title: The importance of working capital management for hospital profitability: evidence from bond-issuing, not-for-profit U.S. hospitals.
abstract: BACKGROUND
  Increased financial pressures on hospitals have elevated the importance of working capital management, that is, the management of current assets and current liabilities, for hospitals' profitability. Efficient working capital management allows hospitals to reduce their holdings of current assets, such as inventory and accounts receivable, which earn no interest income and require financing with short-term debt. The resulting cash inflows can be reinvested in interest-bearing financial instruments or used to reduce short-term borrowing, thus improving the profitability of the organization.
  
  
  OBJECTIVE
  This study examines the relationship between hospitals' profitability and their performance at managing two components of working capital: accounts receivable, measured in terms of hospitals' average collection periods, and accounts payable, measured in terms of hospitals' average payment periods.
  
  
  METHODS
  Panel data derived from audited financial statements for 1,397 bond-issuing, not-for-profit U.S. hospitals for 2000-2007 were analyzed using hospital-level fixed-effects regression analysis.
  
  
  RESULTS
  The results show a negative relationship between hospitals' average collection period and profitability. That is, hospitals that collected on their patient revenue faster reported higher profit margins than did hospitals that have larger balances of accounts receivable outstanding. We also found a negative relationship between hospitals' average payment period and their profitability. Hospital managers did not appear to delay paying their vendors. Rather, the findings indicated that more profitable hospitals paid their suppliers faster, possibly to avoid high effective interest rates on outstanding accounts payable, whereas less profitable hospitals waited longer to pay their bills.
  
  
  CONCLUSIONS
  The findings of this study suggest that working capital management indeed matters for hospitals' profitability. Efforts aimed at reducing large balances in both accounts receivable and accounts payable may frequently be worthwhile investments that have the potential to reduce the costs associated with working capital management and thus improve the profitability of an organization.
authors.affiliation: Department of Health Systems Administration, Georgetown University, Washington, DC, USA. sr468@georgetown.edu
authors.forename: Simone
authors.initials: S
authors.lastname: Rauscher
authors.forename: John R C
authors.initials: JR
authors.lastname: Wheeler
mesh_terms: D002201:Capital Expenditures; D002202:Capital Financing / Q000331:legislation & jurisprudence*; D005377:Financial Management, Hospital; D006077:Government Agencies; D006788:Hospitals, Voluntary / Q000191:economics*; D006801:Humans; D014481:United States