efr ch5 budgetmanagement_sr2.11

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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 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 FACILITYEstimate 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

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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 BUDGETCa

paci

ty

Volume

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OPERATING BUDGET

Operating expenses:• Sources, dollar amounts, &

trends in direct vs. indirect expenses

• Sources, dollar amounts, & trends in personnel & nonpersonnel expenses

• Fixed & flexible personnel & nonpersonnel expenses

Operating revenues:• Sources, dollar amounts, &

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: PERSONNELStaffing:• 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

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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

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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

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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?

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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

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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

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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

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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

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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

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FIGURE 5.2 MILLWAY UNIVERSITY NURSE-MANAGED HEALTH CENTER (MNC) MEDICAL SUPPLIES VARIANCE, JANUARY – JUNE 2012

$0

$2000

$4000

$6000

$8000

$10,000

$12,000

$14,000

$16,000

$18,000

Budget $8333 $8333 $8333 $8333 $8333 $8333

Actual $15,423 $8999 $12,232 $8434 $11,631 $13,498

Jan Feb Mar Apr May Jun


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FIGURE 5.3 EAST WING MEDICAL-SURGICAL UNIT, NONPRODUCTIVE AND OVERTIME HOURS VARIANCE, JULY 2012

0

200

400

600

800

1000

1200

July 2012 Budget 864 70

July 2012 Actual 1101 237

July 2011 Actual 738 91

Nonproductive hours RN Overtime Hours

efr ch5 budgetmanagement_sr2.11

Documents

budget variance variance

variance duration of

efficiency revenue variance

revenue budget service

onvolume variance

flexible revenue total

unfavorable variance

controllable expense