Efr ch5 budgetmanagement_sr2.11

CHAPTER 5: REPORTING AND
MANAGING BUDGETS
• Explain at least three reasons why an operating
budget is important in nursing care settings
• Differentiate between the management
functions
of budget monitoring, investigation and control
• Specify the important features of an operating
expense budget
• Compare applications of fixed and flexible
budgeting in nursing care settings
Copyright © Springer Publishing Company, LLC. All Rights Reserved.
1

FIGURE 5.1 FUNCTIONS OF HEALTH
CARE BUDGETS
2

COMPONENTS OF BUDGETS
• Line items: budget table rows
– Coding systems may be used for identification
– Personnel & nonpersonnel expenses
– Sources of revenue
– Sub-totals, totals, & other calculations
• Budget time period
– Fiscal year (FY) or budget year
– Quarter, month, or shorter time period as required
– More than one FY for long-term budgeting
3

STATISTICS BUDGET—24-HOUR
FACILITY
Estimate or forecast of the volume of service units for a
specified unit or bed type over a specified time period:
•Patient days—number of days a patient occupies a bed
•Average daily census (ADC)
– Patient Days ÷ Days in Specified Time Period
•Average length of stay (ALOS)
– Patient Days ÷ Admissions
•Occupancy rate
– Occupied Beds ÷ Available Beds
4

FIXED VS. FLEXIBLE BUDGETS
Fixed:
• Budgeted amounts
are set regardless of
changes in volume
over FY
• Examples – rent,
equipment, full-time or
permanent staff
Flexible:
• Adjustments made over
the year based on
volume variance
• More complicated to
prepare but more
useful & accurate
• Examples: variable staff,
variable supplies
5

STEP-FIXED BUDGET
C a p a c i t y Volume
6

OPERATING BUDGET
Operating expenses:
• Sources, dollar amounts, &
trends in direct vs. indirect
expenses
trends in personnel &
nonpersonnel expenses
• Fixed & flexible personnel &
nonpersonnel expenses
Operating revenues:
trends in service &
nonservice revenues
• Fixed & flexible revenue
sources
• Dollar amounts & trends in
uncollectible revenues &
investment income
• Pro forma P&L
7
Sources, estimated amounts, & trends in volume (statistics)

OPERATING EXPENSE BUDGET:
PERSONNEL
Staffing:
• Staffing standards?
• Positions: fixed &
flexible
• FTEs: flexible budgeting
• Direct vs. indirect care
• Staff mix
Labor costs:
• Straight time &
overtime
• Differentials &
premiums
• Benefits
8

OPERATING EXPENSE BUDGET:
NONPERSONNEL
Examples:
•Clinical & office supplies
•Noncapital budget equipment
•Seminars & books
9
May be a fixed or flexible budget

COST MEASURES
• Operating costs: expenses
related to the generation of
goods or services (operations)
• Salaries & wages: nonhourly &
hourly employees
• Benefits: health insurance &
other
• Supply costs
• Medication costs
• Charity care is treated as an
expense
• Other relevant sources of
costs
Interpretation:
•Change in costs
•Unexpected costs or cost
behavior
•Cost management
•Related to volume & revenue
•Other events affecting costs
10

REVENUE BUDGET
• Service revenue (operating revenue)
• Nonservice revenue (nonoperating revenue)
• Fixed vs. flexible revenue
• Total revenue: operating + nonoperating revenue
• Gross revenue: total amount charged before
reductions are applied
• Net revenue: gross revenue less reductions
• Pro forma P&L statement
11

REASONS TO INVESTIGATE BUDGET
VARIANCE
• Identify data entry or calculation error
– Amount of unfavorable variance
• Policies, guidelines, or thresholds
• Net loss: total expenses exceed total revenues
• Percent unfavorable variance
– Pattern of unfavorable variance
• Continual increase (trend) in unfavorable variance
• Duration of unfavorable variance
• Impact if unfavorable variance continues the entire
fiscal year
12

REASONS TO INVESTIGATE BUDGET
VARIANCE (CONT’D)
• Unexpected or unusual variance
• Unbudgeted expense
• Variable expense increases when volume decreases
• Determine if variance is controllable
• Expense variance: prices or wages, efficiency
• Revenue variance: reimbursement, charges,
collections
• Personal knowledge and experience
13

HOW IMPORTANT IS THE
VARIANCE?
• Continued increase in variance
• Duration of variance: “three data points are a
trend”
• Institutional policies or guidelines, such as dollar
limits
• Extent of concern if the variance were to
continue the entire fiscal year
• Personal knowledge & experience
• Favorable variance: could funds be transferred?
14

BUDGET VARIANCE
• Variance: difference between the budgeted target and
actual performance
• Favorable budget variance is a desirable difference
between budgeted and actual amounts
– Actual expenses that are similar or less than budgeted indicate
a favorable variance
– Revenues that are similar or greater than budgeted also show
a favorable variance
• Unfavorable budget variance is an undesirable difference
between budgeted and actual values
– Actual revenues that are less than budgeted
– Actual expenses that are higher than budgeted
15

CALCULATING BUDGET VARIANCE
Expense budget variance:
• Variance = Budget –
Actual
• Example:
– $1000 budgeted
– $1100 actually spent
– -$100 variance,
unfavorable, spent more
than budgeted
Revenue or volume
budget variance:
• Variance = Actual –
Budget
• Example:
– $1000 budgeted
– $1200 actually received as
revenue
– $200 variance, favorable,
earned more than
budgeted
16

PERCENT VARIANCE
• Percent variance is the proportional difference
between the budgeted and actual values, calculated
as the variance divided by the budgeted value and
reported as a percent
• Example:
– $1000 budgeted
– $1100 actually spent
– -$100 variance, unfavorable, spent more than budgeted
– -$100 ÷ $1000 = -10% variance, or 10% unfavorable
variance
17

BUDGET CONTROL
• Control uses management strategies to
correct performance problems & meet
budget targets
• Medical Unit RN overtime example
– Unit assistant to manage phone & provide non-clinical
support
– Policies to reduce shift change overtime
– Direct supervision & individual feedback
– Involve staff in solving the problem
18

BALANCE THE BUDGET
• Applying budget control to adjust budget
values to better fit the actual values, or
• Adjust the budget so that revenues equal or
exceed expenses
• Methods include line item flexibility &
adjustment authority
• No single formula or approach for all
situations
19

BUDGET BALANCING: LINE ITEM
FLEXIBILITY
• Authority to transfer funds in one line item to
another line item
– Within specified policy limits
– Typically line items must be within the same
category of personnel or nonpersonnel expenses
– May require additional budget justification or
approval
20

BUDGET BALANCING: ADJUSTMENT
AUTHORITY
• Authority to revise the budget over the FY
– Corrects for the difference between budget &
actual in price or quantity variance
– Variance is expected to continue for the
remaining FY
21

COMPONENTS OF A BUDGET
JUSTIFICATION
• Budget line item(s) requiring justification
• Category & type of line item
• Variance amounts, averages, & percents
• Adjusted variance, if applicable
• Frequency, duration, & trend of variance
• Variance source or sources
• Source identified as controllable or uncontrollable
• Control steps taken & results, if applicable
• Potential impact on revenue
• Effect on profits (if revenues are generated)
• Revised budget table with explanatory notes
22

REVENUE VARIANCE
• Difference between budget & actual revenues
over a specified time period
• Methods used to analyze expense variance
also apply to revenue variance analysis
• Unfavorable revenue variances usually
reported as revenue deficits or shortfalls
23

Jan Feb Mar Apr May Jun
24
FIGURE 5.2 MILLWAY UNIVERSITY NURSE-MANAGED
HEALTH CENTER (MNC) MEDICAL
SUPPLIES VARIANCE, JANUARY – JUNE 2012
$18,000
$16,000
$14,000
$12,000
$10,000
$8000
$6000
$4000
$2000
$0
Budget $8333 $8333 $8333 $8333 $8333 $8333
Actual $15,423 $8999 $12,232 $8434 $11,631 $13,498

Nonproductive hours RN Overtime Hours
25
FIGURE 5.3 EAST WING MEDICAL-SURGICAL
UNIT, NONPRODUCTIVE AND OVERTIME
HOURS VARIANCE, JULY 2012
1200
1000
800
600
400
200
0
July 2012 Budget 864 70
July 2012 Actual 1101 237
July 2011 Actual 738 91

Efr ch5 budgetmanagement_sr2.11

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