An organization needs to have a well-developed financial plan to ensure its survival and success in the business environment. This plan needs to be comprehensive and should be understood by all players in the organization so as to ensure its success. The management needs to come up with materials and resources that will ensure that the objectives are met. Initially, Community Hospital Healthcare System (CHHS) had a strong financial performance and a good credit rating over a long period of time. The company used cost management strategy to accumulate large sums of money and to do better than competitors. However, this strategy could not be sustained for long because the management of the company failed to invest in the areas that were critical to the future success.
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CHHS was aging and there was a need to improve the condition of the facilities. Besides, the management had to come up with better ways to attract and retain the employees. Due to the condition of the facility, the hospital experience financial crisis in the year 2001. There was a drop in the bottom line and the crediting rating also deteriorated. There was a need for a turnaround strategy. In response to the dwindling performance, the management decided to come up with two phases of capital expenditure. The first phase which was approved in 1990 was aimed at improving the competitive position of the hospital. The second phase was a makeover of the facility that was estimated to cost about $90 million (Kaufman, 2006). This money was supposed to be used to improve acute care campus and to provide new services.
The management of the hospital found it is important to evaluate the viability of the second phase of capital expenditure program. In order to achieve this, they decided to create a link between strategic, capital, and capital planning to the entire organization. This was an integrated approach that was aimed at having a comprehensive view of the financial standing of the entity together with all its components. The company followed some key steps in order to come up with the comprehensive outcome. The first six steps entailed understanding credit, capital liquidity, debt capacity, capital position analysis, and cash flow targets. The final step entailed evaluating the feasibility of the increased capital expenditure by retesting capital position and cash flow targets. After analysis each of these components the management realized that if they followed the incremental process, then it could have ruined the entity (Sirman, Hitt & Ireland, 2003). However, the management used an integrated approach and it realized that the organization was not able to afford the second phase of expansion. CHHS needed to stick to the $75 million expansion program until the financial results improved (Kaufman, 2006).
There are a number of other lessons that the management also learned from the integrated approach. First, pursing the second phase of the capital expansion program would have lead to the downgrading of the crediting rating. Secondly, the amount of capital required for the expansion program ranged between $75 million to $165 million. However, the performance of the hospital could not support any amount that was greater than $75 million. Thirdly, it was important to restore the historical debt level because it had reduced drastically. Also, it important not to increase the capital short falls further. Another lesson learned from the process was that financial planning must be integrated with the capital structure. Therefore, the case of CHHS illustrates that it is important to use an integrated approach and not incremental approach in financial planning.
Kaufman, K. P. (2006). Best practice financial management: Six key concepts of health care. Alabama, AL: Health Administration Press.
Sirman, D., Hitt, M., & Ireland, R. (2003). Dynamically managing firm resources for competitive advantage: creating value for shareholders. Washington DC, DC: Saettle Academy of Management Publication.