Health Care Budget, Research Paper Example

The basic concept of economics is the scarcity of resources. The success of any organization also depends to a great extent, on the quality of its revenue and cost management. This is why operating budget is of a significant importance because it deals with the revenues and expenses that result from an organization’s daily operations. Operating budget yields numerous benefits such as forcing the firm to plan its activities in advance, monitor operating performance, compare estimations with actual results to improve forecasting capabilities, and efficiently allocate resources to different cost drivers.

Fortunately, there are certain budget practives that can help the organizations create effective operating budgets. First of all, the organizations should set realistic income targets and only incorporate reliable income estimations. Over optimistic income projections increase the chance for organization’s failure especially if the expenses greatly exceed income. Every department should be involved in the budget creation process so that the final budget is a more realistic picture of the expected operating performance. The organizations should also evaluate the risks posed by the concentration of their revenue streams. If there are diversified sources of revenue, the potential risk will be less than if there are few major revenue sources any of whom if not materialize can threaten the very existence of the firm. Events may be low probability but the organizations should incorporate their possibility to better prepare themselves against unexpected turn of events (Greater Washington Society of CPAs).

Budgets should be prepared in a format and format this is easily readable and understandable. A budget is only as good as its practical impact. If those who are supposed to follow the budget guidelines misunderstand something, the budget has failed no matter how effectively it was prepared. Thus, the budget should be prepared according to the needs of those who will be consulting it to guide their daily actions. Budgets could also be improved by including assumptions to improve the understanding of the readers (Greater Washington Society of CPAs). In addition, budgets should be flexible and are able to incorporate the changing nature of the operating tasks. No budget no matter how well it is prepared, can take absolutely every possibility into account. Budgets are always an attempt at best-possible estimations given the past trends as well as the future expectations.

Because the competitive environment now changes at a faster pace due to globalization and increasing pace, the organizations may benefit from preparing budgets more frequently i.e. instead of going for an annual operating budget only, the organizations may opt for quarterly or even monthly budgets. Doing so may result in additional costs but in most cases, the benefits will make a worthwhile practice. First of all, the firm will be able to improve its estimations by incorporating latest events that might have occurred recently and have significantly changed future expectations. More frequent budgets will also make sure that the management continues to watch its operating revenues and expenses closely. Another benefit will be greater organizational flexibility because more frequent operating budgets will force all the stakeholders to learn to adapt to new guidelines quickly.

The organizations should also set comparative benchmarks to add the element of performance evaluation in operating budgets. The benchmarks could be competitors with similar characteristics , industry average, or even the organizations’ own past performances. There should also be accountability for everyone involved to meet or exceed the goals. Meeting budget objectives is not only the responsibility of a CFO or the finance department but the whole organization. The management should also look for variances in terms of production volume, costs, and revenue. The variances should be investigated and corrective actions should be taken. Moreover, to hold control on costs, new expense requests should be reviewed on multiple levels of management to ensure that they are essential to the strategic goals of the organization. In order to ensure that everyone is committed to the budget, the management may tie bonuses and other forms of performance incentives to meeting or achieving the budget targets (Clark).

Just as management benefits should implement the above mentioned effective financial management practices for operating budgets, it should also be aware of certain non effective financial management practices. One inefficient practice is not to properly match expenses with cost drivers. Doing so leads to widely inaccurate cost estimations and the variations will only increase with the changing production levels. Second inefficient practice is not to include all the departments in the operating budget planning process and for management to trust its own judgment only. This has two major drawbacks. First of all, this will reduce the commitment of the departments to meeting the targets specified in the operating budget. Secondly, the cost estimations will not be as accurate as they would be because operating managers rather than upper management officials are closer to the action and thus, have a better idea of the operational costs.

The operating budgets are also less effective if the management sets too easy targets. In such a case, the operating managers will have little incentive to seek operational efficiency because the targets are easily achievable. A better alternative is to set targets that are not too difficult but not too easy either. The management can seek incremental improvements over previous performance levels as the organization becomes better at its operating tasks. Another indication of ineffective operating budgets is large variances between estimations and actual results. Such large variances indicate poor estimation capabilities on the part of the management, poor data management, lack of working relationship between management and operating managers, and lack of accountability (SmartPros).

Another ineffective financial management practice is not making sure that the operating managers understand the budget well. Unless operating managers understand the budget, one can’t expect them to make serious efforts to meet the budget targets. The management should also ensure that all expenses authorized can be linked to the organization’s objectives. This is even more important in competitive industries like healthcare. Departmental managers often request expenses that have little impact on the overall organizational objectives. The organizations sometimes give equal weight to reliable revenues and transient revenues. Such an action leads to revenue estimations that are less reliable. The organizations should give less weight to revenues that are more variable in nature.

It is clear that organizations who do a better job of tracking their revenues and expenses, maintain proper data repositories, involve all the internal organizational stakeholders in the operating budget planning process, explain the budget clearly, and monitor the variations regularly create more effective operating  budgets than those where budgets become just a formal management practice.

References

Clark, J. J. (n.d.). Improving hospital budgeting and accountability: a best practice approach: if your organization is struggling to achieve its budget targets, your budget process itself may be the culprit. It may also hold the solution. Retrieved September 8, 2011, from BNet: http://findarticles.com/p/articles/mi_m3257/is_7_59/ai_n14817852/?tag=mantle_skin;content

Greater Washington Society of CPAs. (n.d.). Budgeting Practices. Retrieved September 8, 2011, from Nonprofit Accounting Basics: http://www.nonprofitaccountingbasics.org/internal-reporting-good-management/budgeting/budgeting-practices

SmartPros. (n.d.). Signs of Budget Ineffectiveness. Retrieved September 8, 2011, from http://www.pro2net.com/x51946.xml