CHL Financial Planning and Budgeting 4 — Questions and Answers
Question 1: A healthcare organization's days cash on hand is 18 days, well below the industry benchmark of 90 days. What does this indicate?
- The organization is highly profitable and reinvesting surplus cash
- The organization may struggle to meet short-term financial obligations (Correct answer)
- The organization has excessive accounts receivable
- The organization's investment portfolio is underperforming
Correct answer: The organization may struggle to meet short-term financial obligations
Days cash on hand measures liquidity; 18 days means the organization has only 18 days of operating expenses covered by available cash, indicating a precarious financial position.
Question 2: In healthcare financial planning, what is the purpose of a pro forma financial statement?
- To report corrected historical financial results after an audit
- To project future financial performance based on assumptions and planned activities (Correct answer)
- To document compliance with debt covenant requirements
- To summarize prior-year variances for board review
Correct answer: To project future financial performance based on assumptions and planned activities
Pro forma statements are forward-looking projections that model expected financial outcomes under specified assumptions, used to evaluate strategic decisions.
Question 3: A CHL notices that supply costs per adjusted patient day have risen 15% while volume is flat. Which budgeting action is most appropriate?
- Increase the revenue budget to offset higher costs
- Conduct a variance analysis to identify specific supply categories driving the increase (Correct answer)
- Immediately implement across-the-board supply cuts
- Submit a capital budget request for new supply management software
Correct answer: Conduct a variance analysis to identify specific supply categories driving the increase
Variance analysis drills into the specific drivers of cost increases, enabling targeted and evidence-based corrective action rather than blunt reductions.
Question 4: Which of the following is a characteristic of a fixed cost in a healthcare setting?
- It increases proportionally with each additional patient served
- It varies based on the volume of procedures performed
- It remains constant regardless of patient volume within a relevant range (Correct answer)
- It is negotiated separately for each payer contract
Correct answer: It remains constant regardless of patient volume within a relevant range
Fixed costs such as building lease payments and salaried staff do not change with patient volume within a defined relevant range of activity.
Question 5: A hospital's net days revenue in accounts receivable is 55 days. If the hospital collects $2 million in net patient revenue per day, what is the approximate total amount in accounts receivable?
- $27.5 million
- $55 million
- $110 million (Correct answer)
- $2 million
Correct answer: $110 million
Accounts receivable equals days in AR multiplied by daily net revenue: 55 days × $2 million/day = $110 million.
Question 6: When evaluating a major capital investment, the net present value (NPV) method is preferred over simple payback period because NPV:
- Is simpler to calculate and explain to clinical staff
- Accounts for the time value of money across all future cash flows (Correct answer)
- Ignores the initial capital outlay to focus on returns
- Is required by Medicare for capital expenditure approval
Correct answer: Accounts for the time value of money across all future cash flows
NPV discounts all future cash flows back to present value, recognizing that a dollar received in the future is worth less than a dollar today.
Question 7: A healthcare organization receives 40% of its revenue from Medicaid. State legislators are considering a 10% Medicaid rate cut. How should the CHL incorporate this into financial planning?
- Ignore it until the legislation is formally enacted
- Model a scenario showing the revenue impact and identify expense reductions or volume growth needed to offset it (Correct answer)
- Immediately reduce staffing by 10% to prepare for the cut
- Convert all Medicaid patients to self-pay billing
Correct answer: Model a scenario showing the revenue impact and identify expense reductions or volume growth needed to offset it
Scenario planning that models the revenue impact allows leadership to proactively identify mitigation strategies before the cuts take effect.
CHL Financial Planning and Budgeting 4
A healthcare organization's days cash on hand is 18 days, well below the industry benchmark of 90 days.
What does this indicate?