03 March 2004
Capital Spending -- P&L or Investment?
The Wall Street Journal seems to interpret accounting rules according to the need to make its headlines scintillating. On the evening of March 2, one of its writers, Deborah Solomon, appeared on the PBS Newshour declaiming how WorldCom had deceived its shareholders by moving $11 billion of expenses to its capital accounts in order to make its profits appear larger. In the Journal of March 3, Ms. Fuhrmans and Ms. Kranhold state that hospitals' plans to boost capital spending "could sqeeze many hospital systems' already thin profits."
Isn't investment in new facitilties, equipment and information systems a capital expenditure, not chargeable to profits but paid for out of retained earnings or the proceeds of financing? If so, the squeeze on hospitals' operations comes in the form of pressure to be more profitable, rather than a reduction of reportedly thin profit margins. That's what good hospital administrators should be striving for anyway. And not necessarily at the cost of excellent health care.
Bernard Ebbers and his cohorts defined their business objectives as increasing the company's market valuation. That was what drove them to stretch accounting rules. Hospitals are realizing that they are in a competitive marketplace, where the quality of the healthcare they deliver is tied, at least in part, to their efficiency and, ultimately, their profitability. Rather than reducing profit margins, capital spending is needed to increase hospitals' effectiveness and financial success. This is what hospital administrators should be reaching for anyway
The Wall Street Journal seems to interpret accounting rules according to the need to make its headlines scintillating. On the evening of March 2, one of its writers, Deborah Solomon, appeared on the PBS Newshour declaiming how WorldCom had deceived its shareholders by moving $11 billion of expenses to its capital accounts in order to make its profits appear larger. In the Journal of March 3, Ms. Fuhrmans and Ms. Kranhold state that hospitals' plans to boost capital spending "could sqeeze many hospital systems' already thin profits."
Isn't investment in new facitilties, equipment and information systems a capital expenditure, not chargeable to profits but paid for out of retained earnings or the proceeds of financing? If so, the squeeze on hospitals' operations comes in the form of pressure to be more profitable, rather than a reduction of reportedly thin profit margins. That's what good hospital administrators should be striving for anyway. And not necessarily at the cost of excellent health care.
Bernard Ebbers and his cohorts defined their business objectives as increasing the company's market valuation. That was what drove them to stretch accounting rules. Hospitals are realizing that they are in a competitive marketplace, where the quality of the healthcare they deliver is tied, at least in part, to their efficiency and, ultimately, their profitability. Rather than reducing profit margins, capital spending is needed to increase hospitals' effectiveness and financial success. This is what hospital administrators should be reaching for anyway
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