These are very important things to consider in a hospital, such as ABC Hospital which is struggling in these hard economic times. Kennedy (2009) describes how the complex analysis of determining what the ROI (return on investment) will be for a capital purchase and can it make go up or down. Becoming an expert in the field of purchases can help leaders to achieve stronger positions in the financial community.
Describe how providing a schedule of the ROI will improve the chances of board approval during review
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In almost every business sector, at some point, companies are confronted with the need to invest in new facilities, equipment, and people. Those business that have been particularly successful at maintaining a positive revenue stream and that have accumulated large surpluses of cash have the luxury of implementing improvements that may be costly but that are deemed necessary to remain viable, and to do so without incurring debt. Cash surpluses, especially in the case of privately-owned businesses, as opposed to publicly-owned businesses that are obligated to repay investments through the issuance of dividends, are an enormous advantage when it comes time to reinvest in capital improvements. After all, individuals maintain savings accounts so that they can pay for goods and/or services without having to utilize credit accounts. Corporations are no different. The profitable ones can recapitalize without taking out a loan whereas the less profitable, or even unprofitable businesses may have no choice but to incur or increase their levels of debt.
This is where discussions of “returns on investments” comes in. “Return on investment” refers to the period of time it will take to recoup expenses associated with a recapitalization of a business facility. Before deciding on a course of action, business managers have to sit down and analyze their current and projected budget data and perform calculations of how many years it will take to pay off the expenses associated with implementing costly improvements. Too many years, and the “return on investment” may be considered unacceptably low. Calculations that conclude or suggest that an investment will pay off in a reasonable period of time constitute a high return on investment, as revenue generated as a result of that investment, for example, in new equipment, will begin to accrue sooner rather than later.
Let’s take as an example a health care facility’s deliberations regarding whether to purchase an expensive new item, such as a magnetic resonance imaging (MRI) machine so that it can perform diagnostic tests in-house. New MRI machines cost, depending upon specifications, anywhere from several hundred thousand to several million dollars. Before management decides to purchase such an item, it first has to determine, to the extent possible, what it will charge patients/insurance companies for its use, and how many patients will have to be examined utilizing the machine before the cost of purchase is recouped. If a determination is made that the return on investment will occur within a reasonable period of time, then purchasing the equipment and training staff in its use may be a good ideal. If the cost is too high and the return on investment determined to be too low, then it may make sense to continue to send patients requiring an MRI exam to receive such an exam an independent facility that possesses the requisite equipment. This, after all, is the nature of “contracting out” services: it is less expensive to operate a business if certain essential but expensive to conduct activities are performed by a different company that, due to its own business structure and model can perform the work for less money.
Briefing the decision-makers – in this case, a board of directors – on the economic benefits of spending money, especially if that money has to come from borrowing from a bank or other entity, requires a clear and legitimate proposal that includes an attractive return on investment. The board will more likely look approvingly on a business proposal that includes a reasonable return on investment, especially if the cash required for the initial expenditures has to be borrowed at interest. The sooner the investment turns profitable, the better. The longer it takes, the more interest is being paid on a loan, or the less interest is being paid by the financial institution on a savings account because there is less money in that account.
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