Introduction
Budgeting is a plan for income and expenditures. It is an organization’s forecast of expected revenues and expenses, measured against actual financial operations after a specified period. It is a plan of action written in monetary terms. A budget is a key to financial management in any organization.
It is a very important function for the management of hospitals, depending on the changes in funding and the competition faced by other hospitals. Healthcare organizations’ plans should be based on the mission, policies, and financial plan of the whole health system. They should be able to measure if the plan has been achieved and establish any arising variations. Since these institutions mostly depend on reimbursements from the government and other organizations, they should be able to plan well for these funds and account for them after some time.
The senior management should liaise with the managers to develop a culture of accountability. The managers of the departments should be able to manage their expenses, and their budgets should reflect the cost-cutting and revenue maximization measures. It should be made clear to the managers that their performance and salary reviews at the end of the year will be measured against how well they can meet their budgets. This is because, besides being the institution’s goal, it is also a managerial requirement. The management is required to monitor any variances that occur and be able to come up with and implement corrective actions (Clark, 2005, p. 5)
Budgeting is important in healthcare financing to ensure that there is an optimum allocation of resources. The departments in these institutions are many and each of them has to be planned for and, the finance department should understand the flow of funds in the institution. A budget acts as a tool of communication in the institutions. The departments are able to come up with their budgets, which are forwarded, to the finance department for compilation. It shows the needs of the organization, the expected expenses, and revenues and this simplifies the running of the hospital. They also enhance the control measures since the organization is needed to carry its operations guided by the budget and any loopholes that might lead to misuse of funds are monitored.
It is a tool that ensures that all the monetary transactions are monitored and that all the expenditures and receipts are verified by transaction receipts, bills, and financial statements like the cash flow statements, income and expenditure statements, and statements regarding any other financial transaction. Health care institutions will also get opportunities that are arising. They can present their budgets to people and companies who might be willing to fund them because the plan clearly states their deficits. They also save a lot of time when making financial decisions because they refer to their budget. Any extra money will be easily noticed and it can be used for the development of other projects. The decision-making process is made easy and thus, the running of the institution is enhanced.
Types of budgets
There are various types of budgets for healthcare institutions. The master budget includes all the major budgets for the hospital. These are capital, operating, long-range, program, and the cash budget.
Capital budgets
These are budgets prepared to portray the costs of the assets of the hospital and the services offered. They show the expected revenue and expenses in each procedure and how these costs are expected to be paid back. This is a plan for long-term investments in new products, machinery, and any researches that might be carried out. Hospitals have high capital costs because of the equipment required and, they prefer to lease instead of buy them.
With the advances in technology, these costs increase when they plan to purchase new equipment. These are like the CT scanners, installation of IT in the hospital and, MRT machines among others.
Purpose
The major purpose of capital budgeting in hospitals is to enable them to realize and prioritize the capital projects based on the expected returns to the organization. The capital budget gives the projects selected and, the returns expected from them. It ensures that the hospital obtains the assets, which are essential for the provision of quality service. Developments in the health sector are catered for and this ensures that the hospital is able to cope with the increasing competition in this sector. The management is able to evaluate its long-term investments since any equipment or new discoveries are an asset to the institution. It ensures that the allocation of resources to the proposed projects is done in the most profitable way. By evaluating the internal rate of return, the profitability index, net present value, and the annuity, the capital budgets are formulated to ensure that the returns to the organization are maximized (Steven & Christina, 2001, p. 7).
The effects of the capital budget on the cash flow of the hospitals are not much. This is because the assets purchased are to improve the services offered and they may not have a direct impact on the cash. Even with new equipment, the cash may remain the same but the services offered will be of high quality. However, they have a great impact on the future of the hospital. This is because the capital equipment obtained will remain an asset of the hospital in the end. The services offered will be of high quality with the use of new equipment and this will enable the hospital to maintain and attract customers.
Operating budget
This is a plan of the day-to-day operations of the hospital for the period covered by the budget. If the expected revenues exceed the expenses, it shows that a profit is expected and vice versa. The profits generated are used by the management to replace and repair the equipment, which is old and worn out and, to expand the range of services provided to enhance the healthcare quality. It budgets for the revenues expected from bills, Medicare, and other insurers. The operating costs in the routine operations in each department are planned for in the budget.
Purpose
These cater to the goods and services that are offered in the hospital. They are able to plan for the expected revenues, which will be obtained, and the associated expenses. In addition, the salaries and wages are determined since; the operations of the hospital should be able to maintain its staff. The management will use it for their laid strategies. They are able to run the operating plans in the short run and the long-run strategies, which are set to be achieved. The needs of each department are evaluated depending on this plan to ensure that their daily operations are monitored. It is also useful for the staff to realize that there is revenue attached to their departments and the decisions on the staff are made depending on the budget. They cater for overtime and casuals to ensure that the expenses incurred are according to the plan.
Since the operating budget involves the running of daily activities in the hospital, it greatly affects the cash flow. For the operations to run cash will be needed and this means, that the budget mainly focuses on how much revenue is expected to be raised and the expenses incurred. The operations that are planned for could have a major effect on the running of the hospital if they are not approximated properly. The effect of the operations budget on the future of the hospital is not much. This is because it covers the operations of a specific period may be for one year. The operations in one period may differ from those in another period. Nevertheless, if it is a part of the long-range budget, it will affect the future of the hospital.
Cash budget
This is a prediction of the cash flows expected based on the other budgets. It is an estimation of the receipts and withdrawals in the institution over a given period. It portrays all the cash effects on the plans and, if there are any insufficiencies, the budgets can be modified. In the hospitals, the cash is expected to have risen from the services offered to individual patients, the government, and other funding institutions. It is prepared after all the other budgets.
Purpose
It shows the financial status of an institution and if there are enough funds to finance the planned projects and operations. This gives the management a projection of potential problems and this gives them a chance to take the necessary action. They show whether a surplus or a deficit is expected and hence, the management is able to know how to utilize the surplus or how to handle a deficit. It plans on the cash required by each department and how much to borrow to cater to the deficits.
The cash budget deals with the financial terms of the hospital. Therefore, it totally affects the cash flow since it is a plan of where to get cash to finance the daily operations. The sources of cash need to be reliable to ensure a continuous flow and they must be properly planned for to avoid unnecessary uses. The effect on the future of the hospital is not much since the expected cash has to be planned for each year. But the cash flow should be reliable to ensure that the operations of the company are run efficiently.
Long-range budgets
These are the plans covering a long period of time maybe three, five, or the next ten years. It is used by the hospital to achieve long-term goals and they include what must be done each year to achieve these goals. These are plans toward the achieving of the hospital’s vision and where they want to be after a certain period of time. Plans have to be made on what is required to be achieved in each year and the progress should be monitored from time to time.
Purpose
These budgets assist the institutions in building a sense of commitment in the future to ensure that it does not remain in one place over a very long period. The hospital is able to develop long-term goals so that they do not only focus on day-to-day life, and plans which are always attainable within one year. It assists in the preparation of operating budgets based on the overall purpose and many operational budgets will assist in achieving the long-term plan. They are used to achieve the mission and vision of the institution through strategic plans where specific and broad objectives and strategies are incorporated together (Steven & Christina, 2001, p. 6).
Long-range budgets affect a certain amount of cash in each financial year. Since they are long-term, they will not directly affect the cash flow but they will only need to be allocated some cash during operational budgeting. They affect cash flow through operational budgets since they are part of the operations each year. They affect the hospital’s future since they are projects, which will generate long-term benefits for the company. If they end as planned, they will enhance the operations in the hospital and they will improve the quality of services offered.
Program budgets
This is a budget on specific projects where new projects or existing ones are evaluated instead of planning on the associated revenues and expenses from all the projects. The programs to be undertaken are determined depending on their importance. How to achieve these programs is the main concern like, if an advanced laboratory is required, it will be needed to have its plan. Once decisions are made and the evaluation of the programs is made, the expenses and revenues will be put in the operating budgets.
Purpose
The main purpose is to be able to make a decision. The specific programs are determined and the management makes a decision depending on the evaluation. Since they run for more than a year, they are not made as part of the operating budget but, treated as a special budget. They are used to ensure that new programs are formulated to enhance the development of the hospital.
The program budgets affect the cash budget of the hospital and in turn the cash flow. They have to be allocated some cash in each financial year. Once they are allocated the planned cash, they do not affect the cash flow for the rest of the year. However, they greatly affect the future of the hospital because they are programs, which aim at improving the services offered in the future. They will improve the operations of the hospital once they are completed and could lead to a rise in the cash flow.
Budgets could also be classified as fixed, flexible, and variable. Fixed budgets are based on the annual volumes of activity. These could be based on the number of patients attended to, the inpatient and outpatient volumes; tests carried out, or based on any other activity, which is carried out on daily basis. For flexible budgets, they are based on a certain range that is, there is a high or a low range of production capacity. A variable budget allows for control that relates to the production generated.
For any organization to exist, it must have a cash flow that is reliable. This is because its operations will need cash to be executed. The health care institutions will need to ensure that they have the cash to finance the programs, projects, research, and development and to maintain the workforce. Most of the institutions are catered for in national budgets and other funding institutions fund them. The money from their patients also adds to the cash generated and, they should ensure that they maintain quality service to cope with the increasing competition in the sector. The cash generated from the services offered determines the future of an institution and thus, it is important that the hospitals evaluate their inflows and outflows. They should take corrective measures to ensure that they are not having deficits so that they continue being in business.
Conclusion
Therefore, healthcare institutions should have budgets like any business organization. Whether they are profit-making or non-profit making, they should have budgets mostly annually. These will be produced when they need funds from their donors to show how much amount they have as deficits. A budget will also enable the hospitals to come up with investment projects and acquire equipment, which is modern to ensure that they develop. It is very essential for any firm to have a budget to ensure that they plan for their funds and have away, which they can measure whether they are on the right track.
Reference List
Clark, J. (2005). Improving hospital budgeting and accountability, Healthcare Financial Management. Web.
Steven, A. & Christina, M. (2001). Budgeting concepts for nurse managers, Philadelphia: Saunders.