Healthcare Management
Helpm31990
14713_PPTx_CH15.pptxChapter 15: Managing Finance and Budgets
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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
Executive summary
Market analysis
Description of the organization
Ownership and management
Marketing and sales strategy
Description of product, program, or service
Funding needed
Prospective financial data
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
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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
Remove period in bullet two
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
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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
Monitoring the Budget
Setting Performance Standards
Using Industry Standards
Comparing Organizational Performance with Industry Standards
Evaluating and Correcting Organizational Processes
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
