Portia Green 

Assess Capital Decisions  

Capital budgeting is a very important aspect to heath care organizations. Capital budgeting is basically when a company makes decisions on how to invest, as well as on how to manage the company's long term  assets. Good decisions must be made when it comes to capital budgeting because if a bad decision is made it can have a negative effect on a company for years and years. Capital projects takes years to plan, so healthcare organizations must make sure they plan correctly. 

The first thing that managers must make sure they understand is the use of capital expenditures. Capital expenditures is money that is used by a firm or organization to boast assets. These assets can include equipment and property. When it comes to capital expenditures,  a lot of firms just limit themselves to resources that are invested in capital assets (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). It is important that mangers understand, that when it comes to budgeting capital, it is important not to focused solely on tangible assets (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011).  

When it comes to just focusing on tangible assets it implies ownership but many healthcare organizations lease a large amount of their fixed assets, especially in the area of equipment (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). If a lease is not a capital expenditure, it may not make the review or approval system (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). Leases should always be seen as a capital expenditure (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011).  

Capital projects are also very important when it comes to managers and capital budgeting. Capital projects are what managers use to add value and more capital into a firm. There is a way of estimating capital projects cost and these ways must be understood by all managers in healthcare organizations in order for the company to benefit from their capital projects. The way to estimate capital project cost is by life cycle costing (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). 

Life cycling costing is a method for estimating the cost of a capital project that reflects total costs, both operating and capital, over the project's estimated useful life (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). All the programs life cycle cost should be taking in mind, if not there could be possible errors in the decision making process (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). An example would be, two different renal dialysis projects: both may have the exact same capacity, but one both one may have a significantly bigger investment cost because it uses equipment that requires less monitoring and lower operating cost  (Cleverley, W. O., Cleverly, J. O., & Song, P. H., 2011). 

There are a lot of problems that management must avoid in order to make sure that capital projects are going accordingly.  A lot of times capital projects have a risk of failing in the beginning because of inadequate resources, lack of coordination between the internal and external teams and poor internal management (Vianueva, Darren, 2011). It is important that all internal and external teams within management at healthcare organizations, are on one accord. If the management team is not doing what they are supposed to as far as having enough resources and working together, it is more likely for a capital project to fail.  

The common problems that management in healthcare organizations should avoid when it comes to capital projects include: inadequately assigning resources from the start, relying to much on equipment planners, not enough coordination between teams, having an insufficient budget management process for additions and deletions during discovery, failure to get the correct outside assistance, a lack of predefined process management, and not enough experience in managing capital projects (Vianueva, Darren, 2011). 

Inadequately assigning resources from the start 

Sometimes project managers tend to lag behind on projects because of the long time line of the project and sometimes fall behind schedule  (Vianueva, Darren, 2011). It is important that managers have the correct amount of resources in the beginning so they won't fall behind. This means that there should be one or two dedicated managers making sure that everything gets done (Vianueva, Darren, 2011). 

Over reliance on equipment planners 

Many companies rely too much on quantity, specification and budget projections of equipment planners when it comes to capital projects, which can lead into expecting too much and resentment towards the planners when things do not work out the right way (Vianueva, Darren, 2011). The reason for this happening is because of the misunderstanding the role equipment planners play (Vianueva, Darren, 2011). 

Having an insufficient budget management process for additions and deletions during discovery 

There is a 24-48 month time lag giving to plan and execute a project and sometimes when the project is ongoing extra equipment is needed, so it is important to make sure that there is enough in the budget to get anything extra that is needed while doing a capital project (Vianueva, Darren, 2011).  

Failing to get the right amount of outside assistance 

A project is not a learn as you go process but a lot of hospitals use that method  (Vianueva, Darren, 2011). This happens either because they do not have the expertise to do the project, or they are not sure on who to contact about the project  (Vianueva, Darren, 2011). It is important that managers hire consultants to help budget capital and capita projects  (Vianueva, Darren, 2011). Consultants are experienced in managing when timelines are closely together and they are also experienced in keeping things on track  (Vianueva, Darren, 2011). It is also important to bring consultants on board who have experience in the same type of project  (Vianueva, Darren, 2011).  

A lack of predefined process management 

Process management is constantly shifting. Hospitals must set up a process that will enable them to manage and get the right equipment needed for the project (Vianueva, Darren, 2011). It is very necessary to look at where the process is falling short, and plan on how to recover from it as the planning process goes on (Vianueva, Darren, 2011). 

It is also important for managers to understand formulation in testing in certain scenarios, especially when it comes to slowdowns in collections and declines in revenue. Slowdowns in collections and declines in revenue can hurt capital and ultimately make a healthcare organization lose money.  Lets look at both scenarios. 

From prior knowledge I know that scenarios are the way a environment may be in the future, either at the current point of time or another point in time. Looking at the scenario of slowdowns in collections when it comes to healthcare organizations, can be very detrimental when it comes to finances. Collections is basically when organizations receive money from people are paying for service. A slowdown in collections can make a healthcare organization lose money, and not just for the present time but also for the long run. 

When it comes to declines in revenues, this can also be a big risk factor for a healthcare organization or any type of other firm. Loosing money means that a company may be at risk in the long run of not have the necessary capital or assets to still be in business. There are ways to test out these scenarios in any firm, this is where formulation testing comes into play.  

Formulation testing is basically used to test different scenarios in any environment. As far as financial management goes in healthcare, formulations can be used to test different scenarios that may occur in an organization to see what the outcome will be. Testing scenarios can be very helpful because it gives management time to prepare for any unexpected thing that occurs when it comes finances. 

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References 

Cleverley, W. O., Cleverly, J. O., & Song, P. H. (2011) Essentials of health care finance. Sudbury, MA: Michael Brown. 

Vianueva, D. (2011). Healthcare Capital Projects: How to avoid common problems. Health Care Financial Management: Journal Of The Healthcare Financial Management Association, 65(4), 86-90.