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Allocating Capital Appropriately - Use of a single-batch process.

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Presentation on theme: "Allocating Capital Appropriately - Use of a single-batch process."— Presentation transcript:

1 Allocating Capital Appropriately - Use of a single-batch process

2 Healthcare Executive2 Allocating Capital Appropriately (1/3) The decision-making process that determines how much capital to spend and the projects on which capital will be spent is viral to achieving optimal strategic and financial results.

3 Healthcare Executive3 Allocating Capital Appropriately (2/3) Approaches to capital allocation vary considerably in contemporary healthcare organizations. The approach that may cause the most pain financially, and one that some organizations employ, is political or subjective in namre.

4 Healthcare Executive4 Allocating Capital Appropriately (3/3) It results in capital investment decisions that increase the organizations' value—their ability to generate capital for ftiture projects and maintain or improve their creditworthiness— enabling them to accomplish their mission.

5 Healthcare Executive5 The Approach to Capital Allocation (1/4) Best practice capital allocation is founded on portfolio-based review of all projects, resulting in the allocation of funds to capital projects once a year. All initiatives—whether likely to generate a positive return-on- investment (ROI) or not—are reviewed using uniform and consistent evaluative criteria.

6 Healthcare Executive6 The Approach to Capital Allocation (2/4) This approach enables the organization to ensure that the projected results of the combined portfolio of selected capital projects have an overall positive return and that the initiatives are consistent with the organization's overall strategy.

7 Healthcare Executive7 The Approach to Capital Allocation (3/4) Effective allocation of capital requires coordination between the strategic, financial and capital planning processes and the capital management and budgeting processes.

8 Healthcare Executive8 The Approach to Capital Allocation (4/4) Capital management integrated planning and allocation calendar. Task & Sample Date.

9 Healthcare Executive9 Determining Threshold and Nonthreshold Capital Capital constraint = operating cash flow + other sources of cash —total uses of cash - contingency = net cash available for capital. Defining Three Capital Pools : 1.Threshold pool 2.Nonthreshold pool 3.Contingency pool

10 Healthcare Executive10 FUNDING THE TRESHOLD AND NONTHRESHOLD POOLS Ibtal Cash Available $31.1 million 50%Contingency Pool $3.1 million Net Cash Available $28 million 50% Nonthreshold Pool $14 million fhreshold Pool $14 million

11 Healthcare Executive11 FORMING A CAPITAL MANAGEMENT COUNGIL The capital management council should be composed of key members of the C- suitc: the CEO, CFO,COO, CIO, CMO.

12 Healthcare Executive12 Evaluating and Analyzing Projects The allocation methodology should create incentives that maximize dollars allocated to each operating unit based on its successful performance. Monte Carlo simulation or sensitivity analysis. positive NPV

13 Healthcare Executive13 Communicating Through the Process Upjront communication Ongoing communication Feedback

14 Healthcare Executive14 Looking Forward After all is said and done, the most critical factor for successful implementation of a corporate fmancebased capital allocation process is patience. It is likely to be two or three years before the process runs as it was designed—not an unexpected requirement for such a massive change in the order of business in most organizations.

15 Healthcare Executive15

16 Healthcare Executive16 Thanks for your Attention.

17 Healthcare Executive17 【 Proverb / Saying 】 * Count somebody out. May I have rain check?

18 Healthcare Executive18 【 Proverb / Saying 】 * Hang in there.

19 Healthcare Executive19 Even if the trails are challenging, you need to hang in there and try to finish them.


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