Working Capital Management in Healthcare
HCS 579 Health Care Finance
September 24, 2005
Working Capital Management in Healthcare
Working capital is the money required to finance the day to day operations of an organization. Working capital may be required to bridge the gap between buying of stocked items to eventual payment for goods sold on account. Working capital also has to fund the gap when products are on hand but being held in stock. Products in stock are at full cost, effectively they are company cash resources which are out of circulation therefore additional working capital is required to meet this gap which can only be reclaimed when the stocks are sold (and only if these stocks are not replaced) and payment …show more content…
The last article we will review is “Strategies for effective capital structure management: executive summary” which appeared in August 2005 in Healthcare Financial Management. This article begins by talking about how the right capital structure supports strategic-financial goals, while optimizing flexibility and minimizing cost. While a complex task, this article provided strategies to achieve the goal. This article covers the same 8 strategies noted in the GE article but goes into detail regarding each strategy.
ORGANIZE FOR EFFECTIVE CAPITAL STRUCTURE MANAGEMENT
The essential building blocks for effective capital structure management include obtaining and providing education, establishing the team, and defining the organization's attitude toward risk.
DETERMINE THE APPROPRIATE LEVEL OF DEBT CAPACITY
Debt capacity, the amount of debt an organization is capable of supporting within a particular credit rating profile, establishes the parameters of the debt portion of the capital structure. “The amount of debt organizations are willing to incur has to be balanced against their tremendous capital expenditure needs for information technology, new inpatient capacity, outpatient facilities, and a whole host of other spending opportunities," says Randy Fuller, hospital segment manager of GE Commercial Finance Healthcare Financial Services.
DETERMINE THE OPTIMAL MIX OF DEBT-TO-EQUITY FINANCING AND TRADITIONAL-TO-NONTRADITIONAL FINANCING
Once an organization
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3)Working Capital : Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
c) Optimization of the capital structure is also consistent with the growth of the company. The optimal capital structure
Working capital is the key to a successful business. It is like their blood flow and the manager’s job is to help keep it flowing. Under the Generally Accepted Accounting Principles working capital is simply the difference between a company’s Current Assets, which are cash, inventory, accounts receivable and prepaid items, and Current Liabilities, accounts payable and accrued expenses.
HCA, after following a conservative financial policy since its establishment, has entered the new decade preparing to make some changes in order to realign their financial strategy and capital structure. Since establishment, HCA has often been used as a measure for the entire proprietary hospital industry. Is it now time for the market to realign their expectations for the industry as a whole? HCA has target goals which need to be met in order to accomplish milestones in the future. The problem arises as to which area holds priority to the company. HCA must decide how the key components of their financial strategy and policy should my approached in order
Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the
Working capital can be defined as the way we measure how much liquidity a business has. It can be calculated by deducting the current liabilities from their current assets. It's of vital importance for large and small businesses to have cash accessible as this will reflect their credit worthiness and their capacity to meet their liabilities. However, this is not the only or most accurate measurement of their ability to pay their debt (Boundless Open textbook, n.d.).
As Mr. Laporte approaches retirement, American Home Products (AHP) has an important decision to make with respect to adopting a more aggressive capital structure policy. Use of debt carries with it advantages and disadvantages. In accordance with value-based management, we recommend that AHP adopts a capital structure consisting of 70% debt. The following points justify such action:
The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening
Working capital is the excess of a company’s current assets over its current liabilities. Financially healthy firms have positive working capitals.
Capital structure is defined as the mix of the long-term sources of funds that a firm use. It is composed of equity, debt securities and affect long-term financing of the entity. It is made up by shareholder’s funds, long-term debt and preference share capital. The capital structure mostly focus on the proportions of debt and equity displayed in the company financial statements, especially in the balance sheet (Myers, 2001). The value of a firm can be calculated by the sum of the value of its firm’s debt and equity.
The relationship between capital structure and firm value has been discussed frequently in the literature by different researcher accordingly, in both theoretical and empirical studies. It has also been discussed that whether the firm has any optimal capital structure that has been adopted by an individual firm, or whether the proportions of debt usage is completely irrelevant to the individual firm value.
Improving working capital position, a company is able to compare from year to year any increase in revenue; increase in production due to a decrease in variable or fixed costs, increase in sales due to a new sales workforce and any increase in liabilities; new short term creditors, a higher accounts payable account due to the need to purchase new materials. A company can improve its working capital by trying to keep a healthy balance between the two accounts, cutting costs, and analyzing its current short-term debt in terms of how to decrease it or find alternative ways to avoid it such as restructuring production procedures. (Schroeder, el. 2014)