To calculate the annual savings from a lockbox arrangement, we need to determine the amount of funds that would be released by reducing the payment processing time from 6 days to 1 day, and then calculate the investment earnings on those funds.
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Calculate Daily Revenue:
- Annual net patient revenue = $150 million
- Daily revenue = Annual revenue / 365 days \[ \text{Daily revenue} = \frac{150,000,000}{365} \approx 410,958.90 \]
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Calculate the Cash Flow Released:
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Currently, payments are received on average in 6 days, which means the hospital has 6 days of revenue tied up.
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Revenue tied up = Daily revenue × Number of days \[ \text{Revenue tied up} = 410,958.90 \times 6 \approx 2,465,753.40 \]
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With the lockbox arrangement, this revenue will now be available after only 1 day. \[ \text{Revenue released} = 410,958.90 \times 1 \approx 410,958.90 \]
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Therefore, the reduction in cash flow that can be invested is: \[ \text{Reduction in tied up revenue} = \text{Revenue tied up} - \text{Revenue released} = 2,465,753.40 - 410,958.90 \approx 2,054,794.50 \]
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Calculate Annual Investment Earnings:
- The funds released can be invested at an interest rate of 8%.
- Annual earnings from the investment can be calculated using the formula: \[ \text{Annual earnings} = \text{Reduction in tied up revenue} \times \text{Interest rate} \] \[ \text{Annual earnings} = 2,054,794.50 \times 0.08 = 164,383.56 \]
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Subtract Bank Fees:
- The bank fees for the lockbox arrangement are $2,000 per month: \[ \text{Annual bank fees} = 2,000 \times 12 = 24,000 \]
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Calculate Net Annual Savings: \[ \text{Net annual savings} = \text{Annual earnings} - \text{Annual bank fees} \] \[ \text{Net annual savings} = 164,383.56 - 24,000 = 140,383.56 \]
Conclusion: The annual savings from implementing the lockbox arrangement, after accounting for bank fees, would be approximately $140,383.56.
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