Chapter 15A

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Slide 1:

Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, Inc. HEALTH CARE FINANCE Basic Tools for Nonfinancial Managers Judith J. Baker R. W. Baker

Part VI: Construct and Evaluate Budgets :

Part VI: Construct and Evaluate Budgets CHAPTER 15: OPERATING BUDGETS Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types An organization’s objectives define specific activities; how they are assembled; and levels of operation while an organization’s performance standards set out performance levels. A budget quantifies these activities into financial terms.

Slide 4:

Budget Process Objectives Written expression, quantified, of policies and plans Basis to evaluate financial performance according to policies and plans Useful tool for cost control Creation of cost awareness throughout the organization Objectives should provide: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types Operating budgets Capital expenditure budgets There are basic differences between two budget types: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types Deal with actual short-term operating revenues and operating expenses Generally cover the next year (a 12-month period) Operating Budgets: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types Deal with capital expenditures for the organization (not operating revenues or expenses) May also cover the next year, but with a futuristic view; may cover a five or even ten year period Capital Expenditure Budgets: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Viewpoints:

Budget Viewpoints Cost Centers (manager responsible for controlling costs) or Profit Centers (manager responsible for both costs and revenue) Responsibility Centers may be: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Viewpoints:

Budget Viewpoints Grants received by the organization Foundation transactions Transactions outside the operating budget may include: So if transactions are “outside”, they would not be part of the operating budget. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Viewpoints:

Budget Viewpoints May have restricted funds that require separate accounting Grants received by the organization: If so, the separate accounting requirement generally means their transactions will be outside the operating budget Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Viewpoints:

Budget Viewpoints Should require separate accounting because the foundation will be a legally separate organization Foundation transactions: And the separate accounting requirement should mean their transactions will be outside the operating budget Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Basics Review:

Budget Basics Review Within a departmental budget certain costs will be specifically identifiable while others will be allocated instead. Identifiable versus Allocated Budget Costs Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

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Budget Basics Review Mostly identifiable = Direct patient care and supporting patient care Usually allocated = general and administrative expense and patient related expense Maybe not included at all in a manager’s budget = financial related expense Regarding Identifiable versus Allocated Budget Costs: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Basics Review:

Budget Basics Review Variable cost rises or falls in proportion to a rise or fall in volume* Fixed cost does not change even though volume rises or falls within a wide range Fixed versus Variable Costs * Examples of volume: number of procedures or number of patient days. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Fixed and Variable Cost Examples [Exhibit 15-1]:

Fixed and Variable Cost Examples [Exhibit 15-1] Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Slide 16:

Building an Operating Budget: Preparation Plan Gather information Prepare input Construct/submit draft version of budget Make required revisions to draft Present preliminary budget Make required revisions to preliminary Submit final budget Construction stages include: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Slide 17:

Building an Operating Budget: Preparation Format to be used Budget scope Available resources Levels of review Time frame Construction elements include: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Slide 18:

Building an Operating Budget: Construction For the Operating Expenditures Plan: Operating Revenue Forecast Staffing Plan or Forecast Other Operating Expenses For the Preliminary Operating Budget: Capacity Level Checkpoints Budget Information Sources include: See Figure 15-5 on page 170. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Building an Operating Budget: Construction :

Building an Operating Budget: Construction A series of assumptions are made during construction; many key assumptions are within forecasts used for the budget construction process Sufficient information at the proper level of detail is essential Regarding Budget Assumptions: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Building an Operating Budget: Construction :

Building an Operating Budget: Construction Are special projects going to use resources during the new budget period? Are operations going to be placed under unusual or inconvenient circumstances during the new budget period? (Renovation is an example.) Regarding Budget Assumptions - Questions to Ask: Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Building an Operating Budget: Construction :

Building an Operating Budget: Construction Supported by their assumptions Capable of being replicated or reproduced by another qualified individual Comparable (as discussed in the text) Budget Computations should be: Budget assumptions and computations are intertwined in the construction process. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types Static Budgets Are essentially based on a single level of operations. That level of operations — or volume — is never adjusted during the budget period. (See example in Table 15-4) It doesn’t move - therefore it is “static”. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Types:

Budget Types Flexible Budgets Are based on a level of operation that will change. In other words, the level of operations — or volume — is adjusted to show change during the budget period. (See example in Table 15-5) It is adjusted, or flexed - therefore it is “flexible”. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Review:

Budget Review How the budget report format is constructed To review a budget, the manager needs to know More details are in the chapter. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget Review:

More details are in the chapter. Budget Review How to annualize partial year expenses To review a budget, the manager needs to know Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Building Budgets:

The budget process should begin with a review of the strategy and objectives. Remember, building a budget means making a series of assumptions. Building Budgets Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Building Budgets:

Building Budgets To build a budget, a manager must consider The workload forecast (it must tie into the forecasted volume) Whether budget projects will use resources during the budget period. Whether budget operations will be placed under unusual or inconvenient circumstances during the budget period (remodeling, for example). More details are in the chapter. Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC

Budget: Example 15-A:

Budget: Example 15-A $21,600,000 22,000,000 $ (400,000) Revenue Expenses Excess of Expenses over Revenue Step 1. Actual Step 2. Budgeted $24,000,000 22,400,000 $ 1,600,000 Revenue Expenses Excess of Revenue over Expenses $(2,400,000) (400,000) $(2,000,000) $24,000,000 22,400,000 $ 1,600,000 $21,600,000 22,000,000 $ (400,000) Revenue Expenses Excess of Expenses over Revenue Step 3. Actual Budgeted Static Budget Variance Health Care Finance by Judith J. Baker and R.W. Baker. Copyright © 2011 by Jones and Bartlett Publishers, LLC