Healthcare Financial Management - Essay Example

Finance and accounting Question Steps involved in capital budgeting financial analysis. Capital budgeting decisions are of fundamental significance to every organization even those in the health care, and as such it is vital that an understanding the following steps in capital budgeting financial analysis be considered. The capital budgeting decisions characterize the accomplishment or collapse of an organization and shape its future. Among health care organizations that are not-for-profit, provision of value and services that are cost-effective to the community is the main goal. However, these steps are at times challenging and may prove difficult to implement by the health care organizations (Gapenski & Pink, 2011). a. Cash flow estimation: This step involves determining the annual net operating flows that are expected when a project becomes operational, the outlays of investment, and the cash outflows that will be associated with the project upon its termination. A lot of variables are involved in the determination of cash flow forecast and as such requires the participation of several individual and departments of an organization. To a greater number of health care organizations, this step would be the most complicated and demanding one as it is always difficult to determine the projections of costs and revenues of large and complex projects accurately. The other rationale for qualifying this stage as the most challenging to the organizations is that it usually hard to overstate the difficulty or importance of correctly determining the forecast for the project’s cash flows (Berger, 2008). Consequently, this stage requires proper analysis, not unless the firm’s costs may outweigh the revenues thus, likely to result into cannibalization. In effect, the firm may underestimate the true profitability of the project by not recognizing its strategic value which is the value of future opportunities of investment that the health care firm may undertake only if the current project is accepted. b. Conducting a replacement analysis: Replacement analysis deals with replacement decisions, which are made when considering a new asset that replaces and old asset. The analysis of the replacement cash flow is complex and so might turn a challenge to the health care organizations. When compared to the expansion decision, the health care organization may find that the replacement is more complex as it must consider all the cash flows from the existing asset. By the organization considering its operating flows, it shall find that the incremental flows are the cash flows expected from the replacement assets less the flows that it expects from the existing assets (Berger, 2008). c. Conduction of a break-even analysis: The health care organization can use a break even analysis in order to gain an insight into its projects’ profitability potentials. Furthermore, the analysis should help it to evaluate its operational decisions that do not require it to have an initial capital investment, such as the expansion of hours of clinic. Even though a break even analysis can be performed in different ways, the main areas of focus in which the firm can concentrate on are time breakeven and volume breakeven. d. Conducting of a return on investment analysis: In this context, the health care organization will be required to measure its percentage rate of return. This is the most essential stage but which has challenges as well such as entailing complex calculations in the determination of net present value (NPV) and the discounted cash flow (DCF) of the organization. When precision is not observed in their determination, the obtained results are likely to mislead the organization (Gapenski & Pink, 2011). Question 2: Brief scenario Performing of a break-even analysis is one of the simplest ways by which an organization determines the price levels and determines whether an expansion or cost saving project it plans of rolling out makes business sense. Calculations of breakeven are key components of business plans. Since the goal is to determine when an organization’s sales will equal the revenues, a common scenario in this context would be as below: A break-even analysis can be used to determine the feasibility of selling new products, making decisions about prices, and in the evaluation of a project (Gapenski & Pink, 2011). Assume that the health care organization wants to sell old beds then to determine the number of units that will break-even it applies the formula: Revenue (Y) = Fixed Costs + Variable Costs (Y) Fixed costs (FC): expenses that don’t depend on activities of the business Variable costs VC: expenses that depend on activities of the business Y: Number of units of beds needed to be sold to break-even. If FC = $5,000, VC = $120 per unit, and retail price of a bed at that time at $70, then: $70Y = $5000 + $120Y $70Y = total revenue produced by selling Y number of hospital beds $5,000 = Fixed cost $120Y = Variable cost incurred for Y beds To ensure profitability, the organization’s revenues must exceed the costs, and as such the firm will ensure that through a break-even analysis, it is able to determine a stable ground for its assets that it wishes to dispose of without running at a loss (Gapenski & Pink, 2011). Question 3: Project description An example of a project for this health care organization would be when it plans to offer its health care services to a large number of diverse employees who are found in different service area in the region. These employees can be grouped into diverse categories and each of these categories considered as a project. There are usually three types of risks that an organization can undergo. These are stand-alone risks, corporate risks, and market risks. In this scenario of the project of employees, a stand-alone risk of the project by the health care organization may be inappropriate and irrelevant because the project will not be held in isolation. The most relevant risk to the new project will be the contribution to the overall risk i.e. the impact of the project on the overall profitability’s variability of the business. In this case, the best type of risk, which can be associated with the scenario in which the project is a part of a not-for-profit business’s portfolio of a project, would be the corporate risk (Berger, 2008). The corporate risk of a project is usually measured by the corporate beta which depends on the context of the other projects of the firm. In this case, therefore, it is normal to have a project having a high corporate risk to an organization but, on the other hand, a lower corporate risk with the same project for another organization. The best way for this organization to assess the corporate risk associated with its project would be to perform a stand-alone risk analysis which will give further insights into the nature of the corporate risks. Consequently, if the organization expects the returns of the project to be independent or negatively correlated then, it can run a stand-alone risk assessment on the project (Berger, 2008). References Berger, S. (2008). Fundamentals of health care financial management: A practical guide to fiscal issues and activities. San Francisco: Jossey-Bass. Gapenski, L. C., & Pink, G. H. (2011). Understanding healthcare financial management. Chicago, Ill: Health Administration Press. Read More