Being able to manage financial and other types of resources is a must for healthcare organizations. A for profit healthcare organization’s financial books, specifically, the income part, may be benefiting from a high level of foot traffic within the organization’s infrastructures, but without proper management, the new wave of finances obtained from that financial milestone may just go to waste and achieve practically nothing. Fortunately, there are many options or directions that a healthcare organization may choose when it comes to managing its finances.
The objective of this paper is to discuss the best possible options that a fictitious healthcare organization can choose in its current situation. This healthcare organization is currently facing financial difficulties, specifically in the area of capital expenditures. Its capital funds appear to be inadequate to finance its equipment acquisition and other expansion projects. For starters, capital fund is an organization’s source of fund for acquisition, expansion, and even emergency purposes, especially in times of crises.
Working capital or in some cases, capital expenditure pertains to the total amount, either real or forecasted, that an organization has spent or allocated for things such as making improvements in long term assets which include but may not be limited to infrastructures and equipment. This is, in fact, what is happening in the present case. Naturally, a higher capital expenditure would enable an organization to finance larger improvement and expansion projects, finance the construction of larger and more sophisticated buildings as well as the acquisition of higher quality and state of the art tools and equipment. Most organizations who do this know for a fact that investing in long term assets would lead to higher yields, be it in terms of monetary gain or the ability to offer higher quality products and services to their clients, in the future.
The problem in this case, however, is that the healthcare organization is facing a scenario wherein its capital is not large enough to support an increase in the capital expenditures that would be enough to support its acquisition and expansion project proposals. There are two general options that the organization may consider. It is important to note, however, that the main objective in the present case is to provide room in the current capital expenditure model to accommodate the healthcare organization’s equipment acquisition and expansion project plans. This means that the healthcare organization would either have to increase its capital or it can cut its cost so that it would not have to search for new sources of funds to increase its capital. When it comes to the cost-cutting approach, the option chosen was to reduce the agency staff and change the skills mix within the organization. This means that there would be some restructuring that would be done in the human resources department. Firstly, the reduction in agency stuff would require the organization to let go off some workers. The objective is to retain the staff members that man the most essential positions.
And secondly, the modification of skills mix; the objective of this cost-cutting option is to modify the roles (i.e. add more roles) that key personnel in the organization would play, leading to a new environment where the current lineup of staff members would be able to perform multiple roles. The end result of this would be a significantly large reduction in cost. The second option is the loan option. This is, in fact, the less desirable approach because the loan selected carries a high level of interest rate. In fact, any form of loan may pose as a financial risk for the healthcare organization. If for example, the investments where the organization used the loaned money on did not pay off as expected, that would surely mean trouble for the organization, financially at least. If, however, the organization is certain that its long term investment choices would pay off, then choosing the loan option may be considered safe.
Phase II Funding Options for Equipment Acquisition
For the funding options for equipment acquisition, the options chosen were to apply for a refurbishing loan for the CT scanner; Capital Lease for the X-Ray machine, and an Operating Lease for the Ultrasound. These were the chosen options because for the CT scanner, this equipment is required to treat a lot of medical conditions such as stroke, for example and so it would certainly benefit the organization if it would have its own CT scanner, even if the fund used to obtain one is from a loan. For the Capital Lease for the X-Ray Machine, the capital lease option may have been chosen because of the price of the X-ray machine.
Most lessors would not offer an operating lease, which works like a properly or equipment rental, for a machine as expensive as an X-Ray machine. So, this remains to be the best option for the healthcare organization. As for the ultrasound equipment’s operating lease, this is indeed the best option because in this type of lease, the owner of the equipment, the lessor, would assume the risks including the maintenance and repair costs of the equipment, so that would mean additional savings for the healthcare organization . In general, the outcome of these strategies must be positive, considering that all these equipment acquisitions would improve the overall variety and quality of services that the health organization would be able to offer.
Phase III Funding Options for Capital Expansion
For this case, the best choice for the healthcare organization to successfully reinforce its capital for its capital expansion plans would be the HUD 242 Loan option. Just like any loan options, this one carries a certain interest rate, which considering current industry standards, is a little bit high, that the organization would have to pay in addition to the principal amount that it would borrow. It was chosen mainly because of the fact that the healthcare organization’s options are limited.
Sure, it can look for individual or institutional investors who would be willing to finance its capital expansion project but it would take some time and a lot of documentation to finish. The same is, in fact, true if the organization considers going public just so it can have access to more lucrative sources of funding for its capital expansion project. Nonetheless, considering the growing demand for medical and healthcare services and the trend that these two variables would be going, it would only be safe to say that this funding source option for capital expansion would lead to a positive outcome for the organization, provided that the hospital generates enough income to cover the loan payments both for the principal and the interest rates throughout the entire term of the loan.
Summary and Conclusions
What I learned from the simulation is that there are indeed many options that an organization’s administrator may take in order to arrive at a certain financial outcome. In this case, we wanted to enable the organization to finance its capital expansion and equipment acquisition projects, and different options were considered to solve the problem that was the inadequate size of the healthcare organization’s capital. If asked to perform the simulation again, I would decide to pick the same choices again because they are the best ones already.
Diffen, C. (2014). Capital Lease vs. Operating Lease. Diffen.