Week 8 Discussion Response- Managerial Finance

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Short-Term Financial Needs and Working Capital Management

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Short-Term Financial Needs and Working Capital Management

An example that is useful in the analysis of the short-term financial needs is a mid-size outpatient healthcare clinic, which is dependent on insurance reimbursement. These organizations experience constant liquidity strain since day-to-day operations have to be financed way before the revenues can be completely raised. A payroll and benefits is one of the primary short- term financial requirements that will have to be paid either biweekly or monthly irrespective of delays in receiving payments by patients or their insurers. The salaries of clinical staff usually constitute a high percentage of operating costs, and regular cash flow is necessary to ensure the continuation of the services (Brigham and Houston, 2022). The second immediate financial requirement is financial supplies and pharmaceuticals which in many cases must be paid in advance or at short notice to the suppliers. Failure to pay suppliers in time may lead to disruption in supplies that may directly impact patients and revenue collection at the clinic.

With such features, the organization is supposed to have a medium to high working capital. The collection period of healthcare clinics is usually longer because of the insurance billing cycles and increases the cash conversion cycle (CCC). AccountingTools (2021) argues that long collection durations result in a prolonged period between the delivery of the service and the receipt of the cash and hence more current assets are needed to settle the current liabilities. Holding a larger working capital will have a buffer of liquidity that lessens the chance of shortages of cash as long as accounts receivables outstanding. According to Brigham and Houston (2022), organizations that have uncertain or delayed inflows have better liquidity positions to continue operation.

The clinic may use some evidence-based measures to enhance its cash position. First, it may lead to the decrease in the collection period, by enhancing the revenue cycle management, including the filing of claims in a timely manner and closely tracking refused or delayed claims. Reduction in the collection period has a direct positive effect on the CCC and increases the speed of the cash inflows (AccountingTools, 2021). Second, the clinic might work out more extended payment terms with suppliers and spend more days payable outstanding without disrupting the relationships with the vendors. When properly done, extending payables enhances the efficiency of the working capital (Bartram, 2013). Lastly, a short-term line of credit may offer short-term liquidity at times of discrepancy between inflows and outflows a solution that is often advised when it comes to dealing with short-term financing requirements (Brigham & Houston, 2022).

References

AccountingTools. (2021, April 10). Accounts payable days formula.

AccountingTools. (2021, April 11). Collection period definition.

AccountingTools. (2021, April 17). Inventory conversion period definition.

Bartram, P. (2013, July–August). 8 ways to improve working capital. Financial Management, 42.

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