Chapter 5 - Working Capital Management

Question 1

Working capital refers to both ______ and ______

Answer 1

current assets and current liabilities

Question 2

Net working capital refers to the ______ _____ and ______

Answer 2

difference between current assets and current liabilities

Question 3

In day-to-day operations there is ______

Answer 3

an ongoing flow of cash incoming and outgoing

Question 4

In healthcare payments where payment for services may be out 2 months or more __________

Answer 4

there must be sufficient cash on hand to pay bills

Question 5

Steps of the working capital cycle

Answer 5

1. Obtain cash 2. purchase resources and pay bills 3. provide services
2. billing and collections

Question 6

the _____ is important in managing working capital

Answer 6

timing

Question 7

Working capital management is defined as ____

Answer 7

the amount of working capital an organization must keep as cushion

Question 8

What are the two types of working capital management strategies?

Answer 8

Asset mix and Financing mix

Question 9

Asset mix

Answer 9

amount of working capital an organization keeps on hand relative to its potential working capital obligations

Question 10

Financing mix

Answer 10

how an organization chooses to finance its working capital needs

Question 11

Asset mix strategy ranges from ____

Answer 11

aggressive to conservative

Question 12

Aggressive asset mix strategy

Answer 12

An aggressive asset mix strategy focuses on maximizing returns by investing heavily in higher-risk assets. This strategy is suitable for investors who have a high risk tolerance and a longer investment horizon.

Question 13

Conservative asset mix strategy

Answer 13

conservative asset mix strategy prioritizes capital preservation and steady income over high returns. This approach is suitable for risk-averse investors or those nearing retirement.

Question 14

Financing Mix Strategy

Answer 14

3 rules to follow to decide between short term and long term borrowing to finance working capital needs

Question 15

1st rule of Financing mix strategy

Answer 15

finance short-term working capital needs with short term debt

Question 16

2nd rule of Financing mix strategy

Answer 16

finance long-term working capital needs with long term financing

Question 17

3rd rule of Financing mix strategy

Answer 17

finance fluctuating needs for working capital by employing a mixed strategy

Question 18

Revenue Cycle Management

Answer 18

a critical process for healthcare organizations that encompasses the entire lifecycle of patient revenue, from the initial patient encounter to the final payment; involves a series of administrative and clinical functions aimed at ensuring that healthcare providers receive proper reimbursement for their services

Question 19

The Revenue Cycle Management process

Answer 19

1. scheduling/preregistration 2. registration 3. charge capture 4. coding 5. electronic billing 6. payment

Question 20

more and more of the payment responsibility with copays and deductibles resides with the ________ at time of service

Answer 20

patient

Question 21

by _______, providers avoid the costs of billing and carrying accounts receivable

Answer 21

electronically accepting cash payments

Question 22

Most of accounts receivable management is ____

Answer 22

paid by a third-party payor (insurance companies, Medicare, and Medicaid) making up about 75% of a healthcare provider’s current assets

Question 23

what are additional avenues for collecting payments?

Answer 23

decentralized collection centers, lockboxes, wire transfers

Question 24

_____ and _____ as a percentage of revenue are means to judge the management’s success in collecting revenues

Answer 24

aging schedule and receivables

Question 25

Aging schedule

Answer 25

a financial tool used to categorize accounts receivable based on the length of time that invoices have been outstanding. It helps businesses, particularly in healthcare and other service industries, manage their receivables more effectively by providing insights into the collectability of outstanding debts

Question 26

cash management refers to

Answer 26

currency and cash equivalents

Question 27

What are the 3 main reasons to hold cash?

Answer 27

1. daily operations purposes (e.g. payroll, utility) 2. precautionary purposes (e.g. unexpected R&M) 3. speculative purposes (e.g. buying a competing practice)

Question 28

Sources of temporary cash

Answer 28

bank loans and trade credit or payables-extension of credit from supplies

Question 29

Types of Bank loans

Answer 29

LOC, Compensating balance, Transaction Notes

Question 30

Line of credit (LOC)

Answer 30

flexible loan from a financial institution that allows borrowers to draw funds as needed up to a pre-approved limit; commitment fee on unused portion

Question 31

Compensating balance

Answer 31

a minimum balance that a borrower must maintain in their bank account as part of an agreement with the lender, usually to secure a loan or line of credit

Question 32

Transaction Notes

Answer 32

refer to the details or descriptions attached to individual financial transactions, used to explain or provide context for the transaction; ST unsecured loan for a specific purpose

Question 33

Trade credit or payables - extension of credit from supplies

Answer 33

allows businesses to conserve cash by delaying payment, while still acquiring the goods or services needed to operate or produce.

Question 34

2/10 net 30

Answer 34

has two options for payment: Pay within 10 days and receive a 2% discount on the invoice total or Pay the full amount within 30 days, with no discount

Question 35

net period in 2/10 net 30

Answer 35

the difference between 30 days and 10 days in the payment

Question 36

Approximate interest rate for not taking trade discounts is

Answer 36

(discount % / 1 - discount %) x (365 / net period)

Question 37

Ways to invest cash on a short-term basis

Answer 37

treasury bills, negotiable certificates of deposit, commercial paper, money market mutual funds

Question 38

treasury bills

Answer 38

Short-term debt securities issued by the U.S. government. They are sold at a discount and mature at face value, meaning the investor earns the difference between the purchase price and the maturity value

Question 39

Negotiable Certificates of Deposit (CDs)

Answer 39

a time deposit issued by a bank, where the investor deposits a fixed amount of money for a specified period and receives interest in return

Question 40

Commercial Paper

Answer 40

Unsecured, short-term debt instruments issued by large corporations to finance accounts payable, inventories, and other short-term liabilities. It is sold at a discount and matures at face value

Question 41

Money Market Mutual Funds

Answer 41

Pooled funds that invest in a variety of short-term, high-quality securities like T-bills, CDs, and commercial paper. Investors buy shares in the fund, which seeks to maintain a stable net asset value (typically $1 per share)

Question 42

Differences between Regular CDs and Negotiable CDs

Answer 42

negotiable CDs can be bought and sold in the secondary market, which makes them more flexible; Regular CDs are non-transferable, meaning once you open a regular CD with a bank, you can’t sell or transfer it to someone else before its maturity date. However, negotiable CDs are transferable, allowing investors to sell them to other investors before the maturity date if they need liquidity.

Question 43

Forecasting cash surpluses and deficits

Answer 43

important aspect of financial planning for businesses. It involves predicting future cash inflows and outflows to determine whether the company will have a cash surplus (more cash than needed) or a cash deficit (less cash than required) at specific points in time

Question 44

Forecasting cash surpluses and deficits is useful for _____

Answer 44

short term planning

Question 45

Cash balance

Answer 45

the amount of cash an organization must have on hand at the end of the current period to ensure that it has enough cash to cover expected outflows during the next forecasting period

Question 46

Complying with laws and regulations related to _______ is essential for preventing fraud and abuse in healthcare

Answer 46

patient billing, cost reporting, physician transactions, and occupational health and safety

Question 47

______ have programs and approaches to help minimize fraud and abuse as well as structure for compliance programs

Answer 47

Department of Health and Human Services (HHS), Centers for Medicare & Medicaid Services (CMS), and Office of Inspector General (OIG)

Question 48

Aging Schedule equation

Answer 48

AR for month / AR for the Qtr

Question 49

Average daily patient revenue for the Q equation

Answer 49

Net Patient Revenue for Q / # of days in the Qtr.

Question 50

Days in AR equation

Answer 50

Net AR / daily patient revenue