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Industry expertise Healthcare turns its focus to capital management

Learn 5 strategies that hospitals and health systems can use to optimize their cash management.

Henry Grady and Greg Oliver lead the Not-for-Profit Hospitals & Health Systems Industry Specialty Group for Truist. Brittany Furlow and Mark Phelps are Healthcare Treasury Consultants for Truist.

With interest rates rising significantly the past two years, deciding how to fund projects requires careful consideration. Assessing the relative value of an invested dollar versus a deposited, fund-raised, or borrowed dollar isn’t straightforward. CFOs must evaluate the actual cost of capital within a broader framework that includes debt service, CAPEX, working capital, and endowment goals, while closely monitoring days cash on hand. Accurate analysis requires a shift in your cash management mindset.

Cash management in a higher-interest rate environment

Effective cash management has evolved significantly compared to a few years ago when interest rates were historically low. Leaders need to adopt new strategies to successfully manage cash in the current higher rate environment.

With the potential for capturing yield in today’s marketplace, it’s now possible to invest cash for short periods—from three months to two years—and achieve meaningful returns. Project funds can be invested in short, intermediate, and longer-term investments, depending on the timing of the project costs. Applying a layered approach to cash investments allows cash managers to maximize returns while ensuring that funds are available when needed.  

Now that some yield exists in the marketplace, you can invest for three months, six months, one year, or two year and get respectable returns.

Cash managers should seek to optimize cash balances, improve tracking capabilities, and reduce account fees by evaluating account consolidation. It’s also helpful to periodically reevaluate the use of earnings credits to offset service charges versus earning interest income via an interest-bearing operating account.

For a nonprofit that doesn’t pay taxes on interest income and absent any minimum balance requirements, the decision between using earnings credits and earning interest is a comparison of the earnings credit rate and the interest rate.  If the interest rate is higher than the earnings credit rate, earning interest may be more beneficial.

For those clients borrowing via a line of credit, a sweep arrangement can be established  to pay down balances to reduce interest expense.

The current interest rate environment encourages health systems to free up working capital by accelerating receivables, optimizing payables, and reducing supplies and inventory. Paying attention to routine financial processes can deliver significant financial benefits that can support other cash needs.

Strategies to help healthcare providers optimize cash management

1.  Distinguish different cash needs.

Many organizations think about cash in terms of three separate “buckets” based on their projected use horizon.

  • Operating cash refers to dollars in bank accounts used to fund day-to-day operations, typically covering needs within the next 30-90 days.
  • Surplus cash is the amount that exceeds your immediate operational demands, generally representing needs expected within the next 12-18 months.
  • Long-term cash includes money in trusts, foundations, endowments, and other assets earmarked for needs a year or more in the future.

Work with your investment managers and bankers to establish ideal funding levels for each cash bucket and to determine how best to maintain these targeted balances. Next, explore ways to maximize yield while maintaining acceptable risk and adequate liquidity. Consider where you’ll need to invest longer-term cash, aligning your investment strategy with your strategic plans and capital project needs.

2.  Streamline day-to-day cash handling.

Develop a straightforward protocol for managing routine deposits and cash. Prioritize safety and liquidity, according to a clear investment policy, while seeking additional returns wherever possible.

Several account options exist today, offering varying degrees of liquidity and yield. Some are instantly accessible and FDIC-insured, while others have balance requirements, risk, or transaction limitations. When looking to consolidate and concentrate cash, evaluate earnings credit rate accounts versus interest-bearing accounts to determine the best option for your idle cash. 

Account options for holding cash deposits
Checking account with earnings credit rate (ECR) Interest-bearing operating account Money market account Daily liquidity account U.S. Treasury money market fund
Liquidity Highest Highest High Highest High
Safety FDIC insured FDIC insured FDIC insured FDIC insured Highly rated
Potential return Earnings credit rate/fee offset Moderate Moderate Moderate Moderate
Transaction limitations No No Yes No Yes
Minimum balance requirement Varies Varies Yes High (as much as $10MM) High (generally $1MM

3. Consolidate accounts.

Consolidating accounts offers several benefits beyond earning interest and potentially repaying debt. Consolidation also simplifies cash tracking, so staff can spend less time transferring money between accounts.

Consolidation doesn’t have to be an all-or-nothing endeavor. While some credit facilities may require maintaining deposits with certain banks and meeting minimum balance requirements, it makes sound financial sense to consolidate where possible.

4. Scrutinize receivables.

Healthcare receivables are complex. Exploring this aspect of cash flow can offer opportunities for improvement. While outsourcing continues to be trending, hospitals should maintain a firm grasp on revenue cycle management. Selecting the right revenue cycle platform and diligently managing their performance is vital—the amount and timing of collections significantly impacts liquidity.

A medical data lockbox outsources manual processes and leverages technology to enhance the cash-posting and reconciliation processes, allowing finance staff to focus on more value-added tasks. Other technology solutions to streamline and enhance receivables include remote deposit capture, cash vault, merchant services, ACH, and integrated receivables.

5. Drill into payables.

Many healthcare providers continue to rely heavily on checks when making payments. While familiar, checks come with higher fraud risks and costs relative to electronic payment options. In fact, checks are the number one source of payment fraud.Disclosure 1 To reduce risk and lower costs, consider integrating electronic payment methods. 

In addition to the fraud benefit, electronic payment options provide more control over payment timing. These options include commercial credit cards, virtual payment cards, ACH, integrated payables and Real Time Payments (RTP®).

Get a better payoff from your cash management strategy.

Managing your organization’s cash flow is a top priority in today’s economic environment. Your Truist relationship manager, along with our healthcare industry specialists and treasury teams, can help you optimize your healthcare system’s cash management.

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