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Introduction

As mentioned in Chapter 3, the operating budget is the overall plan for future operations, expressed in expense funds and corresponding revenue funds. The operating budget attempts to consider all revenues and expenses of an organization. Of course, the goal is to have revenues exceed expenses. The creation of the operating budget should be a joint effort by the administration and management teams.

The operating budget is one of management's most widely used tools for financial planning and controlling the organization. Although the operating budget is not in itself a management tool, it becomes one through management action. If a manager does not take action to correct budget performance—which, let's face it, some never do—then the operating budget is useless.

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Management action is critical to managing the operating budget.

Analyzing Budget Differences

If you detect a budget difference—for example, you determine that expenses have gone up—you must analyze the variance to identify its root cause. To illustrate, consider the various new vaccines to combat COVID-19, which can be administered to anyone age 18 and older. Suppose it costs a healthcare organization $75 per dose to purchase the vaccine and the organization charges $100 per person to administer it. So, the net revenue per vaccine administration should $25 per injection.

Now imagine that expenses went up during the period in which vaccines were administered. To analyze the root cause of the budget difference, you might ask these questions:

  • Did volume increase? In other words, did more patients get the vaccine?

  • Was a more expensive vaccine used than initially planned?

  • Was more revenue received to offset the expenses incurred?

An increase in expenses isn't always bad—which is true in the vaccine example. If more people receive vaccines than anticipated, that is a good thing; in the long run, fewer people will become ill, resulting in both a cost savings and better health outcomes for patients. With COVID-19, herd immunity will be achieved when 70 to 80% of the American population receives the vaccine, thus decreasing its transmission.

The operating budget projects anticipated activities and the resources required to support the planned activity. It is a projection of revenues and expenses for a given time period (usually one year). It has a framework within the financial structure and reporting mechanisms of the organization.

Specifically, the operating budget is based on the following:

  • Anticipated levels of output, including:

    • The number of admissions

    • The number of patient days

    • Departmental activity

    • New services/programs

  • Predetermined hospital goals and objectives

  • Agreement with the strategic/long-range plan

Key Metrics in the Operating Budget

When creating the operating budget, a key metric for managers is the workload for the next year. Workload is the amount of work performed by a unit. It is often measured in units of service, which are used to determine ...

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