Elijah_Health

Maya Calloway Richardson Week Three Assignment: Elijah Heart Center Paper FIN HC 571 Professor: Douglas McFadden Elijah Heart Center Elijah Heart Center (EHC) is a cardiac care hospital facing declining profit margins despite the increase in the number of patients and increase in revenue. The dilemma requires input from a financial consultant to help create a strategy to turn things around. The following issues must be addressed to avoid corporate failure by EHC: shortage of working capital, review funding options for equipment acquisition, as well as secure or identify funding for expanding capital. Alternate Sources of Short-Term Financing EHC has a history of bestowing discounts to managed care companies. EHC pays higher wages to contract nurses. The company also faces challenges with Medicare reimbursements, an increase in liability growth, and payments for hospital equipment that is not currently in use. Immediate changes are necessary to improve EHC’s cash flow issues. The first step requires a staff reduction. Reducing the staff will allow EHC to focus on improving the skills mix by cross training employees. EHC should also review loan options. A loan in the amount of $1.5 million with an interest rate of 9.45% will cost EHC $131,490 per month for one year. The loan has a higher interest rate; however EHC can potentially close out the loan in three months with only $32,603 in interest. This option provides a practical solution to the cash flow problems. A loan at a lower rate might come with pre-payment penalties forcing EHC to unnecessarily carry the debt for a longer period of time. Accounts Receivable and Inventory EHC faces the equipment challenges by entertaining the idea of purchasing newer and more efficient machinery. EHC wants to purchase a High-Speed CT Scanner, an X-Ray Machine, and a new Ultrasound System to stay competitive in patient care. The recommendation for purchasing refurbished equipment is approved and EHC must now choose from two payment options. Careful consideration of the options results in the following recommendations: EHC should buy a refurbished High-Speed CT Scanner, take out a capital lease for the X-Ray Machine, and obtain an operating lease for the Ultrasound System. EHC will have a minimum of 5 years of use with the CT scanner before depreciation limits the machine’s usefulness. Capital leases allow organizations to save money upfront because of higher present value and use the machinery for the full 15 years of the machine’s life. Similar benefits are gained by buying the Ultrasound System with a operating lease. Cash Conversion Cycle The cash conversion cycle is the method used to evaluate the processes used when assessing an organization’s current financial position. The conversion cycle helps determine current hospital assets and current availability of funds as well as future availability of funds (Cleverly and Cameron, 2007). EHC will still complete the $75 million expansion project. Therefore, EHC must ensure that the working capital is sufficient enough to support the endeavor. The cash flow funds must be large enough to cover short term debt responsibilities and operating expenses. Understanding the conversion cycle will ultimately improve EHC’s odds of generating revenue. The cash conversion cycle will also help EHC choose a fundraising strategy for covering expansion costs. An effective funding strategy includes obtaining a HUD 242 loan. This loan option should yield the highest Net Present Value. It will also allow the company to improve the investment grade by financing their debt affording EHC the opportunity to borrow future funds at a lower rate. Associated Risks Calculated risks exist with all endeavors and this scenario is no exception to the rule. Reducing agency staff might not yield the expected financial savings. There are also potential dangers with cross training or job sharing. Training costs can also have a negative impact on the plan to save money if they exceed expected amounts. These issues can be addressed by setting a tight training budget and adhering to the guidelines. The decision to buy refurbished equipment also has risks. The equipment might not last as long as projected. EHC might also incur fees from leasing equipment that do not occur when the equipment is purchased upfront. These challenges can be countered by ensuring that the purchase price is reasonable and all equipment is in good working order. The benefits of leasing outweigh the risks because it will allow EHC to stay current and up to date with technological advances. Performance Measures For Recommendations The following performance measures were used to evaluate the suggested recommendations: cost cutting strategies to help improve the cash flow; equipment acquisition strategy to help revamp the existing equipment in the hospital; and funding options to accommodate the expansion of the hospital. EHC’s current financial condition is a critical component when determining which recommendations should be adopted by the organization. The current working capital must be adequately managed to ensure balance among daily operations and strategic investment planning. Cost and lease options must be examined and/or reviewed to analyze the potential impact on EHC’s statement of cash flows and balance sheets. The ultimate goal is to acquire cost effective equipment that will depreciate at an acceptable rate. Finally, by reviewing different funding options, EHC can allow thoughtful consideration of the analysis so the organization can choose the best funding option available for the expansion. Suggestions For Implementation Creating an alternative working capital plan/policy for EHC to help reduce future difficulties is a challenge. EHC should maintain quality and consistent patient care through equipment acquisition and employee training. EHC should increase the organization’s cash flow and reduce unnecessary expenditures. Sound financial advising will increase EHC’s ability to maintain adequate cash flow. EHC should strive for offering quality patient care and acquiring equipment that will keep the organization current. Hospital expansion should only be considered if adequate funding is available without significant impact to the daily operating budget. All decisions must be given careful consideration ensuring that EHC’s interests are met to guarantee the hospital’s success in the future. References Cleverly. O., Cameron, E. (2007). Essentials of Health Care Finance (6th ed.). Sudbury MA: Jones and Bartlett.