Budgeting Basics for Nurses



Budgeting Basics for Nurses


Barbara Cherry, DNSc, MBA, RN, NEA-BC



Learning Outcomes


After studying this chapter, the reader will be able to:


1. Understand the basic terminology of budgeting in the health care industry.


2. Contribute to the budget development process for a nursing or clinical department.


3. Contribute to the capital budget development process for a nursing or clinical department.


4. Explain aspects of monitoring financial performance against an operational budget.


5. Understand the overall role of nursing in a health care organization’s budget process.



Key Terms



Budget:


Financial plan for the allocation of the organization’s resources and a control for ensuring that results comply with the plan.


Budget assumptions:


Statements that reflect issues affecting the future performance of the organization; used as the framework for developing the budget; budget assumptions address questions such as the following: Are supply prices likely to increase or decrease? What salary range will ensure that the organization is able to recruit and retain quality employees? What are the competitors offering in terms of new services? Is the patient census likely to increase or decrease over the next year?


Capital expenditures:


Amount spent on items that will have long-term (greater than 1 year) value to an organization. Typically includes property and equipment.


Expense:


An event or item that requires the outlay of money for purchase or the incurrence of a liability for future payment; major expenses for health care organizations include salaries, medical supplies and equipment, and facility maintenance.


Fiscal year:


A 12-month period used for calculating annual (yearly) financial reports in business; the fiscal year does not have to constitute the calendar year (January to December) but may be any 12-month period (i.e., August through July) established and maintained consistently by the business.


Full-time equivalent (FTE):


The number of hours worked or paid that is equal to that expected of a full-time employee working a 40-hour workweek; annual work hours for 1 FTE equal 2080 hours, and monthly work hours equal 173.33 hours. One FTE position may be occupied by one employee working full time or shared by two or more employees working part time.


Incremental budgeting:


An approach to budget development that extrapolates from the prior period’s budget and adjusts for future growth or decline in revenues or expenses to determine the budget for the next period.


Revenue:


Money that a health care organization receives in exchange for providing health care or other related services through normal business activities; synonymous with income.


Salaries, wages, and benefits (SWB):


Budget category that typically includes direct payment for hours worked, bonuses, accrued vacation, health benefits, employer portion of payroll taxes, and workers’ compensation.


Supplies:


Materials used in performing tasks within the organization. Typically includes clinical disposables, pharmaceuticals, and office supplies.


Variance:


The difference between the planned budget and the actual results.


Variance analysis:


The process of analyzing the differences in the planned budget results and the actual results; involves quantitative and qualitative analysis.


Zero-based budgeting:


An approach to budget development that begins as though the budget were being prepared for the first time.



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Additional resources are available online at:


http://evolve.elsevier.com/Cherry/


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The budget serves as the financial guideline that enables the clinical team to provide quality patient care.


Vignette


Justine Scott, RN, sat in the staff meeting being led by the nurse manager for the cardiac telemetry unit where she has worked for the last 6 months since graduating from nursing school. As Justine listened to the nurse manager discuss the unit’s budget, she felt like she was hearing a foreign language. The nurse manager discussed “variances for labor and supply costs that were most likely due to increased patient acuity and patient census above budgeted levels.” The nurse manager explained the importance of accurately identifying reasons for the budget variances to ensure appropriate resources are allocated to their unit to support quality patient care. The nurse manager then requested input from the staff nurses regarding their observations about supply usage and overtime costs and how they might be better controlled. In the final topic for the staff meeting, the nurse manager requested input from the staff on “equipment needs to be considered as the unit’s capital budget request is developed.” As a new nurse, Justine noticed that staff meetings seemed to center more on discussions regarding the “budget” rather than clinical issues. She realized that the budget must be extremely important to support patient care and resolved to learn more about budgets, the financial terminology used by her nurse manager, and what she could do as a staff nurse to support the nurse manager in this seemingly very important area of nursing practice.




Chapter Overview


The budget serves as the financial guideline that enables a health care organization to achieve its goal of providing high-quality patient care services. Just as nurses learn about clinical guidelines for the care of patients with various diseases, it is also essential that nurses have a working knowledge of the guidelines that ensure the organization is able to operate in a stable financial environment through effective budget management. As nurses advance into supervisory and management positions, they will have financial responsibility for a business unit of a health care organization and must be competent in the financial aspects of operating that unit. Additionally, the focus on cost and quality initiatives in today’s health care settings requires that even staff nurses have a basic understanding of the budget. “Nurses must understand their role in delivering higher-quality care more efficiently to increase value to patients and families” (Goetz et al, 2011, pp. 174 -175). This chapter introduces the basic concepts of budgeting in health care organizations, but for a deeper understanding of budgeting, nurses are encouraged to continue to build their knowledge by using a health care finance text and/or other resources suggested at the end of the chapter.



What is Budgeting?


As a nursing student, you are probably more aware of budget concepts than you realize. When you decided to become a registered nurse (RN), you had a goal to graduate from nursing school within a specified time period. You had to make a budget plan by predicting your expenses for that period, such as tuition, books, and living expenses. You also predicted your revenue from sources such as student loans, part-time jobs, savings, or parental or spousal support. After predicting your expenses and your revenues, you most likely planned your budget for how much you could spend on a weekly or monthly basis during this time and eventually achieve your goal of graduating from nursing school. Similarly, health care organizations develop budgets for a specified period by determining what goals they want to achieve, predicting expenses and revenues, then planning the annual budget and monitoring it on a monthly basis. For example, a hospital may plan its annual budget to maintain staffing and supplies to operate its current number of beds, provide a raise for all staff, and open a new outpatient surgical center.


Basically the health care organization’s budget is a document that details how financial resources will be allocated to ensure that the organization is able to conduct its daily business and achieve strategic goals. The budget itemizes the organization’s predicted expenses and expected revenues for a given period of time. More important, budgets require ongoing attention to ensure that the organization’s financial needs are met. Just as nursing students most likely have to make decisions to adjust their budgets during nursing school to meet unexpected changes in revenues or expenses, the health care organization invariably experiences the same challenges during the year. Thus the budget becomes a dynamic action plan that guides the allocation of resources and expenditures and influences the nurse manager’s decision making on a day-to-day, week-to-week, or month-to-month basis.


Budgets perform four basic functions to make certain the organization can achieve its strategic goals and permit continued operations from an economic point of view. The four budgeting functions are: (1) planning, (2) coordinating and communicating, (3) monitoring progress, and (4) evaluating performance. The following sections describe each of these important budgeting functions.



Planning


Planning is the most important function of the budgeting process. During the planning phase, managers first decide on the goals to achieve for a specified period and identify resources (e.g., staff, supplies, equipment) needed to achieve those goals. Next, they predict revenues and expenses based on those goals and budget assumptions to use in planning the budget. Budget assumptions allow the managers to answer various questions that will have an effect on the budget, such as the following:



Budgets are most often developed for a 1-year period based on predicted amounts of services. For example, hospitals will predict patient census for the coming year and then allocate funds for nursing salaries based on this predicted census.


Consider the following example: The hospital management team has decided to establish a chest pain center as part of the emergency department (ED). In planning the annual budget for the ED and its new chest pain center, the managers have developed the following assumptions:



The management team has planned to include the following expenses in the annual budget for the new chest pain center: salaries for nurses and support staff, supplies, monitoring equipment, equipment maintenance, funds for marketing the new program, and funds to remodel an area in the current ED for the program. Managers also need to think about the other areas that will be affected by the new chest pain center, such as the cardiac catheterization suite, echocardiogram, laboratory, electrocardiogram (ECG), and materials management, which all deserve budgetary consideration as a result of the wide-reaching effect of this seemingly small service expansion.


Historically, nursing has had limited input into fiscal (or financial) planning and development of the organization’s budget. Administrators with no nursing background and little understanding of nursing values, beliefs, and care requirements traditionally made decisions about resource allocations related to nursing. Today participating in the budget process to determine resource allocation is a fundamental responsibility of nurse leaders. Involving staff nurses in the budget planning is also highly recommended. Managers and staff who participate in budget planning are more likely to be cost-conscious and appreciate how their unit should function to meet the overall financial goals.



Coordinating and Communicating


Although not commonly associated with budgets, coordination and communication are very important functions of budgeting. The budget process, by necessity, requires that many different groups within an organization come together to discuss the resources necessary to accomplish the goals of a business unit. Therefore, think of the budget process as the best opportunity to discuss concerns about resource allocation with the organization’s leaders who are capable of resolving issues.


Consider the new chest pain center described earlier. To plan how the center will establish itself as a center of excellence for emergency care of patients with chest pain, nurses and physicians with experience in caring for chest pain patients must offer input about equipment and supply needs, room layout and design, staffing models, electronic medical record needs, and support staff; the financial officer needs to offer input about reimbursement rates and other financial considerations related to caring for this population; the hospital marketing staff needs to offer input about how the program can be advertised to inform the community about the new service; and other hospital administrators and department managers need to offer input as to how this new center will affect other areas of business both inside and outside the hospital. Just as coordination and communication among these many groups and departments are essential to develop and manage the budget for the new chest pain center, such coordination and communication are also essential for developing and managing the budgets for all units within the hospital.



Monitoring Progress


Monitoring progress is one of the most vital functions of the budget—and the function that the nurse manager will be most involved with on a daily basis. It is through the comparison of actual performance against expected, or budgeted, performance that an organization measures the effectiveness of its budget. The ongoing monitoring of the budget allows timely corrective action or, if the budget plan is right on target, no adjustments are required.


Consider our chest pain center again. The budget was developed on an anticipated volume of 12 patients every 24 hours, and staffing was implemented to serve this volume of patients. At the end of its first month of operation, the nurse manager reviews the budget information and sees that the actual patient volume is averaging only 8 patients per 24 hours, and the associated revenue for the center is approximately 70% of the planned revenue. The nurse manager has several issues to consider: Does staffing need to be reduced to better reflect the number of patients being treated by the center? Are the patients being seen of higher acuity and thus require a higher intensity of nursing care? Is the low volume a reflection of the new program that is not yet widely appreciated in the community, and as its reputation grows, will the volume also grow? If no immediate changes are made, how will the reduced revenue affect the financial status of the center? Fortunately, the nurse manager can consult others involved in developing the budget to address these important issues and make decisions to ensure the success of the center.


The difference between the planned budget and the actual results is called a variance. A variance is favorable when the results are better than expected, or it is unfavorable when the results are worse than expected. The lower than planned revenue in the chest pain center is an example of an unfavorable variance. Variance analysis, the process by which deviations from budgeted amounts are examined, is discussed in more detail later in the chapter.



Evaluating Performance


Budget results can also be used as part of the manager’s performance evaluation, including the staff bonus structure for some hospitals. Evaluating the manager’s performance based on budget results is becoming more widely used because of the growing trend toward accountability and compliance in the business world. By looking at the budget results for a given period, an evaluator can determine the manager’s overall success in achieving goals. Nurse managers are frequently evaluated based on their effectiveness in managing nursing overtime costs and supply use, both of which are reflected in the nursing unit’s budget. Performance evaluations based on budget results can motivate managers to effectively control budgets and will serve as a basis for salary decisions and career advancement for the manager. Even though the manager is the captain of the unit and is ultimately accountable for the unit’s budgetary performance, a lack of staff ownership and involvement in the unit’s operation usually leads to problems for the manager.



Types of Budgets


The three types of budgets for which a nurse manager typically has responsibility are operational, labor, and capital budgets (Box 17-1).



BOX 17-1   THREE TYPES OF BUDGETS













Operating budget Allocates funds for daily expenses, such as salaries, utilities, repairs, maintenance, and patient care supplies
Labor budget A subset of the operating budget; allocates funds for salaries, overtime, benefits, and staff development and training
Capital budget Allocates funds for construction projects and/or long-life medical equipment, such as cardiac monitors, defibrillators, and computer hardware



Operational Budget


The operational, or operating, budget represents revenues and expenses for an operational unit, such as a product line, unit, department, or overall organization. The chest pain center previously discussed is considered a product line; an example of a nursing unit is the intensive care unit or medical-surgical unit; an example of a department is dietary or human resources. Whereas the product line, unit, department, and overall organization have designated operational budgets, each operational unit has similar categories of expenses and revenues. The expenses in the operational budget are those necessary to operate on a daily basis, and the revenues are those paid to the organization from various payer sources (Box 17-2). (See Chapter 7 for more information about sources of payments for health care services.)



BOX 17-2   EXAMPLES OF TYPICAL EXPENSES AND REVENUES FOR A HEALTH CARE ORGANIZATION











EXPENSES REVENUES


• Salaries


• Benefits (paid time off; health insurance)


• Patient care supplies


• Overhead expenses


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Nov 6, 2016 | Posted by in NURSING | Comments Off on Budgeting Basics for Nurses

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