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Management Essentials Series
2021
Fundamentals
of Financial
Management
Definition of Financial Management
2
An Effective Financial Management Process
Course Content
An effective financial management process sits
on the core of a highly functioning organization.
Modules
Course Overview
Budgeting
✓ A quantified financial plan,
✓ Used by department managers to track
actual and planned expenditures.
Financial Accounting
✓ Measures and records business
transactions,
✓ Used by BOH, regulators, suppliers,
LHOs, department and program
managers.
• Define critical components and
processes of budgeting that
maximize LHD operations.
• Identify components of the
accounting cycle and those
processes for ensuring financial
reporting accuracy.
• Perform ratio analysis to evaluate
LHD and program performance.
• Describe the role of the LHO in the
budgeting and accounting processes.
By the end of this course you
will be able to:
What are the fundamentals of
financial management?
3
Introductions
Briefly introduce yourself:
• Name,
• Years as LHO,
• Key benefits or concerns of your LHD accounting and
budgeting process,
• 1 thing you wished you had learned earlier in your
career,
• Expectations for the course.
Key contacts that you’d like to remember:
1. _______________________________________
2. _______________________________________
3. _______________________________________
4. _______________________________________
5. _______________________________________
6. _______________________________________
7. _______________________________________
8. _______________________________________
9. _______________________________________
10. _______________________________________
4
Module 1:
Introduction to Budgeting
At the conclusion of the module, participants will be able to:
• Describe the purpose of financial budgets.
• Describe expectations of stakeholders.
• Define the types of budgeting: surplus, deficit and break-even.
• Use some tips for helping you develop a budget.
5
Are the following statements True or False?
Pre-Test
1) The purpose of a budget is to keep the LHD from spending money.
2) The accounting and budgeting functions are similar in that they both
require transparency.
3) The budget reflects a consensus of residents’ preferences, board
governance philosophy, and staff concerns about strategic priorities.
4) LHOs should always favor the break-even type of budget because the
customer expects revenue to equal expenses.
5) Benchmarking other LHDs is a good tool, but not for LHDs because
revenue sources and sizes vary significantly across LHDs.
T/F?
Planning is the design of a desired future and of
effective ways of bringing it about. …
Thus there are three attitudes toward the future,
which, ordered from the most to the least
prevalent are:
a) wait and see,
b) predict and prepare,
c) make it happen.
Key Points:
• Modern corporate planning owes much to operations research and systems theory. A
pioneer in that field, Russell L. Ackoff, worked closely with General Electric, Anheuser-
Busch, and other major corporations. The first of his 4 books on the subject,
A Concept of Corporate Planning, had a major effect.
• In his book, Dr. Ackoff defined planning as “the design of a desired future and of effective
ways of bringing it about.” He further said, “Thus there are three attitudes toward the
future, which, ordered from the most to the least prevalent are a) wait and see, b) predict
and prepare, c) make it happen.”
Russell L. Ackoff on Planning
6
Introduction to Budgeting
A budget is a
quantitative
expression of a
plan for a
defined period
of time.
CIMA Official
Terminology,
2005
The Best Friend of This Dog Asked to Buy a Cat…
Sorry, I did the math, the cat is
not in the budget!
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Positive connotations:
Negative connotations:
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Why is budgeting important to the LHO?
• Ensure the LHD pays for all
necessary expenses,
• Allocate revenue to cover expenses,
• Fund the activities of the LHD's
strategic plan,
• Govern or control spending for a
fiscal year,
• Guidance to staff to manage
expenditures.
Revenue
Expenses
“Our only problem
is figuring out how
to switch these.”
Key Points:
• Budget information is needed at both the revenue and at the line-item expense level.
Estimating and matching line-item expenses to revenue is important, because it helps
LHOs determine whether they have enough money to fund operations and expand the
business, if need be. Without a budget, the LHO runs the risk of spending more money
than it is taking in or, conversely, not spending enough money to grow the business and
compete for funds.
• Budgets must include rent or mortgage payments, utility bills, payroll and if required,
interest and tax payments.
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Internal Stakeholders Require Information
Key Points:
• Internal stakeholders
require information
because they want
answers to questions
about LHD
performance.
9
Budget Questions Asked of the LHO
What are questions the LHO is asked, in reference to the budget?
Example question: Are budgets realistic, factual, and attainable?
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
Key Points:
• Budgets should provide information for stakeholders. This means the answers to their
questions should be obvious or readily available in a budget review.
• Program and grant administrators, health commissioners, County auditors, and
vendors will look to LHD budgets to get answers to questions like those listed below.
10
External Stakeholders Require Information
Goals of Budgeting for the LHD
What are goals of budgeting?
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
• _________________________________________________________
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Types of Budgets
Surplus BudgetBreak-even BudgetDeficit Budget
Key Points:
To address budget variances caused by cash flow delays and variances in line item
expenses, planners may use these 3 types of budgets.
• Deficit, where revenues are less than expenses.
• Break-even, where revenues and expenses are the same.
• Surplus, where revenues exceed expenses.
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What type of budget will address the example goal?
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•To react to anticipated but unusual events.
•To invest in a new strategy, e.g., to fund preparation activities for accreditation.
Organizational
Programmatic
•To give non permanent staff raises,
•To fund an unexpected delay in receiving funds,
•To use reserve (excess funds from prior year’s surplus).
•To serve more people,
•To train staff to increase effectiveness.
Break-even Deficit Surplus
Key Point:
LHO’s should make their case for budgeting and funding based on their strategic plan,
organizational requirements, and programmatic goals.
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Break-even (Balance) Budget
• When: Revenues equal Expenses.
• Why?
o To ensure a balanced budget,
o To react to a forecast of slow growth
in expense increases.
Key Points:
Break-even is the most common budget.
• Planners anticipate that revenue and expenditures will be the same for the year.
• Some planners believe this is a message to funders, that the LHD can manage to a
balanced budget.
• Also, some planners send the message to the staff, that a balanced budget is the
goal for all to follow.
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Surplus Budget
• When: Revenues exceed Expenses.
• Why?
Healthy organizations require cash reserves, which means they
must generate excess cash in at least some of the years.
• ______________________________________
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• ______________________________________
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• ______________________________________
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• ______________________________________
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Are there limitations on cash reserves?
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Deficit Budget
• When: Revenues are less than Expenses.
• Why?
o Reserves (net assets) from previous
years will be used.
15
Key Points:
• A deficit budget is created when the LHD has accumulated excess reserves from prior
years and the planner wants to finally use the funds for what the excess was
anticipated to accomplish.
• If a deficit is planned, it’s important that decision-makers and budget-approvers
recognize that the net assets from previous years’ surpluses will be drawn down.
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USVI LHD use of Surplus and Deficit Budgets
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• Given a Ceiling for Expenditures
o Only Break-even Budgets are planned
o Surplus and Deficit Budgets are not planned
• Surplus
o When under spend the ceiling
o Funds can be encumbered/reserved for use in the following year
o Used on another program in current year
• Deficit
o When exceed spending ceiling
o Funds must be captured from other programs that are at a surplus
o Cost reduction efforts must be implemented
Key Points:
Effective monthly budget reviews keep the surplus or deficit activity under control.
What are some best practices that will help LHOs plan the LHD budget?
Discussion:
Best Practices to Help Plan the LHD Budget
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Are the following statements True or False?
Pre-Test Follow-Up
1) The purpose of a budget is to keep the LHD from spending money.
2) The accounting and budgeting functions are similar in that they both
require transparency.
3) The budget reflects a consensus of residents’ preferences, board
governance philosophy, and staff concerns about strategic priorities.
4) LHOs should always favor the break-even type of budget because
the customer expects revenue to equal expenses.
5) Benchmarking other LHDs is a good tool, but not for LHDs because
revenue sources and sizes vary significantly across LHDs.
T/F
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• To provide
answers about
LHD
performance,
• To make
financial
decisions on
allocation of
funds.
• To provide
funds to keep
the business up
and running,
• To fund
strategic and
program plans,
• To set goals,
• To fund
emergencies,
• To assess
performance.
Summary of Module 1: Introduction to Budgeting
Purpose Stakeholder
Expectations
• Deficit:
▪ Expense >
Revenue
• Break-even:
▪ Expense =
Revenue
• Surplus:
▪ Expense <
Revenue
• Benchmark,
• Historical
performance,
• Look to cut
costs,
• Review monthly.
Types of
Budgets Best Practice
What’s Next?: Module 2: The Budget Process