Chapter 16 Current Asset Management and Financing

Question 1

Managing Short-term assets and their financing

• Involves all current assets and most current liabilities
• Primary goal for short-term asset management is to support operations at the lowest possible cost

Cash Management

• The goal is to keep cash limited to the needs of the operations of the business

Answer 1

**Current Asset financng policies **

Moderate: Matches the maturity of the asset to the maturity of the financing

• Uses permanent capital to finance permanent assets
• Uses temporary capital to finance temporary assets

Aggressive: Uses temporary capital to finance permanent assets

Conservative: Uses permanent capital to finance temporary assets

Question 2

Cash Budget

• Forecast volume, revenue, and collections data
• Forecast fixed asset acquisition and inventory requirements
• Estimate times when payments for assets and inventory must be made
• Incorporate cash outlay projections for operating and financial expenses:
  
  • Wages / benefits
  • interest payments
  • tax payments etc.
• Project cash inflows and outflows over some specified period

Answer 2

Cash Budget Interpretation

Surplus / Deficit Summary:

Cumulative Surplus / Deficit

• If deficit: will need to arrange for a loan or a line of credit if it does not have marketable securities to cover deficit
• Figure out how to use the surplus

Question 3

Marketable Sucurities Management:

• Temporary portfolios of short-term securities
• Securities with maturities of 3 months or less

Reasons for Marketable Security Holdings:

• Serve as an interest earning substitute for cash balances
• Used to hold funds that being accumulated to meet a specific large, near-term obligation i.e. tax payment, capital expenditure

Answer 3

Marketable Securities Con’t

• Safety
• Liquid investments that can be sold at any time with predictable price ** **

Question 4

Long-term Securities Holdings

• Not-for-profits and hospitals have large portfolios of long-term securities holdings
• Funds set aside for future fixed asset replacement
• Many hospitals self-insure
• Defined-benefit pension plan
• Endowment gifts must be managed over time in the case of not-for-profit hospitals
• Managers willing to take more risk
• Makes sense for large hospitals who can afford to invest over the long run.

Question 5

Revenue Cycle Management

• Hospitals don’t get paid at the same time service is rendered
• Providers incur cash costs for facilities, supplies, and labor that need to be covered
• The most important element is managing of receivables

Revenue Cycle

• The set of recurring business activities and related information processing necessary to bill for and collect revenues due

Answer 5

Phases of Revenue Cycle Management: 4 Phases

1. Before-Service Activities:
   
   • Preservice Insurance Varification
   • Precertification (if necessary)
   • Preservice patient financial counseling
2. At-Service Ativities:
   
   • Time-of-service insurance verification
   • Service documentation / Claims production
3. After-Service Activities:
   
   • Claims submission
   • Third-party follow-up
   • Denials Management
   • Payment receipt and posting
4. Continuous Activities:
   
   • Monitoring
   • Review and improvement

Question 6

Receivables Management

The total amount of accounts receivable outstanding depends on:

1. The volume of credit sales
2. The average length of time between sales and collections

ADB: Average daily billings

ACP: Average Collections period

ACP = (% billings x days to pay) + (% billings x dasys to pay)…

Receivable Balabce = ADB x ACP

Question 7

• Aging schedule breaks down a firm’s receivables by age of account
• Developed from Account’s receivable ledger

Unique Problems of healthcare providers

• Complexity created by third-party-payer system
  
  • Follow different rules of different payers

Question 8

Supply Chain Management (inventory management)

• Requistioning, ordering, receipt, and payment for supplies.
• Inventory depends heavily depends on volume
• Inventories must be acquired ahead of time

Just-in-time inventory

• Risk of stock out
• Too much dependence on a single supplier
• Point-of-service distribution: The supplier ownes the inventory until it is used.

Question 9

Short-term Financing

Advantages of Short-term debt

1. Speed: Can be obtaned much faster than long-term debt
2. Good for financing seasonal or cyclical debt
   
   • Low admin fees
   • No penalties for early repayment
   • No restrictions or covenants
   • Lower interest rates

Disadvantages of Short-term debt

• More risky than long-term financing:
  
  • Interest expense can fluctuate widely
  • Principal amount comes due on a regualr basis

Answer 9

Sources of Short-term financing:

Accruals

Accounts Payable (Trade credit)

• Purchasing on credit
• A supplier lengthening the credit period and expanding volume and purchases generates “spontaneous” financing for a business

Approximate % cost = [Discount % / (100 - discount %) x 360 / (days credit received - discount period)]

Effective Annual Rate:

EAR = (1 + Periodic rate)^M - 1.0

Periodic rate = Discount % / (100 - discount %)

M = 360 / (days credit received - discount period)

Question 10

Bank Loans:

Secured Short-term debt:

• High admin costs.: better to borrow unsecured loans
• Using collateral to borrow short-term funds