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FNCE238 Capital Markets

Published : 06-Oct,2021  |  Views : 10

Question:

Making the Case for Capital Budget Expenditures

As a nurse, you are probably very aware of and can speak to the emotional reasons behind the need for certain major expenditures such as a new nurse’s lounge or replacing the current patient information system with a new digital system. You would love to see your nurses have a comfortable area where they can rejuvenate from a stressful day with patients. Alternatively, nurses carrying around PDAs would certainly ease the recording and transmission of vital patient information. However, as a nurse manager you need to be able to support those emotional appeals with reliable financial data. Having a place to refresh will help nurses be more efficient, and could reduce sick days and nurse errors. Being able to quickly access doctor’s orders and previous nurse’s comments allows for a more timely response to patients. As your responsibilities expand, you may find yourself at the table when decisions about capital expenditures are being debated. It is therefore to your advantage to understand the workings of a capital budget.

In this Discussion, you consider the impact of both financial and emotional factors in making a capital budget decision,

Answer:

Introduction:

In healthcare organizations, healthcare professionals such as nurse managers having little financial background. The organization considered for analysis of capital budgeting decision is Medicaid healthcare. Nurse Manager needs to understand the basic principle of capital budgeting and performing the basic analysis of financial information for making sound business decision. One of the essential component of management is concept of budgeting. It should be understood by managers that there are many factors that influence the capital budgeting decisions. Capital budgeting is a part of strategic vision of organization and is based on overall operating plan. Healthcare organization needs to purchase new equipment or technology in order to stay competitive. It is required by nurse managers to think strategically when taking any decisions about capital budgeting. Proposal of capital budget should be rationale to support the budget proposal as this will help to ensure that the cost associated with request are realistic.  Nurse Managers should be capable of doing accurate analysis of cost and other considerations, which depicts that request of capital budget is competitive with other request (Clarke & Wilson, 2014). Understanding of the factors considered in budget decision is imperative for ensuring nurse managers weigh options completely and fairly.

Discussion:

Importance of capital budgeting to nurse managers:

Increased form of competition in the healthcare organization is addressed using the techniques of capita budgeting. It forms an overall part of overall budgeting process. Medical equipment is among the highest cost in healthcare today. Some of the medical equipment that might exceed the costs of construction include equipment intensive space such as pharmacy, emergency surgery, Imaging and intensive care. Analysis and generation of budget is done for routine annual capital equipment budget cycle and planned projects. It takes into consideration several things such as verification of cost of capital budget report, assembling the new capital budgetary report, anticipating the cost of planned and budgetary information for specific type of rooms in hospital such as ICU, cath lab and Hybrid OR.

Strategically thinking importance in development of budget:

Proposals of capital budget expenditures should include six major categories. This involve available resources, available alternative, cost data, risk projection, prior performance and benefit data. Nurse Managers should be familiar with budgeting process and capital budget is one of the budget that is managed by them on regular basis. Capital budgeting in healthcare organization such as Medicare involve fixed assets and movable equipment. It might involve renovation of nursing administrative suite. However, the major budget that nurse managers are responsible is the capital budget and it involve major movable equipment budget. Strategic thinking by nurse managers would help in interpreting pattern of investment decisions as per the capabilities of organization. If they have sufficient information about the capital expenditures, they would be able to guide the unit staffs. Nurse Managers using the budget techniques do supplying costs and monitoring the personnel.

 Purchasing of a large costly equipment is linked to the process of strategic planning approach that helps in evaluation of capital budget. Nurse managed organization have limited financial resources. Nurse Managers capable of thinking strategically would help in building consensus and teamwork for process of budgeting. Healthcare professionals such as nurse managers are not well equipped with financial knowledge to take some financial decisions, as they are not expertise in this area. Nurse Managers can perform the capital analysis of Medicare by using the past and present data as this would assist in providing information for approving and prioritizing capital request.

Purchasing of costly medical equipment and influence of capital budgeting:

Suppose the organization such as Medicare has plan of purchasing costly equipment such as portable cardiac monitor. The initial amount of investment to be made stands at $ 303280. It is assumed that the estimated life of the equipment would be five years. Cash flow from the use of this equipment would be $ 80000 per year. Cost of capital is assumed to be at 10%. The approach of this capital budget request would be done by framing several strategies. Generation of request of capital budget is generally done at the departmental level based on wants.

Capital budgeting techniques helps in providing and ensuring supporting decisions for purchasing of equipment that commensurate with the value of equipment. The financial data available in spreadsheet applications helps in evaluating the purchasing acquisition method. The cash flow associated with the purchasing decision of costly medical equipment is done by using the capital budgeting techniques such as Net present value, internal rate of return and payback period. It also helps in financial evaluation of available alternative purchasing decision of equipment. Decision maker is assisted by internal rate of return, in making relative comparison between costs of capital. The discount rate selected for evaluation of the project relating to purchasing of equipment strongly influence net present value.  If the estimates about the project is incorrect, then the potentiality of worthwhile projects might be killed. The lowest cost of ascertaining the acquisition method is offered by another technique of capital budgeting that is internal rate of return (Hicks et al., 2015).

Developing strategies, developing capital expenditure needs accounting for ethical and financial considering:

Monitoring and planning of effective capital expenditure calls for the need of continual review. Healthcare organizations such as Medicare would require the capital-planning group and this will help in providing visibility to portfolio about how the organization is financing the purchasing of equipment. Buying an expensive piece of equipment in an healthcare organization calls for considering return on investment and a lot of time is spend by professionals in estimating accurate return on investment.

The decisions to purchase some equipment in the healthcare organization is also influenced by emotional factors. Capital expenditure planning involves consideration of emotional wellbeing of patients as well as staffs. However, the main goal is to have less emotional decision-making and the decision should be more objective. Some of the strategies involves are listed down as follows:

  • Capital budgeting process related to purchasing of equipment should be so established that it helps in allocating funding down to the direct ownership level.
  • Project prioritization methodology should be so developed that it helps in quantifying the risks and value considerations.
  • There should be implementation of capital management governance structure having clear responsibilities and roles.
  • In the event of developing the strategic framework for capital expenditure, it would involve multiple stakeholders along so that the process has become transparent. This will help in exposing the biases in then room
  • It is necessary for the company to follow a wide range of factors and an insight is required by managers to have in the financial skills. Capital budgeting is a complex process and there should be a multiple matrix that allow the users in varying tools.

One of the fundamental challenge if Medicare is lack of strategic framework and this is regarded integral to setting capital total spending, prioritizing spending and aligning the goals of budgeting process with overall strategy of organization. The amount that needs to be committed in buying the equipment needs a careful analysis of the total amount that needs to be pulled of the balance sheet. Sometimes, nurse managers would make some mistakes when deciding upon the capital expenditure budget. For instance, it is easy for nurse mangers to fall in the trap of not using consistent criteria. When the different investment are viewed against different criteria, they would not be able to get meaningful comparisons. Some mistakes might be in the area of decision criteria that lacks meaningful documentation. Process should be so documented so that they are able to evaluate the expenditure and tracking the expenses and so that they can be reviewed (Enthoven, 2014). One of the biggest mistake that is made in the hospital expenditure. It is necessary to maintain large capital assets and it calls for requirement of future capital.

Financial data and emotional appeals to demonstrate the need of purchasing equipment:

Financial data helps in judging the vulnerability of the financial performance of equipment in hospital. It would help in focusing on the area of attention and improving in performance. Purchasing of portable cardiac monitor by Medicare is also attached with the emotional factors and take into consideration various emotional wellbeing of patients. Since the equipment is portable, it will help patients by providing convenience in their treatment. Purchasing of equipment would generate positive feedback from patients. Available financial data related to past purchasing or data related to competitors and market trend assist in making purchasing decision of equipment (Klein et al., 2016).

Conclusion:

From the above discussion, it can be concluded that nurse managers are the professionals and they form a significant of healthcare organization. There is a need for understanding the concept of capital budgeting on part of nurse managers, as it will assist them in contributing to purchasing decision of equipment in hospitals. Emotional motivators provides a better gauge of future value of customers and this would act as an important source of profitability and growth.

References:

Clarke, M., & Wilson, A. G. (2014). Developments in planning models for health care policy analysis. Medical Geography (Routledge Revivals): Progress and Prospect, 248.

Enthoven, A. C. (2014). Theory and practice of managed competition in health care finance. Elsevier.

Hicks, C., McGovern, T., Prior, G., & Smith, I. (2015). Applying lean principles to the design of healthcare facilities. International Journal of Production Economics, 170, 677-686.

Klein, D. J., Brown, A. D., & Detsky, A. S. (2016). Investing Wisely in Health Care Capital. Jama, 316(15), 1543-1544.

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