Alternative Forms of Capital Discussion

Alternative Forms of Capital Discussion

As the comptroller of a hospital facing reduced reimbursement from third-party payers, one effective strategy to improve working capital is optimizing accounts payable management. Accounts payable represent a hospital’s short-term obligations to its suppliers for services received (Bhattacharya, 2021). Efficient management of accounts payable can help the hospital enhance its cash flow and, as a result, positively impact the working capital. Financing working capital through accounts payable can be implemented by considering various steps. First, supplier negotiations will be required to create better payment terms. Extended payment periods or discounts for early payments can provide the hospital with increased flexibility in managing cash flow (Boisjoly et al., 2020). Second, the invoice processing procedure will be streamlined to help reduce the time taken to process invoices. As a result, the hospital will make payments more efficiently and avoid any late payment penalties. Third, by taking advantage of early payment discounts offered by suppliers, the hospital will reduce the overall cost of goods and services. Lastly, priority will be given to certain suppliers based on their importance. This is so because timely payments to critical suppliers help maintain strong business relationships.

For example, a scenario where the hospital has negotiated extended payment terms with a major medical equipment supplier can be considered. Instead of paying within 30 days, the hospital could negotiate a 60-day payment window. Notably, this extension gives the hospital 30 days to utilize the cash for other critical expenses, thereby improving its working capital. In another example, suppose a hospital takes advantage of early payment discounts offered by a pharmaceutical supplier. If the supplier offers a 2% discount on the invoice amount for payments made within ten days, the hospital can save on costs by making timely payments and reducing its accounts payable while benefiting from cost savings.

References

Bhattacharya, H. (2021). Working capital management: Strategies and techniques. PHI Learning Pvt. Ltd.

Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8.

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Discussion question: Imagine you are the comptroller of a hospital. Due to the reduction in reimbursement from third-party payers, your organization must improve its working capital.

respond to the discussion prompt: Given that working capital is equal to current assets minus current liabilities, how would you finance working capital through accounts payable? Provide examples.