A budget is a method of organizational planning and control that ensures the judicious use of limited financial resources and contributes to the entity’s ability to survive in a competitive healthcare industry (Yoder-Wise, 2011). To keep track of unit adherence to the budget, allow timely adjustments if needed and improve the succeeding fiscal year’s budget projections, variance calculations and analysis for each line item is done. To increase accuracy, projections must be based on concrete data. Moreover, needs that arise should be prioritized in accordance with organization and unit goals in order to optimize the use of finite resources. Variance analysis, projection accuracy and prioritization make the budget highly useful in controlling costs while allowing for efficient and effective operations.
Calculating the Variance
The financial report shows the annual allotment, amount spent in the previous month, year-to-date expenditure and the remaining amount that can be expended for each line item. Variance indicates deviation from the budget and is positive, negative or zero (Finkler, Kovner & Jones, 2007). A positive variance occurs when expenditure is less than the budget, while a negative variance is when expenditure exceeds the budget. Zero variance is noted when expenses and the budget are equal. The following table shows the year-to-date variance for each line item for the month of March.
Percentage variance is calculated by dividing the dollar variance by the annual budget and multiplying by 100 (Tomey, 2009). The dollar variance is the amount remaining for each line item which is derived by subtracting the expended year to date from the annual budget. Personnel, supplies, travel and staff education show positive variance and the values represent the percentage of the budget that is available for the fourth quarter. Overtime and equipment both show zero variance meaning that their respective allotments were already expended even prior to March.
Variance Analysis
Noting deviations from the budget is not enough as it is more important to investigate the causes of the variance and determine whether there is a need for corrective action or not. Volume variance, unit or price variance and use or quantity variance are some causative factors to consider (Finkler, Kovner & Jones, 2007). Overtime and equipment show zero variance and can potentially become negative variance by the end of the fiscal year. Unusually high patient volume or unexpected increases in patient acuity are possible causes of the phenomenon. More patients with more complicated conditions mean more nursing care hours and use of equipment. When the unit is short-staffed or experiencing high turnover, there is reliance on overtime work to enable fulfillment of all nursing care responsibilities.
Another potential cause is off-the-mark patient volume and acuity projections which can cause variance in the overtime budget. In addition, overtime variance can be the consequence of inefficient nursing labor utilization, such as allowing long coffee breaks, especially when there is a high nurse-to-patient ratio (Tomey, 2009). Overreliance on overtime without finding out whether hiring permanent staff is more cost-effective may have led to the budget being expended prior to the last quarter. Still another possible factor is a staffing mix where there are too few RNs. Registered nurses render quality care in less time which reduces the need for overtime (Yoder-Wise, 2011). Finally, an unanticipated increase in overtime pay rates and equipment maintenance are other possible explanations.
Accuracy of Projections and Rationale
Projections are precise when there is minimal variance between the budget and actual expenditures in case study’s line items, all of which are variable costs but more or less controllable (Cleverley, Song & Cleverley, 2011). Based on the year-to-date variance, supplies show the most accurate projection having the least positive variance. However, if fixed quarterly budgets for each line item are considered, i.e. 25% per quarter, then personnel budget will show the least variance with 31.25% remaining for the final quarter. On the other hand, the line items showing the greatest inaccuracies are overtime and equipment, both with no amounts remaining prior to the start of the last quarter requiring major revisions of the remaining budgets. Again, if fixed quarterly budgets are to be considered then the supplies budget is also inaccurate with 13.89% remaining which is way below 25%.
However, given the reality that line items such as personnel, overtime, supplies and equipment maintenance are not fixed but depend on actual patient volume and usage, a fixed monthly or quarterly budget will not be a precise projection of costs. A more accurate method is to base the monthly budget on expected levels of activity using historical data such as the past few years’ nurse staffing, labor costs, patient occupancy and patient acuity data (Tomey, 2009). It is also useful to refer to the results of an environmental analysis which identifies changing needs among consumers (Finkler, Kovner & Jones, 2007). Data analysis reveals when activity levels peak and slow down enabling the budget to closely approximate the trends in volumes and utilization. Anticipating increases in salary rates and supply costs also contributes to projection accuracy.
Addressing the Requests
Requests and suggestions from the care manager, the risk manager and staff nurses are important considerations when planning and implementing a budget. Given that finances are finite and the unit manager cannot go beyond what is allotted, there is a need to prioritize the requests. The use of established criteria will help in guaranteeing that more immediate needs are approved first when the budget allows it and that the evaluation process for requests is fair (Cleverley, Song & Cleverley, 2011). The principle is to align budget request with organizational and unit goals which encompass the provision of safe, effective and efficient care at the least costs (Yoder-Wise, 2011). Additional criteria include acceptability and impact on stakeholders, impact on the organization and effect on the budget.
The request for permanent staff lines, smart infusion pumps, soap dispensers and subscription for a web-based medication resource are all aligned with general organizational goals. All are most likely to be acceptable and will lead to better outcomes among patients, staff and other stakeholders. All are sure to have a positive impact on the organization’s performance which, in the present value-based purchasing scheme, determines reimbursement rates. All will also contribute to meeting standards and benchmarks. However, the costs associated with each request are an important consideration given the state of the year-to-date budget. Not all of the requests can be accommodated.
Given that the unit budget is an operational budget (Tomey, 2009), it is important to distinguish which requests represent operational expenses and which represent capital expenses. Spending for permanent staff lines and the online subscription should be considered top priorities because they are operational costs, staffing being a major operational budget item (Cleverley, Song & Cleverley, 2011). Instead of spending so much on overtime, hiring more permanent staff can prove to be more cost-efficient in the long term. Approving the request for the website subscription will help reduce medication errors thus increasing patient safety and unit performance. Relatively inexpensive compared to the other requests, this can be readily accommodated in the current budget.
Deferred Expenses
Capital projects are those that will deliver useful services lasting more than a year following purchase and the first instance of use (Finkler, Kovner & Jones, 2007). These projects are more expensive with a minimum amount ranging from $500 to $2,000 depending on organizational policy. With the limited operational budget geared to accommodate the operational budget requests, soap dispensers and buying new smart pumps are capital budget requests that should be appropriately deferred to the next fiscal year.
Going through the organization’s capital request approval process that makes use of criteria to decide on either approval or rejection is an effective way to seek funding for large projects (Tomey, 2009). In most instances, there are standard capital project approval forms that need to be filled out to communicate a description of the project and justification of the requests. An approval committee evaluates the request and a priority score is given to the project (Cleverley, Song & Cleverley, 2011). Those that are more immediate in terms of impact, goal alignment and acceptability are approved earlier than others. In addressing capital budget requests, the unit manager’s task is to prepare the capital project proposal.
Adjusting the Budget
Conclusion
Finance is an important concern of the nurse manager. Her performance is in part evaluated on how well planning, implementing, monitoring and evaluating a budget are carried out. The prudent use of finances requires the use of nursing knowledge and skills in making sound decisions as variations from initial projections are noted and budget requests are received. Expertise in financial management helps the nurse revise and improve the budget and undertake effective cost control activities for the unit to achieve its goals and those of the organization.
References
Cleverley, W. O., Song, P. H., & Cleverley, J. O. (2011). Essentials of health care finance. (7th ed.). Sudbury, MA: Jones and Bartlett Learning.
Finkler, S. A., Kovner, C. T., & Jones, C. B. (2007). Financial management for nurse managers and executives. (3rd ed.). St. Louis, MO: Saunders Elsevier.
Tomey, A.M. (2009). Guide to nursing management and leadership. (8th ed.). St. Louis, MO: Mosby Elsevier.
Yoder-Wise, P. (2011). Leading and managing in nursing. (5th ed.). St. Louis, MO: Mosby Elsevier.
