Budgeting Basics

Question 1

Budget =

Answer 1

A financial statement that estimates income and expenditures for a specified future time period

Question 2

Budget cycle -

Answer 2

1 Planning year - Develop statistical budget - Prepare
2 Planning year - Approve operating budget - Approve
3 Budget year - Monitor, control, report variances - Execute
4 Subsequent yr - Review budget yr results - Evaluate

Question 3

Several types of budgets

Answer 3

Operating budget (1 year) 
Strategic budget (3-5 years)
Cash budget

Question 4

Traceability - Direct vs. Indirect

Answer 4

Directly or indirectly related to product
Direct - surgical supplies
Indirect - housekeeping

Question 5

Variability - Fixed vs. Variable cost

Answer 5

Fixed - does not depend on volume

Variable - volume driven

Question 6

Direct vs. Indirect costs

Answer 6

Direct - due to production of services - personal salaries, material supplies, professional staff
Indirect - incurred to operate, cannot be directly associated with a cost object (housekeeping, electricity, IT, admissions)

Question 7

Direct vs. Indirect costs - Allocation of indirect costs

Answer 7

Overhead or indirect costs must be allocated to departments to reflect true cost of producing the product
Ex housekeeping - by square footage
Ex admissions - by # of pts served

Question 8

Broad cost categories - labor costs

Answer 8

Labor is largest single expense for a healthcare facility
Most labor costs are fixed
Compared using full time equivalents and no a head count

Question 9

Broad cost categories - labor costs - full time equivalents (FTEs)

Answer 9

Computed based expectation of hours worked

Based on 2080 worked hours per year (40 hour work week and 52 wks/yr)

Question 10

Broad cost categories - labor costs - full time equivalents (FTEs) - Ex of 24 hour ED that needs 2 triage nurses on duty at all times - how many FTEs are required to meet that need

Answer 10

24 hrs/day x 2 nurses = 48 hrs worked
ED open 365 days/yr
Requires 48 x 365 = 17, 520 worked hours
17, 520 / 2,080 = 6

Question 11

Working capital =

Answer 11

Short term assets - short term liabilities

Question 12

Current ratio =

Answer 12

Short term assets/short term liabilities

Question 13

Revenue cycle

Answer 13

Process of collection of accounts receivable to produce cash
Collection of accounts receivable produces cash
Revenue from providing services to pts does not immediately convert to cash

Question 14

Variance analysis

Answer 14

Identifying the variances in what was budgeted vs. what has actually happened
Variances are RED FLAGS - should be looked at more closely for their causes
They can exceed what was budgeted or be below what was budgeted

Question 15

General sequence for forming a budget

Answer 15

Environmental scanning
Identification of goals and objectives
Gather data on estimated costs and revenues
Develop a proposed budget

Question 16

Budgeting considerations

• Labor
• Taxes
• Operational expenses
• Income
• Allocation

Answer 16

Labor - expenses include income for yourself and staff
Taxes - estimates taxes, benefits, insurances
Operational expenses - other expenses like rent, phone, utilities
Income - estimate charges to be billed and # of client visits needed to meet projected expenses
Allocation - distribute resources to meet expenses using estimated income

Question 17

Expense management - goal is to

Answer 17

maximize net income

Question 18

Operating expenses

Answer 18

Cost of resouces to produce the organization’s services and goods in a limited period of time

Question 19

Capital expenses

Answer 19

Big ticket, long lasting items like purchase of equipment

Question 20

Suggestions for controlling operating and capital expenses

Answer 20

Watch the budget
Influence the utilization of variable cost items (utilities)
Have policies and procedures 
Do environmental scanning 
Engage in cost effectiveness analysis

Question 21

Types of employment - Exempt

Answer 21

Professional, managerial, or supervisory
Paid fixed annual salary
Not paid for working over or under the standard number of hours (typically 40)

Question 22

Types of employment - Non exempt

Answer 22

Paid hourly
May collect overtime for going over standard number of hours
Overtime.holiday pay, premium hourly rate

Question 23

Key drivers in determining FTE requirements

Answer 23

Volume of work
Service standards (24 hr coverage)
Technical skills
Productivity standards

Question 24

Cash budget

Answer 24

Converts approved operating and capital budgets into projected cash flows

Question 25

Cash budget considerations

Answer 25

Level of revenue and accounts receivable Payroll and benefits Expenses and accounts payable Cash shortfall or surplus

Question 26

Productivity

Answer 26

refers to the amount of a resource consumed in the production of an increment of output

Question 27

A useful measure of productivity is

Answer 27

``` Based on a measurable unit of output Objectively measured Readily available Understandable Achievable ```

Question 28

Revenue management - the goal is to

Answer 28

Maximize income from operations and investments

Question 29

Revenue management involves

Answer 29

Setting prices Identifying payer for each service Policies and procedures that address provision of service Estimating expected payment Following procedures for payment receipt, account reconciliation, cash Financial reporting

Question 30

Fee schedule for an organization is

Answer 30

A listing of the services that are provided and the charge for each of those services

Question 31

Billing - getting paid requires

Answer 31

getting paid requires clear communication with the third party payer on what exactly is being billed

Question 32

Budget variance =

Answer 32

actual value - budget value positive = actual greater than budget negative = actual less than budget

Question 33

Budget variance - permanent vs. temporary

Answer 33

Permanent - not due to timing, will not resolve prior to period end Temporary - due to timing will resolve prior to period end