Step-By-Step Guide
How to Calculate Net Income
Your supervisor, Abigail Vincent, has asked you to conduct a financial analysis of each of the four investment options. She has asked that you use a spreadsheet to complete your work. This guide will walk you through the analysis you have been asked to complete.
Prepare to do your Work
- Review the email from your supervisor. Make sure you understand what you are being asked to do. Contact your mentor if you have any questions.
- Download the materials you will need in order to complete this task.
- General Assumptions and Payor Mixes for Proposals
- Investment Proposals provided in Task 1 – Some of the data you need to complete this task may be found in the proposals you were provided in task 1. You should have copies of the proposals on hand as you complete this task. If you need to download them, you should go back to Task 1 and do so at this time.
- Meet with your team and create a plan for completing this task. As you have done in the past, review everything you have been asked to do and decide how your team will approach the work. For additional information on teamwork, see the teamwork resources in the General Skills Resources section.
You are about to start your financial analysis by reviewing the resources your supervisor has provided you. If you need help, go to the Financial Analysis Archive available on the Resources page of this task. This support archive is designed to walk you through each step of your financial analysis. For additional help completing the steps outlined below you should plan to follow along on the Financial Analysis Archive. The work you will do in this task begins in Step 2: Determine the Payor Mix.
- Review all the data you have been given, including the Hospital Payor Mix, the Estimated Payor Mixes, the General Assumptions and information in the proposals. If you need help making sense of the data, you may need to review some of the task resources. As you look at the information you have been given, think about what the information is telling you, and how it contributes to revenue, expenses and net income.
Begin your Financial Analysis
The financial analysis you are about to complete must be repeated for each of the four proposals. You can analyze the proposals in any order you choose. But for each proposal you should complete the following process:
- Normalize the Payor Mix
- Determine the Revenue
- Determine Expenses, Costs and Overhead
- Determine Net Income
- Write a Summary
Normalize the Payor Mix
- Calculate the Normalized Payor Mix for each year of the project. Add you calculations to your spreadsheet. For Excel help, refer to the information available on the Resources page for this task.
- Check in with your mentor. This is a key calculation; other calculations in this task depend on this figure. Errors at this point will cause your other calculations to be incorrect even if you understand the other concepts and do the math correctly. Once your mentor has checked your work you can complete the remaining sections of this task.
Determine the Revenue
These steps will walk you through calculating revenue in a single year for a single payor group, but keep in mind that revenue must be calculated for each year of the project and each payor group.
- Calculate the revenue generated by procedures for each payor group during each year of the project.
- Collect the necessary data. You will need to know:
- The total number of procedures performed in a year
- The price per procedure
- The normalized percentage for the payor group
- The percent of price received for the payor group
- When applicable, add other sources of revenue including research, animal, other and sale of the machine(s) to you spreadsheet.
- Calculate the total revenue for each year of the project.
- Record this information on your spreadsheet.
Determine the Expenses, Costs and Overhead
- Calculate the total variable expenses for the project.
- Determine the staffing required for each year of the project and the corresponding salary for those personnel. The proposals outline information on personnel required for each project as well as data on salary and benefits. This information should be the basis of your calculations in this section.
- When applicable, include other variable expenses.
- Total or add up all the variable expenses for the project.
- Calculate the following for each year of the project:
- Total Fixed Costs
- Overhead
- Total Overhead
- Record these totals and the relevant information related to them on our spreadsheet.
Determine the Net Income
- Determine the Net Income for each of year of the project.
- Record these calculations on your spreadsheet.
Write a Summary
Write a summary of the work you have completed in this task. An important part of your final presentation will be not only to present your findings, but also to carefully explain the analyses you conducted that led you to those findings. Take some time, while the work is still fresh in your mind, to describe your work. Specifically, think about:
- What data you used.
- What calculations you performed, including the formulas.
- What the formulas mean.
- What the results of the calculations were.
Review and Submit
- Review your work.
- Review your calculations. If you used Excel formulas to complete your calculations, double check that your formulas were entered correctly. If you calculated the results by hand, go through you math again in detail and check your work.
- Be sure you have completed all the sections of the analysis for each project.
- Review your summary and make sure you have covered all the components of this task
- Submit your work. Using the instructions on the Submit your Work tab of this task, submit your work to your mentor.
For each of the following, can you give an example of the research someone might conduct?