Capital Decision Making in Health Care, Research Paper Example

Introduction
As businesses continue to experience ever increasing costs the financial healthcare of a business has never been so important.  As such the concept of capital budgeting has become vital for the long term survival of a business. Those businesses that fail to have adequate financial controls may spiral out of control and this can be disastrous for those businesses in healthcare. The concept of capital decision making is a complex business and requires the skill sets of professional accountants.  It is considered that Hospitals generate some 40% of their revenue from non-operating sources.

Capital Budget Management in Health Care

The Healthcare Manager will be responsible for the preparation of departmental budgets. This involves knowledge of both Financial and Management Accounting principles including dealing with capital budgets and depreciation.  Very often there are more needs than available funds for meeting capital funding requirements. This means that there is a need to substantiate capital budgets with cost / benefit analysis in order to gain higher approval ratings.  (McConnell, C.R. 2011).

Healthcare has once again come under heavy scrutiny in the USA.  Equally this has resulted in further pressure to reduce capital expenditure in this sector.  This means  more closer examination of investment alternatives and improving cash flow options.  One technique is the determination of opportuinity cost of capital. Essentially this explores the value of money over time and the potential fluctuations owing to changing market conditions.

Effective Capital Budget procedures offer a number of distinct advantages to healthcare organizations:

• Provides the opportunities to plan the procurement of acquisitions in advance;
• Provides for negotiation of assets at the optimum price levels;
• Identify the sources of financing in advance of the procurement and as such provides for the lowest procurement costs.

Overview of Capital Budget Process

The process in healthcare essentially covers five main steps: (i) The Capital Outlay (ii) The estimated cost of the project (iii) The operating and terminal cash flow (iv) Risk Assessment and (v) the projected cost of capital. Capital budget decisions often must consider many different factors, for example: the needs of the medical staff, the benefits to the community and non-economic financial considerations. Poor capital budget decisions that encourage non profitable projects will be instrumental in losing the organizations financial viability and ultimately may push it towards backruptcy. (Finkler, S.A. 2007)

Sensitivity Testing

Sensitivity analysis is used against forecasts and budgets to determine potential outcomes should the projections turn out to be unreliable. This involves changing assumptions in the capital budget estimates to consider different scenarios that might impact the organizations finances. The gathering of this intelligence can then be factored into the decision making process in order to refine the budgets and optimize result forecasts prior to investment.

Conclusions

Sensitivity analysis forms a vital component of the capital budgeting process and links the

References

McConnell, C. (2011). The manager and equipment decisions: the capital budget. Healthcare Management Vol 30(4), 361-371.

Steven A. Finkler, D. M. (2007). Essentials of Cost Accounting for Health Care Organizations. New York: Jones & Bartlett Learning.