Managing Revenue and Working Capital to Avoid Factoring in Health Organization - Essay Example

Managing Revenue and Working Capital to Avoid Factoring in Health Organization Health organizations sometime run into financial problems, while they need some cash to pay their creditors or recurrent expenditures. These situations arise when debtors to the health organization tend to pay their invoices at a later date after being sent invoices while debtors require payment immediately after supplying products to the organizations. The health organization might result to factoring where it cashes the invoices earlier before their payment date with factoring offices. The risk of this mode of getting cash inflow is that the organization will lose a percent of the invoiced amount to the factoring company. Another risk is that when debtors default in paying their invoices on the stipulated date the hospital risks paying more interest to the factoring company which was not budgeted for. Lack of proper management of working capital and revenue inflow might lead to the business getting to a situation of insolvency. Creditors to the health organization might be claiming from the organization more than the assets of the organization which might lead to bankruptcy. This might tatter the image of the organization and lead to poor performance of the credit rating of the hospital. Banks and other financial organization will refuse to extend any loan to the hospital in future date which might cripple the organization when need for capital arises in future dates. When the health organization gets to this situation it will lack liquid capital to grow, pay supplies or meet unexpected costs within the health unit. Some of the measures that the finance officer has to take into consideration to avoid such situations are: Healthy working capital policy The health organization will need to balance between acquisition of assets and payment of its recurrent expenditure like salaries and wages. The moderate form of working capital policy would suit the health center to avoid situations of need of having to look for short term debts to pay for its current and long term assets. This policy will do away with risks that come with aggressive policy of working capital where short term debts will be needed to finance fixed or permanent working capital. The fluctuating working capital will be financed through short term borrowing. This situation will eliminate a situation of financing all the working capital needs from short term loans which may lead to factoring within the health unit (Nowicki, 2011). Finance through sale of shares The health organization might be expanding or buying long term assets like medical equipment. Buying of these assets will lead to huge cash outflows which will affect the availability of cash to meet other expenditures. The financial manager might look for other ways like sale of rights share issue to existing share holder. The sale of share will generate some cash inflow that can be injected into the long term expenditures plan without affecting other expenditure within the organization. Sale of shares can be done through seeking for approval from private owners of the health unit to sell a part of it to the public as a way of generating extra capital. Shares save the business from getting into debts ether through factoring while improving on its financial rating within the market. Future need of financing through loans either from banks or other financial institutions will not be problem because good rating of the business by having a huge capital base. Changing business credit policy The health unit might be advancing debts to its clients for a long period compared to the period creditors agree to wait for payment. The finance officer should look for a way that might reduce the huge disparities that exist between these two periods. One of the policies might to take supplies from those suppliers who accept payment at a later date. We might take those who allow payment after fourteen days. Then the finance manager should put a policy where the business will put a less than ten days to the period a debtor should pay their debt. The three days period will allow for the collection of enough cash flow to repay creditors when their cheques or payment periods mature. The three days period will help the finance manager identify the bad debtors and identify some source of revenue to cater for the deficit. This situation will save the business the interest charged during factoring and the amount would be charged when the debtors default in their payment. Efficiency in Resource usage The hospital has resources like generators and human labor which are using much of the business cash inflow. Inefficiency in usage of these resources results in low output from them which might even repay their cost. To avoid situation like this the manager should analyze each resource like generator on its cost and revenue it generates. Then the efficiency of the resource should be looked at by generation a ratio of cost and revenue. If the ratio is unfavorable ways should be developed to eliminate the inefficiencies. If the hospital has been paying a monthly bill of half a million dollars for power cost cutting measures can be developed. One of the way would be a rule of switch off the lights or machines if they are not in use. This measure would lead to reduction in cost of power reducing outflow of cash which might be used to do something else within the hospital. Debt eligibility policy put in place The patients of the hospitals who like should be analyzed to establish their credit rating. The standards should be set high to avoid acquiring debts with patients who have a high probability of delay in payment. The hospitals can get such data by obtaining data from the banks or looking at the patients’ pattern in paying their insurance premiums. Patients who pay their basic bills on time have higher chances of paying their debts. Limitation in this form will arise in lack of data to analyze the patients’ credibility. This is because institutions like banks might refuse to share information about people claiming privacy of data. Reference Nowicki M.(2011). Introduction to the Financial Management of Healthcare Organizations, 5th edition. Health Administration Press: Chicago. Read More