Financial_Indicators

The financial indicator used in the simulation for the Perspective of a Cardiac Care Hospital for analyzing the capital shortage, funding for equipment acquisition, and funding options for capital expansion are discussed in the following paragraphs. The first paragraph will tell which of the cost cutting options I selected and why. The second paragraph will talk about the funding option I selected for equipment acquisition and the reasons behind that decision. The third paragraph will discuss the options for capital expansion, which option I choose and why. Bridging a working capital shortage will take cost cutting measure. One of the cost cutting methods would be to a change in the skill mix of the employees and reducing staff. Usually cutting staff should be the last thing a company should do however with employee compensation and benefits expenses it does tend to be the company’s largest expense. The patient volume and revenues should be increasing as the productivity is decreasing. The financial performance should be evaluated in order to bridge the working capital shortage. One of the things the company will have to do to bridge the working capital shortage is to obtain a working capital loan. The loan will enable the company to stabilize until the financial trouble can be resolved. The company needs to focus on both short term and long term financial performs of the company. If the company can not resolve the short term cash flow problem then they will not be able to resolve the long term problems. The cash flow of a company is used to measure company liquidity. A company can fail because of a shortage of cash. A company may be profitable but have little operational cash. Cash flow can be used to determine a company quality of income. Having a shortage of working capital could be a management problem. Changing the skill mix can involve developing skills among a particular group. Changes may be driven by many motives but cost saving would be high on the list to improve cost effectiveness. The issue may be would the employees be willing to change and learn more or different duties. The company options for cost cutting is limited to downsizing, reducing staff agency, changing the skill mix and reducing staff benefits are the only so the company’s operations will not be seriously affected. Working capital is the company’s cash, accounts receivable, inventory or other current assets minus the current liabilities therefore when a company is short on working capital plans needs to be developed quickly to keep the company solvent. The company must reduce expenses while reducing the loan problem by improving profits. Two ways to improve the company’s working capital shortage is to improve their current and quick ratios or the liquidity ratios. The current ratio will improve the company’s ability to pay off the current portion of their liabilities, the liabilities that are due within a year. The quick ration will help the company liquidity because it will show the company cash and short term investments when divided by the current liabilities show how well the company can meet its’ current liability obligations. The results for changing skill mix might increase the staff. Retention of keeping skilled staff is one that I need to look at a little closer. Keeping the skilled and licensed personnel would need to be analyzed to determine if a higher turnover rate would occur if the skill mixed were changed. http://content.healthaffairs.org/cgi/reprint/1/3/14.pdf The HUD insurance loan was the loan that was selected for bridging the working capital shortage. Working capital is regarded as the life blood of the company. Funds are needed to purchase such things as land, equipments, and building. Working capital is important to both the managers within the company and external shareholders. Short term funds are needed for such things as paying salaries and day to day operations. Working capital must be adequate in a business for them to succeed. Working capital is used to place down payments on equipment. The HUD insurance loan seemed like the best method to level the working capital shortage. The company needs an adequate amount of working capital to run the operations. When a company has a working capital problem the company can not utilized the fixed assets efficiently and effectively. A low liquidity may lead to the company going bankrupt. The company must be able to meet it’s debts at maturity to stay in business. The company must be able to meet its debts so that its’ liquidity is not damaged this would result in a lost of reputation. Therefore when a company loses its reputation it will not be able to get loan approval or take advantage of any cash discount offered. Since one of the most important areas of a company business is its working capital, the working capital must be constantly monitored. The company must be alert to changes in the working capital and what it means to the company. The company must monitor and control all business transactions. http://www.associatedcontent.com/article/2726985/business_loans_working_capital_financing.html'cat=3 The funding options chosen for equipment acquisition were capital lease. The cash payment was not chosen because it is assumed that there is not enough cash available for this option. It would not have been a good use of funds because it would have tied up capital that could have been utilized elsewhere. Financed purchase was not chosen either. While this options will not deplete cash and the income from the option would be generated by the equipment purchased, this option would still require a down payment. The down payment while not depleting the cash would affect the cash flow of the company. Other factors to consider is what interest rates would be charged and as stated earlier how mush is the down payment. Now to the capital leasing which was chosen as the best method for funding the acquisition of the equipment' The equipment is owned by the leasing company. The company makes payment for using the equipment. The equipment can either be purchased by the company at the end of the lease or retained by the leasing company. Capital leasing usually requires little or no down payment. Leases are supported by the equipment manufacturer which can offer a lower interest rate on purchasing the equipment when the lease ends. Leasing can let a company keep its much needed cash so it can have more purchasing power. If the equipment is obsolete at the end of the lease then the company would not purchase the equipment at the end of the lease. This could result in less expenditure than a purchase would have required. The disadvantage to leasing is that usually more interest is paid than with purchasing with cash. http://www.leasingnews.org/archives/Jan2010/1_15.htm#special_report2 The funding options used for capital expansion was the HUD insurance loan. Any expansion should be well planned. The company should make sure they know how much the expansion is going to cost so that the funding will include all known cost and the expansion will not fall short of funds before completion. The company needs to lists all possible expenses in the plan before approaching the lending intuition for a loan. The company must keep in mind that the amount of capital they request must cover possibility of future expansion. The interest rate of the capital expansion loan in a lot of cases will be based on how successful the business is and their credit score. Evaluation of the expansion will determine the requirements. The advice from a professional lease broker will be helpful. Financing for capital expansions should start with building a strong financing team. The team should be responsive to variations in the market so they can provide sound financing advice. A company should actively manage their debt as well as evaluate the debt capacity of the company. The company’s debt capacity should grow each year as the company grows. Along with all the planning the company needs to determine the appropriate debt and equity financing mix. http://www.ehow.com/how_7315483_increase-use-debt-cost-capital.html In conclusion, I learned many things from this exercise. I now know that I can use different funding options for different aspect of the company. I also realized how important working capital funds are to a company. I leased how important it is to take care when making financial decisions. All the decision made affect the profitability of the company. The decisions have long term consequences that can determine the future of the company. If I could redo the simulation I would know that I can use different financing sources for different parts of the business and I would analyze my decision accordingly. I’m not sure how I will use this in my present job since I do not make any acquisition decision. However, I enjoyed the simulation and seeing the affects the decisions I made had on the company.