Financial Forecasting: Riverview Community Hospital Essay Example

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In general, lines of credit are used by businesses to meet temporary cash needs, as opposed to being used for permanent long-term financing. Doug had to gather more information if he was going to create a cash budget spreadsheet, as Dr. Cook asked him to do once she was on vacation. Doug went on the collect the following: The clinic operates seven days a week. Patient volume is more or less constant throughout the month, so the daily billings forecast will be 1/(# of days in the month * the billing forecast for the month). Daily billings are 20%, 20%, 60% collection based monthly and the lease payment is made on the first of the month (Gapenski and Pink, 2009). Variable medical costs at the clinic are assumed to consist entirely of medical and administrative supplies. These supplies, which are estimated to cost 15 percent of billings, are purchased two months before expected usage. On average, the clinic pays about half of its suppliers in the month of purchase and the other half in the following month (Gapenski and Pink, 2009). Clinical labor costs are the primary expense of the clinic. During the high season (December through March), these costs run $150,000 a month, but some of the clinical staff work only seasonally, so clinical labor costs drop to $120,000 a month in the remaining months (Gapenski and Pink, 2009).

The clinic pays fixed general and administrative expenses, including clerical labor, of approximately $30,000 a month, while lease obligations amount to $12,000 per month. These expenditures are expected to continue at the same level throughout the forecast period. The clinic’s miscellaneous expenses

are estimated to be $10,000 monthly. The clinic has a semi-annual, five-year, 10 percent, $500,000 term loan outstanding with First Bank. Payments of $64,752 are due on March 15 and September 15. Also, the clinic is planning to replace an old x-ray machine in February with a new one that costs $125,000 (Gapenski and Pink, 2009). The clinic is a partnership, so, for tax purposes, any profits or losses are prorated to the two physician partners, who must pay individual taxes on this income. Thus, no tax payments are built into the clinic’s cash budget.

The clinic has to maintain a minimum cash balance of $50,000 at First Bank because of compensating balance requirements on its term loan. This amount, but no more, is expected to be on hand on January 1, 2010. A monthly budget may not reveal the full extent of the borrowing requirements actually needed (Gapenski and Pink, 2009). To see if her concern is valid Dr. Cook suggested that Doug construct a daily budget for the month of January as a test case. A required maximum loan of $48,250 is shown on the monthly cash budget, but a required maximum loan of $150,024 will be required on the daily budget on January 15 because cash outflows occur on the 1st and 15th, as stated from the additional info from the clinic (Gapenski and Pink, 2009). So yes, the monthly budget monthly budget does not reveal the full extent on borrowing, but it is minor as the loan balance on the daily budget comes to down to $48,250.

Based on the information Doug has given to us, if no commitment

fee is required, the clinic should get a large line credit of $400,000. But if there is a fee on the size of the line, a smaller line is recommended. It is recommended $200,000, because it covers the amount of the 20% below forecasts. Also, it is important to consider getting estimates in projections of cost reductions if utilization falls. Likewise, Alpine Village should consider the possibility of increasing the credit line if more funds are needed.