Archive November 2018 XIX, No. 11

Business Advisor: Will That Equipment Pay for Itself?

The key question to answer before you buy your next big-ticket item.

Rena Courtay

Rena Courtay, RN, BSN, MBA, CASC

BIO

POSITIVE CASH FLOW
POSITIVE CASH FLOW Sharpen those pencils and calculate how many cases, procedures or tests are required to break even on a capital equipment purchase.

Before you buy that new and indispensable technology your surgeons just gotta have, be sure you first answer this question: “Will this new piece of equipment prove its worth?”

The same goes when you’re replacing older equipment that’s become obsolete and unable to be serviced. The replacement equipment almost always costs more than the existing equipment and your operating margins are likely not increasing at the rate of these price increases, if at all. You’re walking the balancing act of increasing quality of care while decreasing costs in the value-based payment world.

Measuring return on investment (ROI) is an elementary practice of healthcare finance. The ROI calculation is typically done on a spreadsheet, but for smaller purchases you can do it in your head. The big decision centers around your facility’s ability to earn its money back after purchasing the equipment and then to go on to reap a profit. The timeframe for the profitability is also a factor. The finance term for this is internal rate of return (IRR). The calculation is straightforward and will serve as the guide in your decision making. The greater the IRR, the better your expected financial outcome is predicted to be. Let’s walk through the process.

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