Treasury and Cash Management

Treasury Functions for Strategic Value

June 20, 2017 2:03 pm

Disruptive forces are shifting the appropriate focus of the corridor of control from financial health to the balancing of risk against the resources available to offset or carry risk.

Every healthcare organization has a portfolio of financial risks and resources, which leaders deploy to balance the pursuit of growth with guardrails to ensure financial health. Sustainable growth requires the prudent allocation of key financial resources, such as cash, credit, leverage, and invested assets. This process of treasury work is the cornerstone of an organization’s ability to assume appropriate risk in the pursuit of growth. Managed well, treasury can provide significant value to the overall organization.

Treasury Functions in Health Care

Healthcare organizations approach treasury functions in different ways. Many health systems use a dedicated treasury model and have a treasurer, who manages liquidity, as well as nonoperating assets and liabilities. Other organizations distribute core treasury functions across multiple executives. Decisions on treasury structure typically focus on cost and complexity.

Leadership teams define the right approach for the four core treasury areas: capital management, operations, external financing, and invested assets.

Function One: Capital Management

Capital management focuses on identifying, managing, and allocating capital and credit resources to stay within the “financial health corridor of control,” which balances strategic investment and financial capability, as shown in the exhibit below. If an organization falls above the corridor of control in the area labeled “over-investment,” its financial need or strategic capital appetite exceeds its financial capability.

Financial Health Corridor of Control: Balancing Strategy and Financial Capability

Within the capital management function, credit positioning and monitoring ensure that the health system achieves and maintains a credit rating that can support access to the required amounts of affordable external capital. Rating and creditor coordination ensure timely and detailed communication of both negative and positive deviations from budgets and near-term forecasts.

The definition of capital capacity (both debt capacity and excess cash) determines the amount of capital—obtained through internal operations and external sources—that the organization can reasonably be sure to generate to support its development over a defined period of time.

All of this is defined by a set of financial targets and ratios that represent how the organization specifically defines its financial health corridor of control.

Function Two: Treasury Operations

Treasury operations focus on managing organizational liquidity and on building the infrastructure to support the seamless flow of credit or capital across the organization.

The core of this function is cash management and the maintenance of commercial banking accounts and products that facilitate receipt and payment of cash. Best practices include conducting periodic reviews of banking relationships to ensure that the organization uses the most innovative product offerings and, to the extent possible, aligns ancillary services across credit and noncredit banks. Specific areas that can provide value to the organization are streamlining the payment posting process in the revenue cycle and maximizing terms, discounts, and rebates through accounts payable and the supply chain.

The operating treasury function also facilitates the free flow of credit and capital to wherever it is needed to defend operations or support growth initiatives. The facilitating aspect of treasury operations might include a foundational master trust indenture, and it should incorporate the centralized control over all treasury activities across the organization, including with merging entities.

Function Three: External Financing

Activities related to external financing focus on building and maintaining an appropriate portfolio of comprehensive debt instruments. This function controls access to outside funding, including markets, products, and relationships. Decision-support techniques and tools should focus on optimizing portfolio composition against risk objectives. An organizational point of view is established across funding channels (debt and leasing), funding partners, and financing products, including swaps and floating-rate instruments.

The financing portfolio is managed continuously across core—i.e., debt and swap—and comprehensive funding activities, including leasing and pension.

Function Four: Invested Assets

Activities in the invested asset area focus on building and managing an invested asset chassis that drives return while remaining within appropriate risk parameters codified under the organization’s investment policy statement. Articulating a clear role for cash investment and its responsibilities to the operation is paramount for establishing appropriate expectations and guardrails.

Many organizations establish relationships with investment advisers, and some are beginning to transition fiduciary responsibilities to external parties through an outsourced chief investment officer model.

A Changing Environment

In many organizations, treasury activities—and balance sheet resources—are built and managed with only an indirect relationship to operations and strategy. Of course, capital capacity and external capital access are integrated into the planning process, but debt and investment portfolios often are built in relative isolation. In times of business model stability, this fragmented management of the treasury functions can be tolerated, with less pressure on how each component works—or doesn’t work—relative to the others.

Unfortunately, health care has entered a sustained period of financial volatility. Volatility within the investment and debt markets may create equal challenges related to the construction and management of portfolios of financial assets and liabilities.

Disruptive forces are shifting the appropriate focus of the corridor of control from financial health (as illustrated in the exhibit above) to the balancing of risk against the resources available to offset or carry risk (as illustrated in the exhibit below).

Enterprise Risk Corridor of Control

A New-Era Risk and Resource Allocation Framework

Healthcare organizations need a framework that much more tightly integrates treasury, operations, and strategy. If the prior imperative was integrated strategic and financial planning, the new imperative is integrated strategic, financial, and treasury planning. Treasury’s inclusion ensures that the management of operations, capital, liabilities, and invested assets is captured under a single decision-support and resource-allocation framework. When treasury sits at the center it brings together the credit and financial resources of the organization with a new focus on staying within the enterprise risk corridor of control.

Where to Go From Here

Healthcare leaders can examine the treasury functions that are in play in their organizations and shore up the weak points. But an integrated treasury framework allows hospitals and health systems to prioritize a number of competing factors. For example, if a health system is carrying excessive risk on the operational side due to heavy investments in population health or other initiatives, it may be prudent to minimize the risks embedded in its debt or investment portfolios.

Healthcare leadership teams can use the treasury framework to drive decision making about how to best prioritize and deploy resources. This enhanced resource deployment defends the health system from outsized claims on liquidity while better supporting its pursuit of risk-adjusted returns.

Eric A. Jordahl is a managing director, Kaufman, Hall & Associates, LLC, and a member of HFMA’s First Illinois Chapter.

David Ratliff is a senior vice president, Kaufman, Hall & Associates, LLC.


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