Your expertise in healthcare finance has attracted the attention of some of the newer employees in your organization. Wanting to become managers someday, they have asked you to share some of what you know in the online journal that serves as the company’s knowledge-sharing portal. Create a journal assignment in which you respond to these specific topics from your colleagues:
1.. Describe the ways in which financial statements, financial calculations, and working capital are used in the organizational budget process
2. Identify the main objective of managing cash flows
3. Explain why financial leaders are concerned about having cash on hand
4. Identify the three factors that set the healthcare industry apart from most other industries with regard to accounts receivable
5. Explain the ways in which trends within Medicare, Medicaid, and third-party payers affect working capital and the cost elements associated with the revenue cycle
Financial management is as crucial in healthcare organization as any other institution. It enables healthcare organizations to manage their finances and risks in a manner that allows them to achieve their financial goals while providing efficient healthcare services to their clients. This Journal presents specific topics regarding healthcare finance.
Ways in which Financial Statements, Financial Calculations, and Working Capital are used in the Budgeting Process
Generating a reasonable profit on resources used in producing services is the primary objective of different companies including healthcare organization. Therefore, the budgeting process entails planning and controlling resources for future profitability. In this process, working capital financial statements and calculations are used in various ways to develop a decent budget as discussed below:
Working capital is a crucial tool in budgeting processing. It refers to the organization’s capital used to fund its day to day operations (Brealey, Myers, & Marcus, 2013). In the budgeting process, working capital shows a company’s expected short-term cash flow which must be considered during budgeting. Working capital enables managers to analyze whether the organization will require additional money or has excess capital. In case additional capital is needed, the same is incorporated in the cash Budget.
Secondly, a budget is a plan for obtaining and using resources. Financial statements show the amounts of resources that are available at any given time to support the services offered to clients in a health center. Based on the values in the financial statements, resource inadequacies can be determined and budgeted. For example, the balance sheet shows the amount of cash available to fund the operations. A cash budget can be prepared from this information.
Again, the budgeting process depends on financial calculations for accuracy and reliability. To effectively allocate resources, the managers use financial calculations to determine the required and the available resource. For example, in preparing a cash budget, financial calculations are used to evaluate the value of working capital (Current Assets – Current Liabilities).
The Objective of Managing Cash Flows
The primary objective of cash flow management is to maintain sufficient liquidity. Like other enterprises, healthcare organizations require adequate cash to meet their short-term obligations such as payment of salaries and other commitments (Brealey, Myers & Marcus, 2013). Inadequate cash levels are not desirable because they increase liabilities.
Importance of Cash on Hand
Financial leaders are concerned about having cash at hand because cash at hand is necessary for the organization’s liquidity position. However, excessive cash on hand is as bad as exercise debt since the institution may not have a specific use for the excess money (Picard, 2011). As a result, the cash may end up being used to increase dividend amounts or clear high-interest rates.
Factors Unique to Healthcare Industry regarding Accounts Receivable
- Denial of claims: Unlike in other industries where account receivables are realized based on terms of the transaction, in healthcare patients must meet certain conditions for insurance companies to approve payments of their medical bills.
- Methods of payment: Whereas in other industries customers pay for services directly, healthcare organizations have to claim their payments from insurance companies.
- Service prices: Service prices in healthcare are highly regulated compared to service prices in other industries which are usually based on the cost of production.
How Trends within Medicare, Medicaid, and Third-party Payers Impact Working Capital and Revenue
Working capital and elements associated with the revenue cycle are affected by various trends concerning reimbursements. For example, Medicaid and Medicare are all reducing physician reimbursements. Third-party payers such as Aetna and Cigna support free-for-service agreements with physicians, thus reducing the charges significantly (Bosko & Hawkins, 2016). Other trends affecting working capital include healthcare abuse and fraud.
In summary, financial statements, financial calculations, and working capital are vital for a healthcare organization in preparation of budgets and ensuring sufficient liquidity.
Brealey, R., Myers, S. C., & Marcus, A. J. (2013). Fundamentals of Corporate Finance (p. 69). McGraw-Hill, New York.
Bosko, T. & Hawkins, C. (2016). Evolving Physician Reimbursement Structures: Moving the Medical Group to Value-Based Success. Retrieved from https://journals.lww.com/jhmonline/Citation/2016/05000/Evolving_Physician_Reimbursement_Structures_.4.aspx
Picard, R. (2011). Too Much Cash Becomes a Really Serious Business Problem. Retrieved from https://www.forbes.com/sites/robertpicard/2011/08/08/liguidity-is-creating-short-term-investment-challenges-for-many-companies/#4d646a265729