The 253-bed healthcare facility in a city requires expansion by 150 beds due to the new business opening in the area and creating 7,500 new jobs. Therefore, the hospital’s management is expecting the city’s population to expand, and therefore, the capacity of the local hospital has to be increased as well. This paper will address the funding sources and other essential decision-making factors that the management will have to consider before obtaining the funding for this expansion.
The first important decision is the type of financing option that the facility will be looking for, and currently, there are two options, equity or debt. Healthcare companies can preserve majority control while receiving the resources required to sustain continuous development by making wise use of debt or equity. Many businesses are not yet ready for a complete recapitalization or strategic takeover but would prefer to obtain funds to explore acquisition targets, dividend recapitalizations, new projects, or other growth activities. Equity finance has no payback obligations and offers additional operating capital that can be utilized to expand a firm (Cleverly & Cleverly, 2017). Thus, by choosing this option, the healthcare facility would have to agree to give up a portion of ownership of the business to the party that would provide the funding. On the other hand, debt financing does not need the surrender of a share of ownership.
The substantial rise of institutional investment in the industry, including debt financing, is a highly encouraging trend for funding healthcare infrastructure projects. Newer infrastructure lenders are eager to expand their portfolio, particularly in healthcare, where public-private partnership mechanisms are well established (Cleverly & Cleverly, 2017). This comprises institutional investors as well as specialized funds, both of which seek long-dated debt instruments with greater yields than the corporate or government bond markets. Another alternative is in-house financiers, who offer an appealing value proposition in the present economy since they are both highly liquid and highly driven to invest in this sector to boost their parent company’s sales and operations.
For this particular project, the healthcare facility should choose a debt financing model, and a bank loan can be a good source of funding for this project. Debt finance entails borrowing money and repaying it with interest (Maverick, 2022). A loan is the most prevalent type of debt financing. Debt finance may impose constraints on the company’s actions, preventing it from capitalizing on possibilities outside of its primary industry. The main benefit of this financing approach is that the hospital will fully own this business, and once the loan is paid off, there will be no obligations or restrictions on it. Moreover, because loan payments do not change, it is simple to anticipate costs. Thus, the hospital’s management should choose a debt financing model and seek a loan from a bank to finance the expansion project.
Apart from a bank, the management of the healthcare facility can contact other parties to obtain this funding. For example, private investors might be interested in this project and can loan the money with the goal of having a profit from the interest on this loan. Moreover, investment companies are another party that can be interested in this project. However, a bank appears to be the best option for this type of development.
There are four primary purposes for investment management. These necessary elements are planning, organizing, managing, and controlling the funds that the organization was able to obtain (“Financial management,” 2021). To achieve investment goals, financial management uses ratios, stocks, and debts. These activities might include portfolio management, dividend distribution, capital raising and allocation, budgeting, foreign currency monitoring, and product cycle tracking, to mention a few examples (“Financial management,” 2021). Finance management is often handled by the company’s highest-level managers inside an organization. However, the phrase may also apply to an individual’s investment portfolio management. Thus, investment management helps organization leaders ensure that their resources are used effectively and that the financing obtained through debt and equity is used efficiently and in accordance with the business goals of this organization.
Financial management is examining money and investments in order to make the best long and short-term decisions. The objectives alter depending on whether you are collaborating with a company or a person, in this example, a healthcare institution. Effective financial management of a corporation enables the company to employ cash and credit to achieve its goals. Profit maximizing, for example, happens when marginal cost equals marginal income and the firm has achieved profit maximization (“Financial management,” 2021). This is one of the primary goals of financial management. Thus, this hospital requires financial management because it has to expand its facility and ensure that there are more beds and a new emergency unit to address the needs of the population.
To carry out the project of the expansion of the healthcare facility, the management has to have a cash reserve. Cash reserves are funds kept on hand by a firm or individual to fulfill short-term and emergency finance requirements (“Cash reserves,” n.d.). Cash reserves are short-term investments that allow clients to access their money quickly, generally in exchange for a lower rate of return. The amount a corporation puts into a cash reserve account is determined by its needs. According to financial experts, a substantial reserve is one that can cover three to six months of the company’s average costs (“Cash reserves,” 2020). Therefore, the hospital needs to obtain the short-term cash reserves for the three months of functioning of the facility.
Apart from the short-term debt reserves, the hospital might need the long-term reserve of funding to cover more significant expenses. Term loans, bonds, and mortgage loans are the three primary kinds of long-term debt (“Financial management,” 2021). Long-term debt is often more expensive than the short-term debt due to the higher uncertainty that the debtor will be capable of making the scheduled loan installments. The hospital might need to secure the long-term debt sources, such as term loans, to ensure that it can support the functioning of the facility after the new units and beds begin to function.
In summary, this paper addresses the hospital expansion funding for the 253-bed healthcare facility. The capacity of the local hospital must also be enhanced. For this project, the healthcare institution should use a debt financing arrangement. In healthcare, where public-private partnership arrangements are well established, newer infrastructure lenders are anxious to extend their portfolios. The most common debt financing is a loan, and to finance the expansion project, the hospital’s administration should adopt a debt financing plan and obtain a loan from a bank. The key advantage of this technique is that the hospital will fully own the firm when the loan is paid off, with no commitments or limitations. This report discusses the funds for hospital expansion for the 253-bed healthcare institution. Cash reserves are funds that a company keeps on hand.
References
Cash reserves. (2020). Web.
Cleverly, W. & Cleverly, J. O. (2017). Essentials of health care finance (8th ed.). Jones & Bartlett Learning. Financial management: Purpose, daily functions, and examples. (2021). Web.
Maverick, J. B. (2022). Equity financing vs. debt financing: What’s the difference? Investopedia. Web.