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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 15 — Revenue Cycle and Current Accounts Management
PROBLEM 2
James Buchanan Orthotics and Prosthetics is planning to request a line of credit from its bank.
The company has produced sales estimates, and these appear in the worksheet below. Collection
estimates are as follows: 10 percent within the month of sale, 75 percent in the month following
the sale, and 15 percent in the second month following the sale. Labor and supplies estimates also
appear in the worksheet below. Payments for labor and supplies are typically made during the
month following the one in which these costs have been incurred. General and administrative
salaries will amount to approximately $27,000 a month; lease payments under long-term lease
contracts will be $9,000 a month; depreciation charges will be $36,000 a month; miscellaneous
expenses will be $2,700 a month; income tax payments of $63,000 will be due in both September
and December; and a progress payment of $180,000 on a new building must be paid in October.
Cash on hand on July 1 will amount to $132,000, and a minimum cash balance of $90,000 will be
maintained throughout the cash budget period. What loan will be the company require in
October?
ANSWER
May
Collections worksheet:
Billed charges
Collections
Within 30 days
30-60 days
60-90 days
Total collections
Supplies worksheet:
Amount of labor and supplies
Payments made for labor and supplies
Net cash gain (loss):
Total collections
Total purchases
General and administrative salaries
Lease payments
Miscellaneous expenses
Taxes
Progress payment
Total payments
Net cash gain/loss
Borrowing/surplus summary:
Cash at beginning with no borrowing
Cash at end with no borrowing
Target cash balance (given)
Cumulative surplus cash / loan balance
June
July
August
September
$180,000
$180,000
$360,000
$540,000
$720,000
$90,000
$90,000
$126,000
$882,000
$306,000
October
November December January
$360,000
$360,000
$90,000
$234,000
$162,000
$90,000
$180,000
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 15 — Revenue Cycle and Current Accounts Management
PROBLEM 5
Suppose one of the suppliers to Seattle Health System offers terms of 3/20, net 60.
a. When does the system have to pay its bills from this supplier?
b. What is the approximate percentage cost of the costly trade credit offered by this supplier? (Assume
360 days per year.)
ANSWER
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 15 — Revenue Cycle and Current Accounts Management
PROBLEM 6
Langley Clinics, Inc., buys $400,000 in medical supplies a year (at gross prices) from its major supplier,
Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the
supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and
replacing the trade credit with a bank loan that has a 10 percent annual cost.
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume
360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual percentage cost of the costly trade credit?
d. Should Langley replace its trade credit with the bank loan? Explain your answer.
e. If the bank loan is used, how much of the trade credit should be replaced?
ANSWER
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 15 — Revenue Cycle and Current Accounts Management
PROBLEM 8
Fargo Memorial Hospital has annual net patient service revenues of $14.4 million. The hospital’s patient
accounts manager estimates that 10 percent of third party payers pay on Day 30, 60 percent pay on Day 60,
and 30 percent pay on Day 90.
a. What is Fargo’s average collection period? (Assume 360 days per year throughout this problem.)
b. What is the firm’s current receivables balance?
c. What would be the firm’s new receivables balance if a newly proposed electronic claims system resulted
in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?
d. Suppose the firm’s annual cost of carrying receivables was 10 percent. If the electronic claims system
costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire receivables
balance has to be financed.)
ANSWER
pay on Day 60,
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 15 — Revenue Cycle and Current Accounts Management
PROBLEM 9
Jones Surgicenter uses 90,000 bags of IV solution annually. The optimal safety stock (which is on hand
initially) is 1,000 bags. Each bag costs the center $1.50, inventory carrying costs are 20 percent, and
the cost of placing an order with the supplier is $15.
a. What is the economic order quantity?
b. What is the maximum inventory of IV solution bags?
c. What is the center’s average inventory of IV solution bags?
d. How often must the center order (in days)?
ANSWER
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