Short-term finance concepts and applications

¶ … Finance

Company has to maintain sufficient amount of resources to manage the business. It must generate working capital fund to meet demands of current obligations and reserve for any uncertainties. Working capital is used in assessing whether the Company is liquid enough to run current operations. It is computed by deducting current liabilities from current assets.

Below is the computation of Hospital Corporation of America, Inc. (HCA, Inc.) and Healthcare Financial Management Association (HFMA) working capital for the years 2005 and 2004:

HCA, Inc. (dollars in millions) HFMA (dollars in millions)

The following are the assessment of HCA, Inc. And HFMA's financial analysis

Current Assets (amounts in millions)

HCA, Inc.

HFMA

2005 2004 Inc.

Dec) % Change 2005-2004 Inc.

Dec) % Change Cash and Cash Equivalents $336.00 $258.00 $78.00 $23% $10.90 $10.56 $0.34 3% Accounts Receivables, net of Allowance for doubtful accounts 3,332.00

3,083.00-249.00 7% 1.06 1.27 -0.21 -20% Inventories 616.00-577.00-39.00 6% -- Convention and Meeting Deposits -- 0.39 0.38 0.02 4% Deferred Income Taxes 372.00-467.00 -95.00 -26% -- Prepaid Expenses & Others 559.00-673.00 -114.00 -20% 0.17 0.28 -0.11 -62% TOTAL CURRENT ASSETS $5,215.00 $5,058.00 $12.52 $12.48

Current Liabilities (amounts in millions)

Accounts Payable $1,484.00 $1,230.00 $254.00-17% $- $- $- - Accounts Payable and Accrued Liabilities -- 3.08 3.56 -0.48 -15% Accrued Salaries 561.00-579.00 -18.00 -3% -- Other Accrued Salaries 1,264.00 1,254.00-10.00 1% -- Def membership dues, net of related chapter rebates -- 4.70 4.37 0.32 7% Deferred institute, subscription&exam'n rev. -- 4.13 3.64 0.49-12% Long-term debt due w/in 1 year 586.00-486.00-100.00-17% -- TOTAL CURREN LIABILITIES 3,895.00 3,549.00-24.71-21.03

Net Income (amounts in millions)

Revenues $24,455.00 $23,502.00 $953.00 4% $21.90 $18.81 $3.09-14% Expenses -22,128.00 -21,361.00 -767.00 3% 18.59-16.99 1.59 9% Net Income before Tax and Minority Interest 2,327.00 2,141.00

Current assets, current liabilities and net income were captured from 2005 and 2004 HCA, Inc. And HFMA's annual report. Based on these data, we can make the following assessments:

HCA, Inc.'s cash increased by 23% as compared to prior year, and HFMA increased by 3% also as compared to prior year.

HCA Inc. And HFMA's Accounts Receivables 7% and decreased by 20%, respectively.

HCA Inc.'s payable (accounts payable and accrued) increased by 15% and HFMA's accounts and accrued liabilities decrease by 15%

HCA Inc.'s revenue is 24 billion as compared to 2004's 23 billion. It increase by 953 million or 4%. Meanwhile, HFMA's revenue in 2005 is 22 million as compared to 2004's 19 million. Net increase is 3 million or 14% as compared to prior year.

Expense of HCA Inc. In 2005 was 22 billion as against 2004's 21 billion or a 3% increase. HFMA's expenses in 2005 and 2004 are 19 million and 17 million, respectively, or 9% increase.

Interlinking the current assets, liabilities and income statements account in the analysis, we can initially assess that HFMA seems to be performing better than HCA. HCA's increase in cash by 23% in 2005 was attributable to cash receipts of $1Billion due to its issuance of common stock. Meanwhile, HFMA's increase in cash by 3% was attributable to sale of its investment, generating $1Million cash receipts. HFMA's revenues in 2005 increased by 14% as compared to last year's while HCA only performed an increase of 4%. HFMA's liquidity is further strengthened by its decrease in receivables by 210,000 or 20%. This may indicate that accounts receivables are collected and their clients/customers are availing their services and pays in cash. Meanwhile, despite HCA's increase in revenue, the Company also increased its receivables by 7%. This shows that although there is an increase in revenue, some of its clients/customers avail their services "on account" which may be paid at a later date, maximizing their credit limit and term, thus, the Company is not being able to maximize its fund.

To further strengthen our basis, below is the computation of both Company's Cash and Operating Cycle:

HCA

HFMA

Days Inventory Outstanding

4.90 Days

22.25 Days

Days Sales Outstanding

47.87 Days

19.37 Days

Less: Days Payable Outstanding

9.40 Days

191.36 Days

43.37 Days

149.74 Days

The time lag between the both Company's purchases or expenses to create sales/revenue, and collection of cash for sales/revenue is referred to as operating cycle. Meanwhile, the time lag between payment of purchases and collection of cash sales is referred to as cash cycle. The smaller the number of days cash ties up with the business, the better.