Chapter 17

Zero based budgeting strengths

-Does not build on prior or incorrect assumptions because each budget is built from scratch with the most accurate information available -Complexity of the process encourages clinical and financial personnel to work closely together, which engenders buy in and acceptance from both groups

Incremental budgeting weaknesses

-Does not take into account significant changes that may need to be made in the budget -Perpetuates the current operating assumptions whether correct or not -Does not address past mistakes that have been incorporated into the budget

Incremental budgeting strengths

-Relatively simple process of requiring a specified increase or decrease in overall expense and revenue categories -Compatible with most organizational practices of budget development at the corporate level and pushed down to the facility or unit level -Efficient and effective approach when applied to a well run department

Zero based budgeting weaknesses

-Time consuming and resource intensive -Overly complex for most organizations that are well run and not undergoing significant change

Iterative budget approach

A combination of top down and participatory approach. Upper management defines strategic goals and then unit leaders develop their operating budgets to incorporate their individual goals in conjunction with the organization's strategic goals

When is a variance considered favorable?

A variance is favorable when the results are better than expected

Zero-based budgeting

An approach to budget development that begins as though the budget were being prepared for the first time. Used less frequently. Builds a budget from the assumption of no volume and no resource allocated; it is developed as though the budget were being prepared for the first time. Each budget cycle begins with a review of budget assumptions and proposed revenues and expenditures. The resources necessary are identified and resource allocation is determined based on volume.

Incremental Budgeting

An approach to budget development that extrapolates from the prior period's budgets and adjusts for future growth or decline in revenues or expenses to determine the budget for the next period. Most commonly used budgeting method. Relatively simple. A forward trend of current or recent performance with adjustments for future growth or decline in revenues or expenses. Ex: The nursing units budget would be based on the actual costs from the previous budget period with a small increase for planned salary raises and an increase in the cost of supplies. Might include a decrease in all expenses.

Evaluating Performance

Budget results are used as part of the nurse manager's performance evaluation. An evaluator determines the nurse manager's performance by looking at the budget results. Nurse managers are frequently evaluated based on their effectiveness in managing nursing overtime costs and supply use. Performance evaluations motivate managers to effectively control budgets. A lack of staff involvement and staff ownership in the unit's operation usually leads to problems for the manager.

Indirect cost

Costs that are incurred as a result of the organization's operating expenses but are not directly related to providing the unit of service. Example, salaries for administrative personnel and expenses for security, housekeeping, and building maintenance. Sometimes referred to as "overhead."

Direct costs

Costs that can be traced directly to the production of the unit of service. Examples include, nursing care and supplies to provide direct patient care. Varies with the volume of services. As patient census increases, the need for additional nursing care and supplies also increases.

Fixed cost

Costs that do not change as the unit of service volume changes. For example, administrative salaries do not change regardless of the patient census on the nursing units. The important point to remember about fixed cost is that they remain steady regardless of the change in units of service. An organization's finance leaders are always interested in increasing volume to provide additional revenue to help cover fixed costs.

Variable cost

Costs that vary directly with changes in the volume of units of service. For example, in an ambulatory clinic, the cost of immunizations varies greatly with the number of patie.nts who receive immunizations

What is the primary use of a budget?

To evaluate to progress of a department or unit.

What is the qualitative analysis of the variances?

Focuses on reconciling the underlying assumptions on which the budget was based with current conditions. Ex: Unit budgeting for 5 hours per patient day based on a given patient acuity level. Hospital gets new internist that attracts large numbers of patients with significantly higher acuity. Increases to 7 hrs per patient day. This is a qualitative change that effects the budget.

What is the quantitative analysis of the variances?

Focuses on the numerical variances to the budget. Are you over or under budget for labor (employee salaries), supply usage, or revenue generated?

Which function of budgeting is the most vital and the one that the nurse manager will be most involved with on a daily basis?

Monitoring Progress

Unit of Service

The basic measure of the product or service being produced. The unit of service varies by the health care setting and type of service being produced. Examples include, patient days (hospital), home care visits (home health agency), patient visits (outpatient clinic), and operating room (outpatient surgical center).

Variance

The difference between the planned budget and the actual results is called a variance.

Participatory approach

The people responsible for achieving the budget goals are including in goal setting.

What is variance analysis?

The process by which deviations from budgeted amounts are examined by comparing actual performance results against expected, or budgeted performance.

Full cost

The total of all costs associated with a unit of service and includes direct and indirect cost

How will the nurse be evaluated in the annual performance evaluation of the budget?

Through the comparison of the actual performance against the expected, or budgeted performance.

Top down budget approach

Upper management sets budget goals and imposes those goals on the rest of the organization

When is a variance unfavorable?

When the results are worse than expected