Budget management strategies and healthcare expense variance analysis

Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year's budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.

Strategies to Manage Budgets

Many strategies may be used to control budgets; managers and the chief financial officer of most healthcare organizations have the tools needed to manage the budget. By managing the budget the organization will be better prepared for the financial forecasts, which are the company's future expenses. Some strategies and tools that will assist with managing the budget are zero based, activity based, performance based, cost variances and benchmarking. Zero-based budgeting analyzes every expense within an organization and justifies the need and cost of each. Activity-based costing is the gathering of the operating cost data, which is assigned to specific activities such as engineering. The performance dashboard uses the metrics of performance and analyzes the root cause of financial problems. Cost variance analysis looks at the differences of the actual cost and expected cost of an expense. Benchmarking gathers information of the performances and processes from similar organizations and compares the data to help with making improvements. Motivating the staff and informing them of the budget goals is another strategy that may be used to help the organization succeed.

Expense Results

The expense reports show the difference between the budget and the actual amount spent and the result is called the variance. Variances may be within the budget which is favorable, or over the budget which is unfavorable. The variance is used to predict the budget for upcoming years, help with spending during the current year, and help with evaluating the managers and their departments. To determine the cause of variances the managers must investigate and justify to upper management why the variance occurred. There are a variety reasons for variances, which must be identified and controlled if possible.

While analyzing the nursing expense results from various units for a pay period, there were some favorable and unfavorable variances. While reviewing the expense record the paid productive hour's variance was within the budget and the paid nonproductive hour's variance was 60 hours over the budgeted hours. The unfavorable variance of paid nonproductive hours may have occurred due to some staff being on modified duty, sick leave, meeting time, or education time, which means they are getting paid with no patient care involved. The overtime percentage of hour's variance was 7.5% over the budget and the registry percentage of hour's variance was 8.0% over the budget, both are unfavorable. The overtime may have been caused by bad time management, late arrival of the next shift, or working past shift hours due to not enough staff. The increase in the registry hours may have been due to not enough regular staff due to hiring freeze or staff being off for personal or illness reasons. The hours per patient day (HPPD) licensed productive hours was .13 over budget, the direct product hours was within budget, and the total productive hours was within budget. The hours per patient day over budget may have been caused by the unit being over staffed or also due to the overtime and registry hours. The average daily census (ADC) per unit varied from being within budget to 7.50 over the budget. The daily census is very unpredictable and depends on the time of year, the admissions from ER or the clinic, and transfers from other hospitals or facilities. Strategies to keep the results aligned with expectations may be done by performance budgeting, which will analyze key areas such as staffing, cost control, increased productivity, and indirect and direct patient care. The activities affected by analyzing these performance areas would be daily staffing calculations, reduced cost to the unit, working more efficiently and better time management, patient care planning, and time spent on patient charting. Offering incentives could also be a good way to involve the staff by informing them of the budget goals.

Conclusion

Strategies to manage budgets are used to maintain the actual cost predicted for budgets and to correct variances in cost. 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). 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.