Zhigang Deng, M.D., President of Mangpu Central Hospital (MCH), was perplexed. Two weeks ago, he had prepared a set of pro forma financial statements in conjunction with a loan request to the Xian National Bank. In comparison with the three prior years, the statements were impressive (Exhibits 1 and 2). According to Dr. Zhigang’s projections, the hospital expected to see a change in its operating fund of over ¥2 million, compared to much smaller amounts in prior years. This amount, comparable to net income in a for-profit organization, indicated that the hospital was managing its financial affairs in a highly efficient manner.
Yet the bank wanted more. Guofu Deng, the bank officer, had expressed some concern about the large projected increase in the line of credit, from just over ¥15 million as of the end of FY2003 to almost ¥27 million as of the end of FY2004. Moreover, this increase came in conjunction with a precipitous decline in cash. Indeed, the hospital had only enough cash on hand to meet the bank’s minimum requirements.
As before, Mr. Guofu explained to Dr. Zhigang that the bank was willing to increase the ceiling on the line of credit, but he was concerned about why the hospital was forecasting such a large increase in the line of credit (coupled with a decrease in cash) when it also was forecasting a change in its operating fund that was almost triple the amount in FY2003. He had asked Dr. Zhigang to prepare a monthly cash flow forecast to see if that shed any light on the problem.
BACKGROUND
Mangpu Central Hospital was a small hospital located in Beijing, China, that had been growing steadily in patient volume. During the 1990s, MCH underwent a large expansion, with the growth continuing into the new millennium. Dr. Zhigang and his management team estimated that inpatient revenue would grow by about 15 to 20 percent a year during the next several years. See Mangpu Central Hospital (A) for more details.
DATA
In thinking about his cash flow forecast, Dr. Zhigang realized that there were several activities that led to a difference between the pro-forma financial statements and the changes in cash:
- Collection of accounts receivable. Exhibit 3 contains the forecasted end-of-month figures.
- Employees were paid on the first of each month for earnings from the previous month.
- The hospital's policy was to charge its medical and office supply purchases, and pay for each month's purchases in the following month.
- The purchase of the new medical equipment.
- The payment of the loans and other debt. . . .
Assignment
- Prepare the cash flow worksheet contained in Exhibit 4. What does this tell you about the operations of MCH?
- What is the cause of MCH’s cash flow problems? What solutions are available to Dr. Zhigang? What recommendations would you make to him?