Question

Scenario: As the administrator of a small privately owned not-for-profit hospital that has been seeing a significant increase in patient volume, it has been determined that another wing should be added to accommodate the increase in volume. However, there is not enough cash in reserves to finance the project.

You have been tasked with planning how the capital required for the project can be raised. address the following prompts, citing four to six scholarly sources to support your claims: Capital needs can be met either through equity or debt financing.

Explain the difference between the two and which financing would be appropriate and why, considering that this is a private, not-for-profit hospital.

Explain the term working capital and how it is related to debt financing for capital expenditures.

Discuss the importance of a cash budget and how it can be used to assess the financial viability of this capital expenditure.

Answer 1

For a Non Profit organisation Capital can be raised mainly through two sources:

1. Debt Financing : Debt financing is one of the commonly used method by any business/firm for raising their funds. Here the borrower accepts the funds from any outside sources and repay the amount in future along with the interest. But the debt financing results in chance of financial loss to the borrower in future if they find it difficult to pay back the amount at the time of maturity.

2. Equity Financing: It means selling a portion of the companys share to the investor. There is no obligation to repay the money acquired through it. Once the investor acquires the companys share, he becomes the real owner of the company. Equity financing helps the owner to share the financial risk along with a group of people.

Commonly organisations include mixture of both debt and equity in its capital structure. But for a Not-for-profit ,private hospital, Equity financing would be a better option.
Advantages of using Equity financing
a) No obligation to repay the money which is acquired through equity financing
b) No additional financial burden on the company
c) Freedom to channel more money into your organisation.

Working capital

Working capital is the amount required in the business for meeting out their day to day expenses. It can be calculated as follows:

Working Capital = Current Assets - Current Liabilities

If the organisation uses debt financing to purchase any capital asset(say for example current asset), the working capital will increase and at the same time if it uses debt financing to purchase a long term capital asset, the working capital will decrease

Cash budget

Cash budget is used for estimation and analysis of cash flows in a business during a specific period of time. It helps in assessing cash inflows and outflows that occurs in the business.
Cash inflows occurs from sale of assets, cash sales, collection of account receivables etc. and cash outflows occurs from purchase of assets, cash purchases, repayment of loan/debt etc.

Cash budget helps the organisation in forecasting the future needs by properly managing and estimation. it acts as a controlling device. preparation of cash budget helps the organisation in controlling the capital expenditures. Cash budget also helps in identifying the cash position during a period.