Preparing and Managing an Operating Budget

Preparing and Managing an Operating Budget

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The significance of budgeting in ensuring money accountability in the operationalization of any organization underpins its necessity in these organizations. It is therefore important for nurse leaders as well as other organizational leaders to be knowledgeable on budget design and preparation for effectiveness in funds utilization. Of significance to note in budget preparation are the frameworks utilized in decision making for the budget, basic steps as well as the programming of basic changes within the budget. The budget prepared should thus be affordable, efficient, and effective. This paper seeks to prepare an operating budget for a 35-bed hospital, outlines its design and preparation, and presents a plan for the ongoing budget management.

Budget

item	fy 2020	FY2021	VARIANCE
income   insurance direct pay others TOTAL REVENUES	$ 25,819,880 $ 18,980,650 $ 3,800,250 $ 48,600,780	$ 27,374,400 $ 19,275,600 $ 3,800,250 $ 50,450,250	$1,554,520 $294950 $0 $1,849,470
expenses salary and wedges EMPLOYEE BENEFITS SUPPLIES UTILITIES RENT HEALTHCARE INSURANCE INCENTIVE PROGRAM PAID TIME OFFS CONTINUING EDUCATION LICENCE AND TAXES OTHERS	$9, 600, 550 $4,781,683 $8,700,350 $2,550,600 $2,155,600 $2,400,750 $ 250,000 $1,250,100 $500,000 $6,559, 700 $1,500,678	$11,580,675 $ 6,000,350 $ 10,200,650 $ 3,500,540 $ 2,155,600 $ 2,400,750 $ 250,000 $ 980,650 $ 500,000 $ 6,559,700 $ 850,750	$1,980,125 $1,218,667 $1,500,300 $949,940 $0 $0 $0 $-269,450 $0 $0 $-649928
TOTAL OPERATING EXPENSES	$40,249,333	$47,979,665	$7,730332
NET REVENUE	$8,351,447	$2,470,585	$-5,880,862

Budget Design and Creation

The budget for the current financial year was projected to cost $47,979,665. The creation of a budget utilizes strategies that take into consideration efficiency, effectiveness, and cost-effectiveness. The initial step in budget creation is establishing the net income of the organization. These income estimates can be obtained from past financial records as well as the projected patterns of revenue streams for the organization. In this hospital case, estimated income for the financial year 2021 was derived from the financial year 2020 actual costs and year estimates for 2021. The actual 2020 total operating costs were $40,249,333. However, the revenue streams were projected to be relatively higher in this new financial year. This is because of the assumption that the market dynamics will be favorable and that patient visitation to the hospital will increase. This enabled the placement of higher-income estimates and consequently allowed adjustments in the budgetary allocation of funds as well as flexibility in the hospital operationalization.

Upon establishment of the income estimates, the organizational spending is then tracked to determine the potential areas where adjustments need to be instituted. This process needs an initial listing of all fixed expenses and variable expenses and forensically auditing them to determine potential areas for variation. This process is also dependent on the organizational objectives as well as arising issues from the previous budgets that require consideration (Hoffman & Reese, 2019). In this hospital’s case, there is an impending shortage of workers since some workers have left, and many staff sign up for extra shifts and overtime. These issues require more allocations into their respective dockets and should be adequately addressed by the budget. Additionally, this hospital serves older populations. This population requires special considerations in terms of their resource utilization. These special considerations should be reflected in the budget.

Upon completion of the tracking process, all the line items of the budget are listed. They are then sifted and aligned with the organizational objectives. It is important, at this step, to take keen consideration of the code centers (Phaup, 2018). In this hospital’s case, all the line items were obtained from the 2020 budget as well as budgets from the previous years. The center codes in this budget were determined by analyzing the revenue patterns of the previous budget against some specific lines of items. These code centers are contributing to the hospital’s profitability but are not directly involved. Such line of items as utilities, continuous education, and incentive programs confer considerable significance in enhancing the efficiency of operationalizations but are themselves not involved in actual profit-making. In as much as efficient and quality healthcare forms the fundamental objective of this hospital, profitability remains of equal significance as it not only enables them to remain operational but also gives them the financial freedom to work towards attaining their core objective. It is thus important to take keen considerations on code centers while designing the budget as it facilitates the realization of profits.

A working plan is then established. This is the operational budget estimate. It is arrived upon after due considerations of all the fixed and variable costs and the variable cost. The significance of a budget in guiding financial operationalization over the specified period of one year underlines its necessity. It is paramount that estimates be realistic, universal, comprehensive, and transparent. A realistic budget will reduce the pressure in the business operation and also prevent overspending, which may reduce the profitability of the organization (Mukherjee et al., 2016). In this regard, any variance in budget estimates from the previous budgets should be adequately accounted for and justified as per the organizational objectives.

During the compilation of the line of items listed on the budget upon their forensic scrutinization, marked considerations have to be made on items that directly drive the organizational objectives. In the case of the hospital, various items, such as equipment and labor, are important drivers of the hospital’s objective and are thus accounted for in the budget. Labor funding was listed under the salary and wedge docket as well as employee benefits dockets. Equipment as well had significant allocation in the budget under the dockets of supplies and utility. By adequately covering these items, the budget intends to ensure work proficiency, quality attainment, efficiency in care processes, and profitability.

Likewise, staffing requirements were adequately met in the budget. The staff is the most important component in any organization. In a hospital, the staff includes the health providers and other subordinates who facilitate the health care process. Staff requirements include salary and wedges as well as employee benefits. Meeting staff requirements is the first step towards meeting the organizational objectives. The workload on the available staff is also important as it determines their work efficiency. Reduction of workload on the employees requires recruiting additional staff to supplement the already available staff. An adequate staff ensures effectiveness in service delivery and maintenance of quality. The created hospital budget adequately addresses staffing requirements as well as workload by increasing allocations for salary and wedges as well as employee benefits. This is expected to not only enhance the pay of the already available staff but also increase the staff capacity considerably to adequately care for the patients visiting the hospital.

The equipment needed by the hospital was covered under the supplies section. The assumption made at the beginning of this budget design was that there would be a marked increase in the patient population visiting the hospital. These higher numbers require more equipment to be utilized in their care process. This high number of pieces of equipment is adequately covered by the budget, as evident in the increased allocation of the amount utilizable for supplies as well as utility. These allocations increase to cover the current expenses in hospital equipment and take care of any increases that may be needed therein.

The staffing requirement and workload of this hospital were established upon the assessment and elucidation of the provider-patient ratio, which was found to be relatively low. These low numbers are attributable to some workers leaving the unit. The effect of low provider numbers is the increased workload on the available staff. They thus have to work for longer hours and in extra shifts, which ultimately result in burnout and consequent reduction in efficiency and effectiveness of work. This expresses the necessity of more workers to offset the workload and better encouragement of the providers through incentives and bonuses, all of which are covered in the estimated budget.

The information utilized in the creation and design of a budget is obtainable from several sources. These include historical sources, key personnel, and the business plan. Historical sources form the most significant component. These include previous financial budgets and previous financial statements. These sources provide the various allocation areas that have been used before by the organization. They also allow scrutinizing these allocation areas to determine their effectiveness towards the attainment of the organizational objectives. The feasibility of these allocation areas can be determined by crosschecking with the financial statements as well as the actual budget of the previous years, where applicable.

Certain personnel are also crucial in the budget creation process. Such personnel as previous managers, financial experts, and managing colleagues can offer beneficial insight into the budget-making process that may contribute to its effectiveness. This personnel is drawn by virtue of their expertise in the budget creation and allocation process. Such budgetary aspects as realistic financial goals and realistic estimates can be easily picked by these key personnel (Ridwan, 2017). Their presence is thus key to the budget creation process.

Information can also be picked from the business plan. The business has its own set of objectives, plans, and organizational structure. It is thus fundamental that while setting the financial goals of the organization, these aspects be looked at. Also, the budget should always be in concert with the business objectives and always work towards its attainment. Issues arising from the business plan are easily solvable by tailoring the budget towards addressing these issues (Walsh, 2016). For instance, a hospital with a shortage of staff needs to allocate more resources in the budget to address the shortage of staff issues. This should be replicated in all aspects of the business where issues arise. By tailoring the budget towards the business plan, the organization ensures that it meets its objectives.

The reliability of information obtained from these sources is dependent on the accurate selection of these sources. Historical information selected should be recent, depicting the current market environment and business patterns. Such information as financial statements and previous financial budgets should be picked from at most 2 years from the year under consideration. This has the benefit of eliminating the obsoleteness of information accustomed to the passage of time. Additionally, the personnel selected for financial consultation should be those who exhibit considerable knowledge and expertise in budget analysis (Agam, 2018). This is particularly important in eliminating any element of chance or doubt as well as errors that would have been otherwise attributed to inexperience or lack of knowledge and expertise in budget analysis. The reliability of information utilized in budget design and creation is dependent on these factors. The selection of inappropriate sources may not only jeopardize the organizational operations but also prevent the organization from meeting its objectives.

The hospital’s mission is to provide quality and effective care in the most cost-effective manner. This hospital seeks to uphold a high level of quality during the care process to the patient at a cost that is affordable to most of its patients. In this regard, it ensures that resources utilized in the care process are ever available, and thus the providers showcase remarkable skills that are evidence-based and up-to-date during the care process. The hospital ensures this by allocating sufficient funds utilizable in the purchase of equipment and also ensures that their staff is well paid. Shortage of staff is also properly addressed in the budgetary allocations.

The budget projections address all issues that were evident in the hospital. Such issues as shortage of staff are adequately covered in this budget. Furthermore, the budget upholds the practicing standards within the hospital by ensuring that all previous budgetary allocation items are retained. Whereas the projection eats into the net revenues of the company and reduces profits markedly, it channels the extra costs into service delivery and code centers that, in the long term, will increase profitability. Profits are, however, still retained, and only its margin is reduced. The management is thus expected to assent to the budget.

The budget is devoid of nice-to-have items. By increasing the expenses, the budget reduces the profit margin and consequently reduces freedom of expenditure, restricting it to just the essential hospital needs. It adequately covers all these essential needs.

For effective implementation of the budget, proper management of the ongoing budget is important. This entails constant evaluation of the budgetary items to establish whether they are going as planned. However, several factors may impede this. Such factors as policies, organizational objectives, and competition for funding may affect the budget. Policies may affect the utilization of certain resources as well as the operationalization of the hospital, thus affecting the revenue flow to the hospital. For instance, insurance policy changes that reduce reimbursement to hospitals reduce their revenues. Organizational objectives may also affect the budget. Objectives towards the expansion of the hospital may warrant cutting fund utilization in some allocation areas, thus impacting the budget. Competition for funds is also another factor that may affect the budget. Various hospital departments may require more funds than the allocated amount to run their activities. This may necessitate a shift of funds that would have been utilized elsewhere by these departments.

Staff overtime can be limited by adding more staff to the hospital workforce. Adequate staff will work in shifts, thus reducing staff overtime. Additionally, the utilization of an efficient shift system and hiring just the right number of staff will reduce non-productive time as well as expenses. Utilization of already quality personnel may also reduce the expenses utilized on educational paid time-offs. Extensive analysis of the available equipment, as well as their utilization in the hospital, is essential in informing the right volume utilized in the hospital processes. Ensuring that just the right volume is obtained is essential in minimizing wastages accustomed to the abundance of resources.

Operating budget preparation requires keen consideration of the allowable items in the budget. These items should tailor the budget towards the realization of the organizational objectives. The budget should as well be effective, universal, and cover a specific period. Upon preparation of the budget, a strategic plan for its management has to be initiated. This ensures that the budget is followed and that the expenses don’t spiral out of the budgetary provisions. It is also important to ensure that the budget helps attain the organizational objectives and not compromise them in any way.

References

Agam, T. (2018). The Influence of Participative Budgeting, Human Resource Quality, and Budgeting Plan towards the Consistency of Budget Preparation Process (Study in Lhokseumawe City Regional Work Units/ Departments). Account And Financial Management Journal. DOI: 10.31142/afmj/v3i4.07

Hoffman, K., & Reese, C. (2019). A comparative analysis of periodicity in the Arkansas state budget process. Journal Of Public Budgeting, Accounting & Financial Management, 31(1), 66-84. https://doi.org/10.1108/jpbafm-06-2018-0058

Phaup, M., 2018. Budgeting for Mandatory Spending: Prologue to Reform. Public Budgeting & Finance, 39(1), pp.24-44.

Ridwan, 2017. Managing budgeting process in an emerging economy: a study of participative budgeting, budget pressure, and budgetary slack in Indonesia. Journal of International Business and Economics, 17(2), pp.83-94.

Walsh, K. (2016). Managing a budget in healthcare professional education. Annals Of Medical And Health Sciences Research, 6(2), 71. DOI: 10.4103/2141-9248.181841

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OVERVIEW:
Prepare an 8–10-page operating budget for a hospital unit.

Note: Complete the assessments in this course in the order in which they are presented.

Sound financial management is essential to the fiscal well-being of all healthcare organizations, and the nurse leader plays an important part. Consequently, the preparation and effective management of operating budgets is a critical skill for nurse leaders. The budget guides leaders in optimizing the use of resources, and because nurses are closest to patients, they understand very well what it takes to operate on a daily basis and provide safe, high-quality care.

This assessment provides an opportunity for you to develop an operating budget for a healthcare unit. Keep in mind that staff is a large part of this budget and is often hard to control.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

Competency 1: Design an operating budget that incorporates variances or discretionary spending.
Prepare an operating budget.
Explain how a budget is designed and created.
Competency 2: Develop a plan for managing the labor force within the parameters of the budget and productivity.
Develop an approach to ongoing budget management.
Competency 5: Apply financial principles to a strategic plan for achieving organizational goals and fiscal success.
Develop a strategic plan.
Competency 6: Communicate effectively with diverse audiences in an appropriate form and style, consistent with applicable organizational, professional, and scholarly standards.
Present budget data and information clearly and accurately.
Integrate relevant and credible sources of evidence to support budget data and information, correctly formatting citations and references using APA style.