Hospital Liquidity and Cash Conversion Cycle: A Study of Washington Hospitals

Abstract

Liquidity in hospitals is typically measured by the static values of the current ratio, the quick ratio and days-cash-on-hand. There is a growing interest, largely outside of healthcare to use a dynamic measure like the cash conversion cycle. Using data from the State of Washington, we compare these measures. For hospitals in our sample, the average current ratio is 2.06, the average quick ratio is 2.07 and the average days-cash-on-hand is 19 days. The average cash conversion cycle is 64 days, comprised of payments received after 57 days, debts paid after 64 days and inventory used in 91 days. Fixed effects regressions of CCC revealed a positive relationship with the current ratio, no significant relationship with the quick ratio and a negative relationship with days-cash-on-hand. To obtain a comprehensive assessment of the liquidity of a hospital, analysts should consider using both the traditional liquidity ratios as well as the CCC. The traditional liquidity ratios measure the effects of past actions while the CCC, as well as it would appear days-cash-on-hand, reflect the process by which liquidity is changing.