Budgeting

Budgeting is a tool for planning, monitoring and controlling costs. It is part of a suite of management tools used in association with other management functions such as planning and controlling. Once the goals of the organisation have been identified, budgeting ensures that they are met by allocating money to them (Rowland & Rowland 1985). The stages of budgeting include:

quantifying objectives, policies and plans;

evaluation of financial performance;

controlling costs; and

creating cost awareness across the organisation (Rowland & Rowland 1985, p.224).

Budgeting is an important skill for managers. One of the principal responsibilities of a nurse manager is to plan and implement the objectives of their unit/ward/department. This is undertaken by identifying the casemix of the patients/clients and determining the predicted throughput, either by calculating the number of patients utilising a predetermined number of beds, or by counting the number of clients attending a community or outpatient-based clinic/service. Once the plan of activity has been articulated, it is time to attach a dollar figure to it. If it costs $2000 to treat one patient and it has been determined that the service will treat 200 patients per year, then the total costs associated with providing the service would be $400 000. This is the planning phase of budgeting. The major issue in providing public health care is not so much identifying the cost of care provision but prioritising the expenditure against the funds available.

The next stage of budgeting is the comparison of the budgeted costs with the actual expenditure. Table 14.1 demonstrates this comparison.

The differences between the two results—those planned and the actual results—need to be examined closely. There is a natural tendency not to worry about a favourable result and to only be concerned about an unfavourable one. However, any deviation from the expected outcome warrants assessment. This review is necessary because if the budget plan reflects the actual activity and costs, then the result should not be favourable and may reflect a problem with the accounting process, for example, an invoice that may not have been paid. Reasons for unfavourable results also require examination and may include an increase in patient activity (e.g. more patients than planned), an increase in costs (e.g. disposable goods such as gauze squares significantly rise in price once the budget has been set), or there is a change in casemix (e.g. the acuity or complexity of care required for patients increases or the ward commences treating medical patients and changes its role to an oncology ward).

Accounting

As explained previously, accounting is the process of recording, classifying, interpreting and reporting financial data to provide a source of financial information. This information informs managers of their performance in comparison to the set budget. The various elements associated with accounting practices include assets (buildings, land), expenses (salaries), liabilities (accrued annual leave) and revenue (private patients, car-parking fees). Accounting practices commence with an analysis of ‘source documents’ (Jopling et al. 1998, p.19), including invoices, receipts and purchase orders. This information is summarised and entered into journals and then into the general ledger. If a manager needs to question the actual financial result at the end of a specific financial period it is the general ledger that provides the detail of expenditure by item. This is one of the reporting tools that managers need to be competent in using to ensure their appropriate understanding of the financial management required within their department/ward.

There are two methods of accounting used in health care. The first method is cash accounting, which identifies revenue when cash is received and expenditure when goods have been delivered. The disadvantages of this method are that the true value of the organisation is not recognised (buildings and other non-cash assets are not identified or represented) and there is the temptation to defer costs until the next financial year. The other method used within health is accrual accounting. In this system, revenue is recognised in the financial period in which it has been earned, while expenditure is realised when the order is placed or the shifts are actually worked. This way, revenue and expenditure are matched. All the assets of an organisation are taken into account when its financial position is reported.

Types of costs

Costs associated with the delivery of care provided in health fall under four main cost concepts of:

direct;

indirect;

fixed; and

variable.

Direct costs are those costs that can be directly associated with a particular cost centre. The nursing salaries and wages for a particular ward are direct costs, as are the disposable medical and surgical supplies, such as cotton wool balls. Indirect costs are the costs associated with services supplied indirectly to the cost centre or which cannot be billed directly. For example, the hospital may only receive one electricity account for the whole facility that cannot be broken down into individual ward accounts. In this instance, the cost centre would be billed for a proportion of the total account. Other examples include a division of the costs of a support service, such as medical records, where once more the costs would be distributed across the clinical cost centres.

Fixed and variable costs relate to the activity of the organisation. The activity may be measured in patient days, level of acuity, number of presentations, number of operations or number of meals. Fixed costs remain the same regardless of the level of activity within the cost centre. Examples of fixed costs include contracts for servicing equipment that may be in place for a specific period of time, such as five years, and lease arrangements for equipment. Variable costs are directly linked with the activity of the organisation. The individual cost per unit may not change but the costs will rise as more is undertaken. For example, if the hourly rate of a nurse is $20 and each nurse cares for five patients, the hourly nursing costs for ten patients would be $40, and for 20 patients the cost would be $80 (Courtney 1998).

This is the reason why there is such heated debate over staffing allocations in nursing. If the number of patients/clients and their acuity or clinical care requirements all remained the same, nursing would be a fixed cost. However, in health care today the increasing demand and increasing age and infirmity of the patients means that there is a need to constantly re-calculate the staffing requirements. How this is done is the basis of debate in both nursing and health care settings today. Across Australia there are many formulas that can be applied. Some are government regulated, such as in Victoria where there has been a patient number assigned to nurses. In other States, acuity systems are in use, such as nursing cost weights for individual diagnostic related group (DRG), nursing hours per patient day or the recommendation of an experienced nurse manager to identify the number and skill mix of the staff required on each shift. There is a requirement for an agreed methodology to determine adequate nursing numbers before a budget can be set. As the casemix and patient numbers vary, so does the need to vary the budget, and for this reason both management and clinicians must understand and agree to the financial implications of increased throughput, even though there are recognised economies of scale as patient numbers increase.

When identifying budgets it is important to understand some basic economic terms. Opportunity cost in economic terms is seen as the cost of the best alternative foregone (McTaggart et al. 1996). When developing a budget it is necessary for nurse managers to use their management skills to consider opportunity costs in their decision-making. This is useful in a workplace where there are limited resources and managers need to make choices between purchasing different consumables and using more creative staffing methods. Another way to consider this issue is to ask the question, ‘With my known fixed budget, is it more important to purchase item X or item Y?’

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