Strategic Budgeting in Healthcare Organizations

Introduction: The Budgeting Challenge in Healthcare

More often than not, the budgeting process is a source of frustration for healthcare financial managers. It can be not only time-consuming but also unfulfilling, involving conflict, concession, and politics. The budget process has proved to be the main challenge for financial managers in healthcare. It is a complex process that requires a mix of activities, including intensive discussions, political trade-offs, and negotiation. It also consumes a large portion of time for many organizations, sometimes lasting up to half the fiscal year.

What are the effects of this complexity? The financial management team becomes unavailable to offer support to essential operational needs in the interim. Furthermore, the budget is often out of step with the organization's central strategic priorities. These problems must be addressed in modern healthcare settings. Decisions ought to incorporate all stakeholders, including the main players in financial teams, and should involve a holistic analysis and a well-considered economic blueprint (Kaufman, 2006).

To understand the healthcare business model, it is imperative to know the major interconnections that drive value generation within the organization, the general criteria that determine long-term performance, and the starting points for value creation. Taking this into consideration highlights the importance and application of strategic budgeting in healthcare organizations.

Steps in Strategic Budgeting for Healthcare Organizations

The following steps in strategic budgeting are drawn from Sussman (2003) and applied to healthcare organizations. The first step is for the healthcare organization to develop its financial and strategic plan. This involves delineating the goals and objectives the organization sets out to achieve, along with a financial plan aimed at assessing the realization of those goals (Ehrhardt and Brigham, 2010). This is integral to financial and budget planning. Financial planning in any organization revolves around its various strategic objectives, set for both the short term and the long run. It is through these objectives that a financial plan is formulated with respect to the different resources required by each organizational department. The financial plan is created following the completion of the strategic plan.

The second step involves the communication of objectives. This encompasses conveying the set goals and objectives of the healthcare organization to the leaders of its various departments. For instance, the organization must include the heads of departments such as cardiology, orthopedics, and general surgery, so that all departments are aligned with the organization's broader objectives. These departmental heads then provide feedback regarding targets and the key assumptions underlying the strategic and financial goals. In particular, managers offer a judgment as to whether the goals outlined in the financial plan are operationally feasible. This incorporates an understanding of the activities occurring in each department that support the organization's strategic and financial objectives for the coming fiscal year, as well as those that may impede their realization (Sussman, 2003).

The subsequent step is for the healthcare organization to develop the first-pass budget. This initial budget lays the foundation for financial planning for the fiscal year, taking into account the targets set for achievement. It is integral to financial planning, as it establishes a baseline capturing the various needs and requirements from each department, which can be altered and adjusted as necessary. The specific targets established in the financial plan are used to generate this original budget, which translates the prospects of the overall strategy into tangible statistical statements and departmental financial plans.

Thereafter, the review and assessment of the first-pass budget is undertaken. At this stage, departmental heads are invited to evaluate the original budget against their distinctive targets. Their key role is to identify exceptions and outline comprehensive, measurable alternatives that will address those exceptions in order to produce well-balanced departmental and organizational budgets (Megginson and Smart, 2011).

Once this is accomplished, adjustments are made and the budget is finalized. This phase involves working with departmental heads to make changes to the budget, modeling the financial implications of alternatives, and finalizing the figures — particularly for departments where the original budget requires considerable revision (Sussman, 2003).

A healthcare provider or institution ought to use the budget as a management tool. The budget can be used for the day-to-day allocation, apportionment, and management of organizational resources designated for a given period (Rice and Smith, 2002). The relationship between the budget and the organization's financial plan should remain dynamic throughout the fiscal year (Kono and Barnes, 2010). The budget enables departmental heads and the organization as a whole to determine whether it is on track with the original plan and what adjustments are needed. Once this is established, the healthcare organization can confirm that it is aligned with its initial strategic plan. Finally, at the end of the financial year, the entire process begins again with the assessment, review, and update of the strategic plan for the following fiscal year (Bukh and Nielsen, 2011).

Conclusion

The employment of best-practice budgeting procedures assists healthcare organizations in ensuring a direct association between their strategic and financial plans and everyday operations. This particular connection is vital to the future success of healthcare organizations (Sussman, 2003). Decisions must incorporate all stakeholders, align departmental activities with organizational strategy, and be supported by ongoing review throughout the fiscal year. Healthcare organizations that integrate strategic budgeting into their operations are better positioned to manage rising costs, maintain creditworthiness, and avoid the financial risks that threaten long-term viability.

References

Bukh, P. N., Nielsen, C. (2011). Understanding the health care business model: The financial analysts' point-of-view. Journal of Health Care Finance, 37(2), 8–26.

Ehrhardt, M., Brigham, E. (2010). Corporate Finance. Ohio: South Western Cengage.

Gapenski, L. C. (2007). Understanding Healthcare Financial Management (5th ed.). New York: Health Administration Press.

Kaufman, K. (2006). Best Practice Financial Management: Six Key Concepts for Healthcare Leaders. Health Administration Press.

Kono, P. M., Barnes, B. (2010). The role of finance in the strategic-planning and decision-making process. Graziadio Business Review, 13(1).

Megginson, W., Smart, S. (2011). Introduction to Corporate Finance. Ohio: South Western Cengage.

Rice, N., & Smith, P. C. (2002). Strategic resource allocation and funding decisions. In Funding Health Care: Options for Europe (p. 250).

Sussman, J. H. (2003). Strategic Budgeting: A Healthcare Imperative. Kaufman Hall & Associates.