Week 10 Discussion Response- Managerial Finance

Student’s First Name, Middle Initial(s), Last Name

Institution Affiliation

Course Name and Number

Instructor’s Name and Title

Assignment Due Date

The Trade-Offs Between Risks and Returns

I remain with the outpatient clinic organization that relies on insurance reimbursement, and as such, it will tend to cover operating expenses prior to the payer cash coming in, and this will put the organization under liquidity strain, which the management has to plan around. During Week 9, the organization assessed a long-term capital investment of approximately 2,000,000 dollars in diagnostic imaging equipment, with the majority of the investment being on purchasing and installing the equipment, and the rest on training and upgrading the facility and early maintenance (Brigham & Houston, 2022). The increased patient throughput and reimbursement capture during a 10-year useful life are expected to provide higher returns, and therefore, the project risk profile must match the returns that the organization needs. The more the risk, the higher the expected return that the organization must demand to invest its capital.

There are a number of risks in the project that determine the overall risk in the project. The demand risk is when volumes or referrals fail to rise to meet the rising fixed costs. Reimbursement risk occurs when the payers alter the coverage policy or payment rates on imaging and decrease the anticipated cash flows (Brigham & Houston, 2022). The risk of financing and interest rate is that in case the organization acquires the purchase using debt, and the rates increase, then it may undermine the coverage ratios and reduce the present value. Execution risk occurs when implementation, training, or workflow redesign results in downtime, and the ability to increase revenue is postponed. The threat of technology and cybersecurity is possible when the high rate of innovation, vendor, or security incidents decreases usage or minimizes the economic life cycles. All in all, I would classify this project as medium to high risk with a mid-sized clinic due to the high investment, high fixed costs, and variable cash flow resulting from different payer and volume conditions.

Nonetheless, the organization is capable of accepting such risks and managing them, provided the leadership accompanies the investment with a high level of liquidity management and strict oversight. The slow inflows relative to outflows in the current operations model mean that the management ought to tighten the revenue cycle management, speed up the submission of claims, and fix any denials within a short time to ensure the cash turns fast (Brigham & Houston, 2022). It must also have a line of credit and plan the capital expenditure in phases to prevent the cash crunch over the ramp-up phase. Operationally, leaders are able to establish monthly utilization goals, monitor payer mix, and vary provider schedules and outreach in the event of volumes that are below plan. In order to enhance accountability, a small capital governance team will have an opportunity to assess the results in every quarter, accept corrective measures, and have a backup strategy in case the project performs poorly.

The risk/return trade-off is that the equipment will be able to boost capacity and generate incremental cash flows that will be sustainable over time, but it will also raise the vulnerability to fluctuations in demand, payer choices, and financial terms that can decimate value in case assumptions are undermined (Brigham & Houston, 2022). As such, I will proceed with it under the condition that a conservative projection continues to yield a positive net present value upon stress testing reduced volumes and reimbursement, and only when the financing constraints, rate volatility, and liquidity are maintained. Provided that the conditions are met, the projected revenue will be worth taking the additional risk, and the investment ought to enhance the long-run competitiveness and increase the access to patients by reducing wait times.

References

Brigham, E. F., & Houston, J. F. (2022). Fundamentals of financial management (16th ed.). Cengage Learning.