Healthcare Finance
Funds and time are both limited assets for all institutions and individuals. Planning is required for the successful and optimal utilization of resources. Nevertheless, planning itself is insufficient. To guarantee that these objectives are followed, managerial control is essential. A budget is a technique that executives utilize to organize and govern the usage of resources. This plan outlines the institution’s goals and how executives aim to gather and apply funds to achieve those goals. This article goes into greater detail on the budgeting processes. It includes a worksheet that elucidates the elements of a hospital budget, a description of the structure and application of budgets for managerial oversight and budgeting, and an example utilizing a budgeted revenue report.
Components of a hospital budget
A healthcare budgeting procedure’s major result is a set of departmental or operation unit budgets that indicate what expenditures should be in the upcoming term. These budgets are typically for one year. An analytical budget, expenditure budget, income budget, operational budget, financial budget, and investment budget are the many types of budgets (Cleverley & Cleverley, 2018). While all of these budgets can be employed, the capital budget, operational budget, and financial budget are the three most significant to any healthcare organization. The capital budget outlines proposals for purchasing equipment’s and expanding industrial operations. The income and cost budgets combine to form the operational budget. It breaks down estimated revenue by source and anticipated expenditures such as commodities, wages, incentives, and services by “natural categorization.” On the other end, a healthcare organisation cannot function without funds (Turner, 2016). This is the primary rationale for keeping a financial budget. A healthcare budget typically comprises the budget timeframe, period, line items, and columns (Green Mountain Care Board, 2018). The budget timeframe could be quarterly, yearly, weekly, or monthly. The elements of a healthcare’s operational budget are depicted in the worksheet below.
| Components of a Hospital Budget | ||||||
| 1st Quarter | ||||||
| January | February | March | 2nd Quarter | 3rd Quarter | 4th Quarter | |
| Revenue and support | ||||||
| Medicare inpatient | ||||||
| Medicare outpatient | ||||||
| Medicaid | ||||||
| Patient payments | ||||||
| Other revenues | ||||||
| Net Patient Revenue | ||||||
| Operating Expenses | ||||||
| Salaries | ||||||
| Fringe benefits | ||||||
| Payroll taxes | ||||||
| Professional fees | ||||||
| Medical/Surgical Supplies | ||||||
| Depreciation/Amortization | ||||||
| Rent | ||||||
| Insurance | ||||||
| Billing Service | ||||||
| Other Costs | ||||||
| Total Operating Expenses | ||||||
| Excess (Deficit) | ||||||
The budgeting process
Nature and use of budgets in the management controls
A budget is a quantifiable representation of a plan of operation. It is an essential part of a company’s overall managerial control method since it specifies how these goals can be met. In comparison to the institutional strategy, it is highly persuading and managerial in style. A budget is often broken into quarters or months and encompasses a one-year timeframe. Static and rolling budgets are the two distinct durations that may be utilized as the duration of the budget cycle, according to Cleverley & Cleverley (2018). A static budget is one that encompasses a definite time span beginning on a particular budget date. It often lasts a year. On the other end, a rolling budget is commonly adjusted on a regular basis, usually by one month or a three-month period. Nevertheless, preparing a budget necessitates an examination of the organization’s holdings and assets, as well as its monetary status. Moreover, it requires the administration to make predictions about the external context, such as rival conduct or the condition of the economy.
Budgeting requires converting product-line judgments into different resource assumptions. It serves two primary functions. The first step is for management to guarantee that there is sufficient money to sustain the organization’s economic stability. Hospitals, like individuals, should not overextend their financial resources. Another function of budgeting is to provide a foundation for managerial control (Cleverley & Cleverley, 2018). If the organization fails to fulfil budget goals, management must investigate why this occurred and take appropriate measures. A budget can thus be thought of as a typical accounting method that reflects management’s estimate on cost performance in relation to particular volume assumptions. It is crucial noting that management places a more significant emphasis on products expenses that have been planned or projected (Cleverley & Cleverley, 2018). Based on the authors, “budgeting is the major management planning stage of interest” (p. 381). Generally, budgeting transforms project recommendations into relevant terms for management. The option to build a radiology unit in a 20-bed health centre, for example, influences the expenses and earnings of other areas such as the specialized care department, pharmacies, and surgical room. When budgeting, management must thoroughly and correctly consider the consequences of such choices. A budget can also be used to adjust initiatives. A more precise and thorough evaluation of earnings and expenditures may persuade management that prior programming decisions were financially viable. In either case, a budget acts as the foundation for managerial control.
The budgeting process
Budgeting is commonly regarded as the fundamental technique used by healthcare executives to monitor and control expenditures in their organizations. As previously said, the principal outcome of a healthcare budgeting process is a sequence of departmental or operation unit budgets indicating what expenditures should be in the upcoming term. The goals of budgeting are to emphasize the medical care facility’s objectives and procedures, to serve as a baseline for evaluating the institution’s fiscal effectiveness in relation to the objectives, to offer an essential mechanism for cost control, and to instil cost consciousness within the institution (Cleverley & Cleverley, 2018). The budgeting process is comprised of several interconnected but distinct budgets. Budgeting is often overseen by the ruling panel, CEO, budgetary panel, controller, and accountability centre executives. The ruling body is typically only indirectly engaged because it sets the objectives and strategies that serve as the foundation for budgeting. The CEO is in charge of establishing the budget in general. Controllers, on the other end, play the function of budget managers because they offer the necessary information on products and expenditures as well as budgetary procedures. The primary point of management is the accountability centre. Lastly, the budgetary panel, which comprises diverse departmental executives, aids in legitimizing budgetary choices that appear unsteady and arbitrary when management seems to have taken a solitary judgment.
A budgeted income statements
A budgeted financial report summarizes the anticipated revenue, costs, and net earnings for the coming months or years. It enables organizations to prepare for the future, distribute resources more efficiently, and generate more thoughtful judgments. According to Buinskien (2019), a budgeted financial report functions best when it accommodates all budget phases to allow for the comparability of outcomes from many seasons. This allows management to discover irregularities that may require remedial intervention. It is essential to mention that the organisation’s gross earnings are shown at the end of the budgeted financial report. Below is an example of a budgeted income statement that can expound more on its content.
INCOME STATEMENT (in Thousands)
| 2021 | 2022 | |
| Operating Revenues | ||
| Gross Patient Service Revenue | $ 258,125 | $ 263,469 |
| Free Care | 5,800 | 6,024 |
| Contractual | 69,320 | 67,985 |
| Net Patient Service Revenue | 183,005 | 189,460 |
| Other Operating Revenue | 14,600 | 14,843 |
| Total Operating Revenue | $ 197,605 | $ 204,303 |
| Operating Expenses | ||
| Depreciation | 13,152 | 13,805 |
| Interest | 3,222 | 5,026 |
| Bad Debt | 5,163 | 6,866 |
| Other Operating Expenses | 168,585 | 173,634 |
| Total Operating expenses | $ 190,122 | $ 199,331 |
Conclusion
A budget is a planning instrument utilized by executives to plan and regulate the usage of an institution’s financial resources. A healthcare budget includes earnings, expenditures such as supplies, wages, and services, as well as the predicted profits or losses. When it relates to management control, a budget is essential. The six kinds of budgets operate collectively to assist management in planning and controlling resource consumption. In other words, management can use budgets to evaluate if the firm met its financial targets. If not, appropriate measures could be taken to remedy the issue.
References
Cleverley, J. O., & Cleverley, W. O. (2018). Essentials of health care finance. Jones & Bartlett Learning.
GREEN MOUNTAIN CARE BOARD. (2018, March). FY 2019 HOSPITAL BUDGET SUBMISSIONS REPORTING REQUIREMENTS. Green Mountain Care Board. https://gmcboard.vermont.gov/sites/gmcb/files/GMCB%20FY%202019%20Hospital%20Budget%20Reporting%20Requirements%20Draft%20for%202018-03-28.pdf
James A Turner. (2016, January 18). (PDF) Net operating working capital, capital budgeting, and cash budgets: A teaching example. ResearchGate. https://www.researchgate.net/publication/292077776_Net_Operating_Working_Capital_Capital_Budgeting_And_Cash_Budgets_A_Teaching_Example
Rita Bužinskienė. (2019). MASTER BUDGET FORMATION IN PRIVATE COMPANIES. Šiaulių valstybinė kolegija. https://svako.lt/uploads/pstp-2019%206-21-32-39.pdf
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