Measuring Financial Strength of Council Designated Hospitals in Tanzania Using Financial Strength Index Model

Abstract

Assessment of hospital’s financial strength refers to the evaluation of hospitals’ financial viability, stability and profitability. In assessing the hospitals financial strength the analysts often use elements such as profitability (ability to generate profit), solvency (ability to pay obligations to creditors and other liabilities) as well as liquidity. This study applies the cash flow theory in conjunction with Financial Strength Index (FSI) model to gauge the financial strength of the Council Designated Hospitals (CDHs) in Tanzania. 17 CDHs were employed in the study which covered 2009 to 2013. Objective of the study was to establish if the CDHs can generate the required margin to support the ongoing hospitals mission. The study also aims to determine whether the CDHs can maintain all the current service line offered into the future. Findings revealed that CDHs were having financial strength index score of -1.0496 which implies a fair financial strength or conditions. Fair financial strength of CDHs was largely caused by strong liquidity and zero percentage of debt financing contained in the CDHs’ capital structure. Specifically, the result records that CDHs were experiencing low ability to generate profit, this was also the same in the case of average age of plant which was also less than the proposed standard. Finding implies that CDHs could not afford to generate margin (or retained earnings) to finance their expenditure rather they can take advantage of good liquidity position they have. CDHs can maintain all current service line offered into the future, since they have good liquidity position and they can almost double the number of days required (in the hospitals industry) for the hospitals to operate without receiving additional cash. Result also confirms that CDHs were experiencing very low financial risk since most of them were financed using internal source particularly liquidity maintained rather than debt financing.