Read a selection of your colleagues' postings. Consider how your colleagues' postings relate to the information presented in the Learning Resources and to your own posting.

Colleagues post

Dear Dr. Mike and Class,

Working Capital

An organization's working capital (WC) requires great amounts of managers' time. In addition, the WC is the organization's investment in short term assets, including its cash and cash equivalent, account receivables, short term or marketable securities and inventories (Dar and Dar, 2017). It also directly affects the organization's liquidity capabilities and estimates its short-term financing and efficiency (Dalci and Ozyapici, 2018). Low levels of liquidity and stock-outs can occur when current assets are low, disrupting smooth operations. On the other hand, excessive amounts of current assets might lead to a decrease in the organization's profitability (Nyeadi et al., 2018).

To obtain the net working capital, the current liabilities must be subtracted from the current assets and can be referred to as the excess of current assets over current liabilities. The current assets and current liabilities have maturities of up to 12 months and must be carefully managed. In addition, as the excess of assets remaining represent the working capital, this proportion of assets is used for performing existing operations and funding the day-to-day running of an organization (Dalci and Ozyapici, 2018).

Working Capital Management

Typically, healthcare managers learn to set the optimal working capital levels and develop capital management policies for their organizations (Nyeadi et al., 2018). Working capital management (WCM) is an essential component of an organization's financial management and is a vital feature for making corporate strategies and policies. When the working capital is appropriately managed, organizations are able to maintain stable growth and incur low financial expenses. Additionally, efficient WCM helps with reallocating underutilized resources to generate higher value. The result is the enhancement of firm's performance, which can help to increase the organization's profitability without causing liquidity problems (Nyeadi et al., 2018; Yunos et al., 2018).

WCM is the management of the organization's current assets and current liabilities and can increase its survival, while maintaining its performance, liquidity, and profitability, and expanding its free cash flow (Yunos et al., 2018). Additionally, WCM is the balancing of and optimum level of the organization's current assets and current liabilities. In fact, an organization strives to achieve an optimal level of working capital to help boost its value. Furthermore, effective working capital management can improve performance and failing to do so, or wasting working capital, could result in reductions in gains, bankruptcy, loss in value, and even solvency. Healthcare administration leaders can utilize working capital management to meet short-term commitments, while avoiding over-investing (Yunos et al., 2018).

Furthermore, it should be emphasized that healthcare administration leaders must monitor the debt level to manage the working capital, which differs from how commercial companies manage theirs. Given that the financial leverage is the ratio of total debt to total assets and using debt to buy more assets, and the cash conversion cycle (CCC) is the measure of working capital and profitability, when the length of the CCC has been decreased and the financial leverage is high, then profitability would be low. Conversely, increasing the length of the CCC, when the leverage is low, can increase profitability. Thus, healthcare administration leaders can use financial leverage to manage the working capital (Dalci and Ozyapici, 2018).

The Working Capital of the Johns Hopkins Hospital System (JHHS)

The chosen healthcare organization is the Johns Hopkins Hospital system (JHHS) in Baltimore, Maryland. The 2021 Consolidated Balance Sheet was reviewed, and the current assets found to be $2,324,900 (in thousands) and the current liabilities $1,505,242 (in thousands). To obtain the working capital, the current liabilities were subtracted from the current assets, equaling $819,658 (in thousands) (Accounting Tools, 2022).

Working Capital Ratio

The working capital ratio can assist healthcare administration leaders, industry leaders, and potential buyers with decision-making and achieving goals. Obtaining the working capital ratio (WCR) would enable JHHS's healthcare administration leaders to obtain a measure of its liquidity, revealing whether it can pay for its obligations or current liabilities with its current assets. To calculate the working capital ratio, the total current assets should be divided by the total current liabilities. Thus, the Working Capital Ratio for JHHS is $2,324,900 divided by $1,505,242 equaling 1.54, which means that the ratio is 1.54:1.

A working capital ratio that is close to 2.0 represents optimal short-term liquidity. However, problems can result when a ratio is less than 1.0, indicating that there will likely be liquidity problems in the future. If a ratio is 1:1 or less, than it could indicate that an organization is self-funding a major capital investment (the ratio should improve in future financial statements) or maintaining minimum cash balances, while drawing down cash for a line of credit. In the latter case, the organization would only infuse cash in to pay liabilities. If it has had a low inventory turnover ratio and has a high level of inventory in its current assets, it would not be able to liquidate the inventory in the short-term (Accounting Tools, 2022).

In addition, lenders and creditors can use the working capital ratio to assess whether a borrower should be given credit. Additionally, a potential buyer (PB) of the organization will review the consolidated financial statements for the past three years to confirm how the ratio was calculated, by viewing the annual current assets and current liabilities. For instance, if there was a marked increase in the current liabilities, the PB could conclude that the organization was unable to pay its ballooning accounts payable. In this case, the PB might decrease her/his offer in anticipation of having make additional cash infusions to offset the settlement of any remaining overdue payables after the sale (Accounting Tools, 2022).

Factors that can Impact an Organization's Working Capital Requirements

A number of internal factors can significantly impact the working capital and setting its optimum level or requirements for a specified period, including the organization's age, size, profitability, operating cycle, operational efficiency, seasonal fluctuations, leverage, and profitability (Nyeadi et al., 2018). Some additional factors are:

1. Regulations:

Federal, public payers (e.g., Medicaid), low-cost Marketplace health plans, and private insurance companies set the payments' deadlines (Siedlecki et al., 2021). When the Affordable Care Act 2010 was enacted by President Obama and fully implemented in 2014, Medicaid was expanded, resulting in millions of Americans obtaining health coverage. This influx of insured individuals increased current assets of healthcare organizations, which in turn, increased the current assets, thus increasing the working capital (WC). In addition, uncompensated care costs in hospitals were reduced. However, these gains could be negated and primarily impact hospitals, when these costs increase, as the result of the federal government approving and proposing Medicaid waivers that will cause millions of Americans to lose their Medicaid coverage and omit those, who are unable to pay their insurance premiums (Schubel and Broaddus, 2018). Unless the hospital experiences a massive influx of uninsured patients for a prolonged period, there would still be sufficient working capital for business operations, because the hospital could absorb the uncompensated care costs as bad debts or utilize other sources to pay some of the costs (Karpman et al., 2021).

1. Policies:

Working capital (WC) policies are those, which organizations follow while making working capital (WC) practices or capital management (WCM) decisions. Over time, it is expected that WC practices and policies change markedly within the healthcare industry and other industries. An organization's WC financing policy would allow it to use its WC investment policy to make investments in its currents assets, while using its current liabilities to fund assets. Different policies can be utilized to impact the organization's value, risk level, and performance level. Additionally, an organization can adopt a less aggressive policy in WC, with a conservative policy for investment. In the case of an aggressive policy, it will be challenging for it to function smoothly. For example, an organization could choose to have a low level of current assets or use a high level of liabilities. However, if a low level of current assets is chosen, its performance could be significantly reduced, resulting in liquidity problems and inventory stock-outs (Dar and Dar, 2017). It would be imperative that the healthcare manager chooses the appropriate policy and current assets' level that ensures that it is sufficient for business operations.

1. Economic Dynamics:

Determinants of the working capital requirements also take external factors in account. For example, the U.S. level of economic activities can impact the working capital requirements. In addition, the COVID-19 pandemic caused a global economic crisis, which has had adverse impacts on the WCM of many organizations, such as those experiencing difficulty with controlling their short-term cash flows and WC, and their cash conversion cycle (CCC). In fact, COVID-19-exposed organizations now operate with higher CCC levels. Furthermore, the pandemic has caused the assets of many organizations to decrease in value, resulting in ineffective WCM. However, a higher CCC indicates an inefficient WCM, tying up of cash, and in all likelihood, the organization would seek external financing, which then causes financing costs to increase. To facilitate increased efficiency in WCM, organizations can explore such options as government subsidies (Tarkom, 2022). The healthcare manager would have to chose the appropriate CCC to ensure that the WCM is efficient and the WC can cover business operations.

Furthermore, research suggests that WCM can no longer be conducted as usual when there is a national or global crisis. Instead, some alternative WCM practices that can help to navigate a crisis are: "dynamic financing, trade credit policy and continuous staff training to develop new skills" (Simon et al, 2021). Moreover, economic conditions have been found to negatively impact WCM, such as inflation rates, interest rates, exchange rates and government policy (Simon et al., 2021).