Effective Operating Budget Development and Management

A budget is a crucial tool for managers in effectively securing and utilizing resources to help the organization achieve its goals. Typically set on an annual basis, budgets take into account the previous year's budget and any discrepancies. This paper will explore the process of creating an operating budget, compare actual expenses with projected budgets, identify potential reasons for discrepancies, suggest strategies for improving alignment between results and expectations, and recommend benchmarking techniques to enhance budget precision.

Finkler, Kovner, & Jones (2007) state that the operating budget is a one-year plan for an organization's revenues and expenses.

In healthcare organizations, nurse managers of each cost center are in charge of creating and managing operating budgets, with assistance from the finance office. These individual cost center budgets are consolidated, and executive management ultimately decides on a budget to present to the board for approval.

The nurse managers require several types of information to start preparing operating budgets for their cost centers, including data from the organization's environmental review and the establishment of general goals, objectives, policies, organization-wide assumptions, program priorities, and specific measurable objectives (Finkler, Kovner, & Jones, 2007).

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This data enables managers to grasp the organization's intended achievements and its perceived capabilities.

Nurse managers need organization-wide assumptions and specific measurable objectives when preparing the budget, as background information is crucial for cost center budget preparation in nursing administration. It is essential for nurse managers to understand the organization's approach to delivering nursing care, including the responsibilities of LPNs compared to RNs, the role of nursing assistants, and the staff proportion on each shift (Finkler, Kovner, & Jones, 2007).

In a study conducted in 2007, Finkler, Kovner, & Jones outlined the necessary steps for developing an operating budget. This involves predicting both personnel and non-personnel costs along with revenue. The first step in creating the revenue or expense sections of the budget is determining the workload for the upcoming year, which refers to the amount of work carried out by a specific unit.

The workload budget is a budget that shows the work done by a unit or department in terms of units of service, such as number of patients, patient days, deliveries, visits, treatments, or procedures. Each cost center needs to determine which measure is most suitable for its services and then forecast the number of units of service expected in the upcoming year.

By creating an operating budget, development becomes possible. The personnel expense budget covers all personnel managed by the supervisor within a specific cost center, including RNs, LPNs, aides, and clerical staff (Finkler, Kovner, & Jones, 2007). The budget for other-than-personnel services includes expenses for supplies, minor equipment, and both direct unit or department costs as well as indirect overhead expenses (Finkler, Kovner, & Jones, 2007).

During the budget submission phase, both revenue and expense sections of the budget need to be consolidated and presented for review along with detailed calculations and narrative explanations. Budget adjustments may be necessary following negotiations on the submitted budget.

Budget implementation is the final stage of budget development, during which managers must address various issues such as creating a staffing plan to cover weekends, holidays, vacations, and sick leave, as well as busy and slow periods (Finkler, Kovner, & Jones, 2007). A budget variance occurs when actual financial results differ from projected budgets (Finkler, Kovner, & Jones, 2007). Expense reports detail the variance between the budgeted and actual expenditure amounts, with variances being either favorable (within budget) or unfavorable (exceeding budget) (Finkler, Kovner, & Jones, 2007).

The variance is utilized for predicting future year budgets, managing current year spending, and evaluating managers and their departments. Managers must investigate and explain the causes of variances to upper management. Variances may have various reasons that need to be identified and controlled. An analysis of nursing expenses in different units for a pay period revealed both favorable and unfavorable variances.

During the expense record review, it was found that the variance for paid productive hours was within budget, while the variance for paid nonproductive hours exceeded the budget by 60 hours. This unfavorable variance in paid nonproductive hours may have been caused by various reasons such as staff being on modified duty, sick leave, attending meetings, or undergoing education time, resulting in payment without any patient care responsibilities.

The overtime percentage of hour’s variance was 7.5% over the budget and the registry percentage of hour’s variance was 8% over the budget, both are unfavorable. Potential causes for overtime include bad time management, late arrival of the next shift, or working past shift hours due to understaffing. The increase in registry hours may be due to insufficient regular staff because of a hiring freeze or staff being absent for personal or illness reasons. The hours per patient day (HPPD) licensed productive hours exceeded budget by .13, while direct product hours and total productive hours were within budget.

The budget overage for hours per patient day could be due to the unit being overstaffed, overtime, and registry hours. The average daily census per unit fluctuated from being on budget to 7.50 over budget. Daily census is unpredictable and influenced by various factors such as seasonality, ER or clinic admissions, and transfers from other facilities. To ensure alignment with expectations, strategies like performance budgeting can be implemented, focusing on areas like staffing, cost control, productivity, and patient care. By analyzing these key areas, activities such as staffing planning, cost reduction, improved efficiency and time management, patient care planning, and charting time can be optimized. Incentivizing staff can also help engage them in achieving budget goals.

Benchmarking is a valuable tool used by both large health systems and smaller practices to identify performance gaps and areas for improvement. It allows staff to compare their service, processes, and outcomes with those already achieving best practice goals. This process involves various techniques, such as financial, performance, and operational benchmarking. Financial benchmarking specifically involves analyzing financial data to assess competitiveness and productivity (Borglum, 2008, para 12; Cimasi, 2006, para 10).

Financial benchmarking utilizes data from a healthcare organization's previous performance to guide decisions regarding its future financial standing (Cimasi, 2006, para 16). Performance benchmarking assesses organizations' performance in a specific process to pinpoint areas needing enhancement and establish objectives (Business Performance Improvement Resources, 2011, para 26).

According to Business Performance Improvement Resources (2011, para 27), organizations typically set performance benchmarks by examining industry leaders. These benchmarks may include analyzing financial indicators such as spending, labor expenses, and income, as well as non-financial metrics like absenteeism and environmental impact (Business Performance Improvement Resources, 2011, para 28).

In conclusion, the operating budget is a plan for the organization’s revenues and expenses that generally covers a period of one year and developed by the nurse manager with support of the finance office of the organization (Finkler, Kovner, & Jones, 2007). Variances may occur at any time, may be internal or external, and in most cases are correctable once investigated by the mangers. Benchmarking is used in strategic management and compares processes and performance to help improve organizations. The use of financial ratios and benchmarking is critical to understanding an entity’s overall historical performance and to the forecasting function of valuation analysis” (Cimasi, 2006, para 28). This paper has discussed specific strategies to manage budgets within forecast, compared five to seven expense results with budget expectations, described possible reasons for variances, gave strategies to keep results aligned with expectations, recommended three benchmarking techniques, and identified what might improve budget accuracy, and justified the choices made.