Perspectives 2019 2020 Public Sector

Not-for-profit healthcare organizations face declining profitability and increasing expenses. But by leveraging tools used by healthcare disruptors, treasurers can improve profitability and efficiency by effectively managing liquidity and optimizing working capital. The past three years have seen the not-for-profit (NFP) healthcare sector face compressed revenues and ever-increasing expenses. This weakness has prompted increased M&A activity; the entrance of corporate industry disruptors; and a market shift to value-based care. These three trends have put increasing pressure on NFP treasurers to optimize cash for a variety of scenarios. Increasingly, cash is needed to maintain a war chest for acquisitions and act as a credit enhancement tool for debt financing. 1 While working capital cash remains essential to support daily operational expenses and provide reserves for liabilities and unexpected events, NFP healthcare treasurers must leave no stone unturned in the search for cash trapped in legacy treasury operations that can also be used to support financing. As healthcare disruptors like Wal-Mart, Berkshire Hathaway, Apple and Google recognize, taking a diagnostic approach to cash management requires more than simply understanding a healthcare organization’s days cash on-hand; the traditional NFP healthcare sector measurement for liquidity. This metric, while useful, is static. 2 Taking a fresh look at cash held in bank accounts across the entire organization, centralizing the investment of strategic cash, and unlocking cash in supply chains, can result in significant increases in cash. In addition, extending days payable outstanding (DPO) can measurably improve an organization’s cash conversion cycle (CCC), a metric used by corporates to evaluate treasury efficiency. Using both traditional liquidity measures as well as the CCC is important to comprehensively analyze liquidity. 3 1 H. Rivenson, J. Wheeler, D. Smith, and K. Reiter, “Cash Management in Healthcare Systems” Journal of Healthcare Finance, (2000): 59-99. https://www.researchgate.net/publication/12473761_Cash_ management_in_health_care_systems 2 Ibid 3 S. Upadhyay, Dean Smith, “Hospital Liquidity and Cash Conversion Cycle: A Study of Washington Hospitals,” Journal of Healthcare Finance, 2016: 148-157. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.924.9103&rep=rep1&type=pdf How Not-For-Profit Healthcare Organizations Can Optimize Cash in the Age of Industry Disruption Thad Garrison Citi Perspectives 91