The first principle that BUPA must adopt is that it must understand true costs. This company will make this achievement by using the standard cost component. This tool should be applied in budget preparation, pricing reporting and performance based incentive plans (Elliott, 2004). This is based on the increase in utility costs, which has decreased the operating surplus. In 2012, the operating surplus was £ 38,364,000. This was a decline from £ 54,202,000 in the previous year (Bupa Care Homes (CFG) plc, 2012). Understanding true costs will ensure that BUPA improves its costing control system. In this case, the company will minimize the payroll and utility costs by use of lean management. Utility bills such as the electricity bill can be minimized by switching off lights in rooms which are not in use (Williams & Torrens, 2005). In addition, any equipment that is not in use should be switched off, always.
The other principle of business control system that should be adopted by BUPA is the principle of management decisions for minimizing organizational costs. This principle is grounded on the fact that costs in an organization are based on the management systems and decisions in that organization (Bradford, 2011). A major issue for BUPA is staff costs. These costs must be incurred by BUPA in the provision of services to its customers. However, any substantial increase in these costs may reduce the surplus significantly. In the year 2012, BUPA recorded an increase in these costs to £ 281,993,000 from £ 271,978,000. This increase of £ 2,235,000 is significant for this company. A business control system of minimizing staff costs is necessary at this point. Minimizing costs are a direct and straight forward strategy of increasing profits (Eccles & Booth, 2011).
Section 1.2: Main amounts of income for BUPA
BUPA had a financial income of £ 7,868,000 in 2012 from its health care segment. This was comprised of £ 19,000 in bank deposits and loans to group undertakings of £ 7,849,000 (BUPA, 2012). From the consolidated income statement, BUPA recorded a surplus of £ 21,697,000. This was a decline from £ 38,983,000 recorded in 2011. The main heads of income for BUPA in 2012 comprised of continuing operations, operating surplus, surplus on ordinary activities before taxation expense and discontinued operations (BUPA Finance Plc, 2012). Continuing operations had revenue of £ 481,613,000 and operating expenses of £ 443,249,000.
The operating surplus had a financial income of £ 7,868,000 and financial expenses of £ 15,045,000. A taxation expense of £ 9,490,000 was recorded in the ordinary expenses category. There was a nil balance for discontinued operations in 2012. This was a decline from £ 12,882,000 in 2011. An unrealized loss on property revaluation of £ 13,623,000 was recorded in the consolidated statement of comprehensive income (Barker, 2012). To add onto this entry, there was an actuarial loss on pension schemes amounting to £ 131,000. Taxation credit on income and expenses amounted to £ 6,155,000. Other comprehensive expenses for the year amounted to £ 7,599,000. The net figure from this statement was a comprehensive income of £ 14,098,000.
Section 1.3: Regulatory requirements in financial resources management
In managing its financial resources, BUPA will have to follow a regulatory requirement with regard to staff costs. BUPA must follow any guidelines that will be issued by regulators in line with wage rules. Any regulations such as increases in minimum wages will have to be followed strictly (Hinnels & Carter, 2010). In this case, BUPA will have to use its financial resources in an efficient manner to cater for the high wages. This will be followed in order to avoid any penalties that the company may be fined in a court of law. The other aspect of management of financial resources is the capital and solvency regulation (Carrington, 2011). Due to insolvency concerns, corporate regulators may be forced to increase capital requirements for BUPA and other players in this sector.
The impact on financial resources management is that BUPA may be forced to minimize its expenditure on other operational areas in order to cater for capital concerns (Stansfield, 2009). BUPA may have to decrease its research costs, in this case. Such capital will be obtained at an opportunity cost of growth. In addition, BUPA will be affected by regulatory requirements in operations. There may be changes in clinical, health and safety regulations. Such changes may be aligned towards ensuring that the quality of healthcare is maintained at high standards (Cole, 2011). This regulation may be embodied on clinical equipment, general standards of customer comfort and bed capacity. The nature of doing business, costs and revenues of BUPA may be altered by such a regulation. Its financial resources may be affected negatively if such a regulation involves additional investment for BUPA. This is an implication that the financial resources of BUPA may be strained (Penner, 2004).
Section 1.4: Systems for managing financial resources
One of the systems for managing financial resources that BUPA maintains is targeted towards its capital concerns. Stringent management of financial resources for BUPA has been brought about by the need to maintain a prudent buffer above the capital requirement set by authorities (Eastaugh, 2004). BUPA reviews this amount constantly in order to find out its effect on business activities. The metrics applied are the regulatory environment and the economic environment. The other system that has been applied is geared towards its investments. The basis for this system is based on the fact that failure to manage its financial assets in an effective manner may lead to financial losses and reduction of solvency (Warner & Townsend, 2008). The strategy applied is management of its investments centrally whereby a Treasury and Investment Committee oversee the financial assets. BUPA maintains most of its investments in cash while restricting exposure to individual counterparties.
Learning outcome 2Section 2.1: Diverse income sources for BUPA
A major source of revenue for BUPA Care Homes originates from the local government. This source is a key determiner of its utilization rates and pricing targets. The revenue for BUPA Care Homes also originates from income received from health and care provision services. In addition, BUPA Care derives some income from supplies of goods (Bailey & Boerma, 2012). This revenue is stated net of VAT and sales taxes. Revenue for BUPA is recognized in the accounting period in which the group receives the right of exchange for service rendering.
In the year 2012, for instance, this company had a sale of goods and rental income of £ 11,764. BUPA Care Homes also derives income from all actuarial gains which have been obtained over a period of one year (Holt, 2012). BUPA has income from other businesses based in Asia and Middle East. The main business activity that this enterprise carries out in this region is provision of health insurance. Its business in this region is differentiated by the expertise of BUPA Care Homes (Brinkerhoff, 2011). In fact, 70% of BUPA’s revenue came from international operations. This company expects to increase its revenue from international operations as it expands its global footprint.
Section 2.2: Factors determining financial resource availability for BUPA.
A major factor that could impact the availability of financial resources for BUPA is an adverse economic environment. This factor could reduce the funds that BUPA receives from local authorities and PCTs (Black, 2012). This was the case in 2012 when funds from these two sources reduced owing to inflationary pressures. To add onto this, profits from businesses in the UK declined owing to increasing costs of healthcare provision. In a chain effect, the consumer confidence declined from the poor economic conditions in the country (UNEP, 2012). BUPA had to deal with adjustments in its expenditures since the revenue from local authorities declined in real terms. All these negative effects were brought about by an increase in inflation.
The other factor that shapes up finances for BUPA is its success in product launches in geographical regions such as Australia and New Zealand. Success in launching these products will imply that BUPA will spread its source of revenue over a wide product range (Cooper, 2001). In the 2012 financial year, this growth contributed to the increase in revenue to £ 481,613. In health insurance business, growth was driven by expansion of corporate business, new products, new retail centers and additional marketing. In terms of care services, BUPA added 640 home care beds in 95 assisting units, in Australia and New Zealand. This expansion will increase the reach of BUPA to its clients, and hence increase revenue and financial resources for the company (Luna & Catino, 2012). The increase in financial resources will be based on the fact that funding by local authorities and PCTs will increase due to the high number of customers that will be served by BUPA. In addition, the high number of customers will increase the number of those customers who will be paying for themselves (Gladwin & Wilson, 2011).
Section 2.3: Review of types of budget expenditure for BUPA
BUPA prepares several types of budget. The first type that is prepared is an operating budget. This presents a financial plan for each financial year for this health care provider (Lee, 2007). The specific areas that are targeted by this budget include expenses, profits and revenues for BUPA.
In the expense budget, BUPA includes fixed and variable expenses and discretionary expenses. The fixed expenses normally comprise of the expected costs in expansion efforts. This represents a substantial portion of the fixed budget since a lot of expenditure is required in acquiring or leasing land in which to set up health facilities. For the variable expenses, BUPA applies managerial decision making in order to control this expenditure. This budget comprises of all the variable production expenditure and remuneration expenses (Cleverley, Song, & Cleverley, 2010). It is set at 7.5% of the expected revenue in each financial year. For the discretionary budget, BUPA relies on the decisions by senior management. This is aligned towards legal fees, research and development fees and accounting fees. Since these fees may not be determined with precision in an easy manner, senior management makes such decisions based on pure managerial judgment (Godlee & Cohen, 2007).
The other type of budget that is prepared by BUPA is the revenue budget. This budget anticipates the income that this health care firm will receive in a financial year (Barnat, 2012). This income comprises of proceeds from health insurance business, sales of goods and payments for health care by BUPA customers. BUPA anticipates an increase in revenue in the 2013 financial year to £ 490,000, in order to meet its needs for expansion. This figure is the basis for all the other types of budgets since they have to be financed by this revenue. The final type of budget prepared by BUPA is the profit budget. This is an aggregation of revenue and expense budgets into gross and net profits. This budget assists BUPA in controlling its activities such as dividend payments and staff remuneration increases (Setel & Hemed, 2009).
Learning outcome 3Section 3.1: Managing a financial shortfall in BUPA
In the event of a financial shortfall, in BUPA, the management must respond by using creative techniques in response to the shortfall. One of the ways is to reduce the level of expenditures (Martins, 2011). The expenditures to be reduced may comprise of payments to rating agencies. Instead of making such payments in a view to increase its rating, BUPA may improve the quality of its health care services. Such a strategy would reduce the expenditure and improve its income since customers would be attracted by the high quality services (Mock & Slizey, 2011).
The other strategy is increasing its earnings. This strategy may work over an extended period. BUPA may increase its channels of earnings by expanding its revenue sources. One of the ways that this strategy can be executed is through offering of medical advice for a fee to customers. This will increase the finances of BUPA without straining its resources substantially. The other way that can be applied in managing a financial shortfall for BUPA is through the sale of some assets. In this case, BUPA may dispose some assets that do not have a lot of benefits (Thacker, Stroup, & Anderson, 2013). Some of these include old and obsolete medical equipment and old furniture. Such a strategy will increase the cash and the financial position of BUPA.
Section 3.2: Action to take in the event of financial fraud
If I suspect financial fraud in my organization, I would report it to law enforcement authorities. This action would place the matter in the right hand of the authorities. The suspect would be investigated professionally, and the right measures would be taken. Reporting such an act to authorities will assist the authorities in gaining a full dimension of the scope of financial fraud (Bruegger, 2013). The other action that I would take is reporting the matter to my seniors. In the case of BUPA, for example, I would report to the chief operating officer. I would inform him of my suspicions and the individual involved. This executive would take action by conducting an independent investigation and apprehending the employee involved in the fraud (Carroll, 2010).
The final alternative would be encouraging such an individual to stop the behavior. In the health care industry, financial fraud occurs since customers are concerned about their health and not about the finances consumed in the process (Wang & Sachs, 2010). This provides a harbor for fraudulent practices. However, a moral persuasion would be effective, in this case. I would convince the individual that conviction of financial fraud will result in a court fine or imprisonment. In addition, the individual will lose his job.
Section 3.3: Budget monitoring arrangements
BUPA has adopted several measures in monitoring its budget. The first arrangement involves the use of under spends and over spends. In this case, BUPA carries forward any over or under spending in a financial year. This is applied for capital expenditures such as acquisition of health facilities in the international platform (Corrigan & Donaldson, 2008). This budget monitoring arrangement assists BUPA in managing its financial resources at an operational level. This is because the carry forwards prevent a rush to spend cash balances at the end of the year, which leads to poor expenditure decisions.
The other budget monitoring arrangement adopted by BUPA is delegation. In this case, BUPA delegates budget monitoring from its headquarters in England to other regional headquarters such as Australia or New Zealand (Perrin & Scanlan, 2008). This delegation allows the regional managers of BUPA to monitor their budgets in a flexible and responsive manner to their regions. BUPA delegates such budgets with a clear specification of their managers. These managers influence expenditures at their levels and are able to attain an improved performance (Mackay, 2006).
Learning outcome 4Section 4.1: Information for financial decisions
Accurate financial information is required in order to make progressive decisions in healthcare. One element of the information required is the number of people that are to be served. This information assists in making financial decisions such as the level of inventory of drugs to maintain (Miller, 2005). Additional information regards the remuneration requirements for a health care institution. The other information required is in terms of regulations. In this case, a health care institution must find out the financial requirements as set by authorities (Walsh & Simonet, 2004). These requirements are in terms of bed capacity and medical equipment. Before starting its operations, a health care institution must have the level of capital that meets the requirements.
Section 4.2: Relationship between care service and costs
Health care service has a direct relationship with costs and expenditure. In order to provide high quality and sufficient services, high costs are incurred (Walsh, Prata, & Evans, 2003). These costs include drug provision costs, costs of operations such as X-ray operations, and utility bills for health care facilities. If a healthcare institution cannot meet these costs adequately, delivery of health care services will be poor.
Section 4.3: Impact of financial considerations on users
Financial considerations affect the level of consumption of healthcare services by users. Users have to pay fees after visiting healthcare institutions (Sherman, 2010). Despite the fact that health services are subsidized or funded, users have to meet certain financial obligations. If users cannot meet such obligations adequately, the consumption of such services is low (World Health Organization, 2011). On the other hand, if subsidization is reduced, the service costs will increase and hence the number of users will decline.
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