Capital Budgeting Process Essay

Custom Student Mr. Teacher ENG 1001-04 15 October 2016

Capital Budgeting Process

Capital budgeting is one of the most important financing tools used to examine expenditures and future projects in the capital spending and to budget for projects and all other analysis of spending for the future. This gives a heads up for healthcare managers to control their spending not only for capital expenditures but other spending such as payments and utilities for the organization. Capital budgeting is a large process that takes many different aspects to run. While capital budgeting is one of the most important aspects in healthcare finance, it is also a broad topic.

A bond is a financing tool that is used when an issuer gives a statement to the payee for money and an interest payment is made to the payee at certain times. When an organization goes through the process of issuing a bond, they go through six major steps to accomplish bond issuing and determine whether this is the best decision at the time. Before issuing a bond, the issuer examines their capital plan and determines whether a bond is needed financially. Next, the issuer looks at the options for payees within bond issuance and is then examined by a credit rating agency to see if their credit score is high enough to issue a bond.

After being examined by the credit rating agency, the bond itself is examined by the agency and after it is approved, the borrower is given terms and conditions to accept from the borrower. The last step that an organization must go through to issue is to sell the bond. These are sold to the payer where they give the money needed for the specific amount. While bonds are a great way to manage debt and become financially secure, leasing is another way that healthcare facilities manage their debt.

Leasing refers to a contract where the lessee pays the owner rent or money for assets for a contracted time where the contract can be renewed and reinstated for longer term usage of those assets. Leasing is undertaken primarily because they don’t have to take care of the maintenance that comes with leasing assets. The owner of the machinery, facility, equipment or anything else that can be leased must continue routine maintenance saving the facility money on expenditure amounts within the spending area.

If a facility is struggling for money, there are options such as bonds and leasing to decrease costs and increase the needed funds. There are two major types of leases that healthcare facilities must understand which are capital leases and operating leases. A capital lease, or financial lease, is used to lease assets for as long as the asset will remain available and running. The lessee is required by the contract of the lease to pay for the assets being used as long as the lease is in motion. Operating lease is almost the opposite of a capital lease.

Operating leases are used for terms that are usually breakable and shorter than the assets given period of operation. Short term borrowing is a term used to describe when a company is in debt for a term of one year or less. These debts are usually paid back in that year and are usually short term bank loans that are used to finance a company. Long term financing is the exact opposite of a short term loan. It is used when a company needs to be financed for longer than one year or will not be paid back within that year.

It can be from a single loan or multiple loans and is used when there are no plans or availability to have these loans paid back within the year. Equity financing sources for nonprofit organizations include internally generated funds, philanthropy, and government grants. These are used to finance and support organizations that are non profit and that help those in need. Today, more and more organizations are becoming nonprofit and are used by their own money, grants and loans and stocks and bonds.

These are all primary sources for nonprofit organizations to keep serving communities in the healthcare world. Capital Budgeting process does occur in several extensive stages that include many different objectives for projects and programs for healthcare organizations. These generally include expenditures and the budget that comes along with those steps. These are used so that there are different views of the budget and what needs to be completed and examined in order to see the direction headed.

Three discounted cash flow methods that are used include net present value, profitability index and equivalent annual cost. Net present value is the amount of the investment compared to incomes after the discount has been applied. (Cleverley, 529). The profitability is the ratio of the NPV and investment costs. (Cleverley, 533). This is used to compare rates of return on capital budgeting. Finally, the equivalent annual cost is the spending of the project compared to the capital spending and the operation costs when not leased but fully owned.

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  • University/College: University of Chicago

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  • Date: 15 October 2016

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