DB #5: Role, Impact, and Value of Budgeting
Budget is one of the most important documents of a healthcare organization and is the central document of the planning/control cycle. It identifies the revenues and resources that will be needed for the organization to achieve its goals and objectives and allows the organization to monitor the actual revenues generated and its use of resources against that which was planned.
To prepare for this Discussion:
Identify one example of an event that has changed the operations of your organization or an organization with which you are familiar with. If you are not currently working in a healthcare organization (HCO), you may choose a case study from a reliable source from which to work.
Review this week’s Reading and Learning Resources.
Post a cohesive response to the following:
Why are planning and budgeting functions are important to an organization’s strategic, financial, and operational success?
Chapter
Budgets
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8
Objectives
• Upon completion of this chapter, you will
be able to:
– Explain the following budget types:
• Annual, authorized personnel, capital, statistical,
revenue, and cash
– Compare top-down and bottom-up budgeting
– Contrast incremental and zero-based
budgeting
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Objectives (cont’d.)
– Discuss how to amend budgets using budget
controls and amendments
– Explain budget development for smaller
medical facilities
– Perform breakeven analyses
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Introduction
• A budget is a plan, expressed in dollars,
for a future period
– Predicts future demands for services
– Projects available financial resources
– Requires updates as conditions change
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The Operating Budget
• Combines annual revenue budget and
annual expenditure budget
– Expenditure budget comprised of:
• Approved operating budgets for all departments
• Approved capital replacements and improvements
• Annual depreciation and amortization
– Revenue budget comprised of:
• Projected revenues from medical services
• Projected non-patient revenues
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The Operating Budget (cont’d.)
• Major cost headings for department
budgets:
– Salaries and benefits
– Operating expenses
• Equipment rentals, continuing education costs,
repairs, miscellaneous costs
– Allocated costs
• Maintenance, utilities, insurance, etc.
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The Operating Budget (cont’d.)
• Developing the operating budget
– Department managers project salaries and
benefits based on current expenses and
projected changes
– Department managers project expenses
based on recent experience, known increases
in prices, and estimates of future costs
– Department budgets combined to create the
operating budget
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The Authorized Personnel Budget
• The full-time equivalent (FTE) position:
– Standard is one employee working 8 hours
per day, 5 days per week, 52 weeks per year
(2080 hours per year)
– Vacation time and sick days are not counted
– Personnel requirements for departments are
stated as number of FTEs even if many
positions are part-time
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Capital Budget
• Schedules purchase of assets with long
useful lives
– Business defines the types of purchases that
are considered capital
• Typical definition: cost > $2500 and life > one year
– Business determines years of capital budget
• Typical spans: 5 to 10 years
– Review existing capital assets and their
expected obsolescence dates
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Capital Budget (cont’d.)
– Estimate costs of capital assets than will need
to be replaced
– Calculate total costs of capital asset
replacements for each year of budget
– Determine how to pay for capital expenditures
• Internally generated funds
• Borrowing
• Capital budget updated annually
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Statistical and Revenue Budgets
• Statistical budget projects revenues from
services to patients
– All services listed
– Volumes (encounters) of services estimated
– Weight (multiple of a base charge) assigned
to each service
• Revenue budget
– Uses statistical budget data times projected
revenue per base charge
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The Cash Budget
• Addresses fluctuations of encounters and
reimbursements
– Annual budget divided into monthly columns
– Monthly portions allocated based on past
experience and known changes
– Some months may have negative cash flows
– Planning will allow facility to cover those
months without borrowing
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Putting It All Together
• Statistical budget is first with its projected
demand for services
• Expense budget prepared based on
personnel and operating costs needed to
meet the demand
• Capital budget prepared and first year of
that budget included in annual budget
• Cash budget prepared
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Budget Philosophies
• Top-down (authoritarian) budgeting
– Top management controls budget with
minimal input from unit managers
• Bottom-up (participatory) budgeting
– Unit managers have direct input
• They learn about organizations goals and financial
limitations
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Budget Philosophies (cont’d.)
• Incremental budgeting
– Adds funds for inflation and projects demands
for services
• Zero-base budgeting (ZBB)
– Units must justify every aspect of their
budgets from base of zero
– Time-consuming process that requires great
effort from all managers
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The Final Step: Balancing the
Budget
• Operating revenues should cover
operating expenditures plus debt service
payments and capital investments
• Prudent approach: start with realistic
revenue budget and make cuts to
expenditure budget to achieve balance
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Mid-Course Corrections
• Variance analysis: comparison of budged
versus actual revenues and expenditures
• Budget control: level of flexibility
provided to unit managers in using
budgeted funds
– Line item control: most stringent
– Department budget control: most flexible
• Budget amendment: approval to move
funds from one budget item to another
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Budgeting for Smaller Medical
Facilities
• Budgeting provides early warning of
financial problems
• Budgeting system can detect employee
embezzlement
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Five Steps to Developing an
Effective Budget
1. Prepare a chart of accounts
2. Track historical revenues and costs
3. Benchmark costs
4. Build the annual budget
5. Perform monthly budget reviews
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Breakeven Analysis
• Answers question: How many patients do
we need to see to cover costs?
• Method
– Calculate fixed costs
– Calculate variable costs for each service
Price ´ Volume = Fixed Costs + ( Variable Cost per Unit ´ Volume)
– Solve for Volume
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Summary
• Budget is future plans expressed in dollars
• Budgets for each work unit combined into
master operating budget
• Businesses use different budgeting styles
• Final budgeting process step is assuring
that revenues and prudent borrowing will
cover all expenditures
• Budget controls used to identify variances
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Summary (cont’d.)
• All healthcare facilities of all sizes benefit
from continually comparing budgeted and
actual expenditures and revenues
• Breakeven analysis calculates number of
units of service needed to cover costs
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Chapter
Cash Management
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Objectives
• Upon completion of this chapter, you will
be able to:
– Identify cash management tools
– Prepare a bank account reconciliation
– Describe development and use of a cash
flows statement
– Explain the importance of cash management
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Introduction
• Cash management is a process involving:
– Accurate cash handling
– Daily bank deposits
– Accurate and timely billing
– Investment of cash
– Bank account reconciliations
– Monitoring cash flow
– Monitoring financial controls
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Cash Management Tools
• Petty cash fund used to account for small
cash expenditures
– Amount based on short-term cash needs
– Cash often kept in a locked cash box
– Withdrawals recorded by petty cash custodian
who also collects receipts
– Additions made as needed
– Replenished to original value at end of the
fiscal year
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Cash Management Tools (cont’d.)
• Cash drawer and cash receipts process
– Used to account for payments received from
customers and to make change
– Cash includes checks from customers
(handed-over or mailed-in)
– Each cash drawer should be under the
responsibility of one employee who:
• Accepts cash payments, provides payment
receipts, prepares bank deposit, and balances the
cash drawer each day
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Cash Management Tools (cont’d.)
• Payments received by mail
– Designated employee stamps back of checks
with secured endorsement
– Second employee records payments to
patient accounts
– Third employee makes bank deposit and
reconciles it to the daily cash receipts journal
– Very small practices may use only one or two
employees but need a good oversight plan
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Cash Management Tools (cont’d.)
• Cash disbursements
– Employee makes payments to vendors
– Authorized person verifies the payments and
signs the checks
• Verification based on invoice, purchase orders,
and delivery tickets (or packing lists)
• Check log is prepared to assure no unexplained
breaks in check number sequence
• Blank checks kept in secure place
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Cash Management Tools (cont’d.)
• Payroll
– Often outsourced due to complexity
– Payroll checking account kept at zero balance
• Amount of each payroll transferred from operating
checking account as needed
– Some businesses require employees to have
a bank or credit union account for direct
deposit of pay
• Avoids costs, hassles, and risks of printed checks
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Bank Reconciliation
• Monthly statements for each bank account
– Balance on bank statement at monthly cutoff
date will not equal accounting ledger balance
• Posting of deposits and checks often occurs at
least one day later
• Bank may pay interest or charge fees that have not
yet been entered into accounting ledger
– Reconciliation balances bank statement to
ledger balance for the account
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Bank Reconciliation (cont’d.)
• Reconciliation three-step process:
– Mark deposits in accounting record that match
deposits on bank statement, then mark as
cleared all issued checks listed as paid on
bank statement
– Adjust bank statement for items that did not
clear as of statement date; list and total the
issued checks that did not clear
• Stale-dated checks are voided and reissued (with
stop payment orders on original checks)
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Bank Reconciliation (cont’d.)
– Identify items on bank statement that need
journal entries such as interest paid, bank
charges, fees for credit card payments, and
checks that didn’t clear due to non-sufficient
funds (NSF) in the check-writer’s account
• Patient accounts related to NSF checks need to be
adjusted to remove the payments and to add fees
for NSF (bounced) checks
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Statement of Cash Flows
• Recent addition to generally accepted
accounting principles
– Required statement supplementing the
balance sheet and the income statement
– Statement of cash flows reports on where the
business acquires cash and how cash is used
• Includes net cash from three sources:
– Operations, capital and related financing, and
investments
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Statement of Cash Flows (cont’d.)
• Concept of accrual accounting
– Revenues and cash availability do not occur
at the same time except when a patient pays
cash at the time of service
– Credit card payments take a few days before
funds transferred
– Third party payers or patients who were billed
may take weeks to send funds
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Statement of Cash Flows (cont’d.)
• Components of statement of cash flows
– Net cash flow from operations is:
• Operating net income plus depreciation and
amortization totals plus the increases or decreases
in prepaid expenses, inventory, accounts
receivable and payable
– Net cash from capital & related financing
– Net cash from investments is:
• Investment income plus purchase or sale of
investments
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The Statement of Cash Flows
(cont’d.)
• Net cash flow from operations is:
– Operating net income
– Depreciation and amortization totals
– Increases or decreases in prepaid expenses,
inventory, accounts receivable and payable
• Net cash from capital & related financing
– Investment income
– Purchase or sale of investments
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Summary
• Basic cash management tools are:
– Petty cash fund, cash drawer, and the
operating checking account
• Bank reconciliation assures agreement
between account records and bank
statements
• Statement of cash flows shows where
cash is generated and what it is used for
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