Healthcare Accounting and Budgeting

Stop action time studies

Also known as scientific management, is a theory of management that analyzes and synthesizes workflows. Created by Frederick Taylor and William Gilbreth in 1910. Its main objective is improving economic efficiency, especially labor productivity. By using stop action time studies, they were able to assign a value per unit time.

CFO

Chief Financial Officer, responsible for financial planning/reporting, risk management and sometimes data analysis, but not for budgeting in most large organizations.

Step-wise fixed cost

Costs that are fixed for a time period and then becomes variable. Graphically, cost over time looks like steps/stairs.

Formal vs. Informal "control"

Enough equity comes with formal control. Large enough debt comes with forms of informal control

Cost vacillation

If costs vacillate, they keep rising and falling by small amounts e.g. after weeks of vacillating around $75/ barrel, the price of crude closed at $85/ barrel

Transparency

The process of offering a clear, concise, and balanced view of your company's financial situation to shareholders.

Cash budgeting

"Budget method focused on the inflows and outflows of cash, regardless of when revenue/expense was gained/incurred. Not as accurate because it doesn't capture liabilities. GAAP recommends The cash or ""operating"" budget (in contrast to the CAPITAL budget) focuses primarily on short-term needs for the coming year. It enumerates whether the organization expects to have sufficient money on hand, or expects to collect enough during the budget period to pay for what it needs on a day-to-day basis."

Managerial vs. Financial Accounting

"Managerial accounting (budgeting) is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals. It varies from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions. The cash or ""operating"" budget (in contrast to the CAPITAL budget) focuses primarily on short-term needs for the coming year. It enumerates whether the organization expects to have sufficient money on hand, or expects to collect enough during the budget period to pay for what it needs on a day-to-day basis."

Allocation

"Subdivisions of an appropriation into more detailed categories, such as responsibility centers, programs, or objects of expenditure. Sometimes, spending is further broken down into allotments."

Consumption Smoothing

(a.k.a. revenue smoothing). The attempt to consume/spend approximately the same amount every year to try to make it easier to plan for the long-term in life i.e. to optimize the standard of living during a later phase of life. Example: saving for retirement. Live a more frugal lifestyle during working life to enjoy a better lifestyle while retired.

Corporate model v. Partnership

A corporation is an independent legal entity owned by shareholders, in which the shareholders decide on how the company is run and who manages it. A partnership is a business in which two or more individuals share ownership

1966 - Medicare reimbursement for capital costs

A deal made by LBJ administration to pass medicare/medicaid, compromise was made with hospitals; if hospital borrowed for extensions or repairs( capital cost), could roll interest on debt into operating cost and increasing bills charges--> pushing charges on medicare/ insurance. Lead to massive expansions of hospitals in late 60s- 80s

Treasury bill

A debt security issued by the U.S. government with a maturity of 3 months to one year

Variable Cost

A form of direct cost. Costs that can be directed traced to a widget but can also vary depending on level of output.

How much money did we make?

A function of accounting and good book keeping we can determine how much money we made

Strategic budget

A long-range budget that spans a period of more than one year. The intent behind strategic budgeting is to develop a plan that supports a long-range vision for the future position of an entity.

Step-down

A method of cost allocation that allocates the cost of services provided by one department to other service departments and operating departments

What does it cost us to do what we do?

A vital function of accounting, budgeting and mangement. Can be difficult to determine

Repo-Man

A way to recoup debt; collect debt by repossessing items i.e your car

Accounting and Finance

Accounting provides information on the financial state/health of a firm. Accounting and budgeting describe how money moves through firms. Money => Flow of Funds. It can also be seen as a series of audits. Finance is the structure of cashflow and the foundation of capitalism. Key instruments are equity and debt.

Taylorism (Gilbreth)

Also known as scientific management, is a theory of management that analyzes and synthesizes workflows. Created by Frederick Taylor and William Gilbreth in 1910. Its main objective is improving economic efficiency, especially labor productivity. By using stop action time studies, they were able to assign a value per unit time. Enemies of labor because it valued efficiency over working culture/tradition and workers rights, status and skills.

Profit

Amount by which an organization's revenues exceed its expenses.

False economy

An action that saves money at the beginning but which, over a longer period of time, results in more money being spent or wasted than being saved e.g. choosing not to have your vehicle serviced on time

Interest rate v. Risk

An direct relationship exist between interest rates v risk. Interest rates increase with increasing risk; lenders need increase compensation in order to take on risk of not being able to recoup their capital( investment or loan). Capital works by people taking risk. Interest rates are also highly associated with demand for money. An example of this is student loans and the reduction in interest rates with a co-signer. US treasury bonds have very low interest rate because they are the safest investment in the world

Audit

Auditing is a form of financial control, mostly seen in a centralized budgeting function. Usually this is carried out in 2 ways 1) self reporting (e.g. time sheets) or 2) monitoring. However, consistent monitoring which can be costly, unproductive, hinders creativity and demoralizing. There is a need to data tracking technology in both methods.

Average Cost

Average is the total cost divided the by the total number of widgets, where the total cost is the sum of the direct and indirect costs. Avg C = (DC+IC)/Q.

The profitability of PhRMA

Big Pharma has a 12% profit margin across the industry. Stable business model rooted in patent protection.

Bond Covenant

Bond covenants are part of the legal documentation that makes up a bond, whether it is issued by a company or the government. They are usually intended to protect investors by providing some assurance on what the bond issuer will and won't do over the life of the bond

Budget process

Budget is an organization-wide plan for a period of time for resource allocation written in numbers rather than in words. It can be (A) programmatic, (B) one-year (based on a fiscal or calendar year), (C) strategic (looking ahead to the next 5-10 years, e.g. -- we don't like to use this model in healthcare, though, because the field evolves so rapidly.) It is an organization-wide effort that is separate from the CFO function. It is an iterative process to be repeated for set periods of time (e.g. annually). Usually starts by a budget request from the budget office. Cost centers must report back to justify their spending for the time period.

Accrual budgeting

Budget method that doesn't worry about cash flow and instead focuses on when revenue was actually earned and when expenses where actually incurred. Accrual budgeting is normally more accurate. Allows for better budgeting and planning because it looks at when liabilities are incurred and revenue earned and not when cash is paid.

Budgeting as political

Budgeting is a political process because it is a competition for resources -- in this case funding and money -- between various departments in an organization. There is a total available for the firm at large to access and it must be divided between departments based on how much each is forecasted to need, and so heads of divisions in an organization must advocate for themselves

Iterative

Budgeting is an iterative process in healthy organizations. It is lengthy and requires many steps and stakeholders. The word "iteration" here refers to how this year's budget is almost always based on last year's budget, excepting small changes; new budgets iterate on previous knowledge of costs/revenue.

Cash costing vs. Accrual costing

Cash costing: Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees. Accrual costing: Revenue is recorded when earned and expenses are recorded when consumed.

Capital Budget

Capital budget is more of a long term budget and includes assets such as building/land, equipment, factory and IP/software. It is usually a bigger budget (though not always!) than an operating/cash budget.

Activity based costing

Cost measurement system that focuses on the activities of the organization that drive its costs.

Equity v. Debt

Debt is like an "IOU". Common debt instrument is a bond, which is a loan in a legally binding contract. Equity is riskier than debt and therefore as greater returns. Common equity instrument is a stock. Both are traded in secondary markets.

Securitized/Collateralized Debt

Debt is the resale value of an asset coupl with any assoicate debts (e.g. mortgage) to get the net value. Securitized debt is a loan with collateral. Unsecuritized debt is a loan with a limited penalty in the form of interest payments (e.g. credit card). Not paying back unsecuritized debt can affect things like your credit score.

Responsibility Center

Defined in Week 2

Periodicity

Dividing business activity into measurement intervals,e.g. monthly, quarterly, annually

Dutch = joint stock ownership company

Dutch original founders of NYC and mainly dealt in the spice trade which was risky business. Borrowed money in order to fund ships to sale across the world to buy spices and sell to the Western World. Created idea of joint stock ownership to split the risk of owning expensive ships that may sink. For example, 1,000 people had ownership of 1000 ships.

Outcomes assessment

Evaluation of an organizations outcomes with respect to the results they were trying to achieve

Internal vs. external audience

External audience comprises of individuals or groups outside and not closely related to the organization . Business communication by a company or for a product is generally targeted towards a specific audience. A certain classification on the basis of the targeted audience can be internal or external audience. On the other hand, the internal audience term refers to individuals or groups within (or closely associated with) an organization like stakeholders, board of directors or employees or colleagues.

For profit v. Non profit

FP and NP are similar in their demand for money, but deal with cashflow differently. NPs don't pay taxes and have to be very open with financial statements. Revenue can be obtained via donations, but other methods are available now. FPs pay taxes and have to comply with SEC regulations, especiall if they IPO and become a public company.

FASB

Financial Accounting Standards Board. A private, non-profit organization standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest.

Capital

Financial assets obtained from special financing sources. Who puts in the funds gets the returns.

Financial Controls

Financial controls can be enacted as a mechanism of auditing, mostly seen in a centralized budgeting function. This can only be carried out in 2 ways: 1) self reporting (e.g. time sheets) or 2) monitoring. However, consistent monitoring can be costly, unproductive, hindering to creativity and demoralizing. Data tracking technology makes both methods more efficient when used.

GAAP

GAAP=Generally accepted accounting principles- set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its approved practices.

Ownership/Control/Claimant of Profits

Having debt does not imply ownership, but a large debt owner can exert influence as a defacto owner. In a bankruptcy case (Chapter 11), debt owner has the first strike at the assets. Equity implies ownership. However, there is no contractual obligation to make a profit and pay dividends. The major difference between Bonds and stocks is that (capital) stockholders have an equity stake in a company (owners), whereas bondholders have a creditor stake in the company ( lenders). Being a creditor, bondholders have priority over stockholders.

Hospital Construction Bonds (low risk)

How hospitals can get into the capital market;debt i.e bonds. Hospital bonds are considered low risk debt. Essentially an IOU. Does not implied ownership. A bond is a contact and as such is legally actionable if not paid back ( unlike other forms of debt)

Initial Public Offering

IPO is a way for companies to get capital from outside individuals by selling ownership of the company through stocks on a public exchange. Facebok going public was an example of an IPO. Question is often what is the right price to go public at? Too high, no one will buy the shares, but too low, they may not get the total amount of capital they need. Facebook was willing to selling 450 million shares=15% of company. Annual profit that year was $1B, so estimated dividend for investors would be around $0.33 The investment bank underwriting the sale suggested selling each share at $38 which only equals 0.87% ROI! That means that to reach 5% ROI ($1.90), the company would have to grow 600%! Reality is though, that FB is currently makes $22B in profit annually, so it was worth the risk in the end for initial investors.

Risk v. Return

Idea that risk is correlated with returns. The higher the risk, usually the better the returns. Equity is normally riskier than debt and therefore gets better returns.

Information

In a capital market, the flow of goods is based on the flow of good information. Failure happens when there is imperfect information (e.g. cultural, political, legal).Why good accounting is so important. How can you tell how much a firm is worth( i.e publically held firms) if good accounting( information) does not exist

Audit/Oversight

In the Bost School Budget Case

Budget Director

In the Bost School Budget Case

Cost Director

In the Boston School Budget Case, the Cost Director is presumably the individual tasked with budgeting costs for the cost center of the organization. (initially, this is Leo Burke)

Decentralization

In the Boston School Budget Case, the old budgeting system was decentralized where budget ownership was split among the different managers. Benefits of a decentralized budgeting function is that there is better knowledge and faster response to the needs on the ground; however, decentralization can also result in less accountability and in "gaming" of the system.

Time as proxy

In the Cambridge Community Health Network Case, ABC used time as a proxy for labor. For example, salary can be broken down to cost per unit.

Public/Private hospitals

In the non for profit hospital arena, two types of hospitals; public and private. Public hospitals are owned and managed by public entities( usually local municipalities i.e NYC). Must provide services to everyone regardless of insurance or ability to pay. Most hospitals are private and do have ways to limit services they provide to non insured including sending them to public hospitals. Public hospitals have fallen out of favor, however two largest systems of public hospitals exist in NYC/LA to serve large undocumented and uninsured populations

Inclusiveness

Inclusiveness is one of the three aspects of budgets (the other two are that budgets are iterative and political.) Inclusive budgeting means that many stakeholders contribute their thoughts to the process and advocate for their departments or projects to receive funding

IRS - tax policy

Internal revenue service. Invested in good accounting practices in order to be able appropriately recroup what is owed in taxes

Buy vs. Lease

Leasing is the action of renting a widget owned by another entity. Unlike a pure purchase, leasing an item allows for more flexibility. In this case, leasing a property which has large capital investments may be an alternative if a company cannot procure funds for a purchase upfront.

Depreciation

Loss of value over time as a product wears down.

Program measurement

Measurement of program outcomes via economic or financial activities in terms of money, hours, or other units.

Amortization

Mental devaluation of a product

Philanthropy

Monetary philanthropy in the form of donations. Used to be primary way to fund NP. However, hospitals started using the FICA loophole to issue bonds, thereby moving away from the philanthropic model to a debt funding model. To pass medicare/medicaid, compromise was made with hospital association; if hospital borrowed for extensions or repairs, could roll interest on debt into operating cost and increasing bills--> pushing charges on medicare/ insurance

Discretionary vs. non-discretionary spending

Non-discretionary spending is spending that is required by a budget, contract, or other commitment. Discretionary spending is spending on non-essential items/ costs.

Capital costs vs. operating costs

Operating Cost =predictable cost- lights, gloves, soap, nursing services. Meet cost through hospital bill. Capital cost- cost to expand and renovate. Use to meet these cost through philanthropy

Responsibility Center

Part of the organization, such as a department or a unit, for which a manager is assigned responsibility.

Operating budget

Plan for the day-in and day-out operating revenues and expenses of the organization. It is generally prepared for 1 year. Includes costs such as labor, utilities, rent and supplies.

Primary and secondary debt/equity markets

Primary & secondary debt market essentially bond market. 4x the size of the stock market. High level of security and liqudity. Equity market= Stock market. Higher risk but legal ownership. Claim on assets

Return on equity

Profitability ratio that assesses the amount of profit earned on each dollar of equity.

Break Even Quantity

Quantity where the revenue from the sale of quantity equals the cost of the quantity. Where profit = 0. Q = FC/(Price - VC)

Structural shock

Random, unpredictable changes to the structural sector of an economy (caused by things outside the scope of economic models) that have a widespread impact on the economy e.g. restructuring physician payments from retrospective to prospective payment methods

Diversification of Risk

Risk diversification is the process of having a diversity of investments in a portfolio in order to lower risk while still earning profits. For most individuals this means mixing higher risk equity with lower risk bonds

Risk tolerance

Risk tolerance is the amount of risk that an investor is comfortable taking or the degree of uncertainty that an investor is able to handle. Risk tolerance often varies with age, income, and financial goals.

Angel Investor

Riskiest of all equity investments. Very early investors( 1-3 employees) Because of large risk, higher percentage of equity for less amounts. Provides capital for a start-up in exchange for either convertible debt (i.e. to be repaid or ownership equity

Bank/S&L

Savings and loans (S&L) associations tend to work more with residential mortgages, while banks may tend to concentrate on working with large businesses and with credit card accounts

Venture Capitalist

Second riskiest of all equity investments.

SEC

Securities and Exchange Commission of the federal government. Holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry. Created by Congress in 1934; the SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.

Deficit spending

Spending more money than you have (i.e. expenditure exceeds revenue), can end up in the debt market if deficit spending continues long term. Example: if a factory is damaged - business continues as usual as this is a short-term problem, if in deficit long term the business may need to liquidate assets. However, it might be in the business interest to go into debt in the short term to get capital in order to maintain quality of goods or services. Like Amazon!

Straight-line vs. weighted

Straight-line is a method for calculating asset depreciation - it involves allocating the cost of the asset (less residual value - which can be considered as the asset's "trade-in" value at the end of its life) evenly over its estimated useful life; Weighted average costing is a method of inventory valuation that calculates an average unit cost by dividing the total cost of goods available for sale by the total units of goods available for sale

Teaching hospital vs. non-teaching hospital

Teaching hospitals are insitutions that have residents as a part of their workforce. Often connected to medical insitutions and often are the sites were complex cases go. Non teaching hospitals are run by attending doctors with the assisstance of NP and PAs

Profit

The additional amount made after subtracting costs from revenue. P = R-C.

Rules/protocols

The agreed upon norms with which individuals and organizations will adhere too

Cost Center

The authorized functional and financial unit within an organization to spend money.

Economy of scale (or lack of)

The bigger you get, the cheaper you get. A proportionate saving in costs gained by an increased scale of operation, with cost per unit of output decreasing with increasing scale

Secondary equity market

The part of the capital market where previously issued securities are bought and sold. It is also called the aftermarket. In secondary-market transactions, the proceeds from the sale of a security, net of any transaction costs, are paid to the seller.

Salvage Value

The residual value after amortization. An item can still have value after full write-off.

Capitalization

The sum of a company's debt and equity. This includes all capital invested in the company, including bonds, stocks and debt.

Institutional inertia

The tendency of institutions to perpetuate the established mode and procedures, even if they are counterproductive and/or directly in opposition to established organizational goals

Market capitalization

The total dollar market value of all the outstanding shares of a company, where the outstanding shares refers to the total number of shares held by all stakeholders.

Private Equity

Third riskiest of equity investments( behind angel investment and venture capital- come in earlier, riskier but can make larger ownersip claim for cheaper investment). Later in prcocess and usually more establised companies. Usually investment for equity stake. Before public equity( stocks)

Widget/Unit of Service

Unitless representation for goods and services.

Wealth = income + assets

Wealth is a function of how much we make( income) and how much the things we own are worth( assets)

Weighted average pricing

Weighted average pricing calculates an average unit cost by dividing the total cost of goods available for sale by the total units of goods available for sale

Substitutes

Where one cost can replace/ displace another cost

Writing Off/Down

Written-down value reflects a previously purchased asset's present worth, given that the value of a good is lost over time. It is the value of an asset after accounting for depreciation or amortization.It is used to keep tabs on assets and determine sell-on value.

Debt Obligation

debt obligation is really just a repetitive way of saying either debt or obligation. When you borrow money from any source, whether it's a bank, a family member or a payday advance, you owe a debt to the person or entity from which you borrowed the money, and that debt is your obligation.

Closely held v. publicly held

difference between a close or closely held business and a publicly held or traded company is that a closely held corporation has a tight-knit group of shareholders that make up the ownership committee for the company, while a publicly held corporation is one that is owned by stockholders.