Explain, in about a paragraph for each question below, what the following problems are telling us. Again, do not concentrate on the math, instead read through the problems and get an understanding for what these problems tell us as managers.
1. Annual Interest Rate (problem 8.1 and pages 212-214)
2. Annual Interest Rate (problem 8.2 and pages 215-217)
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3. Future Value (problem 8.3 and pages 218-220)
Explain, in about a paragraph for each question below, what the following problems are telling us. Again, do not concentrate on the math, instead read through the problems and get an understanding fo
Introduction to the Financial Management of Healthcare Organizations Author: Michael Nowicki Publisher: Health Administration Press, Chicago, Illinois. Edition: 6th or 7th Chapter 8 ― Working Capital Working capital is the sum of a healthcare organization’s investment in current assets. Current assets are: cash, cash equivalents, accounts receivable, inventories, and pre-paid expenses. Obviously cash is the most liquid, with liquidity decreasing with category listed above, and pre-paid expenses being the least liquid. This is important because working capital provides any organization the money needed to pay for the labor and supplies necessary to produce the organization’s net revenue and ultimately the net income. Without an adequate supply of working capital, an organization may cease to exist or go into bankruptcy. Another way of looking at working capital is defined by the following equation: Net working capital = current assets – current liabilities While working capital is the current assets, the organization is already obligated to pay the items on the balance sheet that are listed as current liabilities. These debts have already been incurred getting the organization where it is today. What does working capital do? In essence, it makes fixed or long-term assets productive. I am the new CFO for Vibra Specialty Hospital in Dallas. Our facility will open in September of this year. The fixed assets are our brand new building and all the equipment inside. Without working capital, what can this facility do? How would we pay the people needed to provide the care for our patients? We would not be able to. What we have done is secure a working capital loan for $5 million. This allows us to hire staff and grow the hospital to make the profit the owners expect. What about existing organizations? To increase their working capital, they may need to finance by borrowing or selling additional stock. A not-for-profit organization would need to sell bonds. Another way to increase working capital is to increase revenue, by adding new products or services not previously offered, or by increasing the patient volume. Each of these choices may require an increase in working capital to effectively accomplish the goal. Eventually an organization’s working capital needs should be funded by net income. Temporary working capital needs can be financed by an additional cash investment by owners, short-term debt, or trade credit. Trade credit would be the acquisition of products or supplies with the selling organization allowing payments over time to save cash flow now. Think about where you work now or where you have worked in the past. Think about how much cash it takes to effectively run the organization. Most companies have payroll every two weeks. Very large organizations may have a weekly payroll, with half the organization on one two-week cycle and the other half on another. This spreads out the need for cash, but it also requires that an amount of money be available to cover the payroll and payroll tax expense. Add to that the accounts payable cash needs for the supplies and services used every day by every shift. Add to that the cash payments needed for the existing fixed assets, payments on the buildings or equipment previously purchased. How do companies manage? They manage by managing their cash flow. This is the difference between cash receipts and cash disbursements. Think of yourself as a small company. Your salary is your cash receipts and your bills are your cash disbursements. You want to maximize the receipts and minimize the disbursements, just as any organization wants to do. You can increase your receipts by getting a salary increase, working more hours, or getting a second job. You can decrease disbursements by buying less, making smaller payments, or refinancing debt to get more favorable terms. Large organizations do this by managing the accounts receivables and payables. They want accounts receivable (A/R) days as low as possible and accounts payable (A/P) days as high as possible. For the A/R side, most organizations have a management tool called A/R days or days sales outstanding. What this measures is the average time it takes to collect in full on a specific sale. A/R managers may receive large bonuses when certain organizational goals are met. For the A/P side, while an invoice may state terms at 30 days, many large organizations will delay payment to 45 or even 60 days. With large purchasing power, they have the ability to do this. Many small organizations may try this tactic, but without the large purchasing power, the vendor may put them as a cash only account. In managing cash, an organization must make good decisions. A cash budget is used by most organizations. This budget predicts the cash inflows and outflows. With most organizations, the inflows and outflows are not perfectly balanced, and this requires managing cash flow closely by holding excesses in good times to prepare for the slower times or borrowing to cover the shortfalls.