What is Working Capital?
Working capital, or net working capital, is one measure of an organization’s financial health. The following is the net working capital formula:
Current Assets – Current Liabilities = Net Working Capital
In this definition, current assets include items such as cash, accounts receivables, or inventory (this last item may not be relevant to all organizations, especially those who do not sell products). These are all items of value, used within 1 year of normal operations. Meanwhile, current liabilities are financial obligations your organization has which must be paid within 1 year.
The result of the formula is a measure of how liquid your organization is. If the number is relatively positive, you have better financial health than if your working capital is negative. You want your current assets to be greater than your current liabilities.
Working Capital in the Healthcare Industry
How does working capital apply to the healthcare industry?
Working capital is a part of many industries. If your organization generates cash flow, accounts receivables and payables, and other items of monetary value, then this concept is important for you.
While the concept may be similar, the specifics of current assets and liabilities can differ between organizations.
For healthcare practices, an example of an accounts receivable is the amount billed to insurance payors who have not yet paid. Insurance payments are not usually received when services are performed, but it should not take over a year to get paid. Therefore, it is a good example of a current, accounts receivable.
A medical practice, unlike sales related businesses, would probably not be dealing with inventory as a current asset.
On the other hand, an example of a current liability could be purchasing medical supplies on credit and making payment on it later. Another item under current liabilities could be wages payable, the amount that is still needed to be paid out to staff.
Why is Working Capital Important?
Working capital can show your organization’s liquidity, or how fast your assets can be converted to cash for use. It is important because this number can impact how your organization operates.
With higher working capital, your practice can enjoy certain benefits such as:
- Ability to purchase important medical supplies.
- Maintain everyday operations.
- Ability to hire staff as needed.
- Less financial burden on the organization.
- More possibilities of expanding your practice.
- Overall, more flexibility in how you operate.
In more detail, if your practice is looking to expand, you may need working capital to do so. Whether it is growing your facility, hiring more staff, or purchasing newer supplies, you will need to have enough liquid assets to cover the costs. If you have a higher working capital (more assets than liabilities), your practice may find it is easier to cover these costs.
On the other hand, if a practice has more liabilities, it may be more crucial to pay off these liabilities first. Then, your practice may not be able to expand as quickly as in the first scenario.
Monitor your practice’s working capital periodically and see if it is sufficient for what you want your practice to accomplish. If you need help overcoming any challenges, contact us for more support!
Improving Your Working Capital With Americare Network
Americare Network not only delivers customized billing services for practitioners, but we also help with practice transformation consulting, medical financing, and facility & practitioner credentialing to support your practice. Our experts have knowledge on a spectrum of different practice types from clinics to hospital-based physicians to virtual practices. Let us know how we can help you!