Nursing Management Ch 12 Budgeting

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A budget is a quantitative statement, usually in monetary terms, of the plans and expectations of a defined area over a specified period of time.

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Budget

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Budgeting provides a foundationfor managing and evaluating financial performance.

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Budget

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The budget's purpose is to allow management to project action plans and their economic impact on the future so that objectives of the organization are coordinated and met. It also helps ensure that resources necessary to achieve these objectives are available at the appropriate time and that operations are carried out within the resources available. It increases the awareness of costs and also helps employees understand the relationship among goals, expenses, and revenues. As a result, employees are committed to the goals and objectives of the organization, and various departments are able to coordinate activities and collaborate to achieve the organization's objectives.

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Budget Purpose

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Budgeting is the process of planning and controlling future operations by comparing actual results with planned expectations. Planning first involves reviewing established goals and abjectives of both nursing and the organization. Goals and objectives help identify the organization's priorities and direct the organization's efforts.

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Budget

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Management often use the past as the common starting point for projecting the future, but in todays volatile payment environment, the past may be poor predictor of the future. This is one of the major drawbacks of the budgeting process. In a rapidly changing industry, basing budgets on historical data often requires readjustment during the actual budget period.

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Budget-projecting the future using past information

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Controlling is the process of comparing actual results projected in the budget. Two techniques for controlling budgetary performance are VARIANCE ANALYSIS and POSITION CONTROL. By measuring the difference between the projected and the actual results, management is bettwer able to make modifications and corrections. Thus, controlling is dependent on planning.

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Controlling

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Budgets may be developed in various formats depending on how the department is viewed by administration. They may be considered:
1. COST CENTERS-managers are responsible for predicting, documenting, and managing costs (staffing, supplies) of the department.
2. REVENUE CENTERS-managers are responsible for generating revenues (patient volumes)
3. PROFIT CENTERS-managers are responsible for generating revenues and managing costs so that the department shows a profit (revenues exceed cost)
4. INVESTMENT CENTERS- managers are responsible for generating revenues and managing costs and capital equipment (assets)
-How the unit is considered is crucial in determing the manager's approach to budgeting.

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Approaches to Budgeting

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With an INCREMENTAL or LINE-BY-LINE, budget, the finance department distrubutes a budget worksheet listing each expense item or category on a seperate expense line. The expense line is usually divided into salary and non-salary items.

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Incremental Budget

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The advantage of the line-by-line budget method is its simplicity of preparation. The disadvatage of this method is that it discourages cost efficiency. To avoid budget cuts for the next year, an astute manager learns to spend the entire budget amount established for the current year, because this amount becomes the base for the next year.

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Line-by-Line Budgeting

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The Zero-Based budget approach assumes the base for projecting next year's budget is zero. Managers are required to justify all activities and programs as if they were being initiated for the first time. Regardless of the level of expenditure for the new year must be justified under the current environment and its fit with the organization's objectives. Because zero-based budgeting is time consuming, organizations may not use this process every year. An adaptation of the zero-based budget is to start the budget with lower base, for example, 80 percent of the current expenses. Managers then have to justify any budgetary expenses requested above the 80 percent base.

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Zero-Based Budget

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Budgets can also be categorized as fixed or variable. Budgets are considered FIXED BUDGETS when the budgeted amounts are set without regard to changes that may occur during the year, such as patient volume or program activities, that have an impact on the cost assumptions originally used for the coming year.

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Fixed Budgets

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VARIABLE BUDGETS are developed with the understanding that adjustments to the budget may be made during the year based on changes in revenues, patient census, utilization of supplies and other expenses.

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Variable Budgets

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The OPERATING BUDGET also known as the annual budget is the organization's statement of expected revenues and expenses for the coming year. The operating budget can be further broken down into smaller periods of time.

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OPERATING BUDGET

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THE FISCAL YEAR IS A SPECIFIED 12-MONTH PERIOD DURING WHICH THE OPERATIONAL AND FINANCIAL PERFORMANCE OF THE ORGANIZATION IS MEASURED

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FISCAL YEAR

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The REVENUE BUDGET represents the patient care income expected for the budget period. most commonly health care payers pay a predetermined rate based on discounts or allowances. In many cases, actual payments generated by a given service or procedure will not equal the charges that appear on the patient bill. Instead of the health care provider will be reimbursed based on a variety of methods.

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Revenue Budget

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Revenue projections for the next year are based on the volume and mix of patients, rates and discounts that will prevail during the budget period. Projections are developed from historical volume data, impact of new or modified clinical programs, shifts from inpatient to outpatient procedures, and other influences.

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Revenue Projections

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The EXPENSE BUDGET consists of salary and nonsalary items. Expenses should reflect patient care objectives and activity parameters established for the nursing unit. The expense budget should be comprehensive and thorough; it should also take into consideration all available information regarding the next year's expectations.

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Expense Budget

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In health care organizations nursing units are typically considered cost centers. A cost centers is described as the smallest area of activity within an organizationfor which costs ar accumulated. They can be revenue producing (lab) or non-revenue producing (environmental services).

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Cost Centers

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A profit is the deifference between revenues and expenses.

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Profit

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Costs are commonly classified as fixed or variable. Fixed costs are costs that will remain the same for the budget period regardless of the activity level of the organization, such as rental payments and insurance premiums. Variable costs depend on and change in direct proportion to patient volume and patient acuity, such as patient care supply expenses.

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Classifications of Costs

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Direct costs are expenses that directly affect patient care. Example: salaries for nursing personnel that provide hands-on patient care are considered direct costs.

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Expenditures
Direct costs

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Indirect costs are expenditures that are necessary but dont affect patient care directly. Example: dietary and housekeeping

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Expenditures
Indirect Costs

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Projects the salary costs that will be paid and charged to the cost center in the budget period. Managing the salary budget is directly related to the manager's ability to supervise and lead the staff.

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Salary budget also known as Personnel Budget

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Paid time, such as vacation, holidays, and sick days for which there is no work output.

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Benifit Time

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The capital budget is an important component oftthe plan to meet the organization's long-term goals. This budget identifies physical renovations, new construction, and new or replacement equipment planned within the budget period.

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Capital Budget

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The difference between the amount that was budgeted for a specific cost and the actual cost.

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Variance

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Differnces in the budget as a result of increases or decreases in patient volume.

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Volume Variances

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The differnce between budgeted and actual nursing care hours provided.

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Efficiency Variance

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The difference between budgeted and actual hourly rates paid.

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Rate Variance

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Deviation from the budget as a result of changes in patient volume, supply quantities or prices paid.

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Nonsalary expenditure variance

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A monotoring tool used to compare actual numbers of employees to the number of budgeted FTE's for the nursing unit.

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Position Control