Business Proposal- Healthcare Accounting

Business Proposal- Healthcare Accounting

Background/History of the Organization

AbbVie Inc. is a healthcare organization selected for analysis in this business proposal. It is an American multinational research-based company that operates in the pharmaceutical industry. The company has been successful in the last nine years, employing more than 30,000 people in 75 countries. The company is headquartered in the Chicago metropolitan area known as Lake Bluff, Illinois. The company officially started its operations in 2013 after separating from Abbott industries and has more than 30 products. The products entail drugs and medical devices, which generate billions for the company yearly. One common product of the company is a drug called Humira, which doctors often describe as a drug to treat arthritis, Crohn’s disease, and psoriasis. Notably, this product generates more than half of the company’s revenues.

Operation Structure

AbbVie Inc. is an incorporated company in the United States. The company, therefore, enjoys a legal personality upon which it can sue or be sued. The operational structure is hierarchical, as provided in the company governorship structure. It is headed by a company CEO who leads the organization’s strategic direction in consultation with the company directors. The board of directors makes major decisions, including the appointment of auditors for the company. Regarding financial performance, the company has succeeded in performing well since its incorporation in 2013. Since its incorporation, the company has achieved a total stockholder return of 334.1%. Further, the organization has attained an adjusted net revenue growth of 13.6% and a $135 billion increase in market capitalization.

Financial Analysis and Stability

Financial analysis is an important aspect that should be considered for AbbVie Inc. It entails assessing the health of a company in generating revenues, profitability, viability, and stability. According to Grennan & Michaely (2021), financial analysis is required by professionals equipped with the skills to handle information from financial statements and other reports given by a given company. Upon a successful financial analysis, company stakeholders can get insightful information regarding the company’s financial performance, enabling them to make various investment decisions, such as purchasing the organization’s stock. Additionally, financial analysis helps companies determine the uncertainties they face and how to improve and expand business operations to ensure more effective running.

Four steps are followed while conducting financial analysis. First, the information required for analysis is gathered. The information required can be obtained from company annual reports. Examples of the reports include the statement of financial position, cash flow statement, and income statement. Second, various ratios in inquiry to financial performance aspects are calculated. The calculated ratios inquire about the company’s financial performance based on profitability, liquidity, solvency, gearing, and market growth. Third, a risk assessment is done for the company based on the ratio analysis. Finally, the value of the organization is determined. Some of the information that highlights a company’s worth includes the price of its stock and the value it can deliver to investors. Considering the case of AbbVie Inc., the company has solid financial stability, which is expected to continue growing in the future based on its plans to expand its product portfolio. Essentially, this is its plan for growth, which includes reducing its dependency on a few products and expanding its portfolio, which can generate more revenues. However, they will undertake this amidst a competition challenge from other established brands such as Johnson & Johnson Plc.

Vertical and Horizontal Analysis

The vertical analysis involves comparing items within a single financial period to assess their relationship. On the other hand, the horizontal analysis compares information from multiple accounting periods (Bussolo et al., 2018). For the case of AbbVie Inc., the vertical and horizontal analysis is given below concerning revenues, cost of goods sold, gross profit, and net profit margin, all of which are drawn for the company’s latest income statement.

Vertical Analysis

Income statement item	Percentage of sales revenue
Cost of goods sold	($17,446 ÷ $56,197) × 100 =31.04%
Gross profit	($38,751 ÷ $56,197) × 100 =68.96%
Net Income	($11,542 ÷ $56,197) × 100 =20.54%

 

The vertical analysis above expresses the cost of goods sold, gross profit, and net income as a percentage of sales revenue. From the analysis, AbbVie Inc. uses 31.04% of its sales revenue to pay for the costs of making the sales. Additionally, the company’s gross profit margin and net income constitute 68.96% and 20.54% of revenues, respectively.

Horizontal Analysis

Income statement item	2021	2020
Revenue	$56,197,000	$45,804,000
Cost of goods sold	$17,446,000	$15,387,000
Gross profit	$38,751,000	$30,417,000
Net Income	$11,549,000	$4,622,00

 

The horizontal analysis compares the financial performance between 2021 and 2020. For comparison, AbbVie Inc. had a better financial performance in 2021 than in 2020. Notably, this is so because the company achieved more sales revenues, gross profit, and net income in 2021 than in 2020.

Financial Ratios

Financial ratios are used to assess the financial performance of an organization regarding various aspects such as profitability, liquidity, capital structure, and market growth. The financial performance is evaluated by comparing the company’s performance across multiple periods against other industry participants. For the case of AbbVie Inc., the current ratio and net profit margin ratios are selected for analysis. Notably, the ratios assess the company’s financial health concerning liquidity and profitability, respectively. The analysis is given below.

Current Ratio

	Formula	2020	2021
Current ratio	Current assets ÷ Current liabilities	$27,928 ÷ $35,194 =0.79	$24,173 ÷ $28,661 =0.84

The current ratio assesses a company’s ability to pay its short-term maturing obligations as and when they fall due (Hakimov et al., 2018)). For the above analysis, AbbVie does not have excellent financial health and is likely to face liquidity problems. Notably, the company cannot pay its liabilities using current assets. The value for the ratio has declined across the two years, indicating a worsening liquidity position. Also, the ratio is way below 2, and the industry-recommended value for the ratio.

Net Profit Margin

	Formula	2020	2021
Net profit margin	(Net profit margin × 100) ÷ sales revenue	($11,542 × 100) ÷ $56,197   =20.54%	($4,622 × 100) ÷ $45,804   =10.09%

The net profit margin assesses the profitability of a company based on the net profits. From the analysis, the financial performance of AbbVie Plc. has increased across the two fiscal periods. Essentially, this indicates a good financial performance for the company.

Recommendation for Leadership

AbbVie Inc. should improve its liquidity position to enhance its credit and avoid serious solvency problems. Essentially, one major strategy to achieve this should entail minimizing the level of current liabilities that the company holds. Currently, the proportion of liabilities in the statement of financial position is relatively high when the current assets are considered. Notably, this strategy can help the company to acquire short-term loans to facilitate its working capital needs.

Conclusion

The information presented in this paper assesses various aspects of financial analysis. AbbVie Inc. is used as a healthcare for-profit organization for analysis. The company, which is listed on the NYSE, has been in operation since 2013. Overall, its financial performance is established to be solid and stable. However, its liquidity position does not reflect good financial health. Nonetheless, the company’s profitability is excellent and improving, making the company a good destination for investors. Thus, a recommendation of reducing current liabilities to improve company liquidity is made.

References

Bussolo, M., Krolage, C., Makovec, M., Peichl, A., Stockli, M., Torre, I., & Wittneben, C. (2018). Vertical and horizontal redistribution: the cases of Western and Eastern Europe. World Bank Policy Research Working Paper, (8657).

Grennan, J., & Michaely, R. (2021). Fintechs and the market for financial analysis. Journal of Financial and Quantitative Analysis, 56(6), 1877-1907.

Hakimov, B., Yunusov, M., & Holmirzayev, U. (2018). Elaboration of the Balance Sheet Liquidity Analysis-Requirements of the Period. International Finance and Accounting, 100.

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Preparing for the Assignment:
You have been recognized as a financial analysis expert. As such, you have been hired to conduct a review of a for-profit organization’s latest consolidated financial statement and make recommendations to leadership based on your findings. The business proposal requires the use of 3 scholarly sources to support your work.

Select 1 consolidated financial statement from a for-profit healthcare organization of your choice.

Review the financial ratios in the Week 3 Discussion – Financial Ratios.

Assignment Directions:
Choose 2 of the financial ratios listed below and perform a calculation of that ratio using your selected organization’s financial statements. Alternate ratio names are provided in parentheses.

Current ratio (liquidity ratio)
Debt to assets ratio (solvency ratio)
Free cash flow (solvency ratio)
Price-earnings ratio (profitability ratio)
Profit margin ratio (profitability ratio)
Return on total assets Ratio (profitability ratio)
Working capital (liquidity ratio)

Include an explanation of what the result of the calculation means about the organization.

Write a 1,050- to 1,400-word business proposal using your own template or the Business Proposal Template.
Include the following items in your business proposal:

Background/History of the Organization:
Describe the health care organization.
Include the history and purpose, and identify the service or product they offer. (This information is typically found in the annual report.)
Operational Structure:
Describe the company’s operational structure (i.e., sole proprietorship, corporation, partnership, etc.).
Include a definition of the type of structure and discuss their financial health. (This information is typically found on the SEC website.)

Financial Analysis and Stability:
Explain the purpose of financial analysis.
Identify the steps required in performing a financial analysis.
Include information about the organization’s assessment of its current financial stability.
Identify their growth plans or plans to increase future revenue. Include any challenges they have encountered or anticipate.
Vertical and Horizontal Analysis:
Compare vertical and horizontal analysis.
Include the actions the organization should take if the findings show unexpected differences. Provide 1 example.

Financial Ratios:
Explain the use of financial ratios.
Define the 2 financial ratios you selected for this assignment.
Using the organization’s financial statements, perform a calculation for the 2 ratios.
Include an explanation of what the result of each calculation means about the organization’s financial status.

Recommendation For Leadership:
Recommend 1 financial strategy to leadership. The recommendation must be based on the organization’s financial statements and related to their financial status improvement, liabilities reduction, revenue streams expansion, or future growth.

Conclusion:
Write a conclusion. This closing paragraph is designed to assist the reader in understanding the purpose of the paper.
Summarize the key points from the supporting paragraphs without introducing any new information.
Include how this information would be used by health care managers.

Cite 3 scholarly sources to support your assignment.

Format your citations and references according to APA guidelines.

Submit your assignment.