In November 2005, Ms. Carolyn Ringer, Treasurer of Menotomy Home Health Services (MHHS), was preparing a loan request to go to the Norten Municipal Bank. Less than eight months earlier, MHHS had expanded their staff by 30 percent. At that time, the home health service had been in a secure financial position and Ms. Ringer, anticipating no financial problems, had spoken to the agency's board of directors in favor of the increase in services. However, in July, Ms. Ringer realized that although MHHS had begun training and paying their new staff in June, the agency would not receive the additional revenue generated by the new staff until later in the year. With the staff totaling about 30 employees (full and part-time), Ms. Ringer realized that MHHS could not always have on hand the cash it would require.
Faced with these unexpected expenses, Ms. Ringer had gone to the Norten Municipal Bank to apply for a short-term line of credit to cover the additional costs. Mr. Jansen, the bank officer, had granted MHHS a line of credit, which had reached almost $66,000 by September 2005. Although he had allowed the agency to continue using its line of credit into its next fiscal year 1, he had raised some important considerations.
He explained that the bank was willing to continue a line of credit for the agency but he was concerned that Ms. Ringer had not adequately anticipated the agency's cash needs. He asked Ms. Ringer to present the bank at the outset with a detailed monthly statement of MHHS's projected cash needs for fiscal year 2006. Consequently, Ms. Ringer began to review the agency's financial statements (contained in Exhibits 1 and 2) and collect data that would help her plan for MHHS's future cash requirements.
Menotomy Home Health Services was a private, nonprofit home health agency founded in 1982 by four retired nurses. Each founder had between 10 and 35 years of experience working with elderly and disabled patients in Norten's hospitals. Realizing that a majority of their patients would not have needed hospitalization if Norten or the near vicinity had had a home health service, the nurses started their own agency. At first, MHHS was small and operated out of one person's home. The agency then employed the four founders, a part-time social worker, and six home health aides, three of whom were volunteers.
By 1991, the organization had outgrown its “office space” as well as its organizational structure and objectives. Although two visiting nurse associations had sprung up in Norten in the early 1990s, there was still greater demand for MHHS services than the agency could provide. Demand had risen at an average rate of 10 percent per year, and forecasts at that time indicated a steady increase at the 10 percent level. . . .
- Prepare the cash flow worksheet contained in Exhibit 4. What does this tell you about the operations of MHHS?
- Prepare pro forma financial statements for FY2006. What do these tell you about the operations of MHHS? How can you reconcile the information in the cash flow worksheet with that in the financial statements?
- What is the cause of MHHS’s cash flow problems? What solutions are available to Ms. Ringer?
- What recommendations would you make to Ms. Ringer?
1 MHHS had an October 1- September 30 fiscal year. For example, fiscal year 2006 began on October 1, 2005.