What is Working Capital?

In this reflective journal, I will answer some questions to give more insight into healthcare finance management. 

Describe the ways in which financial statements, financial calculations, and working capital are used in the organizational budget process 

A budget process involves the creation and implementation of a financial plan of an organization. The realization of an organization’s objectives is dependent on a budget process that adheres to the financial plan and goals. The financial statements and calculations are important as they allow the management of an organization to keep track of the budget. They provide financial information about the organization’s actual operations (Nowicki, 2018). The information is then used to check whether the budget is being followed. The financial statements and calculations are also useful in the creation of subsequent budgets as they offer a more realistic financial position of the organization. The working capital is equally valuable for a budget process. It refers to the difference between an organization's current assets and current liabilities. It, therefore, provides an organization's operating liquidity. The working capital is vital as it enables an organization to meet its short-term financial requirements. The management of the accounts receivable from Medicare and Medicaid is crucial in maintaining a working capital in and healthcare organization (Nowicki, 2018). 

Identify the main objective of managing cash flows 

Cash flow refers to the net amount of cash and cash-equivalents that move in and out of an organization within a particular accounting period. The primary objective of managing cash flows is to ensure there is a balance between cash inflows and cash outflows. An organization should always have an adequate amount of cash to make the required payments (Nowicki, 2018). The management of cash flows, therefore, ensures a balance of an organization's liquidity and its profitability to improve the long-term profits. 

Explain why financial leaders are concerned about having cash on hand 

Cash on hand helps to measure an organization’s liquidity. It allows the business to meet its financial obligations, such as paying its suppliers and employees. The financial leaders are concerned about having cash on hand for transactive, precautionary and speculative purposes. For instance, it may be essential to make an emergency payment which prompts the financial leaders to be concerned about cash in hand. However, holding on too much cash in hand may impact the organization's profitability as the money may be used to make non-profitable payments (Eaton & Paye, 2017). Financial leaders need to have sufficient cash to make crucial payments and avoid too much cash in hand to prevent unnecessary expenditure. 

Identify the three factors that set the healthcare industry apart from most other industries with regard to accounts receivable 

Three factors distinguish a healthcare industry from other industries with regard to accounts receivable. The three elements are; i) the nature of the services provided ii) the cost of the services and iii) the method of payment for the service (Nowicki, 2018). Due to the nature of the services provided, the clients are often unprepared to make the necessary payments thus delayed payments for the accounts receivable. The methods of payments include reimbursements that are made by insurance companies as third parties. Reimbursement delays may also impact the accounts receivable (Daly, 2016). Also, high tech equipment used to provide healthcare and need for specialized treatment for some patients may increase the cost of healthcare, thus affecting the accounts receivable. 

Explain the ways in which trends within Medicare, Medicaid, and third-party payers affect working capital and the cost elements associated with the revenue cycle 

Reduced or delayed reimbursements by Medicare, Medicaid and other third-party payers have a significant impact on the working capital (Daly, 2016). Current trends in the healthcare industry include reduced physician reimbursement by Medicare and Medicaid. Also, third parties payers in the healthcare industry such as Aetna, Cigna and BCBS have recently have adopted the fee-for-service contracts with healthcare providers which have led reduced reimbursement of the charges. Other current trends, such as increased healthcare fraud and abuse, has affected the revenue cycle in the healthcare industry. Accurate billing has become a significant factor in mitigating fraud in the healthcare industry. The delayed, denied or reduced reimbursements by the insurance companies and other third-party payers lead to loss of revenue by the healthcare organizations. 

References 

Daly, J. (2016, July 20).  Strategies for managing working capital . HomeCare Magazine.  https://www.homecaremag.com/operations-management-homecare-experts/july-2016/strategies-managing-working-capital 

Eaton, G. W., & Paye, B. S. (2017). Payout Yields and Stock Return Predictability: How Important Is the Measure of Cash Flow?.  Journal of Financial and Quantitative Analysis ,  52 (4), 1639-1666. 

Nowicki, M. (2018).  Introduction to the financial management of healthcare organizations . Health Administration Press, Chicago, Illinois.