21st June 2011 Essay Example
FINANCIAL INDICATORS FOR DECISION MAKING 6
Topic: Financial Indicators for Decision Making
21st June 2011
Phase 1: Capital shortage
The most appropriate cost-cutting option selected is changing the skill mix which means hiring unlicensed but qualified assistive personnel in the healthcare facility. This will offer and effective means of reduction in costs because unlicensed but qualified personnel are cheaper to maintain in terms of salaries paid. It is also cheaper to maintain the unlicensed assistive personnel because as opposed to the rest of the staffs they are not entitled to certain benefits such as retirement, paid leave benefits and salary increase budgets (Baker & Baker 2011).
By hiring the unlicensed but qualified assistive personnel the nurses will be able to delegate simple tasks to such personnel so that the nurses can concentrate on more complicated tasks of taking care of the increasing volumes of patients in the facility. The second most appropriate cost-cutting option is reducing the agency staff. This should go hand in hand with the hiring of assistive personnel in order to ensure that as one of the contracted labour or agency staff leaves the facility another assistive personnel is hired.
Since, the salaries paid to the assistive personnel will be lower than that of the agency staff, it means that numerous amounts of costs will be reduced in terms of salary payments. This will also ensure that the current liabilities such as salaries of contracted agency staff reduces significantly and the rate of cash inflow will be more than the rate of cash outflow.
The option one of repaying the loan in monthly instalments is the most appropriate. The reason for this is that both the short term and the long term objective is to reduce the operating costs in order to reach the required break-even point (Pandey 2006). By taking option 1 of monthly repayment of the loans it means that as the earnings of the healthcare facility increases the current and the long term liabilities decreases. It follows that within a given duration of time such as one year the facility will be able to operate without relying on huge amounts of loans because the amount of cash inflow will surpass the amounts of cash outflows as the instalments reduce and the amount paid to agency staff reduces. Hence, loan option 1 is the most appropriate in this situation.
The outcome of the above decision is that significant amounts of costs such as salaries and other benefits will reduce when assistive but qualified personnel are hired to assist the nurses in performing simple task in the facility. The other outcome of this decision is that nurses and other professional and specialized staff will not be affected in the process and thus the morale of such staff will not be affected. Hence, the quality of services offered to the patients will be up to the required standards which means that the facility will continue to record increases number of patients thus which translate into increases in earnings. By taking loan option one, it means that the healthcare facility will be able to meet its short term obligations.
Phase 11: Funding options for equipment acquisition
The health care centre is considering acquiring new technological equipments that can enable the facility to meet the increasing needs of its patients. Among the equipments the facility considers include High-Speed CT Scanner, an X-Ray machine and a new ultra-sound machine intended to proved utmost and quality care to the patients. The most appropriate funding option for this kind of capital expansion strategy can be arrived at by considering the useful life of the equipments to be acquired. The High-Speed CT scanner has a useful life of 10 years and this technology is not expected to change drastically.
This means that the present value of this equipment will be positive at the end of its useful life (Saleem 2005). Hence, the most appropriate option is to purchase this equipment because in its useful life the equipment will have generated adequate cash inflows to repay itself and extra cash flows from it usage. The X-Ray machine has a useful life of 15 years and it has a low technological obsolescence. From this perspective, it is evident that purchasing this equipment is also a better option because the initial capital outlay is small and the equipment will be in use for a longer period of time.
With increasing number of patients in the facility it follows that the equipment will remain useful in the facility for a longer period of time since this technology is not likely to become obsolete any time soon. Hence, purchasing the equipment is the best option. However, the most appropriate option of acquiring the ultrasound system is through operating lease because the equipment will be treated as a rental. In this regard, when the technology changes the healthcare facility will not incur additional costs of purchasing a new ultrasound system but just entering into another rental agreement with another renting facility with the latest ultrasound system technology.
The outcome of this decision is that purchasing the High-Speed CT scanner and the X-Ray machines will only raise the capital expenditure in the short turn but the cash flows in the useful life of these two equipments will offset the initial cash outlays in the long run. However, by acquiring the ultrasound system through the operating lease strategy the facility will have saved on the initial outlay and also the ultrasound system will only be rented when it is relevant due to the high vulnerability to changes in technology.
Phase III: Funding options for capital expansion
The HUD 242 Loan Insurance program is the best funding option for capital expansion of the health care facility because it has the lowest borrowing rate as compared to the bank funding option (Saleem 2005). In addition, this option has a higher Net Present Value than the other funding options. The outcome of this decision is that EHC will end up paying less interest and thus this expansion strategy will be cheaper in the long run.
From this simulation I have learnt a number of things. First, a healthcare facility just like any other profit making business is vulnerable to bad financial management and thus the need for better costs cutting measures should be taken in order to ensure the continuity of services to the intended customers. Second, I have learnt that proper measures must be taken into consideration when acquiring healthcare equipments in order to reduces the losses that might arise due to obsolescence.
If I performed this simulation again I would single out other costs-cutting areas needed to reduce the costs incurred at the healthcare facility such as removing unused equipments in patients which is not billed in order to remain with only the required equipments in patients’ rooms. I will apply this knowledge in my future job as an administrator in any one of the healthcare facilities in the country. I will apply the cost reduction skills significantly in making sure that the variable costs in the healthcare facility are maintained at the lowest point possible while trying to meet the fixed costs.
Baker, J.. & Baker, W. (2011). Health care finance: Basic tools for non financial managers, (3rd ed.). Sunbury, MA: Jones & Bartlett
Pandey, M. (2006). Introduction to
financial management. New Delhi: Vikas Publishers
Saleem, K. (2005). Managing finances in healthcare facilities. New York: Sage Publishers
More Important Things