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Alternate Working Capitlal Policy

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Alternate Working Capital Policy
In the health care field it is extremely important to have available cash for contingencies because anything can happen in the health care field. For example, the changes in laws and procedures such as the Affordable Health Care Act, has caused some major changes for health care facilities, physicians, and insurance companies and the changes have put some hospitals at a standstill but they still must operate and cash on hand would help in this situation. “Good cash management should focus not only on the acceleration of receivables, but also on the complete cash conversion cycle” (Cleverly & Cameron, 2007). Elijah Heart Center (EHC) is a New York hospital that specializes in cardiac care with 140 beds. To provide full support for cardiovascular patients, EHC includes the following services: cardiac catheterization laboratories, ancillary equipment for radiology, nephrology, laboratory, surgical suites for open-heart surgery, pulmonology, and other cardiovascular services. EHC’s patient volumes and revenues are growing but profit is dropping (University of Phoenix, 2012). Elijah Heart Center is facing a potential working capital shortfall. This paper will discuss alternate sources of short-term financing, how accounts receivable and inventory affect EHC, discuss the importance of the cash conversion cycle to EHC’s working capital. As well as discuss EHC’s risks associated with the recommendations and how to adjust for risks, and explain how to evaluate the recommendations based on performance measures.
Alternate Short-Term Financing Reducing agency staff will reduce the shortfall by approximately one million dollars. Changing the skill mix by hiring unlicensed assistive personnel will reduce the shortfall by approximately $250,000 annually. Reducing EHC’s contracted staff is another alternative because by implementing this strategy it will drastically reduce costs without a huge impact on revenue. The loan option recommended in the amount of $1,500,000, which will solve EHC’s short-term cash flow problem and reduce the shortfall to zero. Although the interest is 9.45%, as compared to 6% for the other option, but there is no prepayment limitation, and the loan can be repaid in three months, when payments will be received from Medicare and managed care.
Accounts Receivable and Inventory Medicare reimbursement rates are about 70% of the charges, and are based on past medical costs. Medicare typically takes more time to pay their bills, which accounts for a good percentage of EHC’s cash flow problem. It would be beneficial to EHC to explore the average age of accounts receivables, to determine the core problems causing the cash flow problems. Inventory is crucial to EHC’s purchasing-production-marketing process. In EHC’s case, x-ray machines and CT scans is a necessity for the facility to operate smoothly. If x-ray machines or CT scans are unavailable for cardiovascular patients the success of the hospital will not reach company goals on patient satisfaction. “During periods when sales are expected to increase, a long collection period will require the hospital to finance a larger amount of working capital in the form of increased receivables” (Cleverly & Cameron, 2007, p. 474).
Cash Conversion Cycle Working capital management involves decisions that have an impact on operating cash flows of the firm. Cash conversion cycle measures the liquidity of assets to an organization. The cash conversion cycle is very poor for EHC. Although patient volumes and revenues are up, profitability is down. This is due to the managed care and Medicare payments, which are made after services are delivered to the patient. This is vital to EHC’s working capital management, as the cash flow shortage could negatively affect the future of EHC and its vision for expansion. Through cost cutting measures and a short-term loan, the cash flow is improved, and plans are in place for EHC’s expansion. The HUD 242 Loan Insurance Program is recommended as an expansion option. The Net Present Value for the project is $221 million when funded through this option. This option enables EHC to have their debt financed as an investment, which provides the lowest possible rates available. Another advantage is that the bonds are callable after eight years, which means that if after eight years the interest rates go down, EHC could buy back the bonds and reissue them at the lower rates (University of Phoenix, 2012).
Risks and Recommendations The biggest risk is funding EHC’s expansion project. The HUD 242 Loan Insurance Program requires financing the mortgage on the entire hospital. If the hospital should default on their payments the mortgage could be taken over by HUD. The application process is long, and there is no guarantee of approval. However, the forecasting reports show that the risk is worth taking. By reducing the agency staff and changing the skill mix by hiring unlicensed assistive personnel is a risk because a shortage in staff may jeopardize the availability of health care providers to each patient. With the shortage in staff there will be long wait times and this will be a problem for patients. The recommendation to avoid dissatisfaction with health care service is to not over book the physicians and if there is a long wait time acknowledge the patient and assure them they will be seen with great appreciation for the temporary change. By having unlicensed assistive personnel there is a risk that health care laws or practices have the opportunity to be implemented by this staff. Therefore, regardless of being unlicensed, a recommendation to avoid such practices, employees must acquire the proper training and knowledge to certify that they are qualified to be assisting licensed health care professional and understand and are willing to abide by the laws.
Performance Measures Performance measures are the profitability ratios that can measure how well EHC can use its assets to continue operations. Liquidity measures the ability of the business to meet financial obligations. Two recommended measures of liquidity are the current ratio and the working capital. (Cleverly & Cameron, 2007). After cost cutting measures and a short-term loan, the working capital was greatly improved. The performance measure of EHC should be improved and will show a major decrease in financial expenses and savings will occur overtime. For potential lenders or investors EHC will be seen as low risk investment. In conclusion, in order to fully evaluate the stability of a health care organization, it is important to analyze all aspects of financial operations. Good cash flow is essential to any organization, especially hospitals. A better cash flow will help improve borrowing chances, which will help sustain income level. EHC has now been given recommendations for working capital to reduce financial difficulties. “Reduction of the cash conversion cycle, along with the related investment of surplus funds, should be a critical objective of financial managers” (Cleverly & Cameron, 2007). EHC has options for alternate sources of short-term financing that will benefit the organization in the long run which will put the organization in a much better standing.

Baker, J.J., & Baker, R. W. (2006). Health care finance: Basic tools for nonfinancial managers
(2nd ed.). Sudbury, MA: Jones and Bartlett.
Cleverly, O. W., & Cameron, E.A. (2007). Essentials of health care finance (6th ed.). Sudbury,
MA: Jones and Bartlett.
University of Phoenix. ( 2012). Financial resource management [Computer Software]. Retrieved from University of Phoenix, Simulation, FIN/HC571 Health Care Finance website…...

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