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Capital Efficiency Concepts: How to Evaluate Capital Purchases

Rising interest rates and historic inflation are impacting hospital purchasing decisions. Using capital efficiency concepts in making hospital purchasing plans is as important as ever.

What is Capital Efficiency?

Capital efficiency refers to how effectively a hospital deploys its resources to generate returns. In the context of fixed assets and software purchases, capital efficiency involves making strategic decisions about how to invest in plant, equipment, software, and other purchases to deliver quality care while also optimizing financial performance.

Optimize Financial Performance using Capital Efficiency Concepts

Effective management of capital expenditures includes measuring the cost and ongoing maintenance of a purchase relative to the discounted cash flows expected to be generated by that purchase. Hospitals can better achieve their financial goals through careful planning and rigorous analysis of their capital needs, total capital costs, and potential returns on each purchase.

Financial metrics that are useful include the asset turnover ratio, which is calculated by dividing revenue by the cost of the assets used to generate that revenue. A higher value indicates a hospital is using its assets more efficiently, while a lower ratio means there is an opportunity to re-evaluate asset allocation decisions.

Contact Us

Blue & Co. has helped many of our client analyze their capital budgets and spending plans for strategic and financial returns. To learn more about how we can help your hospital, please reach out to your local Blue & Co. Advisor or the contact below.

Larry King, CPA, FHFMA, Director-in-Charge

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