Working Capital Management

Working Capital Management

Introduction

• Definition: Working Capital Management refers to the administration of current assets (like cash, receivables, and inventory) and current liabilities (like payables and short-term borrowings) to ensure adequate liquidity, operational efficiency, and financial stability of an organization.
• Formula:
  Working Capital = Current Assets – Current Liabilities
• Objectives:
• Ensure uninterrupted hospital operations.
• Maintain optimum levels of current assets to avoid both shortage and excess.
• Improve profitability by efficient use of short-term resources.
• Minimize the cost of financing working capital.
• In Hospital Context: Proper working capital management ensures that hospitals have adequate cash to pay staff, procure medicines, pay vendors, and manage patients’ dues without financial stress.

Inventory Control

·       Inventory in hospitals includes drugs, surgical items, linens, diagnostic reagents, consumables, and other medical supplies.

·       Inventory control ensures that stock is maintained at an optimum level to avoid both overstocking (leads to wastage/expiry) and understocking (leads to disruption in patient care).

• Objectives:
• Ensure uninterrupted patient services.
• Minimize holding cost (storage, insurance, deterioration).
• Avoid stock-outs, especially for life-saving medicines.
• Techniques:
• Economic Order Quantity (EOQ): Optimal quantity to order to minimize ordering and holding cost.
• Re-order Level (ROL): The point at which new stock should be ordered.
• Just-in-Time (JIT): Ordering and receiving supplies only when needed (used in some corporate hospitals).
• Challenges in Hospitals: Managing expiry-sensitive drugs, emergency needs, theft/pilferage, and vendor reliability.

ABC Analysis

• Definition: A method of categorizing inventory into three groups based on value and importance.
• Application in Hospitals:
• Category A: High-value items (e.g., specialized implants, advanced surgical instruments). These need tight control, accurate records, and frequent monitoring.
• Category B: Moderate-value items (e.g., antibiotics, syringes, diagnostic kits). Moderate control required.
• Category C: Low-value, high-volume items (e.g., cotton, gloves, bandages). Simple controls are sufficient.
• Advantages:
• Prioritizes control over costly and critical items.
• Helps reduce wastage and pilferage.
• Improves budget utilization.

Receivables and Patients’ Dues

• Meaning: Receivables include outstanding payments from patients, insurance companies, TPAs (Third-Party Administrators), and government health schemes.
• Issues in Hospitals:
• Patients often delay payments.
• Insurance claims may take months to process.
• Government reimbursements are slow and bureaucratic.
• Management Techniques:
• Establish a credit policy (advance deposits, part payments).
• Monitor receivables regularly using Ageing Analysis (classifying dues as <30 days, 30–60 days, >60 days).
• Speed up insurance claim processing by maintaining proper documentation.
• Appoint a Receivables Management Team to follow up with patients and agencies.
• Objective: Minimize bad debts and ensure cash inflow without hampering patient relations.

Cash Management

• Definition: Planning, monitoring, and controlling cash inflows and outflows to ensure the hospital never runs out of liquidity.
• Objectives:
• Meet daily operational expenses (salaries, utilities, medicines).
• Maintain optimum balance—not too high (idle cash) or too low (liquidity crisis).
• Tools:
• Cash Budgeting: Forecasting cash needs and inflows.
• Float Management: Minimizing the time between patient payment collection and its availability for use.
• Bank Reconciliation: Ensuring accurate tracking of balances.
• In Hospitals: Must handle heavy cash transactions at billing counters while ensuring security and accountability.

Investment of Surplus Cash

• Meaning: Hospitals may temporarily invest surplus funds for short-term income.
• Instruments:
• Short-term fixed deposits.
• Treasury bills.
• Money market mutual funds.
• Liquid bonds.
• Principles: Safety, Liquidity, and Return (in that order).
• Hospital Example: A corporate hospital may invest surplus in short-term deposits while ensuring funds remain available for emergencies or expansions.

Sundry Creditors (Investors/Payables)

• Meaning: Short-term obligations to suppliers, vendors, and contractors.
• Hospital Example: Payments due to pharmaceutical suppliers, equipment vendors, housekeeping contractors.
• Management Approach:
• Negotiate favorable credit terms with suppliers.
• Maintain good relations for emergency supply needs.
• Avoid excessive delays that can spoil credibility.
• Importance: Helps hospitals maintain liquidity by using supplier credit as a short-term financing source.

Availability of Bank Finance

• Hospitals often require short-term loans, overdrafts, or working capital financing from banks.
• Forms of Bank Finance:
• Cash Credit/Overdraft: Hospital can withdraw funds as needed within a limit.
• Bills Discounting: Receivables (insurance claims, TPA dues) can be discounted with banks for immediate cash.
• Short-term Loans: To meet urgent cash requirements.
• Factors Considered by Banks:
• Hospital’s credit history and repayment capacity.
• Nature of receivables (TPA, insurance, govt schemes).
• Strength of hospital’s balance sheet.

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