Chapter 15 Notes
- Understand the difference between operating budgets and capital expenditure budgets
- Understand what budget expenses will most likely be identifiable versus allocated expenses
- Understand how to build an operating budget
- Understand the difference between static and flexible budgets
A budget is an organization-wide instrument. It takes into account projected revenue flow and spending outflows. This is in conjunction with the organizations objectives. The budget is the instrument through which activities are quantified in financial terms.
Objectives for the Budgeting Process
The four objectives of budgeting as outlined by the American Hospital Association are:
- To provide a written expression, in quantitative terms, of a health care organizations policies and plans.
- To provide a basis for the evaluation of financial performance in accordance with a healthcare organizations policies and plans.
- To provide a useful tool for the control of costs.
- To create cost awareness throughout the organization.
Operating Budget vs Capital Budget
Operating budgets deal with the short term, usually 12 months, of an organizations revenue and expenses necessary to operate the facility. It deals with day to day operations and is a projection of what the financial picture will look like.
Capital expenditure budgets may cover the next year but may also project a futuristic view going out as far as 10 years.
In a responsibility center, the managers are responsible for a particular set of activities. In a budgeting sense, there are two common responsibility centers, cost centers and profit centers. In cost centers, the manager is responsible for controlling costs. In a profit center, the manager is responsible for both costs and revenue.
Transactions outside the Operating Budget
Certain transactions are outside of the budget process. These costs will be related to restricted programs such as grants received for special programs not directly related to the daily operation. The funds received through grants are restricted to specific needs of the organization. These monies cannot be commingled with operating funds.
Foundation transactions are also outside the operating budgeting. Foundations are legally separate organizations that require separate accounting and reporting of their funds. Therefore, their costs are not included with the operating budget.
Budget Basics – A Review
Identifiable vs Allocated Costs
Within a departmental budget, certain costs will be specifically identifiable while others will be allocated.
- Direct patient care and supporting patient care should be mostly identifiable.
- General Administrative expense and patient related expense will probably be mostly allocated costs.
- Financial related expense, such as interest expense, may not be included at all in the manager’s budget. See Figure 15 -3 on Page 167.
Fixed vs Variable Costs
As previously discussed, fixed costs do not change in total, even though volume rises or falls. Variable costs rise and fall in proportion to a change in volume. This can mean a change in number of procedures, change in census or perhaps prescriptions filled. See Figure 15 – 1 on Page 166.
Building an Operating Budget: Preparation
Appropriate preparation is an important stage in building an operating budget. Even though a manager is responsible for direct department duties, the budget process is integral in an organizations success.
Construction stages include:
- Gather information
- Prepare input
- Construct and submit draft version
- Make required revisions to draft
- Present preliminary budget
- Make required revisions to preliminary budget
- Submit final budget
Input includes both assumptions and calculations; required revisions to the draft version would occur after upper-level management has reviewed the draft. Additional revisions will be typically required after the preliminary budget has been presented.
The budget is a useful tool to efficiently run your department. As part of the budget process, the following should be determined:
- Format to be used – will templates be used?
- Budget scope – will your budget be a segment of a larger budget?
- Available resources – can include certain reports or staff allocated to assist
- Levels of review – who is ultimately reviewing and making final decisions?
- Time frame – when is each level due
Building an Operating Budget: Construction
Budget Information Sources – See Figure 15 – 5 on Page 170.
Three primary sources of operating budget information include:
- Operating Revenue Forecast
- Staffing Plan or Forecast
- Other Operating Expense Forecast
Budget Assumptions and Computations
Building a budget means making a series of assumptions. The first step is to review strategy and objectives. Hours report needs more detail to include hours by job title. Another critical assumption in building a budget is whether or not special projects are going to use resources during the new budget period.
Computations should be supported by their assumptions and should be replicable. Any other person should be able to reach the same conclusions by looking at your assumptions.
Previously, preparation of staffing forecasts was discussed when we calculated FTE’s and annual paid days off. Now costs must be attached to the staffing forecasts for budget purposes. When projecting staffing costs, gross salaries and benefit costs should be calculated the same in each department in order to have comparable figures.
Finalize and Implement the Budget
The final budget is approved after multiple reviews and adjustments of previous drafts. Now the budget must be implemented. The contents of the budget must be explained to all involved personnel.
Working with Static Budgets and Flexible Budgets
Is essentially based on a single level of operation. That single level of operation which is the volume, is never adjusted. Budgets are measured by how they differ from actual results. Thus, a variance is the difference between an actual result and a budgeted amount when the budgeted amount is a financial variable reported by the accounting system. The computation of a static budget variance is:
Actual Results minus Static Budget Amount = Static Budget Variance
Static budgeted expense amounts never change, even if volume changes. If volume changes, the original projected revenues and expenses remain the same.
These original volume projections were a goal. See Table 15 – 2 on Page 172.
A flexible budget is created using budgeted revenue and budgeted costs. A flexible budget is adjusted to the actual level of output achieved during the budget period. A flexible budget looks towards a range of activities or volume versus only one level of activity.
The concept of flexible budget addresses workloads, control and planning. In completing a flexible budget, you must:
- Look at the outer limits of fluctuations by defining the relevant range
- Analyze the patterns of the costs expected to occur during the budget period.
- Separate the costs by behavior (fixed or variable)
See Table 15 – 3 on Page 173.
See Table 15 – 4 on Page 174 and 15 – 5 on Page 175.
Review Exhibits 15 -2 and 15 – 3 on Pages 175 and 176 respectively.