Budget

• A budget is a quantitative statement,

usually in monetary terms, of the plans and
expectations of a defined area over a
specified period of time.
(Sullivan. E, 8th edition)
Budgeting
• Budgeting is a process of planning and
controlling future operations by comparing
actual results with planned expectations.
(Sullivan. E, 8th edition)
Purposes
Control costs

Accurately
report all Establish annual
financial and & monthly budget
statistical data

Identify & analyze

actual experience
compared to the
budget plan
IMPORTANCE OF BUDGETING:
 Needed for planning future course of action and
control over all activities in the organization.
 Facilitates coordinating operation of various
departments and sectors.
 Helps to weigh values and make decision when
necessary.
FEATURES OF BUDGET
The form of statistical
standard laid down in
Flexible
specific numerical
terms.
Support of top management Synthesis
of past,
throughout the period of its present &
planning supplementation. future
Product of joint venture+ co-operation of
executives/department heads at different
levels of management.
Approaches to Budgeting

● Cost centers. Managers are responsible for

predicting, documenting, and managing the
costs (staffing, supplies) of the division.
(Sullivan. E, 8th edition)
● Revenue centers. Managers are responsible for
generating revenues (previously by increasing
patient volume, although health care reform may
make the future of revenue-generating centers
obsolete).
(Sullivan. E, 8th edition)
Conti
● Profit centers. Managers are responsible for
generating revenues and managing costs so that
the department shows a profit (revenues exceed
costs).

● Investment centers. Managers are responsible

for generating revenues and managing costs and
capital equipment (assets).
(Sullivan. E, 8th edition)
Others Approaches
The organization may choose various approaches,
or combinations of approaches, for requesting
departmental managers to prepare their budget
requests. These approaches are incremental
1. Incremental (line-by-line)
2. Zero-based
3. Fixed or variable.
(Sullivan. E, 8th edition)
Incremental (line-by-line)
Based on estimated changes in present operation
plus a percentage increase for inflation, all of
which is added to previous year budget.
• The expense line is usually divided into salary
and nonsalary items.
• Comparison projected expenditures for the
current year.
• Advantage : Simplest method.
• Disadvantage : It discourages cost efficiency.
(Sullivan. E, 8th edition)
Zero-Based Budget
Requires nurse manager to examine, justify each cost of
every program both old and new in every annual budget
preparation.
• Assumes the base for projecting next year’s budget is
zero.
• Manager’s are required to justify all activities &
programs as if they are initiated for the first time.
• Every proposed expenditure must be justified with:
• current environment
• fit with organizational objectives
(Sullivan. E, 8th edition)
 Fixed budget, the budgeted amounts are set
without regard to changes that may occur during
the year.
• The uppermost spending limit is set.
• Defined areas of responsibility.

Variable budgets are developed with the

understanding that adjustments to the budget may
be made during the year based on changes in
revenues, patient census, utilization of supplies,
and other expenses.
(Sullivan. E, 8th edition)
Types of budgets
1. Operating Budget
o The Revenue Budget
o The Expense Budget
2. Personal Budget(salary)
3. Cash budget (non- salary)
4. Capital Budget
1. Operating Budget
Provides an overview of agency function by
projecting the planned operation for upcoming
year. Deals wit salaries, medical-surgical supplies,
office supplies, laundary services, books
periodicals, recreation and contractual services.
o The Revenue Budget
o The Expense Budge
(Sullivan. E, 8th edition)
Revenue budget

The revenue budget represents the patient care

income expected for the budget period. Most
commonly, health care payers pay a predetermined
rate based on discounts or allowances.
Reimbursement of a predetermined amount.
Negotiated rates, such as per diems.
Negotiated discounts.
Capitation.
(Sullivan. E, 8th edition)
Expense budget
The expense budget consists of salary and nonsalary
items. Expenses should reflect patient care objectives and
activity parameters established for the nursing unit.
 Cost Centers A cost center is described as the
smallest area of activity within an organization for which
costs are accumulated. Cost centers may be revenue
producing, such as laboratory and radiology, or non–
revenue producing, such as environmental services and
administration.
(Sullivan. E, 8th edition)
Classification of Costs
Fixed costs
Variable costs
are costs that depend on and
will remain the change in direct
proportion
same.

Indirect costs
Direct costs are
are expenses expenditures
that directly that are
affect patient necessary but
don’t affect
care patient
2. Personal Budget (salary)
• The salary budget, also known as the personnel
budget, projects the salary costs that will be paid
and charged to the cost center in the budget
period.
• In addition to anticipated salary expenses, factors
such as benefits, shift differentials, overtime,
on-call expenses, bonuses and premiums may
affect the salary budget as well.
(Sullivan. E, 8th edition)
3. Cash budget (non- salary)
The supply and nonsalary expense budget
identifies patient-related supplies needed to operate
the nursing unit. In addition to supplies, other
operating expenses—such as office supplies, rental
fees, maintenance costs, and equipment service
contracts—may also be paid out of the nursing
unit’s nonsalary budget.

(Sullivan. E, 8th edition)

4. Capital Budget
• Fund needed for the capital items for the Growth
• New supplies & facilities & the replacement of
worn out equipment, machinery and furniture.
• The decision on capital budgeting is primarily is
based on:
i. Needs of patients and existing alternatives
ii. Effects of additional equipment on income &
Expenditure
iii. Availability of funds.
(Sullivan. E, 8th edition)
Budget Process
BUDGETING PROCESS:
• STEP 1: Establishment of operational goals and
objectives and policies.
• STEP 2: Goals must be translated into
quantifiable management objectives for
organizational units.
• STEP 3: Formal plan for budget preparation and
review including assignment of responsibilities and
timetable is prepared.
(Rastogi.H ppt)
cont….
• STEP 4: Departmental budget are revised and
master budget is prepared.
• STEP5: Financial feasibility of master budget is
tested and final document is approved and
distributed to all parties involved.
• STEP 6: Every head of the office required to
prepare budget estimate in respect of salaries of
establishment, contingent expenditure and others.
Example- Telephone, office expenses, rent of
building etc.
(Rastogi.H ppt)
ADVANTAGES OF BUDGETING:
 Fixes accountability, assignment of responsibility and
authority.
 Encourages managers to make careful analysis of
operation.
 Weakness is revealed, corrective measures taken.
 Financial matters can be handled in orderly fashion.
Activities are balanced.
(Rastogi.H ppt)
DISADVANTAGES OF BUDGETING

 Converts all aspects of organizational performance in

monetary values. Only easy aspects can be considered and
equally important facts such as organizational development
may be ignored.
 May become an end in itself instead of means to end.
Budgetary goals may supersede agency goals.
 Skills and experiences are required for successful
budgetary control.
 Time consuming and expensive.
(Rastogi.H ppt)
Monitoring Budgetary
Performance During the Year
• Variance The difference between the amount that
was budgeted for a specific revenue or cost and
the actual revenue or cost that resulted during the
course of activities is known as the variance.


(Sullivan. E, 8th edition)

To assess variance:

● Identify items that are over or under budgeted amounts

● Find out why the variance occurred (e.g., a one-time event or
an ongoing occurrence)
● Keep notes on what you have learned in preparation for next
year’s budget
● Examine the payroll and note overtime or use of agency
personnel
● Validate the use of overtime or additional personnel and keep a
note for your files
 Variance

1.Variance 2.Position
analysis analysis

b. Non-
a. Salary
salary
analysis
analysis
 Variance analysis Position Control
•  can be defined as an Another monitoring tool
analysis of the difference used by nurse managers is
between planned and the position control. The
actual numbers. position control is
• When expenses occur that used to compare actual
differ from the budgeted numbers of employees to
amounts, organizations the number of budgeted
usually have an FTEs for the nursing
established level at which
unit.
a variance needs to be
investigated and explained
or justified by the
manager of the department (Sullivan. E, 8th edition)
 Nonsalary Expenditure
Salary Variances
Variances
• A nonsalary expenditure
• With salary expenditures,
variance may be due to
variances may occur in changes in patient volume,
volume, efficiency, or rate. patient mix, supply
• Volume workload quantities, or prices paid.
requirements. New, additional, or more
• Efficiency nursing skill, expensive supplies used at
unit management, the nursing unit because of
technology, and technology changes or new
productivity. regulations could also
influence expenditure totals.
• Rate reflect the difference
in budgeted and actual
(Sullivan. E, 8th edition)
hourly rates paid
Problems Affecting Budgetary
Performance
Reimbursement Problems

Staff Impact on Budget

Magnet Hospital
Performance