Budgeting Basics Flashcards
Budget =
A financial statement that estimates income and expenditures for a specified future time period
Budget cycle -
1 Planning year - Develop statistical budget - Prepare
2 Planning year - Approve operating budget - Approve
3 Budget year - Monitor, control, report variances - Execute
4 Subsequent yr - Review budget yr results - Evaluate
Several types of budgets
Operating budget (1 year) Strategic budget (3-5 years) Cash budget
Traceability - Direct vs. Indirect
Directly or indirectly related to product
Direct - surgical supplies
Indirect - housekeeping
Variability - Fixed vs. Variable cost
Fixed - does not depend on volume
Variable - volume driven
Direct vs. Indirect costs
Direct - due to production of services - personal salaries, material supplies, professional staff
Indirect - incurred to operate, cannot be directly associated with a cost object (housekeeping, electricity, IT, admissions)
Direct vs. Indirect costs - Allocation of indirect costs
Overhead or indirect costs must be allocated to departments to reflect true cost of producing the product
Ex housekeeping - by square footage
Ex admissions - by # of pts served
Broad cost categories - labor costs
Labor is largest single expense for a healthcare facility
Most labor costs are fixed
Compared using full time equivalents and no a head count
Broad cost categories - labor costs - full time equivalents (FTEs)
Computed based expectation of hours worked
Based on 2080 worked hours per year (40 hour work week and 52 wks/yr)
Broad cost categories - labor costs - full time equivalents (FTEs) - Ex of 24 hour ED that needs 2 triage nurses on duty at all times - how many FTEs are required to meet that need
24 hrs/day x 2 nurses = 48 hrs worked
ED open 365 days/yr
Requires 48 x 365 = 17, 520 worked hours
17, 520 / 2,080 = 6
Working capital =
Short term assets - short term liabilities
Current ratio =
Short term assets/short term liabilities
Revenue cycle
Process of collection of accounts receivable to produce cash
Collection of accounts receivable produces cash
Revenue from providing services to pts does not immediately convert to cash
Variance analysis
Identifying the variances in what was budgeted vs. what has actually happened
Variances are RED FLAGS - should be looked at more closely for their causes
They can exceed what was budgeted or be below what was budgeted
General sequence for forming a budget
Environmental scanning
Identification of goals and objectives
Gather data on estimated costs and revenues
Develop a proposed budget
Budgeting considerations
- Labor
- Taxes
- Operational expenses
- Income
- Allocation
Labor - expenses include income for yourself and staff
Taxes - estimates taxes, benefits, insurances
Operational expenses - other expenses like rent, phone, utilities
Income - estimate charges to be billed and # of client visits needed to meet projected expenses
Allocation - distribute resources to meet expenses using estimated income
Expense management - goal is to
maximize net income
Operating expenses
Cost of resouces to produce the organization’s services and goods in a limited period of time
Capital expenses
Big ticket, long lasting items like purchase of equipment
Suggestions for controlling operating and capital expenses
Watch the budget Influence the utilization of variable cost items (utilities) Have policies and procedures Do environmental scanning Engage in cost effectiveness analysis
Types of employment - Exempt
Professional, managerial, or supervisory
Paid fixed annual salary
Not paid for working over or under the standard number of hours (typically 40)
Types of employment - Non exempt
Paid hourly
May collect overtime for going over standard number of hours
Overtime.holiday pay, premium hourly rate
Key drivers in determining FTE requirements
Volume of work
Service standards (24 hr coverage)
Technical skills
Productivity standards
Cash budget
Converts approved operating and capital budgets into projected cash flows
Cash budget considerations
Level of revenue and accounts receivable
Payroll and benefits
Expenses and accounts payable
Cash shortfall or surplus
Productivity
refers to the amount of a resource consumed in the production of an increment of output
A useful measure of productivity is
Based on a measurable unit of output Objectively measured Readily available Understandable Achievable
Revenue management - the goal is to
Maximize income from operations and investments
Revenue management involves
Setting prices
Identifying payer for each service
Policies and procedures that address provision of service
Estimating expected payment
Following procedures for payment receipt, account reconciliation, cash
Financial reporting
Fee schedule for an organization is
A listing of the services that are provided and the charge for each of those services
Billing - getting paid requires
getting paid requires clear communication with the third party payer on what exactly is being billed
Budget variance =
actual value - budget value
positive = actual greater than budget
negative = actual less than budget
Budget variance - permanent vs. temporary
Permanent - not due to timing, will not resolve prior to period end
Temporary - due to timing will resolve prior to period end
