Introduction
Every organization should do its best to create and manage its budget professionally and properly. This statement is equally applicable to not-for-profit entities, and hospitals are no exception. In these organizations, nurse leaders are responsible for developing and monitoring budgets, including fixed and variable costs, capital expenses, and other important aspects. Thus, the current paper presents the upcoming budget for a 20-bed medical-surgical unit, and specific attention is drawn to all the points under discussion.
Primary Cost Categories
When nurse managers deal with budget management, they can come across various types of costs, including primary ones. In particular, the primary cost category includes costs that can directly impact the unit’s performance because they are involved in creating and distributing services. This category is represented by a few specific elements, such as labor, equipment, and energy costs. Labor refers to the required number of doctors and nurses to provide care to patients. Specific equipment, tools, and medications are additionally significant to cope with this task.
Simultaneously, the energy costs represent utility bills that are needed for operation. These are called primary because it is impossible to distribute health care to patients without incurring them. That is why the primary cost category often represents the largest part of the organization’s total cost, and it even accounts for over 85% in some cases (Aldamigh et al., 2020). This information demonstrates that the medical-surgical unit is expected to manage these primary cost categories carefully.
Fixed Costs
It is worth acknowledging that there are a few cost categories that can affect budget management. Fixed costs are among them, and they represent expenses that stay the same irrespective of how many patients are admitted (Dial, 2021). This statement denotes that the medical-surgical unit is expected to spend a pre-determined amount of financial resources to keep operating. In the current scenario, the fixed costs are salaries and utilities, and their estimated amount is $3 million in the upcoming budget. This sum includes annual salaries for six surgeons, twelve nurses, and ten technical staff members. The suggested total amount of the salaries is $2.5 million.
Thus, the remaining $0.5 million is needed to cover the utility bills throughout the year. This cost item includes money spent on electricity, heat, and water supply. One should acknowledge that the cost of $3 million is fixed because the unit is forced to spend it irrespective of how many patients will be admitted. That is why the selected medical-surgical unit is interested in witnessing higher volumes of patients.
Variable Costs
Variable costs represent the opposite phenomenon because they are directly connected to the number of patients. In particular, these expenses can be defined as “costs related directly to patient care occurring during the encounter” (Kim et al., 2022, p. 2). Suitable examples of this cost item refer to medications, meals, expendable supplies, and other costs that are directly connected to patients and their care.
Furthermore, hourly staffing expenses are additionally included in the given category if the unit requests them. It is challenging to calculate the variable costs for the upcoming year because no one can precisely predict how many patients will be admitted during a year. It is even impossible to calculate expenses per patient because various health conditions require different numbers of financial resources. However, a suitable scenario is that the annual variable costs are close to the fixed ones. In this case, the estimated total costs will be $6 billion.
Capital Expenses
Capital expenses represent an additional cost item that should receive adequate attention. Examples of such expenses include building new facilities, replacing large medical equipment, or installing electronic health records (EHRs) systems (Minnesota Department of Health, 2019). The shared feature of all these expenses is that they depreciate over time. As for the medical-surgical unit, it is beneficial to install an EHR to improve performance and achieve better health outcomes.
A suitable option is to purchase an EHR from Epic Systems Corporation because this organization is among the best manufacturers of such products. The cost of this solution depends on the unit size and the needed features. Since the unit has 20 beds and 18 medical professionals, the estimated subscription fee for the needed EHR is $90,000. In addition to that, it will be necessary to spend an additional $10,000 per year on maintenance costs. Thus, the upcoming budget should include $100,000 as the capital expense.
Justifying the Capital Expense
While the purchase of the specific EHR service is recommended, it is reasonable to present evidence to clarify that this expense is justified. On the one hand, EHRs are beneficial for healthcare organizations and patients. Potential advantages include presenting accurate and up-to-date patient information, sharing information securely, and establishing coordinated care. On the other hand, this intervention is cost-effective for medical establishments, and scientific evidence proves this statement.
According to Highfill (2020), hospitals that employ basic EHRs “have 12% lower average costs than comparable hospitals” (p. 65). If we apply this finding to the scenario under analysis, we will see that an EHR can help the unit save over $600,000 because the estimated total costs are $6 million. In other words, the selected Epic Systems Corporation EHR can help the medical-surgical unit reduce its expenses by $500,000 every year. This sum represents the Return on Investment, and the given financial analysis explicitly demonstrates that the presented capital expense is justified.
Using the Budget to Manage Expenses
A budget is an effective and practical tool for expense management. In general, any budget includes estimated figures representing financial resources that are going to come and leave an organization. Since I am a nurse manager, I will effectively use the budget to cope with expense management. The most important advantage is that this official document includes the list of all expected expenses and their estimated costs. Thus, if I wonder whether it is appropriate to incur a particular expense, I will obviously consult the budget to see whether their purchase is included.
However, one should admit that unexpected situations occur, and it is impossible to control and predict everything. Under some conditions, unpredictable expenses are needed and justified, and a recent example happened during the COVID-19 pandemic. The crisis resulted in the fact that healthcare facilities were forced to incur significantly higher costs to provide care to an exceeding number of patients. That is why a reasonable practice is to establish a specific fund that will allow the unit to be prepared for a similar crisis.
Budgeting Process and Strategic Plan
Even though a budget and a strategic plan are different phenomena, there exist significant links between the two. According to Kabeyi (2019), strategic planning “is the process of defining an organization’s direction and making decisions on allocating its resources to pursue this strategy” (p. 27). This phenomenon additionally includes activities that are used to set priorities and determine how to mobilize resources to achieve the stipulated goals (Kabeyi, 2019).
In turn, a budget presents an organization’s income and expenditures over a particular time period. The two are closely connected because a budget denotes how fundamental strategic planning can be. For example, if an organization has a big budget, it is likely to set ambitious objectives that can significantly impact performance. Low budgets do not contribute to this state of affairs since when an organization does not have a large income, it has fewer resources to establish and achieve distant goals. In other words, budgets determine the volumes of strategic planning in an organization.
Conclusion
The paper has overviewed the most important aspects of budget presentation for a 20-bed medical-surgical unit. The primary cost category was defined, and it was determined that labor, equipment, and energy costs represent it. Furthermore, the comparison of fixed and variable costs was included, and the paper described their amount for the unit. The estimated fixed costs are $3 million, while the specific number of variable costs is impossible to include.
However, a suggested figure was $3 million, and the unit’s total costs were $6 million per year. The unit could benefit from the purchase of an electronic health record system, which is a capital expense. This intervention is needed because it can contribute to establishing coordinated care, which is advantageous for the organization, staff, and patients. The careful analysis reveals that this capital expense can result in approximately $500,000 Return on Investment. Finally, a budget is significant because it impacts and determines an organization’s strategic planning.
References
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Dial, A. (2021). Fixed vs variable cost. LinkedIn. Web.
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Kabeyi, M. (2019). Organizational strategic planning, implementation, and evaluation with analysis of challenges and benefits. International Journal of Applied Research and Studies, 5(6), 27-32.
Kim, J., Jacobs, M. A., Schmidt, S., Brimhall, B. B., Salazar, C. I., Wang, C. P., Wang, Z., Manuel, L. S., Damien, P., & Shireman, P. K. (2022). Retrospective cohort study comparing surgical inpatient charges, total costs, and variable costs as hospital cost savings measures. Medicine, 101(50), 1-8. Web.
Minnesota Department of Health. (2019). Health care capital expenditures in Minnesota – A data short take [PDF document]. Web.