Cases in Healthcare Finance

Case Questions

CASE 8 QUESTIONS

ALPINE VILLAGE CLINIC

Cash Budgeting
1. Construct a monthly cash budget for the clinic for the period January through June 2010. What
is the maximum monthly loss during the six-month planning period? What is the maximum
cumulative borrowing balance? (For purposes of this question, disregard any interest payments
on short-term bank loans or interest received from investing surplus funds.)
2. The monthly cash budget you have prepared assumes that all cash flows occur on the same
day each month. Suppose the clinic's outflows tend to cluster at the beginning of the month,
while collections tend to be heaviest toward the end of each month.
a. How would this imbalance affect the validity of the monthly budget?
b. What could be done to correct any inaccuracies that might occur?
3. Construct the clinic's daily cash budget for January. Does it indicate the same maximum
borrowing requirement for the month as does the monthly budget? Does the end-of-January
borrowing requirement in the daily budget match the end-of-January borrowing requirement in
the monthly budget? If not, explain the difference.
4. Should seasonal variations be incorporated into the clinic's target cash balance? In other
words, should the balance be higher during months when cash needs are greater?
5. The only receipts shown on the clinic's cash budget are collections. What other types of cash
inflows could occur?
6. Consider the interest paid on short-term borrowings and earned on short-term investments.
Modify the monthly portion of the model to include these cash flows. Do these flows have a
significant impact on estimated borrowing requirements?
7. The clinic's cash management policy is to invest any surplus funds in marketable securities.
a. Can you suggest an investment policy that would provide liquidity and safety yet offer the
clinic a reasonable return on its investment? Specifically, describe the types of securities,
the desired maturities, the expected returns, and the risks that would be involved.
b. Would your suggestions be the same for a business whose cash balances were projected
to be in the millions of dollars as opposed to thousands of dollars?
8. What would be the impact on the monthly net cash flows if actual billings from November 2009
to June 2010 were 20 percent below the forecasted amounts? What if they were 50 percent
below the forecasted amounts? In your answers, assume that purchases and labor costs, as
well as all other expenses, cannot be adjusted downward during this period even though
realized volume was below that forecasted.
9. Suppose the clinics third-party payers changed their payment patterns and began paying as
follows: 10 percent in the month of sale, 20 percent in the following month, and 70 percent in
the second month versus the old 20-20-60 pattern. How large a credit line would the clinic
require?
10. On the basis of all your analyses, how large of a credit line would you recommend the clinic
seek from First Bank?

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