The budgeting process is an attempt to establish a set of realistic standards for operating a health care organization. The budget is a set of specific objectives for the year ahead. The finance system provides the cost and revenue data and sometimes assists with other measures.
Formulating a budget is the beginning of the process. Every budgeting system must contain provisions for preparing the budget and implementing a system. This system must include coordination, control, follow-up, and maintenance. An effective budget must be tailored to the organization’s specific needs. The budget must be comprehensible and attainable. There should be innovation and flexibility to meet unexpected occurrences.
A health care organization’s budget provides a fully detailed description of expected financial transactions, by accounting period, for at least an entire year. The review of future expectations is useful in making smooth progress toward financial goals.
The major parts of an annual budget address operational and financial planning needs. The operating budgets are made up of the following:
- Expenditure or cost budgets anticipated by reporting period and responsibility center: Costs are often identified as fixed, semi-variable, or variable. Anticipated volumes of demand or output are incorporated into cost budgets.
- Revenue budgets reflect the receipt of income from services rendered. Standard gross revenue accounting reports a profit increase to the responsibility center, creating an incentive for productive activity.
- Income and expense budgets consist of expected net income and expenses incurred by the organization.
- Financial budgets embrace the effects of the organization’s financial decisions. These plans include a budgeted balance sheet that shows the effects of planned operations and capital investments on assets, liabilities, and equities. The plans also include a cash budget that forecasts the flow of cash and other funds in the business.
- Cash budget is for cash planning and control, presenting expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in a reasonable relationship to needs. You must know how much cash will flow in and out of the organization. You must also have an idea when these will take place. The cash budget is primarily used to spotlight periods of too little or too much cash rather than for continual control.
- Capital budgets are lists of proposed capital expenditures and new or significantly revised programs, with the implications for the operating and cash budgets by period and responsibility center. The capital budgets include all anticipated expenditures for facilities and equipment and for sources of funds.
Cost accounting is the process of determining the full and incremental costs of providing services and goods to patients and customers. To determine the full cost of providing a service, you must ensure that all costs are included. For instance, a number of departments that do not provide direct patient or customer services are essential to the institution’s operation. The burden of these departments must be allocated to the using departments. In reality, to make sound management decisions, costs must be known at the procedure, patient, and department levels.
Costs may be determined based on historical methods of charging for services, such as patient days and procedures. Finally, determine full and incremental costs within the organization’s structure. You must know the cost of each procedure and major product line, as it is essential to financial stability. Without accurate cost information, health care organizations are at financial risk when making decisions concerning current operations and long-term plans. The cost of providing services is one of many considerations. Accurate costing, however, has been a major missing component of the decision-making process.
In identifying direct and indirect costs, rely initially on the hospital’s traditional distinction between revenue-producing and nonrevenue-producing departments. Costs directly assigned to revenue-producing departments are direct costs, and hospital expenses recorded in nonrevenue-producing departments are indirect costs.
Budgeting deals with expectation setting and achievement, the basic engine for continuous improvement and competitive operation, and rests on effective managerial accounting and financial planning. After this week, you will identify various types of budgets used in health care organizations. You will have a better understanding of the budgeting process, from creation to implementation. In addition, you will be able to identify direct and indirect costs and their importance in health care organizations.
*****Must CITE/ REFERENCE EACH QUESTION******
*****Word count must be 180 to 200 words********
*****Relate the material to health financial******
*****Textbook: Baker, J.J., & Baker, R.W. (2014). Health Care Finance: Basic Tools for nonfinancial managers (4th ed.). Sudbury, MA: Jones & Bartlett.*******
Why is effective management of cost in a health care organization important? What may you do as a health care financial manager to evaluate and monitor cost?
Chap 8- Do you or your supervisor have to deal with depreciation expense? If so, please describe the circumstances. Have you ever had to compute depreciation expense? If so please describe the circumstances.
What would you consider when reviewing a budget? Under what conditions is a flexible budget more effective than a forecast budget?
The concept of forecast and flexible budgets can be difficult to grasp initially. In my experience, when constructing a corporate budget, whether you choose a forecast methodology or a flexible methodology, you start with the same assumptions about revenue, expenses, the future business environment, etc. Initially, the two methodologies would develop the exact same budget. The difference between them starts to appear as the budget period goes on. A forecast budget will remain static throughout the period, i.e. no changes will be made (Baker & Baker, 2014). However, a flexible budget may change based on the results of previous months (Baker & Baker, 2014). For example, if your facility saw increased patients over the first quarter of a year a flexible budget may have its expenses and revenue adjusted for the remaining three quarters of the year. A key principle to keep in mind is that a flexible budget can only be updated after changes have occurred, e.g. you cannot “flex” current funds to cover deficits in other departments. With this as your foundation, in what circumstances might a flexible budget be more effective?
Baker, J.J., & Baker, R.W. (2014). Health Care Finance: Basic Tools for nonfinancial managers (4th ed.). Sudbury, MA: Jones & Bartlett.
Experience has taught me that forecast budgets are often more effective in a broader set of circumstances than flexible budgets. This is because a flexible budget is not exactly what its name indicates. A flexible budget is a budget that can be changed as the business environment changes and is only effective in unpredictable environments (Baker & Baker, 2014). This is because a flexible budget can only be updated after changes in revenue and expense have occurred and only for the future period, i.e. if you expenses increased last quarter you can change the budget for the remaining quarters. A flexible budget cannot be “flexed” to cover current or past changes.
Additionally, the work necessary to maintain a flexible budget is significant – not only within the finance department. I was once involved in a situation where a department head, based on their current budget, was understaffed and finishing the interview process – making offers to three good candidates. Following an update to the flexible budget, the department head was now overstaffed by four FTEs. This meant that the three offers had to be withdrawn and that the department head had to layoff four additional staff members. This sort of management workload is common in flexible budget environments. With this scenario in mind, do you think that a forecast budget is more effective than a flexible budget? Why or why not?
Baker, J.J., & Baker, R.W. (2014). Health Care Finance: Basic Tools for nonfinancial managers (4th ed.). Sudbury, MA: Jones & Bartlett
Chap 15- Do you believe your organization uses a flexible or a static budget? Why do you think so? If you reviewed a budget at your workplace, do you think the major increases and decreases could be explained?
If you were assigned to prepare a capital expenditure budget request, what two
people would you most want to have on your team? Why? How would you expect to
The local school system asks you to submit a proposal to do pre-employment physicals for 60 bus drivers. What financial or accounting information do you need to submit the proposal? What will you charge the school system?