health care finance week 5

Part VI: Construct and Evaluate Budgets

CHAPTER 15: OPERATING BUDGETS

Health Care Finance by Judith J. Baker and R.W. Baker.

Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types

• An organization’s objectives define

– specific activities,

– how they are assembled,

– levels of operation,

• While an organization’s performance standards set out performance levels.

• A budget quantifies these activities into financial terms.

• Objectives should provide:

• Written expression, quantified, of policies and plans

• Basis to evaluate financial performance according to policies and plans

• Useful tool for cost control

• Creation of cost awareness throughout the organization

Budget Process Objectives

Budget Types

• There are basic differences between two budget types:

• Operating budgets

• Capital expenditure budgets

Operating Budgets

• Deal with actual short-term operating revenues and operating expenses

• Generally cover the next year (a 12-month period)

Capital Expenditure Budgets

• Deal with capital expenditures for the organization (not operating revenues or expenses)

• May also cover the next year, but with a futuristic view; may cover a five or even ten year period

Responsibility Centers

• Cost Centers (manager responsible for controlling costs)

or

• Profit Centers (manager responsible for both costs and revenue)

Budget Viewpoints

• Transactions outside the operating budget may include:

– Grants received by the organization

– Foundation transactions

• So if transactions are “outside”, they would not be part of the operating budget.

Budget Viewpoints

• Grants received by the organization may have restricted funds that require separate accounting

• If so, the separate accounting requirement generally means their transactions will be outside the operating budget

Budget Viewpoints

• Foundation transactions should require separate accounting because the foundation will be a legally separate organization

• And the separate accounting requirement should mean their transactions will be outside the operating budget

Identifiable Versus Allocated Budget Costs

• Within a departmental budget certain costs will be specifically identifiable while others will be allocated instead.

Budget Basics Review

• Regarding Identifiable versus Allocated Budget Costs:

• Mostly identifiable = Direct patient care and supporting patient care

• Usually allocated = general and administrative expense and patient related expense

• Maybe not included at all in a manager’s budget = financial related expense

Fixed Versus Variable Costs

• Variable cost rises or falls in proportion to a rise or fall in volume (Examples of volume: number of procedures or number of patient days.)

• Fixed cost does not change even though volume rises or falls within a wide range

Exhibit 15–1 Fixed and Variable Cost Examples

• Plan

• Gather information

• Prepare input

• Construct/submit draft version of budget

• Make required revisions to draft

• Present preliminary budget

• Make required revisions to preliminary

• Submit final budget

Building an Operating Budget: Construction Phases

• Format to be used

• Budget scope

• Available resources

• Levels of review

• Time frame

Building an Operating Budget: Construction Elements

Building an Operating Budget: Information Sources

• For the Operating Expenditures Plan:

– Operating Revenue Forecast

– Staffing Plan or Forecast

– Other Operating Expenses

• For the Preliminary Operating Budget:

– Capacity Level Checkpoints

• See Figure 15-5

Building an Operating Budget: Assumptions

• A series of assumptions are made during construction; many key assumptions are within forecasts used for the budget construction process

• Sufficient information at the proper level of detail is essential

Building an Operating Budget: Assumptions: Questions to Ask

• Are special projects going to use resources during the new budget period?

• Are operations going to be placed under unusual or inconvenient circumstances during the new budget period? (Renovation is an example.)

Building an Operating Budget: Computations

• Supported by their assumptions

• Capable of being replicated or reproduced by another qualified individual

• Comparable (as discussed in the text)

• Budget assumptions and computations are intertwined in the construction process.

Static Budgets

• Are essentially based on a single level of operations. That level of operations — or volume — is never adjusted during the budget period.

• See example in Table 15-4

• It doesn’t move - therefore it is “static”.

Flexible Budgets

• Are based on a level of operation that will change. In other words, the level of operations — or volume — is adjusted to show change during the budget period.

• See example in Table 15-5

• It is adjusted, or flexed - therefore it is “flexible”.

Budget Review

• To review a budget, the manager needs to know

• How the budget report format is constructed

• How to annualize partial year expenses

• More details are in the chapter.

• The budget process should begin with a review of the strategy and objectives.

• Remember, building a budget means making a series of assumptions.

Building Budgets

Building Budgets

• To build a budget, a manager must consider

• The workload forecast (it must tie into the forecasted volume)

• Whether budget projects will use resources during the budget period.

• Whether budget operations will be placed under unusual or inconvenient circumstances during the budget period (remodeling, for example).

Budget: Example 15-A

$21,600,000

22,000,000

$ (400,000)

Revenue

Expenses

Excess of Expenses over Revenue

Step 1. Actual

Step 2. Budgeted

$24,000,000

22,400,000

$ 1,600,000

Revenue

Expenses

Excess of Revenue over Expenses

$(2,400,000)

(400,000)

$(2,000,000)

$24,000,000

22,400,000

$ 1,600,000

$21,600,000

22,000,000

$ (400,000)

Revenue

Expenses

Excess of Expenses over Revenue

Step 3. Actual Budgeted Static Budget

Variance

Budget Practice Exercise 15-I

$17,550,000

4,400,000

$21,950,000

$16,100,000

4,000,000

$20,000,000

$ 1,850,000

Revenue – Inpatient

Revenue – Outpatient

Subtotal

Expenses – Inpatient

Expenses – Outpatient

Subtotal

Excess of Expenses over Revenue

ActualStep 1.

$19,500,000

4,000,000

$23,500,000

$18,000,000

3,800,000

$21,800,000

$ 1,700,000

Revenue – Inpatient

Revenue – Outpatient

Subtotal

Expenses – Inpatient

Expenses – Outpatient

Subtotal

Excess of Expenses over Revenue

BudgetedStep 2.

$(1,950,000)

400,000

$(1,550,000)

$(1,900,000)

200,000

$(1,700,000)

$ 150,000

$19,500,000

4,000,000

$23,500,000

$18,000,000

3,800,000

$21,800,000

$ 1,700,000

$17,550,000

4,400,000

$21,950,000

$16,100,000

4,000,000

$20,000,000

$ 1,850,000

Revenue – Inpatient

Revenue – Outpatient

Subtotal

Expenses – Inpatient

Expenses – Outpatient

Subtotal

Excess of Expenses over Revenue

Static Budget

Variance BudgetedActualStep 3.