2. BUDGETING
Zelman, William N., McCue, Michael J., Millikan, Alan R., Glick, Noah D.,
Financial Management of Health Care Organizations - An Introduction to
Fundamental Tools, Concepts, and Applications, 2nd edition, Blackwell
Publishing Ltd, 2003 ( Chapter 10 )
3. INTRODUCTION
The budget is the central document of planning/control cycle, has four
major components :
1.Strategic planning
2.Planning
3.Controlling
4.Implementing
4. Strategic Planning & Planning
o Provide the basis to develop the budget.
o Strategic planning to identify the organization’s vision, mission,
goals, and strategy in order to position itself for the future.
o Planning to identify goals, objectives, tasks, activities, and
resources necessary to carry out strategic olan over a defined
time period ( commonly one year ).
o Mission statement guides the organization into the future by
identifying unique attributes of the organization, why it exists, and
what it hopes to achieve.
7. 1. PARTICIPATION
o The authoritarian approach : budgeting and decision making
which are done by few people concentrated in the highest level
of the organizational structure top-down budgeting
o The participatory approach : the roles and responsibility of putting
together a budget are diffused troughtout the organization. There
are guidelines to follow, and approval must be secured by top
management bottom-up budgeting
advantages : develop a shared of understanding of goals,
cooperation – coordination among various dept, and clarifying
roles and responsibility troughtout organization, etc
8. The Participatory Approach
Advantages :
1. Develop a shared of understanding of goals, cooperation – coordination
among various dept
2. Clarifying roles and responsibility troughtout organization
3. Motivating staff
4. Bringing about cost awarenest
Disadvantes :
1. May result in lost of control
2. Time consuming and uses resources tha could be devoted to other
purposes
3. May result disappointment
9. Budget Models
o Two basic budget models :
1. Incremental / decremental budgeting
Begin with what exists to plan future budgeting
Begin by asking : “ how much of an increase or decrease should
each programs receive? “
2. Zero based budgeting
Continually questions both the need for each program and its
level of funding
In preparation, each budgeting unit prepares : overall justification
for the program, condition of the programs in various levels of
funding
10. Budget Detail ….. ( 1 )
Based on the amount of detail they contain :
1. Line-item budget : showing only revenues and expenses by
category
2. Program budget : extension of line-item budget, shows
revenues and expenses by program or service lines
3. Performance budget : lists revenue and expenses by line item
for each program or service covered by the budget
11. Budget Detail ….. ( 2 )
Other budget details :
1. Multi-year budget : a budget which is forecast multiple years
out, rather than just for upcoming year.
2. Rolling budget : multiyear budget which is updated more
frequently than annually
3. Static budget : a budget which is uses a single or fixed level of
activity
4. Flexible budget : a budget which accommodates a range or
multiple levels of activities
13. Types of Budgets ….. ( 2 )
Statistic Budget
Identifies the amount of services that will be provided, usually
listed by payor type :
a. Charged-based payors : pay what is charged
b. Cost-based payors : pay based on estimate of what it costs
an organization to deliver the service for which they are
paying
c. Flat fee payors : pay a predetermined fee per unit of service
d. Capitated payors : pay a fixed amount per enroll for a fixed of
period of time
14. Types of Budgets ….. ( 3 )
Operating Budget
Combination of two budgets developed using the accrual basis
of accunting : the revenue budget and the expense budget
The revenue budget : forecast of the operating revenues that will
earned during the budget period. It has two components : Net
patient revenues and non-patient revenues
The expense budget : lists all operating expenses that are
expected to be incurred during the budget period
15. Types of Budgets ….. ( 4 )
The Cash Budget
Represents the organization’scash inflows and outflows
The bottom line : amount of cash available at the end
of period
The Capital Budget
Summarizes the anticipated purchase for the year
16. Variabel Labor Budget
Developed by :
o Estimate how many hours will be covered by full-time staff
o Determine how many hours will not be covered by full-time staff
o Determine how many of the non-covered hours will be filled by
overtime and how many will be covered by part-time hours
o Apply the full-time and part-time rates to the full and part-time
hours to calculate full and part-time wages
17. Supplies Budget
Made of :
A variable supplies budget ⇒ vary with the number of patient
seen : dispoables syringes, disposable gloves, X-ray film
Formula :
Ending Inventory =
Opening inventory + Purchases – Cost of Goods Used
A fixed supplies budget ⇒ covers item such as office
supplies, which do not vary with the number of patients seen
18. OPERATING BUDGET
Baker, Judith, Baker, R.W., Health Care Finance: Basic Tools for Nonfinancial
Managers, 3rd edition, 2011 by Jones and Bartlett Publishers, 2011
( Chapter 15 )
19. OVERVIEW
o A budget is an organization-wide instrument, through which
activities are quantified in financial terms
o Budgeting Process :
1. To provide a written axpression, in quantitative terms of a
hospital policies and plans
2. To provide a basis for evaluation of financial performance in
accordance a useful tool for the control of costs
3. To provide a useful tool for the control of costs
4. To create cost awareness troughout the organization
20. OPERATING BUDGETS vs CAPITAL
EXPENDITURE BUDGETS
OPERATING BUDGETS
o Generally deal with actual short-term revenues and expenses
necessary to operate that facility
o The usual period covered is the next year
CAPITAL EXPENDITURE BUDGETS
o Linked into a more futuristic view
o May cover a five or ten years period
24. BUILDING AND OPERATING BUDGET :
PREPARATION …… ( 1 )
CONSTRUCTION STAGES, include :
o Plan
o Gather Information
o Prepare input
o Costruct and submit draft version of budget
o Present prelilinary budget
o Make required revisions to preliminary budget
o Submit final budget
⇒ Input includes both assumption and calculation
25. BUILDING AND OPERATING BUDGET :
PREPARATION …… ( 2 )
CONSTRUCTION ELEMENTS
o As part of the preparation process, we should
determined :
- Format to be used
- Budget scope
- Available resources
- Time frame
27. BUILDING AND OPERATING BUDGET :
CONSTRUCTION …… ( 2 )
II. BUDGET ASSUMPTIONS AND COMPUTATIONS
III.FINALIZE AND IMPLEMENT THE BUDGET
28. WORKING WITH STATIC AND FLEXIBLE
BUDGETS ….. ( 1 )
STATIC BUDGETS
o is essentially based on a single level of operations.
o After a static budget has been approved and finalized, that single
level of operations (volume) is never adjusted.
o Budgets are measured by how they difference from actual results.
o Thus, a variance is the difference between an actual result and a
budgeted amount when the budgeted amount is a financial
variable reported by the accounting system.
o The variance may or may not be a standard amount, and it may or
may not be a benchmark amount
29. WORKING WITH STATIC AND FLEXIBLE
BUDGETS ….. ( 2 )
FLEXIBLE BUDGETS
o A flexible budget is one that is created using budgeted
revenue and/or budgeted cost amounts.
o A flexible budget is adjusted, or flexed, to the actual level of
output achieved (or perhaps expected to be achieved)
during the budget period.
30. CAPITAL EXPENDITURE
BUDGETS
Baker, Judith, Baker, R.W., Health Care Finance: Basic Tools for Nonfinancial
Managers, 3rd edition, 2011 by Jones and Bartlett Publishers, 2011
( Chapter 16 )
31. OVERVIEW
o Capital expenditures involve the acquisition of assets
that are long lasting, such as equipment, buildings,
and land.
o Capital expenditure budgets are usually intended to
plan, monitor, and control long-term financial issues.
o It is also important to note that the budget for capital
expenditures is usually part of an overall, or
comprehensive, financial budget.
32. BUDGET CONSTRUCTION TOOLS ….. ( 1 )
Cash flow concept
o Illustrates how the project’s cash is expected to move over
period of time
o Must also be reported as cumulative
Cash flow reporting methods ---- there are four methods :
1. Payback method
2. Accounting rate of return
3. Net present value
4. Internal rate of return
34. TYPES OF CAPITAL EXPENDITURE
PROPOSAL
Proposal types commonly include the following types of
requests :
o Acquiring new equipment
o Upgrading existing equipment
o Replacing existing equipment with new equipment
o Funding new programs
o Funding exoansion or existing programs
o Acquiring capital assets for future use
35. EVALUATING CAPITAL
EXPENDITURE PROPOSALS
Most organizations will consider the following factors in some
fashion or other:
Necessity for the request
Cost of capital to the organization
Return that could be realized on alternative investments
Be considered in a descending sequence of
decision making
