way down. Then I will show you the really interesting thing.
Here’s the operating section:
Here’s the investing section:
Here’s the financing section:
You can see at the very end, we get a grand total INCREASE in cash of $91M. Not bad on a net income of ($838M).
Interesting to compare to 2021, which saw a net income of $1.5B and cash DECREASE of $676M. But it’s all about context. With so much cash from operations and a strong balance sheet in 2021 Advent invested heavily, spending $1.6B primarily on acquisition activity and a booty load to brokers.
Need to find out who those brokers are and if they’re hiring. Dang.
As you can see, the cash flow statement seems daunting, but it’s really just another high-level view of the business and how cash moves in and out.
I almost forgot!
The really interesting thing. Because what would a breakdown be without something super interesting. Check this out:
Advent sells its Patient Accounts Receivable. It shows up as a decrease in cash in operating activities and an increase in cash from investing activities. It throws you for a major loop because of the seeming $1.3B increase in receivables which drags the operating cash way down. But then it shows back up downstream like that Busch Light you absent mindedly dropped in the river when you were tubing last summer, in investment income.
P.S., the reason an increase in receivables decreases cash from operations, is because it represents cash the business should have but didn’t receive. Essentially, Advent’s accounts receivable is pretty steady, but looks insane because it seems like it’s increasing over a billion dollars each year. Whacky laffy taffy.
I just thought it was interesting and definitely makes operating cash look way worse than it is.
Also, interesting to see it’s investment activities. I know a lot of people say we shouldn’t be focused there, but I say we should be overly focused. What are these investments? Are they risky? How much are they costing? What impact do they have on operations?
This is a non-profit hospital after all.
It’s all connected and shrugging our shoulders at the investments any organization makes would be a mistake.
You may have noticed it, but here it is again:
The sale of $12.5B in investments and the purchase of $12.2B in investments. Lots of cash flowin.
Next week we are going to be looking at Revenues vs. Cash flow.
Now that we have the basics of the statement of cash flow, we can add this important layer on top. The culmination will be forecasting cash.
It’s critical to managing a business or starting one.
Cool beans. All right back to your Sunday pancakes.
That’s the breakdown for today.
If you’re interested here’s two other things I’m up to:
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I hope you found this breakdown useful.
Please let me know if you have thoughts on how to improve it! I read every email.
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See you out there!