Module 7: Management of Financial Resources

budget
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Terms in this set (38)
budget
- In accounting, budgeting is defined as planning, forecasting, controlling, and monitoring the financial resources of the organization
two major types of budgets
- operational budget
- capital budget
Operational budget - consists of revenues and expenses
- day-to-day accounting of needs and expenditures
- process of planning for the laboratory as an ongoing business concern and
- represents the financial parameters of the laboratory's goals for the coming year
capital budget

-evaluate major projs and investments
-important bc it creates accountability and measurability
- focuses on the laboratory's long-term budgeting or goals
-example, specific equipment acquisitions and building projects
- require major financial commitments
three types of strategies for the operational budget

- these methods and techniques are similar
- budgeting process differs in the terms applied for government and private entities
1) Forecast/Projection Method
2) Flexible Budgeting and
3) Zero-Based Budgeting
budgeting in govnment and public institution - appropriations budget
-simply referred "the budget" in the private sector
Forecast/Projection Method

-all types of budget depend on here
-indicates where the budget is spent
-intended for the next period not now
- business needs it for the present
- All types of budgets depend on the tools and techniques used in this type
- the budget is prepared based on a forecast of what is expected to occur during the next period
- decision in this budgeting process is affected by historical information and anticipated changes such as inflation or the nature of the business
Flexible Budgeting

- another disadvantage: more maintenance, time consuming, need to check regularly
- limits the ability to plan in some areas when the budget is changing
- budget depends on a variable workload volume
- ex, the number of medical technologists in a laboratory depends on the number of specimens being processed
- difficult to implement because of recruitment and retention problems
- Even the supplies must be ordered in advance to make sure that there is an adequate amount
- forecast method is applied but still closely monitored to ensure that projections are within the target.
Zero-Based Budgeting

- approach from making the budget from scratch
-not based on the previous budget, starts at zero
-company needs to justify the expense before adding it to the official budget
- based on the goals and objectives of the institution
- disregards the past allocation
- found to be successful in educational establishments as well as in large government institutions
- for successful budgeting using this method, it is still necessary to predict how much activity will cost and the historical data should still be considered
In preparing an operational budget, the following 4 issues must be considered:
- time frame
- forecasting method
- scheduling stage
- synthesis of info
time frame *most common/usual timeframe: annual *typical strategic plan: 5 year plan-long term budgeting- refers to the time range a budget will cover - set at an annual budget wherein the budget will cover a 1-year cycle - can also be prepared to cover other periods, for example, a 5-year plan - This long-term budgeting is helpful for the manager to plan the direction and long-term needs of the laboratory.Forecasting Method -lab uses historical data -used in order to determine how to allocate budgets - cutbacks = those that ordered by physicians last time but now indi na- In a healthcare facility, it is useful to consider the historical data plus the following forecasts: * Shifts in patient mix or volume * Changes in medical staff composition * Changes in business parameters such as inflation and reimbursement rates * Expansion or cutbacks in services * Population fluctuations because of the local economyScheduling Stage - helps team members to achieve objectives - one of the essential factors to consider in operational budget- Budget preparation is a tedious process, thus, most facilities start preparing their budgets 6 months before the beginning of the new budget periodSynthesis of Information -financial info = data/financial reports = formal documents of activities- financial information should be organized in a logical and orderly manner - The budget report is usually organized into 3 major parts: (1) Revenue and volume figure (2) Itemized cost categories (3) FTEs and labor hoursThe following steps and techniques are available for budget preparations:1. Developing a prediction of the future volume 2. calculate the ratio between the item and revenue or volume 3. Knowing the items with a predetermined cost 4. Comparing the revenue and the expense of the department/calculating the percentage to project future relationships1. Developing a prediction of the future volume- followed by calculating the percentage and ratio to project future economic activity - Done by applying a growth factor to the volume generated in the past, like for example, the expected increase in the number of specimens in the laboratory. - we are still using historical data2. Calculate the ratio between the item and revenue or volume- For example, for us to know how much budget we should prepare for the supplies next budget cycle, divide current supply expense by the number of laboratory tests performed. This will give us an idea how much should be prepared for each laboratory procedure, and considering the forecast in the number of increase in specimens, we can figure out the budget for supplies that we should prepare for the next cycle.3. Knowing the items with a predetermined cost- means the items with fixed known costs, for example, instrument leases and service agreements.4. Comparing the revenue and the expense of the department/calculating the percentage to project future relationships- For example, the cost of reagents represents 18% of the revenues of the laboratory.Monitoring and Feedback - its better if you yourself should manage so you should know the flow- control of financial resources is the major objective of the organization - To do this, actual results with budget projection are compared.Capital budgeting - the following are four issues that must be addressed in capital budget preparation: 1. Definition of the capital budget 2. Parts and formats of the capital budget 3. Certificate-of-need requirements 4. Tools for analyzing and making purchasing and project decisions.- process of choosing between future investment opportunities - Together with the operational budget, the capital budget enables the laboratory to determine revenue needs and manage financial resourcesCapital budget- refer to the monetary needs of the institutionCapital items - time, price and purpose = falls under capital budget, these 3 criteria should be met to have a good capital budget- purchases or projects that meet specific guidelines of time, price, and purpose - means that in order for the specific item to fall under capital budget, it should meet all three criteria, or else it will fall under supply expensethree criteria - new machines: capital budget - machine broken/equipments - broken: operational budget - usual: 1 year - ideal/strategic = 5 yr- Time criteria - Price criteria - Purpose criteriaTime criteria- time frame of capital items is at least 1 yearPrice criteria- varies widely and depends on the accounting policy of the businessPurpose criteria- Entirely new instruments, or building projects should normally fall under the capital budget - For repairs or parts replacement, it will fall under the operational budgettwo parts to a capital budget1. Projects costing less than a set limit (usually $10,000) - these usually need minimal paperwork - preparation of this type of capital budget usually just requires only written justification describing the purpose, function, goals, and prioritization 2. Projects costing above the set limit which requires extensive in-depth analysisCertificate-of-need (CON) authorization- required from a healthcare facility - purpose of this is to control spiraling medical costs and to avoid duplication of services and the overbuilding of hospital beds - required when projects or buildings will exceed the set limit which is usually at $150,000two types of analysis in evaluating capital expenditures:1. Narrative Tools 2. Quantitative Tools1. Narrative Tools - includes a written justification of the project and prioritization of the competing proposals- Justification - PrioritizationJustification- mgr must explain why the project is needed, how it will benefit the laboratory and why it should be considered over competing projectsPrioritization- additional step needed in the justification process is to prioritize the project, both in the time frame and in relation to other requests2. Quantitative Tools - Common methods used in healthcare facilities: - Payback Period - Average Rate of Return (ARR) - Net Present Value (NPV) - Internal Rate of Return- vary from simple profit-and-loss projections to sophisticated models of the account taxation, inflation rate, economic forecasts, and revenue and cost predictions *profit and loss - projected incomePayback Period- Determines how long it will take to recover cash outlaysAverage Rate of Return (ARR)- calculation of the attractiveness of the average yield that will be earned over an investmentNet Present Value (NPV)- Determines the current value of an investment considering the impact of interest and inflation, and the anticipated revenueInternal Rate of Return- also known as the time-adjusted return method - comparison between cash flow and cost of capital factors with the amount of investment required