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Home My WebLink About670212.tiffMEMBERS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS HERBERT R. DUNHAM & ASSOCIATES CERTIFIED PUBLIC ACCOUNTANTS SUITE 830, 1200 LINCOLN STREET DENVER, COLORADO 80203 823-4357 September 18. 1967 Mr. George N. Stout, Administrator Weld County General Hospital Sixteenth Street at Seventeenth Avenue Greeley, Colorado 80631 Dear George: HERBERT R. DUNHAM CHARLES C. LEHMAN, JR. JERRY R. TOFT WELD CO, COMMISSIONERS GREEc RECEIVED SEP 2 3 1967 A.M. �1�1819110II1I12I1I2I8I4I5I� . Your questions with regard to the provision for working capital increases in the budget document can pretty well be answered by answering the series of questions you proposed. It is an "adjustment between the accrual basis and the cash basis of accounting" and it does consist of changes in receiv- ables and inventories, as well as prepaid insurance and accounts payable during the course of the budget year. As to whether the term working capital is a misnomer, I would say that with the exception of cash balances there are no elements of working capital which are not included in the figure. Hence, the term "Working Capital Required - Other Than Cash" might be more accurate. The use of this factor in the preparation of the budget document is essential because there must be enough cash to make it possible to pay the bills and operate the hospital. When the budget document is prepared on figures which are derived from the accrual basis of accounting, any changes in the accrual factors during the year must be considered and reflected either (1) as a revenue derived from the decline in working capital required (other than cash) or (2) as a cash outlay in the form of increases in working capital (other than cash). You may recall that this factor was introduced into the budget document at the time the new wing was about to be placed into operation. We knew that the revenue derived from the new wing would not all be realized in cash in the subsequent year; we expected a sharp rise in the balances of accounts receivable. For that matter, there was also expected to be a rise in inven- tory and other assets of a working capital nature. If we had paid all the expenditures as budgeted, our cash balances would have dropped sharply and there would have been insufficient asooa7 67oa2 Mr. George N. Stout, Administrator September 18, 1967 •Weld County General Hospital cash to cover the cash needs because the revenue as projected would not have been realized in cash. For this reason, we placed an item in the budget and asked the taxpayers to provide the cash needed to carry the increased working capital require- ments (other than cash) for the new operation. We think all of the local governments in the State of Colorado, when converting their accounting bases from cash to accrual, in the course of the next few years will find it neces- sary to consider what amount of adjustment to the accrual operating statements will be necessary to provide adequate cash reserves to carry on their operations. When the budget documents are prepared on a pure cash basis of accounting, which is to say that all anticipated receipts are collected in cash and all anticipated disbursements are paid in cash, then no such adjust- ment is needed. But when an operation starts recording accounts receivable and inventories, as well as its obligations on an accrual basis, it must provide cash to carry those working capital requirements and the adjustment becomes essential. I intend to discuss this matter with Bob Anderson in the hope that he too can help explain this factor to your Board and to those that inquire about it. If I can be of any further help, please feel free to call me. Yours very truly, HERBERT R. DUNHAM & ASSOCIATES V"-CUICAYIC .-C Herbert R. Dunham Certified Public Accountant HRD:plc Hello