CHAPTER 22

Working Capital and Cash Management

TEST BANK

Define working capital. Working capital is the difference between current assets and current liabilities.
What is the purpose of working capital? It is through its working capital that a health care organization collects its funds, pays its employees and creditors and buys supplies.

3. What is the working capital cycle and why must it be managed? Also known as the cash conversion cycle- it represents the time it takes a firm to go from an outlay of cash to purchase the needed factors of production, such as labor and supplies, to the actual collection of cash for the produced product or service. The objectives of cash management is to minimize the collection period and to maximize the payment period. The working capital cycle looks at the four major phases of the inflows and outflows of cash: 1) Obtaining cash, 2) turning cash into resources and paying bills, 3) using the resources to provide services, 4) billing and collecting revenues earned so that the cycle can be continued. It is important to manage the working capital cycle in order to insure that cash is available when needed

4. Describe the two major components of a working capital management strategy? Working capital management strategy has two components: asset mix and financing mix. Asset mix refers to the amount of working capital the organization keeps on hand relative to its potential working capital obligations. Financing mix refers to how the organization chooses to finance its working capital needs.

5. What is the difference between temporary and permanent working capital needs? Temporary capital needs result from seasonal changes, while permanent working capital needs arise from more ongoing factors, such as permanent increase in patient volume.

6. Compare and contrast the advantages and disadvantages