The Midterms are in (?)-How Will They Affect the Policy Debate on Health Care?
 
by David H. Fater

Red States, Blue States and Purple States- What does it mean?
 
The midterm elections are in despite being in various stages of completion (Will the counting ever end and will Florida ever get it right?). Despite the voting problems, the results will reshape the health care policy debate at a national and state level. All that���¢�¯�¿�½�¯�¿�½s left now is for the American public to figure out what it means and how policy may change in 2019.
 
Health care absolutely was before and after the election the top issue on voter���¢�¯�¿�½�¯�¿�½s minds. (That does not mean that it was the top factor driving people���¢�¯�¿�½�¯�¿�½s vote which may have been mostly President Donald Trump).  BUT elections are almost never about the top issue.
 
The elections were a big night for Medicaid expansion. This continued momentum for Medicaid expansion with the referendums passing in three states and, even more importantly, the election of the governors in Kansas and Maine who will move it forward. At the same time, it���¢�¯�¿�½�¯�¿�½s not a Medicaid wave because of the defeat of Andrew Gillum in Florida and Stacey Abrams in Georgia. Florida, in particular has outsized importance politically as a state coveted by both parties in every election. And Florida has become the critical swing state that would be presidents have to carry.
 
There���¢�¯�¿�½�¯�¿�½s more than Medicaid expansion involved in this. As the states expand, and as governors invested in Medicaid win, you have more and more red states and purple states with a stake in Medicaid. So, it makes it harder, if not impossible, for a future Congress to return to big cuts in federal Medicaid spending in the form of a block grant, or per capita cap, or some other form.
 
Work requirements are a huge fighting issue between the left and the right on principle and do affect significant numbers of people. Work requirements will be affected by another fallout from the election���¢�¯�¿�½�¯�¿�½ aggressive and relentless oversight by Democrats in the House. And that will be in every area, but it will certainly be in health care, and a lot of it will focus on Affordable Care Act (ACA) waivers and Medicaid waivers.
 
With Medicare, there are a couple things occurring. One is the Democratic control of the House, and the second is the departure of (retiring Speaker of the House) Paul Ryan, who was the champion of premium support. The combination of those two things means that big Medicare restructuring, especially premium support, is dead for now.
 
There will be an effort in the House���¢�¯�¿�½�¯�¿�½a big effort���¢�¯�¿�½�¯�¿�½to bring Democrats together around a coherent health policy agenda. But that will not work with the presidential candidates. The presidential candidates will all be out advancing the platforms that they think appeal to the slices of the Democratic base that give them the best chance to win the nomination down the road.
So they will be kind of somewhat all over the place, some pushing ���¢�¯�¿�½�¯�¿�½Medicare for all,���¢�¯�¿�½�¯�¿�½ some as an option, some building on the Affordable Care Act, some may emphasize other things like drug prices. Medicare will be in the middle of all that.
 
In summary, pick your color.
 
Small businesses, hospitals eye workplace medical clinics
 
We have long been a believer that employers would begin directly contracting with providers. We discussed in the last edition of the newsletter and the fact that General Motors had done it with the Henry Ford Health System for 34,000 of their employees.
 
Workplace medical clinics were once a benefit reserved for employees at only the largest companies with the deepest pockets. But now some vendors are helping groups of small and midsize employers provide convenient primary care at shared clinics in hopes of tamping down medical spending.
 
Meanwhile, as employers of all sizes grapple with rising healthcare costs and consider workplace clinics as one remedy, hospital systems are signing up to staff those clinics to gain new patients or keep vendors from stealing existing ones.
 
Many employers find workplace clinics can help lower healthcare costs to the point they can put more money into paychecks. If a clinic is well-run, staffed correctly so that providers are productive���¢�¯�¿�½�¯�¿�½that they���¢�¯�¿�½�¯�¿�½re seeing your patients���¢�¯�¿�½�¯�¿�½and the providers are referring patients to specialists within the favored networks of the employer, it will help to save money. One such example is The International Brotherhood of Electrical Workers local in Cincinnati that shares two such medical clinics with the local plumbers and pipefitters union. The clinic was a way to curb those insurance costs and put more money into workers���¢�¯�¿�½�¯�¿�½ wages and pensions. The union pays $26 per person per month���¢�¯�¿�½�¯�¿�½for about 2,400 members and their dependents���¢�¯�¿�½�¯�¿�½to a company that is staffing the clinics. About 60% of the union members are using the clinic, but their dependents are visiting less frequently. A return has not been calculated yet, but younger union members who rarely went to the doctor are now using the clinic, which offers a wellness program that could help prevent conditions like high cholesterol and curb bad health behaviors early.
 
The clinics are typically staffed by a salaried physician, advanced practitioner and two medical assistants, a team that can manage 2,500 to 3,000 patients. Companies with as few as five employees come together to share the clinic. And because the teams have adequate time, they can pinpoint the root cause of patients���¢�¯�¿�½�¯�¿�½ conditions, make sure they understand their medications, follow up on referrals and manage chronic conditions. These clinics produce a return on investment for all the employers.
 
Big Pharma becomes the next big target
 
The soon to be led Democratic House of Representatives and the Trump administration are poised to square off against the pharmaceutical industry as they look to rein in drug prices, and providers are more than willing to join the fight against their common adversary.
 
Democrats gained control of the House in the midterm elections last week for the first time in nearly a decade, while the Republicans retained the Senate majority. A split House and Senate likely means that most of the sweeping policy changes related to an overhaul of the Affordable Care Act or implementing a single-payer system are off the table until 2020. Instead, lawmakers, the Trump administration and healthcare lobbyists can focus on areas like drug pricing, transparency and cost control.
 
Now that Democrats control the House, they will push harder on prescription drug costs and HHS Secretary Alex Azar ���¢�¯�¿�½�¯�¿�½is lasered in on that���¢�¯�¿�½�¯�¿�½. They believe prescription drug prices are out of control and there has to be a better solution for the patient. The provider community needs to be in the room to talk about that as well.
 
Late last month, President Trump announced a proposal to tie prescription drug rates paid by Medicare Part B to the lower prices paid in other advanced countries. The mandatory proposal would save the government and Medicare beneficiaries an estimated $17.2 billion over five years.
 
About a week later, Health and Human Services (HHS) said it would move ahead with its plans to cap the prices drug makers can charge hospitals that participate in the 340B drug discount program. In his drug pricing blueprint, President Trump advocated bolstering competition by introducing more generic and biosimilar drugs, letting private plans negotiate discounts for Medicare beneficiaries, creating incentives to lower list prices and reducing out-of-pocket spending for consumers.
 
While the House may hold more hearings on drug pricing and how the administration���¢�¯�¿�½�¯�¿�½s proposals have fallen short, those efforts are not expected to lead to price controls.
They can all agree on beating up pharma, and pharma never seems to have too much of a problem with that, so long as not too much really happens. They will  have more rhetorical agreement than agreement on anything significant which will break down into the usual partisan logjam.
 
A Democrat-controlled House builds more support for passage of the so-called Creates Act, which aims to help more generic drugs get to market by removing some barriers pharmaceutical companies use to limit access to samples of branded products.
 
Early association health plans defy fears by offering comprehensive benefits
 
When the Trump administration made it easier for small businesses and self-employed workers to band together to buy insurance that didn���¢�¯�¿�½�¯�¿�½t have to abide by all the Affordable Care Act rules, supporters of the ACA exchanges feared the worst. (This is something we have tried to do for our clients but always ran into legal roadblocks that now seem to be crumbling).
 
Would easing restrictions on association health plans lure healthy people out of the ACA markets, causing premiums to spike for those who remained? Would consumers be duped into buying skimpier coverage that left them unprotected in a crisis? Most of the early association health plans being formed or expanded under the June rule claim to comply with ACA mandates, and say they aren���¢�¯�¿�½�¯�¿�½t charging people different premiums based on their health conditions or barring people with pre-existing conditions from enrolling. Sponsors of the plans also say they cover each of the essential health benefits, provide broad networks of doctors, and don���¢�¯�¿�½�¯�¿�½t impose annual or lifetime limits on coverage.
 
And despite claiming to not cut corners, these association plans are still able to offer lower premiums than comparable plans on the individual insurance exchange, the sponsors say.
In one example, farmer-owned cooperative Land O���¢�¯�¿�½�¯�¿�½Lakes said its self-insured association plan, which it is expanding to farmers across state lines under the new rule, will cost about 25% to 35% less than exchange plans in Nebraska, and 10% to 12% less than comparable plans in Minnesota.
 
The senior director of benefits for Land O���¢�¯�¿�½�¯�¿�½Lakes (based in Arden Hills, Minnesota) said the plan primarily achieves savings because of its size. The combined plan has about 44,000 farmers who will be eligible in Minnesota and Nebraska. The savings do not arise from skimping on coverage but rather the size and diversity of the participants. (This is where the ACA plans fall short-they encourage adverse selection arising from the cycle of higher premiums forcing health participants to drop out thereby increasing premiums and so goes the cycle). The plan started as a pilot in Minnesota. Land O���¢�¯�¿�½�¯�¿�½Lakes, several Nevada chambers of commerce, and the National Restaurant Association have formed association plans this year and each say they want to do what is best for small businesses and their workers by providing an option that may be a better fit for a family than what is available in the traditional individual and small-group markets.
 
Critics have done a very good job of messaging that association health plans are going to offer skimpy coverage, but the facts to date do not corroborate that claim. These are member-based organizations, and if they offer skimpy coverage, their members are going to leave and they are certainly not going to attract new members. It is common sense.
 
The Labor Department loosened restrictions on association health plans by allowing them to serve more employers and self-employed people in the same industry nationwide or in different professions within the same geographic region as a single large employer. Previously, association plans had a hard time meeting the requirement of ERISA���¢�¯�¿�½�¯�¿�½s large-employer insurance plans. The Labor Department estimated that 4 million people could be covered under association plans in the coming years.
 
Some healthcare advocates and ACA supporters railed against the rule, saying it would expand the availability of junk health plans and undermine the exchanges. Democratic attorney generals in 11 states and the District of Columbia sued in late July to block the rule, and that case is pending. Some state insurance regulators, such as those in Massachusetts and California, have issued emergency rules and guidance limiting what association plans can do within their borders, fearing that access to the plans could destabilize their markets and lead to fraud and insolvencies.
But in a state like Nebraska where choice on the ACA exchange is lacking and premiums have soared, regulators welcome the chance to bring in new competition. Medica is the only insurer offering coverage on the ACA exchange. The average monthly individual premium for the second-lowest cost silver plan is rising 9.1% to $686 before subsidies in 2019 compared with 2018, according HHS data.
 
Nebraska���¢�¯�¿�½�¯�¿�½s insurance director has stated that the Land O���¢�¯�¿�½�¯�¿�½Lakes association plan will offer another really good choice for individuals who either don���¢�¯�¿�½�¯�¿�½t receive a subsidy and cannot afford coverage on the exchange or for some reason prefer not to purchase that coverage. Recognizing that Land O���¢�¯�¿�½�¯�¿�½Lakes was one of the good players, the state bent over backwards to help get it out and approved for Land O���¢�¯�¿�½�¯�¿�½ Lakes as quickly as possible.
 
In addition to size, the Land O���¢�¯�¿�½�¯�¿�½Lakes self-insured status will also help fetch savings. Being self-insured means it will avoid certain state premium taxes, and it will not have to pay a ���¢�¯�¿�½�¯�¿�½risk load���¢�¯�¿�½�¯�¿�½ or profit margin to a health insurance carrier. The plan also will vary rates based on ZIP code and age, leading older members to pay as much as four times what younger members pay. ACA exchange plans are limited to charging older patients three times more. Independent insurance experts have opined that those explanations make sense. Association Health Plans can offer comprehensive coverage and still be cheaper than marketplace plans if they either serve a population that is less costly than the average of the marketplace and/or they somehow are able to pay less for services. (All of which is possible without government interference).
 
In summary (and there was more to cover), 2019 and 2020 will be a colorful period with respect to health care policy. Red state, blue state or purple state, the election took place on November 6 and the next presidential election started November 7. Pick your color and recognize it may change by November 3, 2020.

CASH AND WORKING CAPITAL MANAGEMENT (PART 2)
 
by David H. Fater
 
(This is the second part of a two-part feature on cash and working capital management. This first part examined the cash flow cycle. This segment will focus on the individual components of working capital management.)

In Part One we explored the cash flow cycle and the concept of cash management both as an expense reduction technique and a method of increasing a company���¢�¯�¿�½�¯�¿�½s liquidity. In Part Two, we will examine how the management of working capital will impact liquidity.

APPROACHES TO CONTROLLING WORKING CAPITAL

As we saw in Part One, the key to cash management is controlling the flow of cash through working-capital accounts, thereby reducing your investment in working capital. To effectively control working-capital accounts, the business manager must focus on the individual elements of working capital: inventory, accounts receivable, accounts payable, and cash position management, including, perhaps, bank cash management services.

Inventory

For adequate inventory control, consideration should be given to reducing the lead times required for materials and services. Without good production and purchasing planning, overly long lead times can be the result, thus causing significant overstocks of one or more products or raw materials or work-in-process. Planning is the real key to the control of raw material, work-in-process, and finished-goods inventory levels. Inventory can generally be defined as those costs incurred but not yet sold to customers. In service companies, this would include labor or materials expended but not billed. Sound "inventory" control in service businesses is critical to liquidity.
 
The greatest single requirement for planning inventory levels, and thus production and purchasing lead times, is reasonable sales forecasts. Sales forecasting requires adequate anticipation of customer requirements. If close working relationships exist between your marketing personnel and your customers, it may be feasible to request long-term forecasts on orders from major customers. The availability of this information from customers may save a great deal of additional interest and obsolescence costs. If this requirement is presented to customers in terms of better service and cost control, customers will frequently be willing to assist you in planning your production.

In planning lead times from your company's suppliers, the converse may be true. If you can supply vendors with an estimate of your anticipated purchases over an extended period of time, it may be easier for those suppliers to assure shorter lead times on orders from them. A continuing dialogue with suppliers can also be a significant source of information on future problems in your supply channel. Thus, changes in vendor lead times and the availability of their products can more frequently be included in your company's planning process.

Improved management information systems (MIS) in sales forecasting, production planning, and purchasing can often convert good sales forecast data into timely, meaningful information on departmental production loading, material requirements, and labor requirements. With good MIS, changes in any variable can quickly be reflected in inventory and production plans.

Business managers frequently analyze the number of inventory turns per year, or the average number of days of inventory. This information assists in controlling the overall level of inventory. However, additional improvement in inventory levels may be realized if individual products or raw materials are evaluated in relation to their usages or customer shipments. This can frequently assist you in identifying slow-moving or obsolete inventories, as well as other areas in which purchasing or production planning could be improved.

Accounts Receivable

The investment in accounts receivable and related risk of customer default is typically minimized by those companies that maintain close working relationships with their customers. Payment terms, credit limits, and collection programs are useful only if used to reinforce the basic agreements already negotiated. If your payment expectations are made clear to the customer during the initial sales process, at the same time pricing and service levels are considered, your organization will be better positioned to collect those balances. Candid discussions with customers regarding the mutually beneficial nature of the relationship can help assure that interest expenses can be minimized and potential liquidity problems avoided. By projecting an image of being firm about collections, most companies will be successful at controlling accounts receivable.

Payment terms can be used to make earlier customer payment beneficial to your customer. For example, offering customers a 1 percent discount for net payment in 10 days as opposed to 30 days is the equivalent of offering that customer 18 percent (365 divided by 20) on his or her money. This concept has been in use for many years and is still relevant today.

Frequently, companies that offer discounts are dissatisfied with the results because customers continue to pay late but also take the discount. This problem means the customer does not grasp the relationship. It must be understood, during the sales negotiation, that the company intends to enforce the ten-day maximum and that the payment must be in your office by the tenth day to be eligible for discount.
Collection programs must also be used to reinforce terms agreed to in the original negotiation. While some discount terms are dictated by industry practice, other discounts can be established on a case-by-case basis, often to mutual advantage. For example, a company borrowing at 12 percent would find it advantageous to offer terms of 1 percent 10/net 60 (effective annual rate of 7.3 percent = 1 percent x (365/[60-10]), while a customer investing at 6 percent would find it advantageous to take the discount.
Collection programs that represent "hounding" will typically have the effect of generating animosity and reducing the likelihood of early payment. If, however, the original negotiations explain your collection program and your expectations pertaining to credit, a collection call could simply reiterate the interrelationship between pricing, service, and payments. Frequently, a collection call serves not only to collect bills on time but also to build a better relationship.

Your collection procedures should be designed to alert customers to an escalating concern on your part. Three consecutive telephone calls from your collection manager to the customer's accounts-payable clerk will not be as productive as one call from your collection manager, a second call from your controller to the customer's controller, and finally a call from the president of your company to the president of the customer company. This approach can serve to emphasize that the relationship is becoming strained as invoice payments are delayed and that your entire organization is becoming increasingly concerned about the status of that customer's account.

Credit limits can also be used as a method of creating awareness of credit problems at successively higher management levels in your company at a relatively early point. If a customer purchases goods every 10 days and your payment terms are net 30 days, then credit limits that are equal to 45 days of sales will effectively limit shipments to the customer and help assure that no invoice becomes a collection problem in your company because accounts reached "critical" levels.

Another critical element in a sound accounts-receivable collection program is invoicing. If invoices are prepared in a timely manner and forwarded to the customer at the earliest possible date, then customer complaints that invoices were too late to take the discount or to process through its accounts-payable system can be minimized. In situations involving large volumes of invoices, improvements to the invoicing process may require automated systems to speed the processing. The invoicing process should be evaluated to ensure that invoices are properly prepared, with all terms and conditions, and that necessary documentation is forwarded with the invoice. In evaluating information required for invoice preparation, data requirements may include information typically associated with your accounts-payable system. For example, professional service companies that invoice based on time and expense may need accounts-payable detail to properly bill their expenses. Construction companies that bill on cost-plus basis also require a significant amount of accounts payable data on which to base the invoice. A complete range of financial and operational information required for invoice preparation should be considered in determining the enhancements to your company's information system that may be required for improved invoicing.
One final note on payment terms for those companies that work on large contracts or that have a few very major customers: negotiating specific terms and methods of payment can be critical. If large amounts are to be received from a limited number of customers, it may be advantageous to negotiate with those customers for wire transfer payments and possibly trade-offs in price to gain earlier availability of those funds. On the flip side, if your company is experiencing some short-term liquidity problems, it might be extremely beneficial to offer your customers a discount if they pay immediately which represents a discount they would otherwise not receive. It gives them an incentive to do so and your liquiidity crisis may be resolved. Again, a candid relationship with the customer regarding the full range of issues for a mutually beneficial relationship is critical to maintaining sound control of accounts receivable.

Accounts Payable

Since working liabilities are not always equal to working assets, accounts payable can be used to bring them more into balance. In a practical sense, you can take certain actions that have the effect of giving you non-interest-bearing loans from your suppliers.

When you negotiate the terms of your relationship, try to extend your payment period to the maximum. This is simply a matter of keeping your money as long as possible before paying it out. This will cut down on the amount you might have to borrow and pay interest on to keep faith with your suppliers. Negotiated payment terms with your vendors should include the exploration of benefits that can be accrued from cash discounts, convenient timing of payments to coincide with your cash-flow cycle, or even more specialized arrangements such as lines of credit, bartering, and equity investments. Any saving could be important in reaching your goals of profit and growth. Most suppliers and vendors would appreciate your spelling out these goals, knowing that they will benefit in the long run as you prosper and become a bigger customer. This is another example of how a close, candid relationship can benefit both customer and supplier.

Liquidity in a business is critical. Some of the factors affecting liquidity may be perceived as beyond the company���¢�¯�¿�½�¯�¿�½s control; However, the most important elements consisting of cash and working capital management are within the control of management.

BANK CASH MANAGEMENT SERVICES
What They Are and How to Use Them

While the greatest opportunities for effective cash management are internal to the company, banks offer a variety of services that can be used to further improve cash flow and asset utilization.

Once a customer has mailed a check to the company, there are several techniques that can be used to accelerate the conversion of the check into available funds. Perhaps the most commonly used technique is the lockbox, a service provided by most major banks. Under the lockbox system, the bank, operating under contract to the company, maintains a post office box to which the company's customers send their checks. The bank (1) collects the contents of the box several times daily and often on weekends and holidays; (2) processes the contents in accordance with the company's instructions; (3) credits the incoming checks to the company's account; and (4) forwards various information and documents (such as empty envelopes, check stubs, invoices, and photocopies of checks) to the company. The company can also establish lockboxes in cities other than the one in which the company's main office is located.
The lockbox system improves cash flow because (1) incoming mail time is reduced (the bank receives the mail at a central post office and picks it up more frequently than would the company); (2) the checks received are entered directly into the bank's check-processing system, (eliminating as much as one day of the processing lag that would occur if the company processed the incoming checks itself); and (3) the bank can clear the checks more rapidly because it receives them at a central location earlier in the day than would be the case if the checks were deposited in the afternoon. In addition to accelerating the incoming cash flow by as much as one or two days, a lockbox system transfers a certain work load from the company to the bank and provides improved controls as a result of the separation of the billing and receivables functions.

Two primary types of lockbox services are available from most larger banks: (1) the wholesale lockbox and (2) the retail lockbox. The wholesale lockbox is generally a customized service designed for companies dealing with business customers. Generally, transactions flowing through a wholesale lockbox are relatively few in number but large in dollar amount. "All in" charges for this service generally approximate $1 per transaction, with a minimum monthly charge often exceeding $100. Care must be taken to assure that a wholesale lockbox is cost-effective. For example, if a 90-cent transaction charge is assessed and one-day float reduction results from the lockbox, then, based on a 12 percent cost of funds, the break-even transaction size is approximately $1,350.

If smaller transactions are routed through the lockbox, the bank service charges will exceed the resulting benefits. (This might, how- ever, be offset by savings resulting from the transfer of the company's work load to the banks.) For this reason, wholesale lockboxes are often inappropriate for companies dealing primarily with consumers.

A retail lockbox is characterized by a high volume of relatively low dollar-amount transactions. Unlike their customized wholesale lockbox service, banks handle retail transactions on a "production-line" basis. If a company's transactions meet the bank's specifications for this automated processing, substantial cost savings can be achieved. The specifications might include a standard envelope size and a standardized payment coupon readable by the bank's automated machinery.

In addition to the cost savings, a retail lockbox service can provide the company with a daily magnetic tape (or similar medium) detailing each transaction processed, including account number and payment amount. The company can then use this tape to update its files. The charges for a retail lockbox are generally less than half those for the wholesale lockbox-perhaps 15 cents per transaction, but with a high monthly minimum. While a retail lockbox does result in some float reduction, this advantage is generally small compared with the advantage of transferring a substantial work load from the company to the bank. Often it is possible for a bank to process retail transactions more efficiently than the company can because the bank can invest in and support a sophisticated remittance-processing system.

Even if a company uses a lockbox system, some transactions will be sent directly to the company. In such cases, the company should establish procedures designed to ensure that such incoming funds are deposited at the bank on a timely basis. Unless the funds are of nominal amounts, they should not be mailed to the bank since this impairs cash flow. Rather, they should be hand-delivered daily in time to receive same-day credit from the bank.

Electronic Data Interchange

Electronic data interchange (EDI) is the exchange of information between a company and its trading partners either directly or through third-party value-added networks (VAN). Electronic data interchange has evolved over the last few years from a few exchanges addressing the needs of specific industries to a wide array of transactions crossing industry boundaries. The perceived benefits of EDI are increased timeliness of information exchange between trading partners; decreased manual processing, paper, and mailing costs; and, perhaps most importantly, reduced data-entry errors by clerical staff.

The natural evolution of EDI is to financial EDI. Financial EDI involves the transmission not only of remittance data but also of electronic payment instructions. Thus, financial EDI requires the banking system to participate in the exchange of electronic information, and indeed many banks actively promote financial EDI. Financial EDI is used for the transmission of a variety of data, including lockbox information reports, daily bank-balance and transaction reports, and monthly account-analysis reports.

Although financial EDI has these uses and benefits, many perceive electronic invoicing and payment as providing the most benefit to financial EDI users. Electronic invoicing enhances the accounts-payable process of electronically matching the invoice with the purchase order and receiving documents, reducing the clerical staff required to manually perform this matching process. In addition, receiving electronic payments enhances the automated cash-application process. Companies need not wait for checks to clear. Finally, receiving remittance information in electronic form virtually eliminates the need for manual data entry of customer identification and invoice payment information.

Before implementing EDI, a company should develop a strategy to help determine the company's overall goals and capabilities. Implementing financial EDI requires each company to compare the benefits of financial EDI to the barriers associated with incorporating EDI capability into the company's data processing and accounting systems, including obtaining and implementing EDI software and hardware. Companies need to identify what EDI software and hardware should be used for the EDI transactions, and determine whether existing systems can be modified or enhanced to accommodate the requirements of financial EDI.
 
Check Clearing

While certain checks, particularly those deposited through a lockbox, may clear on a same-day basis, other checks, particularly those drawn on Federal Reserve "country" points, may take up to two days to clear. Thus, while the date that a bank gives the company credit for a deposit is important, the date on which the funds become available is even more important.

Funds availability is governed by the bank's own check-clearing system and is generally spelled out in the "funds-availability" schedule published by most banks. This schedule specifies the clearing time (in business days) and deposit deadline for checks drawn on various locations. The funds-availability schedule should be an important consideration in selecting a bank.

Utilizing the Funds

The two basic ways of obtaining full utilization of funds are (1) concentrating the funds and (2) managing the bank balances.

Funds Concentration
A major cash management function for a company with multiple bank accounts is to concentrate its funds. For example, in the case of a retail chain, each store in a branch-banking state would make a daily deposit at a local branch of a bank with which the chain had established a "concentration account." These funds would automatically be concentrated into a single account and, if necessary, transferred to the company's main bank in another state. The use of a concentration account usually results in lower bank service charges because the bank maintains only one account rather than numerous accounts.

Outgoing Funds

As previously discussed, a variety of factors should be considered in determining when to mail checks to vendors. On the one hand, borrowing expense can be minimized by delaying the mailing of the check. On the other hand, it is important to maintain good vendor relationships and discounts can be worthwhile in many cases. Considering mail, processing, and check-clearing times, a week or more will often elapse from the date a check is mailed to the date it clears. An effective cash-management system will utilize funds during this period, perhaps by using an interest-bearing account, estimating check clearings, or using a controlled-disbursement account, which slightly extends clearing time and provides daily reports of checks clearing.

Other Bank Services

A variety of other bank services can be used by various companies to improve cash flow, concentrate funds, and manage bank balances.Not all services are appropriate for all companies, and the cost of some can exceed their value to a smaller company. Nevertheless, it is important for the cash manager of a company to understand available services such as the following so that appropriate and cost-effective services can be used.

Account Analysis. Compares the value of balances with the bank's charges for services provided. If balances for a given month are inadequate to support services provided, a service charge may be assessed.

Deposit-Reporting Systems. Daily reports of account balances and activity in the account.
 
Wire Transfers. Instantaneous transfer of funds, often used for intracompany and investments transactions. Occasionally used for larger customer and vendor transactions, often as a special sales term.

Zero-Balance Accounts. A "master" account serves as a depository account, and "subsidiary" accounts serve as disbursement accounts. As checks clear against the subsidiary accounts, the bank automatically transfers funds from the master account to cover the checks.

CASH POSITION MANAGEMENT

The best possible system of accounts receivable and payable will achieve only a portion of its potential value if not used in conjunction with an effective system of managing cash on hand. Specific activities include cash forecasting; management of bank balances, and investments or borrowings.

Cash Forecasting and Daily Cash Positioning

1.            For Planning. The management of cash or near-cash balances for most early-stage, high-growth companies can be signifi������­cantly enhanced by simply forecasting receivable collections in relation to accounts payable and payroll disbursements. Au������­tomated accounts payable and receivable systems can provide very timely information for use in generating at least weekly projections of required cash outlays in relation to anticipated cash collections. This information, considered with scheduled cash transactions such as debt-service payments and short-term investment maturities, can alert management to critical cash balance shortages or cash balance excesses. Early knowledge of these circumstances will provide greater flexibility in plan������­ning alternate courses of action.

2.            For Investment or Payment o f Borrowings. In addition to fore������­casting cash for planning purposes, business managers often utilize information from banks in conjunction with internal systems and procedures daily to convert cash in the bank into an earning asset. These information systems and procedures are collectively referred to as daily cash positioning or daily cash worksheet preparation. Cash-positioning procedures are performed daily because the actual cash balance in the bank will vary considerably from day to day, even though cash trans������­actions on the company books may occur at less frequent in������­tervals. The timing of these procedures is usually in the morn������­ing so that investment decisions can be made prior to daily financial institution transaction deadlines.

The key to successful management of bank balances is timely and accurate information. This begins with the opening bank balance according to the bank's books. This information must be obtained from the bank, perhaps via a phone call, or through the use of a balance reporting system. There is often a wide discrepancy between the bank balance and the balance on the company's books. This is due primarily to checks that have been issued but not yet cleared. The estimated amount of checks clearing that day should then be subtracted. (If controlled disbursement is used, the bank will be able to provide an exact amount of that day's clearings.) Then, any transactions (such as wire, investments, or borrowings) that result in same-day settlement should be added or subtracted. Deposits being made that day generally should not be considered, because they will not result in available funds that day. Finally, a target balance, or "cushion," should be subtracted. Note, however, that it is often preferable to compensate a bank with direct fees rather than balances because the effective earnings credit on the balances is generally less than investment or borrowing rates. This cushion is to allow for unexpected transactions or variances in estimates and to leave a balance that helps compensate the bank for services provided, as shown in the account analysis. The net result of all of these computations is the projected ending net balance. If negative, additional funds will need to be deposited, perhaps by borrowing. If positive, funds can be withdrawn and invested, or used to pay down borrowings.

Electronic Funds Transfers
Over the past few years many companies have started utilizing electronic funds transfers (EFTs), rather than checks, for disbursements. This increase in the use of EFT transactions caused the addition of Article 4A (Funds Transfers) to the Uniform Commercial Code (UCC). Essentially, UCC 4A establishes the liability for fraudulent wholesale wire transfer and nonconsumer automated clearinghouse (ACH) transactions to the originating corporation or bank based on the application of "commercially reasonable security procedures." While ACH transactions are usually completed on a next-day basis, the typical wholesale wire transfer involves a larger amount of money and most are completed on a same-day basis. Thus, companies may be able to minimize their liability for a fraudulent EFT transaction by placing greater emphasis on EFT procedures and controls. In particular, corporations that fail to utilize wire-transfer control procedures offered by banks may have a high level of exposure.

These controls can be as simple as restricting access to the hardware and software used for EFT transactions. For example, many EFT transactions are now processed through personal computers (PCs) rather than mainframe computers. While mainframe computers are usually located in secured areas, PCs are often located on desks or in other open areas accessible to unauthorized personnel. To help prevent the possibility of a fraudulent EFT transaction, the hardware and software for processing EFT transactions should be located in an area that has restricted access. In addition, no one authorized person should have control of the entire EFT system. For example, one employee should input wire-transfer information into an automated bank wire system and a separate employee should release the transmission.

Another control might be the establishment of a security administrator to be responsible for changes in existing user identification, receiving of test-key material, assigning new users and functions, and assigning transaction limits on accounts. However, the security administrator should have no transaction authority on any EFT system.

Other controls are often internal to the EFT software and hardware, and typically involve the use of passwords to control access to the EFT system and encryption or authentication to protect the EFT transmission. A password, by definition, is a secret word that enables a particular user to be admitted to the system. However, passwords are good only if they are kept confidential. Having passwords on display on computer monitors, cubicle walls, or desks for all to observe defeats the purpose of the password. Furthermore, passwords should be a minimum of six characters and changed every 30 days. Likewise, persons attempting to gain access to the system by password should not be permitted more than three tries to find the right password before they are logged off the system. Additionally, EFT systems should be designed to minimize or eliminate the possibility of unauthorized access via telephone.

In encryption, the EFT transmission is scrambled with the use of an algorithm and secret key. Authentication is similar to encryption in that it also uses an algorithm and secret key, but rather than scrambling the data, a code' is generated that is specific to the combination of EFT data, secret key, and algorithm. For both encryption and authentication, only the intended receiver of the EFT transmission has the secret key and algorithm to decipher the data.

Companies should also include EFT procedures and controls in any disaster contingency plan. Disasters include storms that cause telephone or power outages, bank failures, fires, or other problems that lead to a failure of financial systems at the company or the banks used for EFT transmissions. Disasters increase the potential for a fraudulent disbursement by the loss of controls provided by the financial systems. For example, a systems failure could result in the loss of separation of controls provided by automated bank wire systems related to the entry and release of EFT information.

Short-Term Investments

Beyond the controls discussed in the previous section, short-term investments raise an additional set of issues:

Only certain types of investments with low-risk, high-liquidity characteristics should be authorized. These types of investments should be identified in official company documents filed with the bank. Usually, these investments include U.S. Treasury securities,major bank certificates of deposit, high-grade commercial paper, major bank acceptances, and securities of government agencies. ���¢�¯�¿�½���¢ Each investment should be entered in the company records, and the internal documents supporting the transactions should be matched to investment purchase confirmations-received from the financial institution-on a timely basis.
Note that a viable alternative to procedures of estimating a net cash position, and then adjusting investments and borrowings, is to have the bank do most of the work. Many banks offer a "sweep" arrangement, where excess funds can be automatically invested in repurchase agreements or similar instruments, and any deficit positions can be automatically funded by accessing a pre-approved line of credit. While banks may assess fees for this service, and while interest rates may not be as good as if the company managed its own, such bank services can be invaluable if they enable the entrepreneur to focus on more important areas.

PHASES OF CASH MANAGEMENT DEVELOPMENT

Sales versus Availability and Cost of Capital
Typically, a growth company's financial strength will improve dramatically over time. The availability of alternative sources of financing increases because banks and other financial institutions will more readily advance cash based on strong financial positions and performance. (Actually, a highly successful growth company will frequently find that working capital can be financed from internal sources after some period of time.) In addition, the cost of capital will decline dramatically with increased financial strength
Because financial institutions will finance working capital for the successful growth company, raising capital through costly venture placements will be avoided and bank credit lines at prime or slightly higher interest rates will be available.

Timing Cash Management Improvements
 
The typical growth company will move through three distinct phases of cash management development as cash flows grow from zero to approximately $40 to $50 million per year. The transition from one phase to the next will vary by industry and company, but the transition points will occur based on the cost/availability of working capital and on the total-dollar cash flow through the company.

Phase 1 can be characterized by a company with sales between $1 million and $10 million per year. This company is experiencing high growth, high costs of capital, and frequently unavailable sources of working capital. During this phase, management should focus heavily on short-term cash planning procedures/systems, vendor and customer relations and policies, and improved planning and control of purchases and inventory. The desired effect is to minimize the net working-capital requirements of the business and thereby reduce both the cost of working capital and the pressures for additional external financing.

As the company's sales grow to around $10 million per year, profitability and financial strength typically will improve to the point that working capital is more available and the cost of capital is dramatically reduced. These are characteristics of a company entering Phase 2 of cash management development. Phase 2 will often continue until the company's sales reach approximately $30 million per year. In this $10 million to $30 million range of sales, cash flows will run from $40,000 to $120,000 per business day. In addition to enhancing management information systems to control and plan receivables, payables, and inventory (to minimize net working capital), the company should begin to focus on the management of banking relations and cash-investment balances. Bank relations should be redefined to include more favorable terms on credit and the expansion of bank services to assist in managing cash at these greater levels. Bank services that may be of assistance include balance reporting of "current day" collected and uncollected balances, and controlled disbursing to enhance management's ability to plan daily cash and investment (or loan reduction) activities.

As the company's sales reach approximately $30 million per year, important working-capital financing alternatives are usually available and the cost of such financing declines. These are characteristics of the company entering Phase 3 of cash management development. Above this level of sales, due to the magnitude of cash that flows through the company on a daily basis, even small improvements in the number of days required in working capital (the flow of cash) can have a dramatic effect on the benefits derived.

You may find that cash management "studies" will prove beneficial in identifying bottlenecks in the cash-flow cycle that result from interdepartmental differences in priorities, policies, or procedures. These interdepartmental conflicts frequently can be resolved when the differing priorities are compared with the priority for sound working-capital management. At this level of development you may also find that evaluations of alternative short-term investments may be useful in improving your investment yield. Often, significant enhancements to management information systems, or increased sophistication of banking and cash-processing relations, will result from evaluations of the company's total working capital, planning, and control systems.
 

To explore ways in which we can provide assistance in analyzing your working capital issues and strategies to improve your liquidity, please contact David H. Fater at dfater@alda-associates.com or Richard M. Cohen at rcohen@alda-associates.com

Representative Engagements

• Initiated and developed a de novo Accountable Care Organization to participate in the Medicare Shared Savings Program which grew to over 250 physicians over three years which successfully generated savings.
• Financial advisor to large physician practice in connection with a potential acquisition transaction where engagement includes determination of strategic and fair value and assisting in negotiations for closing the acquisition and in post acquisition integration.
• Review and in-depth analysis of new Medicare Reimbursement rules for subsidiary of Fortune 50 insurance company and assistance in developing a business model enabling the capture of a new revenue stream for both physician practices and affiliated providers.
• Acquisition due diligence and integration assistance for a public healthcare staffing company involved in numerous acquisitions. Retained by parent company to manage acquired company for 22 weeks through ALDA developed integration plan.
• Turnaround assistance for a near bankrupt client company, including tax and financial restructuring, and ultimate sale at a significant cash price.
• Leadership of development of client company's strategic plan for the next decade and assistance in repositioning the company.
• Determination of strategic value of a client company, packaging for sale and assisting in negotiations.
• Providing the entire management team for several life science and healthcare companies from early stage through obtaining additional patent protection, guiding clinical development plans, navigating the pathway through the FDA, establishing the manufacturing processes, initiating commercial sales and eventually transforming the Company into a publicly traded Company.
• Determination of strategic implications of a line of business with weak performance; development of strategies to maximize profitability contribution.
• Turnaround assistance for a troubled venture-backed company, including raising additional debt and equity capital.
• Acquisition and financing assistance for a public, international railroad in connection with a $300 million cross-border acquisition and refinancing.

Our experienced professionals are dedicated to helping clients unlock inherent value and create new value.

The ALDA Team includes, among others:

David H. Fater - Chief Executive Officer

Strategy, capital markets, restructuring, and mergers and acquisitions experience with public healthcare companies focused on physician management, rural healthcare, nursing homes, HMO's, diagnostic imaging and medical devices. Deeply involved in the implementation of the Affordable Care Act with Accountable Care Organizations, Independent Practice Associations and Management Services Organizations. 

Richard M. Cohen - Senior Operations and Business Development Executive

Healthcare operations and worldwide sourcing experience. Skilled in healthcare (physician management, clinical trials, medical and patient process flow, diagnostic imaging and life science) operations as well as in issues dealing with importing, exporting and manufacturing operations in South America, Far East and Europe. 

Thomas J. Bohannon - Senior Financial Executive

Accomplished, creative CPA, outstanding analytical and technical abilities. Has experience for over 40 years in public accounting and private industry including nursing homes, medical device companies,  hospitals, not-for-profits, retail, manufacturing, import/export and natural resources.

A. Ronald Turner - Senior Healthcare Executive

Senior healthcare industry executive with strong entrepreneurial focus including CEO and COO positions with start-up hospital companies and a publicly-traded hospital company. Extensive and successful operations experience for more than 50 hospitals and 9 nursing homes, and senior reimbursement experience for a major publicly-traded hospital company and a national accounting firm. Experienced in mergers and acquisitions, led operational turnarounds and debt restructurings that created significant value.

Mark W. Caton ���¢�¯�¿�½�¯�¿�½ Senior Healthcare Executive

Senior hospital executive with over 30 years experience in operating not-for-profit and investor-owned rural/community hospitals as CEO or COO, and Regional COO with several national hospital companies.  Skilled in strategic planning and business development, operations management, revenue cycle management, medical staff development, and quality/resource management.

Daniel N. Weiss, M.D., F.A.C.C. - Chief Medical Officer

Medical devices and healthcare practice experience, engaged in a private medical electrophysiology practice where he performs numerous invasive cardiac procedures and has served as a consultant for several Fortune 500 Medical Device Companies including Philips, Boston Scientific/Guidant, St. Jude and Medtronic, as well as for several medical device and drug start-up companies. 

David Bott - Senior Information Technology Executive

Systems and network support solutions experience, proviedes analyis of strategic business needs and assessment of business models and their integration with technology.  

Santiago Guzman - International Executive

Experienced in new project development for companies in a variety of industries from start-up to Fortune 500. Client relations management, fluent in English and Spanish. Skilled facilitator for introductions with influential leaders in South America including those in the health care industry. 

With offices in:

• Delray Beach/Boca Raton, FL
• Atlanta
• New York
• Quito, Ecuador

For additional information, please contact:
David H. Fater, Chief Executive Officer
ALDA & Associates International, Inc.
751 Park of Commerce Drive; Suite 128
Boca Raton, FL 33487
(877) 845-4657
dfater@alda-associates.com