The Cash Conversion Cycle And Profitability: A Study of Hospitals in the State of Washington

Abstract

The cash conversion cycle (CCC) is the difference in time between the expenditures for purchases of medical inventory and services provided to patients, and the collection of revenues from those services. Data from hospitals for the State of Washington from 2002-2011 were used to study the relationship between the CCC and hospital profitability. A fixed effects analysis revealed that a 10 day lower than average CCC was associated with an operating margin 0.13 points higher than average. The overall CCC relationship to operating margin is largely attributable to management of inventory. The associations between days accounts receivable and days accounts payable and operating margins were insignificantly different from zero. Days accounts payable was positively related to total profit margin. Managers may increase hospital profitability by decreasing the length of cash conversion.