Capital Shortage
The first selected cost-cutting option is to reduce the “Length of Stay” while the second is to reduce “agency staff”.
Reason for the Selection
After analyzing the cash flow statement of the facility, it is financially prudent to cut some costs that do not affect the delivery of health service directly (Anne & Gruen, 2005). In terms of decision making, the process involves judgment of available alternatives and their effects to an organization’s cash flow (Brigham & Houston, 2011). With this analytical perspective, the most optimum cost-cutting option is to reduce the period of time that inpatients spend at the hospital. This will be done by discharging the healed patients to another facility or home care service. This way, the cost of the extra days spent by a patient will be avoided.
The next most optimum option is to reduce the number of agency staff that are contracted to assist health care workers at the centre especially the nursing professionals. This can be done by allowing human resource team of the Heart Centre to directly hire health care staff and non-specialized health care attendants. This way, the center will be relieved off the costs paid to agents to fill vacancies without compromising the quality of staff contracted.
Selected loan option
The selected loan option is option 2.
Reason for the Selection
This is because the loan option offers the most optimum credit terms that will be favorable to the cash flow statement. According to Anne & Gruen (2005), the best loan facility is the one that not only solves the current financial needs but also places an organization at a better position to re-pay the debt. This means that the loan option will make an organization’s more favorable after the loan period than the period before the loan facility. The loan’s repayment period is twelve months with a prepayment limitation of six months. The interest rate of option two is lower than that of option one which makes it favorable in reducing the amount of monthly payment. This way, the cost of capital is reduced as compared to option one.
Outcome of the decision
The implication of the above decision model is a favorably planned financial outlook for the health centre. First, the target of the health centre to have a cost saving of over $ 900,000 is met. Secondly, the decision of cutting costs leads to zero expected shortfall in the entire cash flow period. In addition, the loan facility leads to a debt responsibility to the health care centre for twelve months with a prepayment limitation of six months. Finally, the main outcome is a surplus on the cash flow statement to the Heart Center. This is spread from a deficit in the first quarter to favorable surpluses in the second, third and fourth quarters of the year.
Funding Options for Equipment Acquisition
Selected cost-effective equipment
The cost effective equipment were selected as follows; The first acquisition is a High Speed CT Scanner machine which will be financed by a new loan. The second equipment to be acquired is an X-ray machine which will be financed by an operating lease. The third machine selected for acquisition is an ultrasound system that is to be financed by capital lease.
Reason for the Selection
I selected a new loan to purchase a High Speed CT Scanner machine to avoid obsolesce due to possible changes in technology of the machine. To maintain the standards, it is advisable for Elijah Heart Center to purchase a brand new machine for CT scanning no matter the cost incured.
I selected a capital lease to finance the acquisition of an EX-Ray machine since the program had ten years of machine life. This is the maximum possible age compared with other funding options. According to Brigham & Houston (2011), a capital lease is the most optimum asset financing option for equipments that have a long life and a high cost outlay.
Outcome of the selection
The outcome of the above selection is the acquisition of three non-current equipments. The other implication is a financial outlay of $230,353 which Elijah Heart Center is expected to incur for the projects. This will therefore have an outward implication to the cash flow statement of the Heart Center.
Funding Options for Capital Expansion
The selected source of funding is HUD 224 Loan Insurance Program.
Reason for the selection
This is because the funding program is the most optimal source of financing in terms of cost of capital as well as return on capital. The cost of capital for the funding is $745,250 at the interest rate of 3.9% which makes it the lowest cost possible. In comparison to the other options, the selected program has the highest NPV value which makes it the most optimum. According to Bierman & Smidt (2003), a project or a program with the highest level of Net Book Value is the most favorable project for an organization. This is because it is the program that presents higher gains when it net inflows are expressed in current terms (Brigham & Houston, 2011). The only limitation for the program is eight years of repayment along with the first mortgage on the entire amount.
Outcome of the selection
Financial implication of the choice is an investment of $75,000 by the heart centre. The decision also leads to an expected net present value of$221,221 which is the highest possible benefit. With such a program, the Heart Centre will have an eight year debt repayment responsibility to the financier. This will directly impact on the cash flow statement as a cash outflow every year until the debt is fully settled.
Summary
The main lesson learnt from the simulation exercise is that every financial decision has a resultant financial implication. It is therefore the task of an officer to make the most optimum decision in real life situation just like in the simulation process. Another lesson is that the Net Present Value (NPV) is the best tool of analyzing a project and is the basis of making an optimum decision. Finally, the role of a cash flow statement is the other main lesson learnt through out the simulation process.
If I were to take the simulation task again, I would choose different otions. I would choose first loan option since the second loan option constrains my cash flow statement by six months despite it friendly interest rate. I would also choose different financing options for the three machines.
Conclusion
With the lessons learnt at the simulation task, I will be more prudent in making financial decisions to favor long-term gains instead of focusing on short-term benefits. I will also focus on making a statement of Net Present Value for every project before investing organizational or personal resources into it.
References
Anne, H., & Gruen, R.(2005). Financial Management in Health Services. Boston United States: McGraw Hill Higher Education.
Brigham, F., & Houston, F. (2011). Fundamentals of Financial Management Concise. Stamford, United States: Cengage Learning.
Bierman, H., & Smidt, S. (2003). Financial Management for Decision Making. Maryland, United States: Beard Books.