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- 18 Marks
Question
KTM Regional Hospital is a public referral hospital under Ghana Health Services established in 1980. The hospital is a sub-vented organization that finances its operations from Internally Generated Revenues (IGR) and government subventions. In order to forecast for the first quarter of 2017, you are provided with the following information on revenues and expenditure projections of the Hospital for the fourth quarter of 2016 and first quarter of 2017.
| Month | IGR (GH¢ ‘000) | Subvention (GH¢ ‘000) | Donations (GH¢ ‘000) | Non-Established Post (GH¢ ‘000) | Goods and Services (GH¢ ‘000) | Non-Financial Assets (GH¢ ‘000) | Other Expenditure (GH¢ ‘000) |
|---|---|---|---|---|---|---|---|
| October 2016 | 2,000 | 8,000 | 200 | 300 | 700 | 1,200 | 120 |
| November 2016 | 2,400 | – | – | 310 | 740 | – | 240 |
| December 2016 | 2,500 | – | 100 | 400 | 900 | 1,000 | 125 |
| January 2017 | 3,000 | 10,000 | 500 | 600 | 800 | – | 130 |
| February 2017 | 3,200 | – | 700 | 820 | 1,600 | – | 150 |
| March 2017 | 3,400 | – | 900 | 800 | 840 | – | 290 |
Additional Information:
- The cash and bank balance of the Hospital as at December 2016 was a deficit of GH¢500,000.
- Breakdown of IGR:
- National Health Insurance Customers (60% of IGR) pay two months after service.
- Corporate Customers (20% of IGR) have one-month credit terms.
- Cash Customers (20% of IGR) pay immediately.
- Government subvention is released in two equal instalments in the second and third month of each quarter.
- Donations for March 2017 (GH¢900,000) will be received 40% in cash and 60% in kind.
- Non-established post refers to wages and salaries for casual and contract workers, paid in the month incurred.
- Goods and services are paid 40% in the month incurred and 60% in arrears.
- Non-financial assets are paid for in four equal instalments starting from the month of purchase.
- Other expenses are paid as and when incurred.
Required:
i) Prepare a cash forecast for the Hospital for the first quarter of 2017, showing the forecast for each month and that of the quarter as a whole. (12 marks)
ii) On the basis of the cash forecast in (i) above, advise management on the financing options available to them for the 2017 fiscal year. (4 marks)
Answer
i) Cash Forecast for the First Quarter of 2017
| Month | Receipts/Inflows (GH¢ ‘000) | Payments/Outflows (GH¢ ‘000) | Surplus/(Deficit) (GH¢ ‘000) | Balance Carried Down (GH¢ ‘000) |
|---|---|---|---|---|
| January | 3,040 | 2,140 | 900 | (500) + 900 = 400 |
| February | 7,740 | 2,308 | 5,432 | 400 + 5,432 = 5,832 |
| March | 8,480 | 2,568 | 5,912 | 5,832 + 5,912 = 11,744 |
| Total | 19,260 | 7,016 | 12,244 | 11,744 |
Workings:
- Receipts/Inflows:
- IGR (Cash): Collected immediately (20% of total IGR).
- IGR (NHIS): Collected two months after service (60% of IGR).
- IGR (Corporate): Collected one month after service (20% of IGR).
- Subvention: GH¢5,000,000 in February and GH¢5,000,000 in March.
- Donations: GH¢500,000 in January; GH¢700,000 in February; GH¢900,000 in March (40% in cash, 60% in kind).
- Payments/Outflows:
- Non-Established Post: Paid fully in the month incurred.
- Goods and Services: 40% paid in the month incurred, 60% in arrears.
- Non-Financial Assets: Paid in four equal instalments starting from the month of purchase.
- Other Expenditure: Paid fully in the month incurred.
ii) Advice to Management:
- January Financing Needs: Seek additional financing in January or revise payment plans to cover the GH¢500,000 deficit.
- Investment of Surplus: The cash surpluses in February and March should be invested in short-term securities to maximize returns and optimize cash management.
- Tags: Budgeting, Cash Flow Management, Cash Forecasting, Hospital Finance, Public Sector
- Level: Level 2
- Topic: Public sector fiscal planning and budgeting
- Series: MAY 2017
- Uploader: Kwame Aikins