Management of Health Care Organizations: Assignment Week 6

Chapter 15: Managing Finance and Budgets

Objectives

• Know the elements of a business plan

• Be able to interpret a set of organizational financial documents

• Understand budgets and explain the uses of budgets

• Be able to construct incremental and zero- based budgets

Outline

• Business Plans • Financial Statements • Budgets and Budgeting • Operating Budget • Capital Budget • Cash Budget • Zero-based Budget • Implementing and Using Budgets • Using Budgets to Evaluate Organizational

Performance

Business Plans • Outline used to launch, maintain, or expand the activities

of an organization • 9 components

1) Executive summary 2) Market analysis 3) Description of the organization 4) Ownership and management 5) Marketing and sales strategy 6) Description of product, program, or service 7) Funding needed 8) Prospective financial data 9) Appendix

Financial Statements

• Convey the financial position of an organization

• 4 parts:

– Income Statement

– Balance Sheet

– Statement of Cash Flows

– Statement of Retained Earnings

Income Statement

• Also known as the profit and loss statement

• Details the sales, expenses, and net income generated by an organization

Balance Sheet

• Also known as the statement of financial position

• 3 sections

– Assets

– Liabilities

– Equity

• Assets = Liabilities + Equity

Cash Flows

• Reconciles changes in cash balances of a business

• 3 sections

– Operating activities

– Investing activities

– Financing activities

• See Figure in text for an example

Retained Earnings

• Reconciles the equity section of the balance sheet

• 4 parts

– Beginning equity balance

– Net income

– Dividends paid

– Final equity balance

Budgets

• Budget is defined as a comprehensive, detailed plan for achieving an organization’s goals and objectives expressed in monetary terms

• Budgets include data which are:

– Objective

– Measurable

– Obtainable

Preparing a Budget

• Budget preparation will likely include many revisions.

• Approaches to budgeting:

– Incremental: based on previous budget

– Zero-based: starts with blank slate

• Completing a budget should involve input from various levels of personnel (executives to front-line staff)

Types of Budgets

• Operating – detailed plans for revenues and expenses

• Capital – plan for spending on improvements and additions to property, buildings, or equipment

• Cash –detailed estimates of anticipated cash receipts and disbursements

Operating Budget

• Contains detailed plans concerning the anticipated revenues and expenses for every product, program, or service delivered

• Created at the department or unit level but rolled up into a consolidated operating budget

• Operating budgets contain four parts: statistics, revenues, expenses, and pro forma

Operating Budget: Statistics

• Contains information related to the expected extent and scope of activities.

• 3 steps/decisions

1) Output expectations – estimates of the activities of a given department

2) Methodology – the approach used to calculate output expectations

3) Responsibility – accountability for meeting expectations placed with appropriately knowledgeable personnel

Operating Budget: Expenses

• Converts expected work activities into predicted expenditures

• 2 main components:

1) statistical information – generally a unit of volume to measure service output

2) cost data – all costs can be defined as either variable or fixed

• The time length of an expense budget can be fixed or rolling

• Allocating indirect costs can be contentious

Operating Budget: Revenues

• Estimates the payments or other monetary collections used to offset expenses

• Revenue budgets are driven by the statistics and expense budgets

• Rates are designed so that the anticipated expenses break even at minimum

Pro forma Budget

• Designed to project revenue and expenses for a possible scenario

• Contains information developed in the statistics, expense, and revenue budgets

• Used as a final test to check the validity of the other budgets and the accuracy of their assumptions

Capital Budget

• A plan for spending on improvements and additions to property, plant, or equipment (generally fixed assets)

• Capital budgets are long-term in nature (greater than 1 year) and require an analysis of the time value of money.

– The time value of money is an analysis that determines the current value of future money

Analyzing a Capital Request

Non-financial Criteria:

• Safety and Regulatory

• Quality and Customer Service

• Mandatory Replacement

• Discretionary Replacement

• Expansion

Cash Budget

• Used to evaluate an organization’s solvency in the immediate future

• Uses information from the operating and capital budgets

• Typically compiled for one or more defined periods within a budget cycle

Zero-based Budget • Arranges an expense budget using the

assumption that no existing program is entitled to renewal

• Cost data is obtained and listed as in incremental budget

• Importance of each budget item is prioritized and ranked

• Rankings are split into two categories, those required by law and those not required by law

Incremental Budget

• A budget developed by modifying an existing budget, usually the current or previous

• Modifications are based on changes in assumptions

• Changes tend to be small and applied uniformly to all categories

Implementing and Using Budgets

• Creating an appropriate budget requires informed decision making and this can be accomplished by:

– Budget reviewing and analysis

– Enabling employee participation

– Anticipation of funding needs over time

– Context of quality and customer service

Budget Options

• Type of Budget – incremental or zero- based

• Level of Detail – determine how thorough data collection activities should be

• Sources of Information – deciding who should participate in budget creation and what sources of data should be used

Budget Options (continued)

• Approach to Information Gathering

– Bottom-up budgeting – budget process starts with information provided by front-line workers

– Top-down budgeting – budget process starts with senior managers influencing and controlling budget inputs

• Expense Budgets – Fixed budget vs. flexible expenses

• Bottom-Up vs. Top-Down Budgeting

Using Budgets to Evaluate Organizational Performance

1) Monitoring the Budget

– Setting Performance Standards

– Using Industry Standards

– Comparing Organizational Performance with Industry Standards

– Evaluating and Correcting Organizational Processes

2) Variance Analysis

Variance Analysis

• Using monthly variance analysis is an effective way to compare planned budgets and actual expenditures

• 4 steps:

1) focus on significant variances

2) identify the cause for each variance

3) concentrate on controllable variances

4) take action to correct variance