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Management of finance is an imperative practice that must be ensured by organizations, aiming to succeed in their short and long-term financial objectives. Working capital management is essential in accomplishing the efficiency of the day-to-day operations of the organization. The working capital comprises activities that deal with inventory, receivables, current creditors, and cash. Working capital management ensures that an organization can meet its short-term financial obligations. Poor management of the working capital may lead to a shortage of the organization’s funds, which forces the organization to source funds from expensive means such as factoring. A factor provides short-term funds to the organization using their account receivables as security. The factor receives a discount on the account receivables of the organization, reducing the number of cash receivables of the organization (Nowicki, 2011).
Healthcare Financial Management Association
Healthcare Financial Management Association (HFMA) states that a strong ratio of working capital is essential in facilitating access to the low cost of borrowing. The working capital affects the ability of health care institutions and hospitals to meet their short-term financial obligations, which exercises impact on the day-to-day operations (Nowicki, 2011). Finance managers ensure supervision of different aspects of the working capital to reduce the risk of health institutions’ inability to meet their current financial obligations, including administration of account receivables, account payables, inventories, and cash management. Therefore, financial managers should understand any changes in the payment mechanisms used by the organization, as well as must be able to assess the quality of debtors. Understanding any variations in the availability of cash in the organization by managers improves their ability to finance short-term financial needs. Financial managers should also ensure the adequacy of supplies to prevent costs involved as a result of stock-outs in the organization. For example, the unavailability of medication in the health institution or a hospital may hamper the daily operations of such institutions (Zelman, McCue, & Glick, 2009).
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Three policies are normally used in the course of working capital management, which includes aggressive policy, a conservative policy, and moderate policy. The aggressive policy is based on holding a certain level of minimal inventory in the organization to minimize the costs. However, in that case, the organization faces the risk of not being able to meet the rapid increase in demand, as the level of stocks is low. This approach is highly risky; yet, it provides the organization with the highest returns. The Conservative approach is based on maintaining a large inventory. This approach is less risky for the organization, but the returns are relatively low compared to the aggressive approach. The moderate working capital financing policy mixes the conservative and the aggressive approaches, balancing between the probability of risk and returns on the working capital management elements (Zelman, McCue, & Glick, 2009).
Several external factors affect the working capital management in the organization. For example, in health institutions and hospitals, industrial actions may affect the working capital of the organization. Also, economic factors, such as recessions can severely affect the credit availability for the organization and its working capital. The organization may not have control of the external factors affecting the working capital of the organization, but they can counter using internal measures (Nowicki, 2011). These include maintenance of internal health working capital policies in the organization in ensuring the organization's ability to meet the current needs even in the midst of crisis.
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There are many consequences of poor management of working capital that lead to the inability of the organization to meet current financial needs. For example, the organization may have an excess of inventories, which may entice the organization to increase leniency of the credit policy to increase sales. The increased amount of credit funds will lead to working capital management problems (Zelman, McCue, & Glick, 2009). This can be referred to as overtrading, which causes a shortage of working capital for the business to meet the current financial obligations. Also, increased inefficiencies in the management of working capital management escalate the probability of embezzlement of the organization’s cash.
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The finance department in any organization plays a vital role in ensuring close monitoring of the organization’s working capital, to sustain the organization's ability to meet its current financial obligations. Working capital is referred to the organization’s current assets. Health institutions and hospitals cannot rely on account receivables, such as patients’ billing and insurance in financing normal day-to-day operations. Uncertainty originates from the potential delay of receivables that leads to insufficiency of cash used to meet the current needs of the organization. The shortage of funds causes these institutions to outsource funds from short-term sources, which may lead to a long-term financial crisis. For example, the institution may be unable to pay the employees or reinvest in new technologies. Working capital management is a daunting task to financial managers, but short-term financing is a not only costly method of financing to general organizations, but also health institutions. Also, short-term sources of funding are not always available to these institutions aggravating the problem. Health reforms can be used to enhance the reduction of the threat to the financial solvency of health institutions. These reforms include Affordable Care Act, which increases patients’ seeking treatment in health institutions.
Nowicki (2011) defined working capital as current assets, which include cash and other liquid current assets that can be converted to cash within one year. Working capital is imperative for an organization since it’s the basis upon which fixed capital operates. For example, it is used for payment of the workforce and other day-to-day financial obligations of the firm. Also, it shows the ability of the organization to meet its current loan obligations. When an organization faces short-term shortages of cash it can use its receivables to obtain funds from a factor, who charges interest. This method is expensive and creates threats to the firm’s ability to maintain a strong financial position. Health Finance Management Association (HFMA) has made various recommendations aimed at improving the working management of health institutions. For example, it has recommended automation and institution of good purchase control policies, as well as delaying payment of debts. Finally, the organization should create clear objectives of working capital management.