For that best practice, explain how it will achieve cost reductions and/or service level improvements.

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Choose one of the six best practices described in the Purchasing and Procedure Center’s online article. For that best practice, explain how it will achieve cost reductions and/or service level improvements. read chapter 16 article: lecture notes: Managing Working Capital The funds that an organization has available to use at any given time are referred to as working capital. One text defines Working Capital as equaling current assets, and Net Working Capital as current assets minus current liabilities. (Neumann, 1999, p. 376) Yet, others use the terms “working capital” and “net working capital” interchangeably. (Finkler, 2000, p.188) You would probably be safe in using either term (“working capital” or “net working capital”) to mean current assets minus current liabilities. Current assets include cash and other assets that can be readily (within one year) converted to cash. Current liabilities are those obligations that come due within a year. Working capital management involves balancing having enough cash on hand with having too much. Too little cash and obligations cannot be met, sometimes resulting in late charges. On the other hand, having too much cash usually means that management is not investing enough of that cash, diminishing its income from investments. Investing and Financing Current Assets An important part of managing working capital is determining a policy for investing those capital assets. Managers may choose to be aggressive, conservative, or somewhere in between. An aggressive investment policy means putting a larger portion of the working capital into purchase of capital assets. It seeks higher levels of income from the investments, but generally carries more risks than a conservative policy due to having less capital on hand. On the other hand, the conservative policy keeps more working capital and invests less. While seemingly safer, this policy will likely generate a smaller return. The same concepts apply to financing of current assets. Aggressive current asset financing involves use of more short-term financing, balancing the usually lower cost against the potential of not having enough working capital on hand. A more conservative policy relies more on long-term financing. The costs may be higher, but more working capital is kept available for use. Cash, Marketable Securities, and Accounts Receivable These forms of current assets – cash, marketable securities, and accounts receivable – deserve special attention here because of their usual high level of activity and their importance to the overall financial status of the organization. Cash Any business organization must keep enough cash on hand (or in readily accessible bank accounts) to make day-to-day transactions, such as paying employees and suppliers. It must also have enough cash to provide a safety cushion against sudden unexpected expenses. A sort of “worst case scenario” is the organization having to borrow to meet its obligations and paying interest on the money borrowed. Third, cash on hand makes it possible to take advantage of sudden unexpected investment opportunities. Yet, keeping too much cash carries a cost. It is not being used actively for the purposes of the organization while it sits in the bank and earns little or no return. The challenge to the manager is to keep just the right amount of cash. That means predicting the amount of cash coming in and that going out. Predicting, or budgeting, cash flow involves knowing where the cash is coming from (payment sources), how much can be expected from each, and the most likely timing for receiving those payments. The other side of cash management is controlling cash outflow. That involves more than minimizing expenses. When it comes to cash, the effort focuses on keeping available cash as long as possible. It means achieving the proper balance between making payments at the last possible moment, and not making them in time, which would result in incurred costs. Marketable Securities A second type of current asset, which is almost as liquid as cash, is marketable securities. Marketable securities are short-term interest-bearing securities such as Treasury bills, certificates of deposit, stocks or bonds. They have an advantage over cash in that they produce some return on investment. The disadvantage is that most securities carry some risk of loss of value in the market. Accounts Receivable Managing cash inflow means managing accounts receivable. There is considerable work involved in collecting accounts receivable, but the payback is worth it, which is why most health care organizations devote much attention to doing it well. Accounts Receivable represents credit extended by the organization to its customers. Effective management of accounts receivable requires care and attention to billing, credit, collection policies and procedures. Those policies and procedures may vary depending on the reimbursement source. Government programs such as Medicare and Medicaid have their own sets of rules concerning what is allowable and what is not. So do managed care organizations (MCOs) and other group purchasers of health care services. Then, there are private payments from the patients themselves, requiring another set of policies and procedures. Accounts receivable are usually monitored in terms of the length of time it takes to collect them. That is because while an account is in receivable status, the revenue is not really the organization’s to use to pay its obligations or to invest. Also, some accounts receivable become bad debts, meaning that they will never be collected, so it is up to managers to collect them as soon as possible, trying to reduce that possibility. (Finkler, 2000, p.199) Capital Investments Health care organizations generally have a great deal of money invested in buildings and equipment. These are known as capital investments, and are usually defined as resources or investments that will benefit more than one accounting period (fiscal year). Because the benefits from a capital investment occur over multiple years, and because the amounts are usually quite large, the capital budget is created separately from the operating budget. That takes the acquisition costs out of the operating budget and places them in a separate budget where its costs and benefits can be evaluated over its complete lifetime. (Finkler, 2000, p. 135) The costs of capital acquisitions are spread over time through the process of depreciation. Several different time periods may be used to describe the life of the asset. One is its physical life, which is how long it is expected to last. A second time period is the asset’s economic life, the period over which it is expected to produce benefit to the organization. Because of rapid advancements in technology, many types of health care equipment have very short economic lives. A depreciation period often used is the payback period, the time it takes for the asset to pay for itself. The actual depreciation period used is often dictated by third party payers or the Internal Revenue Service. (Neumann, 1999, p.422) Leasing Versus Purchasing Leasing capital equipment is now a real consideration for many hospitals, and a very attractive option for organizations that simply don’t have the money to purchase equipment out right. But while leasing may solve a temporary problem, it can cause other long-term ones. The complex decision of buying versus leasing capital equipment raises eight important questions. What is the total cost of ownership? Before deciding whether to buy or lease, you must determine the total cost of ownership (TCO), or total cost of leasing. This will help you see all costs associated with a piece of equipment so there are no surprises later. Let’s say you begin leasing a new 64-slice CT scanner. Revenue from the procedures is now up – great! But the service costs start accumulating, and you actually end up spending more money over the life of the lease. This scenario is a familiar one for many hospitals who fail to analyze the total cost of ownership/lease. Leasing agreements with hefty service contracts may end up costing much more than buying. You may already be using a TCO methodology for your organization, which you can customize for your potential purchase. If not, consider items such as: Purchase price (or leasing cost) Maintenance/service contract costs Installation costs Financing costs Energy costs (or savings) Repair costs Updates and/or upgrades Downtime Productivity Training Disposal Is a service agreement a necessary part of your lease? A service agreement with an original equipment manufacturer (OEM) can be the most costly part of buying or leasing equipment. Combining the service costs into a leasing agreement could potentially add hundreds of thousands of dollars each year. It’s important to know that you have choices in service agreements. They are not mandatory parts of leasing contracts. Before you decide on a service agreement, consider the following: Can your in-house clinical engineering team provide the service? This is the absolute best way to save money on a purchase or lease. Of course, your team must be adequately trained, or have the means and ability to obtain the training. Is there a third party or independent service organization (ISO) that can provide the service? If your in-house team does not have or cannot obtain the skills to provide service, you may consider contracting with an ISO. Though not as cost-effective as using an in-house team, it’s certainly much cheaper than using an OEM. Can you go T&M with the OEM? Most times, even if your in-house team doesn’t have the maintenance skills to service equipment, and it’s not possible to partner with an ISO, you can save considerably by using OEM service on an as-needed, “time-and-materials” (T&M) basis. Does the service contract cover the times you anticipate needing equipment serviced? Many service contracts do not cover after-hours preventive maintenance or weekend service, so requiring service at these times can increase your total cost significantly. Can you fight the pushback? Many times, OEMs will “require” or “recommend” service contracts. They may push, but remember: you have choices. Consider the case of a hospital leasing a 64-slice CT scanner. The OEM told them that the device would have a higher end-of-lease resale value if serviced by the manufacturer, despite the fact that the hospital had OEM-trained technicians. The hospital continued to reason with the OEM until they relented, and thus saved thousands of dollars per year. Are you working with a vendor-neutral third party? There are a lot of factors that go into the decision to buy or lease medical equipment. It may feel overwhelming; if that’s the case, consider partnering with a vendor-neutral third party organization. They should ensure you’re considering all options and asking the right questions when it comes to TCO. They can negotiate service contracts, and even conduct pre-installation site surveys. Put simply, they can make your life a whole lot easier. (Collins, 2011)

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