Understanding the Liquidity Crunch -with- Publisher’s Interview
By Calvin W. Weise; MBA, CMA, CPA
Hospital are struggling in the current financial crisis, and like most of us, liquidity is scarce. In general, hospitals have three sources of capital: equity from earnings, equity from donations, and long-term debt.
Equity from Earnings
Earnings generate cash, and a portion of that cash is available to fund capital investments. Besides funding capital investments, cash generated from earnings is used to fund working capital. As operations grow, more working capital is required to fund the difference between the operating receivables and operating payables since days of revenue in receivables tend to be a good deal higher than days of expense in payables. Additionally, cash on hand should increase as operations grow so that days of cash remain constant or increase. Once working capital has been adequately funded, any remaining cash generated from earnings is available to invest in capital.
Most not-for-profit hospitals engage in active fundraising to generate donations. Donations are a good source of capital in certain markets. Often, fundraising initiatives are less useful than they appear due to the costs expended in the fundraising activities. It is important to ensure that all the costs incurred in fundraising activities are properly attributed.
Borrowing long-term debt has been an important source of capital for hospitals and will continue to be. Debt is particularly attractive due to the low cost associated with borrowing on a tax-exempt basis. Long-term debt, borrowed on a tax-exempt basis, is probably the lowest cost form of capital available to hospitals. Tax-exempt borrowing is fairly complex due to the tax regulations affecting it. Because of its complexity, the costs associated with these transactions are quite high, making it less practical for small borrowings.
Tax-exempt borrowing transactions require many lawyers and high-priced investment bankers. Credit rating agencies and credit enhancers are also typically involved. Accessing the tax-exempt markets requires a good bit of sophistication and expertise. Despite these requirements, this capital is highly attractive to hospitals and should be used whenever possible.
Read: Dr. David Edward Marcinko’s recent interview on the current status of hospitals.
Link [edited version]: http://www.arkansasmedicalnews.com/news.php?viewStory=738
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Filed under: "Doctors Only", Health Economics, Healthcare Finance, iMBA, Inc., Investing, Risk Management, Sponsors, Subscribe CD-ROM Journal Tagged: | calvin weise, charity care, david marcinko, for-profit hospitals, HealthcareFinancials.com, Hill-Burton Act, hospital capital sources, hospital capitalization, not-for-profit hospitals, pro-bono healthcare, SHIPs, tax-exempt hospitals