Capital Management
- Evaluate effective working capital management techniques.
The health sector involves many activities in dealing with finances. Working capital is among functions that deal with cash and inventory management. In addition, it deals with the payable and receivable accounts. Therefore, Working capital management techniques are fundamental tools when determining operational liquidity. The essence of understanding the working capital is to establish ways to minimize risks while maximizing assets.
Working capital management techniques are critical in an organization and to ensure it is effective there are various factors to assess. The forecasting cash flow should be based on a contingency plan (Sunday, 2011). Therefore, the current state of the economy is assessed to understand how it influences cash inflow. If there are significant, effect in cash flow that will have a future impact on the company should be noted early enough. Therefore, there should be mechanisms to help in dispute management based on the consumers’ complaints. Further, the techniques should offer alternatives to capital projects that an organization could invest in to ensure the cash flow is sustainable. Also, there should be proper procurement and inventory management, ensure the vendors are paid in good time, and facilitating a suitable accounts receivable process through a fast billing and shortened cash conversion process.
- Evaluate alternative capital projects
The health care sector should also consider some alternatives for the source of cash inflows. Various options are available for an institution to choose, and they do not have to depend on the payments from the clients. For example, there can be the establishment of real estate trusts, a partnership between the for-profit and non-profit organizations, utilizing the abandoned buildings whitening the premises, and investing in private equity investment (Sunday, 2011). These alternative capital projects are meant to establish a one-time project that will reduce liquidity in the organization. In the long and short run, these investments will lead to revenue generation for the organization to match the projected forecasted cash outflows to cash inflows. Therefore, a wise decision should be made before investing in these capital projects to determine if they are viable within the targeted time. If the feasibility study before the establishment brings a negative report then it is not worth investing in such a project because there should be a balance after trading-off and risks and returns.
- Analyze risks associated with capital projects.
The definition of risk according to financial management is the degree of uncertainty of the outcomes from a project. Therefore, health care stakeholders should consider the possible risks that could be associated with the intended capital project. Therefore, the risk-return trade-off is a major tool that the management should evaluate an investment that will ensure that the sourced resources and funds committed to the project will yield high rates of return. However, the projects that require funds tend to be riskier despite a projection of high returns. However, it is advised to invest despite the risks if the returns are highly projected instead of committing resources on a project that will offer lower returns (Baker, 2019). There are possible risks related to wrong spending of the available capital, which should be avoided as long as they do not profit the organization. However, there are external forces that lead to a change in the economy, and technology changes that affect cash flow. In such a case, the healthcare sector should choose technology that will not affect the costs of operation to remain relevant.
- Describe the decision-making factors in lease versus buy.
Most organizations face the dilemma of whether to buy or Lease. The decision should be determined by various factors meant to bring the desired results. A decision should be based on assets’ requirements benefits to the organization and the expected returns for the specified period. In addition, the type of asset and technological developments drives the decision. As a result, companies have to make a wise decision on the capital-intensive assets that will be vital for the organization. For example, the acquisition of properties, machinery, and land requires much money and it is upon the organization to decide if to buy or lease. Therefore, the level of capital intensity, the term of use (short or long term), and the significance of the ownership are major factors (Vasigh, Fleming & Mackay, 2017). Finally, the risk and rewards, as well as the tax benefit of the assets, must be considered to ensure the organization benefit from the decision.
- Describe the effect of financing strategies on the cost of capital.
The significance of managing the cost of capital in a company is crucial because it affects the capital structure. As a result, it is crucial to embark on a strategy during the financing of the operations and investing because it affects the cost of capital. It is well elaborated through the weighted average cost of capital (WACC), which factor in the total cost of capital (Baker, 2019). The adoption of the external financing strategy leads to an increase in the cost of capital compared to firms that rely on their internal sources of finances; hence offering a free source for finances.
- Describe the benefits and risks of debt financing
The benefits include retaining control, taxation advantage, and better planning. Debt financing leaves the control to the lender and makes decisions and in the end, the full repayment ends the relationship. In addition, there is a reduction in tax interest and the borrower can plan the budget every month. The risks include qualification barriers, discipline, and collateral requirements (Schich, 2019). Therefore, borrowers have to qualify enough credit rating. However, financial discipline is a challenge, which increases the risks among investors. Lastly, the asset placed as collateral is at risk if the loan is not repaid accordingly.
References
Baker, J. H. (2019). Capital Projects. Building America, 72-109. doi:10.1093/oso/9780190696450.003.0004
Schich, S. (2019). Implicit Bank Debt Guarantees: Costs, Benefits and Risks. Contemporary Topics in Finance, 41-78. doi:10.1002/9781119565178.ch3
Sunday, K. J. (2011). Effective Working Capital Management in Small and Medium Scale Enterprises (SMEs). International Journal of Business and Management, 6(9). doi:10.5539/ijbm.v6n9p271
Vasigh, B., Fleming, K., & Mackay, L. (2017). Buy versus Lease Decision- Making. Foundations of Airline Finance, 339-363. doi:10.4324/9781351158046-12
