Question

Analyze and discuss some of the ways in which a hospital can raise capital to operate more efficiently,

Answer 1

There are various sources of finance such as equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, venture funding etc. These sources are useful under different situations. They are classified based on time period, ownership and control, and their source of generation.

Choosing right source and right mix of finance is a key challenge for every finance manager. The process of selecting right source of finance involves in-depth analysis of each and every source of finance. For analyzing and comparing the sources of finance, it is required to understand all characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified.

On the basis of time period, sources are classified into long term, medium term, and short term. Ownership and control classifies sources of finance into owned capital and borrowed capital. Internal sources and external sources are the two sources of generation of capital. All the sources of capital have different characteristics to suit different types of requirements.

A hospital can raise finance from the following sources and operate more efficiently. It totally depends on the vision and long term requirement of the hospital. If the hospital is newly set up , then it needs to invest heavily on equipment and R&D and building and premises. For such needs, it should take long term financing. For training of staff and other day to day activities , it should take medium term financing. For immediate spending like medicines and other consumables, short term financing is suitable.

The various sources under these have been explained in detail below:

• Long Term Sources of Finance: Long term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or may be more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long term sources of finance. Part of working capital which permanently stays with the business is also financed with long term sources of finance. Long term financing sources can be in form of any of them:

• Share Capital or Equity Shares
• Preference Capital or Preference Shares
• Retained Earnings or Internal Accruals
• Debenture / Bonds
• Term Loans from Financial Institutes, Government, and Commercial Banks
• Venture Funding
• Asset Securitization
• International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.
  
• Medium Term Sources of Finance: Medium term financing means financing for a period between 3 to 5 years. Medium term financing is used generally for two reasons. One, when long term capital is not available for the time being and second, when deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources can in the form of one of them:
• Preference Capital or Preference Shares
• Debenture / Bonds
• Medium Term Loans from
  • Financial Institutes
  • Government, and
  • Commercial Banks
• Lease Finance
• Hire Purchase Finance

• Short Term Sources of Finance: Short term financing means financing for period of less than 1 year. Need for short term finance arises to finance the current assets of a business like inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short term financing is also named as working capital financing. Short term finances are available in the form of:
• Trade Credit
• Short Term Loans like Working Capital Loans from Commercial Banks
• Fixed Deposits for a period of 1 year or less
• Advances received from customers
• Creditors
• Payables
• Factoring Services
• Bill Discounting etc.