An evaluation of the working capital management practices in Kenyan National Referral Hospitals

Abstract

The purpose of this study is to evaluate the policies in the two national referral hospitals in Kenya in view of the normal day to day practices carried out in the management of working capital. These hospitals are Kenyatta National Hospital and Moi Teaching and Referral Hospital. Numerous studies have been conducted in the field of working capital management in both for-profit and not-for-profit organizations. A review of this literature is presented in this study with the aim of highlighting areas that require further research. All these studies illustrate the importance of efficiently managing working capital and more so in the public health sector domains where public hospitals are facing progressively less funding from the treasury as well as other donors. It emerges that many public hospitals globally are facing liquidity problems and hence, these problems are not peculiar to anyone state or continent. In studying the working capital management practices at KNH and MTRH, personal interviews targeting key finance staff were carried out. The results of this exercise were then analyzed using statistical and spreadsheet software. The findings show that government and hospital policies often impact negatively on the hospitals' revenue bases particularly considering the extent of poverty levels amongst communities served by these institutions. Whereas treasury regulations require that any surplus funds of these institutions be invested in treasury bills and bonds (Treasury Circular No. 10 of 1992), any year end surpluses must be remitted back to the government, meaning that the institutions may not be able to plough back the surpluses generated to fund their operations. It is also evident that although the two institutions have financial regulation policies to guide financial management practices, these policies are often too general and superficial. In other words, they do not set comprehensive benchmarks or minimum requirements that cover all possible areas of working capital management. This has made the implementation of these policies to be ad hoc and uncoordinated. Numerous other challenges facing the management of working capital have been identified in the two institutions. These challenges have adversely affected operational efficiency and thereby created liquidity problems. Addressing these challenges can improve the efficiency of working capital management and in consequence, improve the operating cash flows of these institutions.