Budget Development Project
The great depression in 1929 led to the emergence of organization some of which are meant to make profits while other run as non-profits (Penner, 2013). Indeed, these organizations are required to budget for their expenses in light of their operations. A budget refers to the overall estimation of how an organization, institution, individual or government aims to spend the resources for a specific period. These resources may include money, inventory, labour among other factors of production . Normally, top-level managers including CEOs do the formulation of a budget. However, there can be involvement of subordinate staff in decision-making. In addition, the budget is aligned to the strategic planning of an organization. Strategic planning is the long-term goals an organization proposes to meet within a particular period. In the corporate world, organizations strive to align the budget with the strategic planning and vice versa. Importantly, tying the priorities of budget is paramount in an organization. I chose hospital B as my research scope. In hospital B, the budget formulation is strategically aligned to hospital’s mission. First, the financial forecast by the Hospital’s budget reflects the financial strategies included in the strategic planning. In particular, the budget for hospital B reads 1 billion US dollars. Another priority contained in the budget is source of capital for the financing of various projects, which is also included in the strategic planning. For instance, the source of capital for financing theatre equipment is proposed to be sourced from loan from Barclays bank. In summary, financial forecast and capital source are the two ways that reflect the way in which budget of hospital B is tied with its strategic planning.
The organizational goals, objectives and priorities are crucial in the budget formulation of hospital B . The chief financial officer of Hospital B articulates that the goals are what determine the size of the budget. For example, the goal of hospital B is to provide affordable health services including surgical services to the members of the public. Therefore, this goal of hospital B spearheads the budget for example the budget must stipulate the additional theatre equipment needed in the preceding financial year. Again, another goal of the Hospital B is to be a world consultant in matters of the health services such as customer relationship. The two goals of hospital B generally influence the allocation of resources to meet the stated goals. Additionally, hospital B has two main objectives according to the operational manager we found. First, the hospital aims to acquire the best surgical equipment to provide surgical services both locally and internationally. Secondly, build a strong customer relationship locally and abroad. The above two objectives of hospital B are considered in the formulation of budget, where the hospital resources are budgeted towards recognition locally and internationally. Finally, hospital B prioritizes the customer relationship and trust. This helps build its reputation and image in the public eye.
In terms of who calculates the revenues, expenses and capital needs, the top level manager spearhead all financial management activities in the operations of the hospital. However, the chief financial officer is the primary person who calculates the hospital’s revenues and expenditure as well as capital needs. For example the chief financial officer oversees the preparation of financial statements such as statement of financial position and statement of comprehensive income. In addition, the statement of cash flow is prepared, which give the total expenses and incomes of hospital B. The chief financial officer of hospital B assured that the budget is formulated in relation to the projected income. “Literally, no institutions can budget what it doesn’t have, for we budget based on the income level” CFO posed. He also explained that the expenses of the hospital are accounted for and presented to the management for further scrutiny. This not only improves accountability but also the accuracy of financial data. The top managers headed by the chief executive officer analyze the capital needed by the hospital. The CEO must approve the capital needed such as funding of daily operations. Therefore, different personnel have different mandates. For example, calculating the expenses is done by chief financial officer whereas chief executive officer approves the total capital needed of the hospital.
The board of directors engages in the process of primary research. In addition, other demographic factors are considered in the budget formulation. For example income is a key demographic factor that determines the budget formulation. In budget formulation, there are two regulations that are put in place. First, issue of finance and the budget timeline. The budget formulated should be SMART (sizeable, measurable, accurate, realistic and time framed). Also, the background information such as past performance of hospital B is very critical in the budget formation. The operation manager said that past financial performance is used to predict the future income for the hospital. Therefore, if the past statistics saw the hospital has been running into losses for example, the budget will be quite different from the time the hospital projects huge profits. Again, in the development of the hospital B budget, there are two main assumptions taken into consideration. First, the projected source of income will be readily available and secondly, the wastage will be minimal as possible and risks will be mitigated.
The budget cycle of hospital B revolves around yearly. To start with, the financial year of hospital B starts at March and ends in the preceding month of March. Basically, the financial year of hospital B is one year. Like any other organization, hospital B starts the process of planning the budget after the analysis of the income statements. The CEO in collaboration with the chief financial officer fixes the scheduling of budget. Therefore budget cycle of hospital B is after one year, where after each year, a budget must be formulated. On the other hand, scheduling of budget involves hospital B readingthe budget to its subordinates Thursday of every first week of March. In addition, Hospital B budget has fixed its budget calendar to be on month of March of every year. Therefore the budget is active only after one year after which it is abandoned. However, the chief finance officer elaborated that the past budgets are helpful in terms of formulating the current budget. According to the operations manager, hospital B has primarily chosen March to be the start of their fiscal year because the hospital started operating on a month of March therefore they adopted the same throughout.
In The course of budget development in the Hospital B, various packages are utilized. For instance, use of software such as Prophix and Oracle JD Edwards used in budgeting. This software is used to make work easier for managers in creating the budget. Also, the software is used to automate the financial forecast of Hospital B. another package include by senior management is the accounting packages. These packages display the true review of the financial position of the hospital in the year ended. Hospital B uses guidance material such documented policy.
Zero based budgeting is the budgeting approach that Hospital B adopts. According to the chief financial officer, the adoption of zero based budgeting was related to the types of operations by the hospital. Zero based budgeting has the following advantages according to the Operations manager of the hospital. First, only the projects that payback to the hospital will succeed. For instance the project of increasing the patient beds would succeed if the benefits outdo the costs. Secondly, the hospital resources are fully utilized and are directed to the betterment of the hospital. This is because if the project budgeted fails, the next budget does not consider it. Again, the fact that the budget approach can open room for managers to understand the budget, he or she can prioritize on the best project to undertake. However, zero based budget, has limitations which includes; high demand of offer and energy in preparing the cost/ benefit analysis to help determine the profitability of a project. Secondly, the notion of focusing on benefits at short run can reduce the capability of the organization in strategic planning which is long term.
In implementation of the budget, there are variances that are provided by the hospital B senior management. These variances determine the maximum and minimum error that can be allowed in a budget formulation. The variance of hospital B is that the budget should be created giving it an addition five percent of the total budget to cater for losses and risks that might occur. Also, the budget should not exceed the available net profits in the current year. This means the budget should be within the available resources. If the budget exceeds the available resources, there are variance investigations as to whether the sustainability is achieved. The issue that the investigations are required depends on the extent of the malpractices by the hospital. For example, budgeting for increasing the surgical equipment and at the end of the budgeting period is not achieved; the senior management of the hospital can primarily give variance investigation of two months extra. Therefore, hospital B allows a variance investigation of about two months after which final decision is made by the senior managers.
Hospital B uses various methods of capital budgeting. This is determined by the type of investment undertaken by the Hospital. Capital budgeting is the process of deeming the worthiness of an investment to an organization. Hospital B uses payback period in its capital budgeting. Payback period is the period that an investment takes before recovering the investment cost. For example, an investment of 20, 000 US dollars having a payback period of three years. This means three years is the payback period. Hospital B is concerned with the period at which the paying back of the investment will occur. The chief finance officer of hospital B explained that to make the investment decision of the project, they take the project that has shorter payback period. The managers of Hospital B are keen to ensure the investment decisions are implemented. For example, the operating manager of Hospital B gave us an example of their latest investment, which was the project to upgraderadiotherapy equipment.
Staffing budget in hospital B is used in the labour forecast. The discussion formulae in class are used by hospital B in staff budgeting. To formulate the staffing budget, Hospital B follows a series of processes. This includes calculating the number of hours worked by full time and part time employees, summing up the total number of hours worked part time and full time and finally dividing the total hours worked by number of full time employees.
VPs, also known as the chief nursing officers, have the responsibility to ensure the coordination of various departments in Hospital B. such departments include consultation, injection, wards and pharmacy. Their input is measured in terms of the number of admitted patients in the hospital B. On the other hand, directors of hospital B have direct correlation with the level of strategic planning of the hospital. However, collaboration of both directors ad VP is paramount in the overall operating and success of hospital B.
The staff of hospital B plays a great role in the operations of the hospital. For instance, nurses keep in touch with the patient’s first aid. Doctors mainly are categorized into consultation, injection, and general treatment and further according to their area of specialization. Doctors have expertise in treating specific diseases. Surgeons are professional in the different ways. In addition, staffs have a role in the budget formulation in hospital B. Their input is manifested in providing recommendations and in definition of requirements of the hospital. Hospital staff input was demonstrated through scrutinizing the minutes of previous meeting in patronage of chief nursing officer.
Affordable care Act has contributed much on both the structure and extent to which the budget of hospital B is formulated. Under the Act, signed into law by President Obama of United States, requires the hospitals to provide their services in a cost controlled, better outcomes and better methods of reaching customers. Therefore, hospital B has significantly benefited from the Act because it aims to provide the best health services both locally and internationally with the lowest cost possible.
In summary, from the research of hospital B, I was able to deduce that budgeting is critical process in an organization. The health industry is faced with financial challenges which unless budget is used, the management of finances may not be possible. In addition, the research on hospital B has greatly influenced the perception I previously held concerning the hospital. For instance before I researched on this hospital, I was not able to articulate the exact importance of budgeting but now I can confidently acknowledge the same. Budgeting process is subset of strategic planning in an organization.
References
Kumar, T. (2012). Summary of Vermont Hospital Budgets. International Journal of Advanced Research in Computer Science and Software Engineering, 6.
Penner, S. (2013). Economies and financial management for nurses and nurse leaders. New York: Springer Publishing Company.
Socha, K. (2014). From global hospital budgets to the mixed reimbursement system: Incentives for activity and efficiency. Business and Social Sciences journal, 9.
