Read Me Firsthcs/405

HCS/405 Read Me First

Read Me FirstHCS/405

Week Three

Introduction

The budgeting process is an attempt to establish a set of realistic standards for operating a health care organization. The budget is a set of specific objectives for the year ahead. The finance system provides the cost and revenue data and sometimes assists with other measures.

Formulating a budget is the beginning of the process. Every budgeting system must contain provisions for preparing the budget and implementing a system. This system must include coordination, control, follow-up, and maintenance. An effective budget must be tailored to the organization’s specific needs. The budget must be comprehensible and attainable. There should be innovation and flexibility to meet unexpected occurrences.

A health care organization’s budgetprovides a fullydetailed description of expected financial transactions, by accounting period, for at least an entire year. The review of future expectations is useful in making smooth progress toward financial goals.

The major parts of an annual budget address operational and financial planning needs. The operating budgets are made up of the following:

• Expenditure or cost budgets anticipated by reporting period and responsibility center:Costs are often identified as fixed, semi-variable, or variable. Anticipated volumes of demand or output are incorporated into cost budgets.
• Revenue budgets reflect the receipt of income from services rendered. Standard gross revenue accounting reports a profit increase to the responsibility center, creating an incentive for productive activity.
• Income and expense budgetsconsist of expected net income and expenses incurred by the organization.
• Financial budgetsembrace the effectsof the organization’s financial decisions. These plans include a budgeted balance sheet that shows the effects of planned operations and capital investments on assets, liabilities, and equities. The plansalso include a cash budget that forecasts the flow of cash and other funds in the business.
• Cash budgetis for cash planning and control, presenting expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in a reasonable relationship to needs. You must know how much cash will flow in and out of the organization. You must also have an idea when these will take place. The cash budget is primarily used to spotlight periods of too little or too much cash rather than for continual control.
• Capital budgets arelists of proposed capital expenditures and new or significantly revised programs, with the implications for the operating and cash budgets by period and responsibility center. The capital budgets include all anticipated expenditures for facilities and equipment and for sources of funds.

Cost accounting is the process of determining the full and incremental costs of providing services and goods to patients and customers. To determine the full cost of providing a service, youmust ensure that all costs are included. For instance, a number of departments that do not provide direct patient or customer services are essential to the institution’s operation. The burden of these departments must be allocated to the using departments. In reality, to make sound management decisions, costs must be known at the procedure, patient, and department levels.

Costs may be determined based on historical methods of charging for services, such as patient days and procedures. Finally, determine full and incremental costs within the organization’s structure. You must know the cost of each procedure and major product line, as it is essential to financial stability. Without accurate cost information, health care organizations are at financial risk when making decisions concerningcurrent operations and long-term plans. The cost of providing services is one of many considerations. Accurate costing, however, has been a major missing component of the decision-making process.

In identifying direct and indirect costs, rely initially on the hospital’s traditional distinction between revenue-producing and nonrevenue-producing departments. Costs directly assigned to revenue-producing departments are direct costs, and hospital expenses recorded in nonrevenue-producing departments are indirect costs.

This week in relationship to the course and the program

Last week,you explored the components of a healthcare organization’s financial statement, the relationship between revenues and expenses, and the sources of revenue. This week, your readings cover several areas that include cost accounting and budgeting. You explore the budgeting process, the steps involved in creating a budget,and various types of budgets that may be used by health care organizations. The terms to know are operating budgets and capital budgets. Additionally, you become familiar with cost accounting, direct cost, and indirect cost.

The week’s objective helps you identify the process for creating operating and capital budgetsanddiscussthe costs as they relate to health care organizations.

Hints for a reading strategy of the assigned materials

Your readingscover the basics of cost accounting and budgeting. When reading, focus on the importance of the budgeting process and various types of budgets used by health care organizations. Pay attention to the budget planning process and the role of the health care financial manager in this process. Thesereadingswere designed to help you become familiar with budgeting processes and the concept of cost as related to health care organizations. Pay attention to various types of cost associated with health care organizations, such as fixed, variable, and average cost.

Some questions to ask as you hone your critical thinking

As you read the material, ask yourself why and what questions that assist you in applying these concepts. Ask yourself the following questions:

• What elements are required to create and implement an effective budget?
• Why is budgeting important to the organization?
• Why is effective management of cost in a health care organization important?
• What mayyou do as a health care financial manager to evaluate and monitor cost?

Summary

Budgeting deals with expectation setting and achievement, the basic engine for continuous improvement and competitive operation, and rests on effective managerial accounting and financial planning. After this week, you will identify various types of budgets used in health care organizations. You will have a better understanding of the budgeting process, from creation to implementation. In addition, you will be able to identify direct and indirect costs and their importance in health care organizations.