1. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Chapter 16 Budgeting Basics for Nurses

2. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing What Is Budgeting?

3. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. The Four Budgeting Basics  Planning  Coordinating and communicating  Monitoring progress  Evaluating progress

4. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Planning  Decide goals to achieve for a specified period, and identify resources to achieve those goals  Predict revenues and expenses on the basis of goals and budget assumptions  Budget assumptions allow managers to answer various questions that will have an impact on the budget: What should nursing salaries be in the coming year to remain competitive with other health care organizations in the area? What should nursing salaries be in the coming year to remain competitive with other health care organizations in the area? How will new services that are being offered by other health care organizations in the area affect our organization? How will new services that are being offered by other health care organizations in the area affect our organization?  Budgets are most often developed for a 1-year period on the basis of predicted quantities of services

5. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Coordinating and Communicating  Coordinating and communicating are essential functions of budgeting Many different groups within an organization come together to discuss the resources necessary to accomplish the goals of a business unit Many different groups within an organization come together to discuss the resources necessary to accomplish the goals of a business unit

6. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Monitoring Progress  Monitoring Vital function of the budget Vital function of the budget Nurse manager will be most involved with monitoring on a daily basis Nurse manager will be most involved with monitoring on a daily basis Through comparison of actual performance against expected, or budgeted, performance, an organization measures the effectiveness of its budget Through comparison of actual performance against expected, or budgeted, performance, an organization measures the effectiveness of its budget

7. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc.  Variance Difference between the planned budget and actual results Difference between the planned budget and actual results A variance is favorable when the results are better than expected A variance is favorable when the results are better than expected A variance is unfavorable when the result are worse than expected A variance is unfavorable when the result are worse than expected Monitoring Progress

8. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Evaluating Performance  Budget results can be used as part of the manager’s performance evaluation and may include a staff bonus structure  Budget results can be used by evaluators to determine a manager’s overall success in achieving goals  Nurse managers are frequently evaluated on the basis of their effectiveness in managing nursing overtime costs and supply usage—both of which are reflected in the nursing unit’s budget  Performance evaluations based on budget results can motivate managers to effectively control budgets  Even though the manager maintains ultimate accountability for the unit’s budgetary performance, lack of staff ownership of and involvement in the unit’s operation usually leads to problems for the manager

9. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing Types of Budgets

10. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Operational Budget  Operational budget Represents revenues and expenses for an operational unit, such as a product line, unit, department, or overall organization Represents revenues and expenses for an operational unit, such as a product line, unit, department, or overall organization Expenses in the operational budget are those necessary to operate on a daily basis: Expenses in the operational budget are those necessary to operate on a daily basis:  Salaries  Utilities  Equipment maintenance  Patient care supplies

11. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Operational Budget  Revenues in the operational budget are those paid to the organization from  Health insurance companies  Medicare and Medicaid  Patients’ out-of-pocket payments  Other government programs or grants

12. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Labor Budget  Subset of the operational budget  Purpose is to provide detailed documentation of salaries, wages, and benefits with respect to the operational unit  Factors that affect the personnel budget include salary rates, overtime, benefits (e.g., paid time off, health insurance), staff development and training, and employee turnover  Virtually always the largest expense item in an operational budget for a health care organization—typically 55% to 65% of total expenses

13. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Labor Budget  Used to provide managers with a productivity metric The productivity metric is necessary to give managers a measurement of the number of nursing hours worked in comparison with the amount of patient care provided The productivity metric is necessary to give managers a measurement of the number of nursing hours worked in comparison with the amount of patient care provided  Low productivity (high nursing hours worked with low patient care provided) is not desirable because it means higher staff salaries combined with lower revenues for patient care services  High productivity (high patient care provided with low nursing hours) means that the staff may be overworked and may not be able to provide safe and quality patient care.

14. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Labor Budget  Primary difficulty encountered in managing the labor budget is accurately predicting future staffing needs  Balancing patient acuity, or degree of patient illness, with the nurse-patient ratio is a concern related to the labor budget  An important aspect of labor budgeting is understanding the 12-month historical trend for both labor hours and patient days  As a general rule, organizations expect nurse managers to control the number of worked hours versus the actual salary expense

15. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Capital Budget  Represents funds allocated for construction projects and major equipment  Main requirement for a purchase/acquisition to be considered part of the capital budget: Useful life expectancy of longer than 1 year Useful life expectancy of longer than 1 year Cost over a minimum dollar amount established by the organization, usually from $500 to $2000 Cost over a minimum dollar amount established by the organization, usually from $500 to $2000  The term “capital” simply refers to the funds used to purchase long-term investments.  Capital assets are treated differently from the operating budget expense because of their multiyear value

16. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Capital Budget  Capital purchases are often considered investments and are carefully scrutinized during the budgeting process  Planning capital budget requests will test the nurse manager’s long-range planning skills  The unit or department need for capital purchases must be weighed against the financial implications when a request is made for a portion of the organization’s annual capital budget  Capital expenditures necessary for ensuring patient safety should be addressed with urgency

17. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing Budget Methods: Incremental and Zero-Based

18. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Incremental Budgeting  Most commonly used budgeting method, primarily because it is relatively simple to apply to most circumstances  Forward trend of current or recent performance with adjustments for future growth or decline in revenues or expenses  Primary strength is its simplicity It is relatively easy to take current revenues or expenses and assume a small inflationary or growth factor It is relatively easy to take current revenues or expenses and assume a small inflationary or growth factor  Compatible with most corporate organizational practices

19. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Incremental Budgeting  Extremely efficient and effective when applied to a well-run department that is supporting organizational goals  Primary weakness is that it does not take into account significant changes that may need to be made within a department. Perpetuates current operating assumptions, whether they are correct or incorrect Perpetuates current operating assumptions, whether they are correct or incorrect Problematic when departments are not well run or require significant change to support organizational goals Problematic when departments are not well run or require significant change to support organizational goals  Does not address past mistakes that have been incorporated into the budgeting process

20. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Zero-Based Budgeting  Used far less frequently than incremental budgeting  Builds a budget from the assumption of no volume and no resources allocated; in other words, it is developed as though the budget were being prepared for the first time  Each budget cycle begins with a critical review of budget assumptions and proposed revenues and expenditures

21. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Zero-Based Budgeting  Strengths and weaknesses essentially mirror the incremental approach:  Does not build on previous/incorrect assumptions  Complexity of the process yields a number of beneficial results  Encourages clinical and financial personnel to work closely together in developing a budget because neither group will have all of the information necessary to complete the task  Approach is extremely time consuming and resource intensive  Requires that a common frame of reference be shared by all participants to be truly effective  A well-run organization that is not undergoing significant change may find this approach to be far more resource intensive relative to the marginal improvement it would yield

22. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing Developing a Budget

23. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budget Process  Organizations usually have a defined procedure in place for budget development  May use incremental method or zero-based method  Procedures will define approach to budgeting:  Top-down approach: Upper management sets budget goals and imposes those goals on the rest of the organization  Participatory approach: People responsible for achieving the budget goals are included in goal setting  Iterative approach: combination of the top-down and the participatory approach

24. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budget Process  Unit-of-service is key to understanding budgets  Provides the basis for allocating expenses and revenues  Examples: “Patient days” are common for inpatient facilities “Patient days” are common for inpatient facilities “Patient visits” or visits by categories (short, intermediate, long) are common for ambulatory clinics and home health agencies “Patient visits” or visits by categories (short, intermediate, long) are common for ambulatory clinics and home health agencies

25. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budget Process  Steps in the budget development process Review the organization’s strategic plan to identify goals and objectives Review the organization’s strategic plan to identify goals and objectives Set budget assumptions upon which to base budgeting decisions Set budget assumptions upon which to base budgeting decisions Budget assumptions address issues that affect the future performance of the organization with questions such as the following: Budget assumptions address issues that affect the future performance of the organization with questions such as the following: Are supply prices likely to increase/decrease and by what %? Are supply prices likely to increase/decrease and by what %? What salary range will ensure that the organization is able to recruit and retain quality employees? What salary range will ensure that the organization is able to recruit and retain quality employees? What will the health insurance plan cost in the coming year? What will the health insurance plan cost in the coming year? What are the competitors offering in terms of new services? What are the competitors offering in terms of new services? Is the patient census likely to increase or decrease over the next year? Is the patient census likely to increase or decrease over the next year?

26. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budget Process  Gather information about past results, and use the information in combination with budget assumptions to set reasonable expectations about future performance  Predict the units-of-service that will be provided during the budget period  Project expected revenues on the basis of units-of- service  Project expenses on the basis of units-of-service

27. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing Variance Analysis

28. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Variance Analysis  Process by which deviations from budgeted amounts are examined by comparison of actual performance results versus expected, or budgeted, performance

29. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Variance Analysis  Through this process, variances are evaluated on a quantitative basis and a qualitative basis  Quantitative analysis focuses on numeric variances to the budget Example: Are you over/under budget for labor? supply usage? revenue generated? Example: Are you over/under budget for labor? supply usage? revenue generated?  Qualitative analysis of budget variances focuses on reconciling the underlying budget assumptions with current conditions in the clinical department Example: As patient acuity rises higher than projected when the budget was developed, the labor usage will be higher than is allowed for in the budget Example: As patient acuity rises higher than projected when the budget was developed, the labor usage will be higher than is allowed for in the budget

30. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Variance Analysis  Variance information typically will be presented by means of certain standard reports  Labor budget variances will be presented on a pay period basis and will provide information on performance against the budgeted standard  Overall budget variances will be presented on a monthly, quarterly, or annual basis and typically will provide information to compare the following:  Current performance against budget  Current performance against the previous year’s performance

31. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Budgeting Basics for Nursing Clinical Decision Making

32. Mosby items and derived items © 2008 by Mosby, Inc., an affiliate of Elsevier Inc. Clinical Decision Making  Labor is the largest expense line item and is arguably the most relevant and important for consideration  Labor budgets, because of the large expense to an organization, are expected to be managed on a daily basis, even from shift to shift  Many health care organizations neglect to consider the acuity of patients in the daily monitoring of labor budgets  Active daily participation in budget management links staffing and acuity variables to ensure the clinical unit’s success