Posted: May 1st, 2025

briefly explain

Read Chapter 8 and 9. Review the Power Point Presentations. Answer the following Questions.

Chapter 8:

a. Explain briefly the different types of budgets commonly used by healthcare facilities:

1. Annual budget
2. Authorized personnel budget
3. Capital budget
4. Expenditure budget
5. Statistical budget
6. Revenue budget
7. Cash budget

b. Explain briefly the Five Steps to Developing an Effective Budget

Chapter 9:

a. Describe briefly the basic cash management tools used by any medical facility, including the petty cash fund, the cash drawer, and the operating checking account.

Chapter 9
Cash Management
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Chapter Objectives
After completing this chapter, you should be able to:
• Identify the basic cash management tools used by any medical facility, including
the petty cash fund, the cash drawer, and the operating checking account.
• Demonstrate the ability to properly prepare a bank reconciliation.
• Describe the development and use of the statement of cash flows.
• Illustrate the importance of cash management in ensuring adequate cash
resources to operate the business.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Introduction
• Cash management is a process involving:
− Accurate cash handling
− Daily bank deposits
− Accurate and timely billing
− Investment of cash
− Bank account reconciliations
− Monitoring cash flow
− Monitoring financial controls
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Cash Management Tools
(1 of 5)
Petty Cash
• Used to reimburse employees for small cash expenditures
• Allows flexibility to pay or reimburse small expenditures without needing to write a
company check or use a company credit card
• Created by writing a check from the company checking account to the new account,
Petty Cash
− Amount based on short-term cash needs
− Cash often kept in a locked cash box
− Withdrawals recorded by petty cash custodian who also collects receipts
− Additions made as needed
− Replenished to original value at end of the fiscal year
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
Cash Management Tools
(2 of 5)
The Cash Drawer and the Cash Receipts Process
• Used to account for payments received from customers and to make change
• Cash includes coins, paper money, and checks from customers (handed-over or
mailed-in)
• Each cash drawer should be under the responsibility of one employee who:
− Accepts cash payments
− Provides payment receipts
− Prepares bank deposit
− Balances the cash drawer each day
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
Cash Management Tools
(3 of 5)
• Payments received by mail
− Designated employee stamps back of checks with secured endorsement
− Second employee records payments to patient accounts
− Third employee makes bank deposit and reconciles it to the daily cash
receipts journal
− Very small practices may use only one or two employees but need a good
oversight plan
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
Cash Management Tools
(4 of 5)
Cash Disbursements
• Employee makes payments to vendors
• Authorized person verifies the payments and signs the checks
− Verification based on invoice, purchase orders, and delivery tickets (or
packing lists)
− Check log is prepared to assure no unexplained breaks in check number
sequence
− Blank checks kept in secure place
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7
Cash Management Tools
(5 of 5)
• Payroll
− Facility may maintain a separate checking account for payroll
▪ Allows greater accountability for these expenditures
− Payroll often outsourced due to complexity
− Payroll checking account kept at zero balance
▪ Amount of each payroll transferred from operating checking account as
needed
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8
Knowledge Check Activity 9.1
Which of the following cash management tools is used to account for small cash
transactions?
a. Petty cash fund
b. Operating checking account
c. Cash drawer
d. Payroll checking account
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9
Knowledge Check Activity 9.1: Answer
Which of the following cash management tools is used to account for small cash
transactions?
a. Petty cash fund
b. Operating checking account
c. Cash drawer
d. Payroll checking account
Answer: a. Petty cash fund
The petty cash fund is used to reimburse employees of the business for small
miscellaneous cash purchases such as postage or refreshments for a staff
meeting.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
Bank Reconciliation
(1 of 4)
• Monthly statements for each bank account
− Balance on bank statement at monthly cutoff date will not equal accounting
ledger balance
▪ Posting of deposits and checks often occurs at least one day later
▪ Bank may pay interest or charge fees that have not yet been entered into
accounting ledger
− Reconciliation balances bank statement to ledger balance for the account
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Figure 9-1 A Blank Example of a Bank
Reconciliation Statement
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
Bank Reconciliation
(2 of 4)
• Three-step process:
− Step One:
▪ Mark deposits in accounting record that match deposits on bank
statement.
▪ Mark as cleared all issued checks listed as paid on bank statement.
− Step Two:
▪ Adjust bank statement for items that did not clear as of statement date.
– Deposits made late on day of statement
– Checks that did not clear
▪ Stale-dated checks are voided and reissued (with stop payment orders
on original checks).
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
13
Bank Reconciliation
(3 of 4)
− Step Three:
▪ Identify items on bank statement that need journal entries such as
interest paid, bank charges, fees for credit card payments, and checks
that didn’t clear due to non-sufficient funds (NSF) in the check-writer’s
account.
– Patient accounts related to NSF checks need to be adjusted to
remove the payments and to add fees for NSF (bounced) checks.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Figure 9-2 Journal Entries Recording Earned
Interest and Bank Charges
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
15
Figure 9-3 A Single Journal Entry Recording
Earned Interest and Bank Charges
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
Bank Reconciliation
(4 of 4)
• Bank reconciliation becomes more complicated when dealing with automated
payment processes, such as credit card payments.
− The payment will be deposited directly into the operating bank account of the
facility along with an itemized report being sent.
− Double-checking all entries on the bank reconciliation form to ensure
accuracy is important.
• Modern computer software makes the process of bank reconciliation much
easier.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17
Figure 9-4 A Completed Bank Reconciliation
Form for Morningside Medical Clinic
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18
Knowledge Check Activity 9.2
Which of the following is deducted from the bank statement balance when
reconciling the bank statement?
a. Interest received
b. Bank charge
c. Deposit in transit
d. Outstanding check
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
Knowledge Check Activity 9.2: Answer
Which of the following is deducted from the bank statement balance when reconciling the
bank statement?
a. Interest received
b. Bank charge
c. Deposit in transit
d. Outstanding check
Answer: d. Outstanding check
Checks issued that have not cleared the bank by the statement date will need to
be listed and the total of outstanding checks used as a reconciling item.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
20
The Statement of Cash Flows
(1 of 6)
• GAAP-required statement supplementing the balance sheet and the income
statement
• Reports on where the business acquires cash and how cash is used
• Includes net cash from three sources:
− Operations, capital and related financing, and investments
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Figure 9-5 Statement of Cash Flow
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22
The Statement of Cash Flows
(2 of 6)
• Concept of accrual accounting
− Revenues and cash availability do not occur at the same time except when a
patient pays cash at the time of service.
− Credit card payments take a few days before funds are transferred.
− Third-party payers or patients who were billed may take weeks to send
funds.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
The Statement of Cash Flows
(3 of 6)
• Components of statement of cash flows
− Net cash flow from operations
▪ Operating net income
▪ Plus depreciation and amortization totals
▪ Plus decreases or minus increases in prepaid expenses, inventory,
accounts receivable
▪ Plus increases or minus decreases in accounts payable
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24
Figure 9-6 Morningside Medical Clinic Cash Flow Statement
with Comparative Data for Present Year and Year Prior
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
25
The Statement of Cash Flows
(4 of 6)
− Cash and cash equivalents
▪ The combined total of the balances in cash accounts such as petty cash
and operating checking accounts and cash equivalents, defined as
financial assets such as money market accounts or short-term
investments that may be converted to cash.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26
Figure 9-7 Examples of Cash and Cash
Equivalents
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27
The Statement of Cash Flows
(5 of 6)
− Proof of accuracy
▪ Net increase (decrease) in cash and cash equivalents
▪ Plus cash and cash equivalents, beginning of year
▪ Equals cash and cash equivalents, end of year
– Tied back to the balance sheet amount for cash and cash
equivalents to determine accuracy
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
The Statement of Cash Flows
(6 of 6)
− Net cash from capital and related financing
▪ Proceeds of capital financing
▪ Minus purchases of capital equipment
▪ Minus payments of interest and principal on long-term debt
− Net cash from investments
▪ Investment income
▪ Plus sale or minus purchase of investments
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
29
Figure 9-8 Completed Cash Flow Statement
for Morningside Medical Clinic
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30
Knowledge Check Activity 9.3
The statement of cash flows begins with:
a. Cash from the balance sheet.
b. Net income from the income statement.
c. Total revenues from the income statement.
d. Total expenses from the income statement.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
31
Knowledge Check Activity 9.3: Answer
The statement of cash flows begins with:
a. Cash from the balance sheet.
b. Net income from the income statement.
c. Total revenues from the income statement.
d. Total expenses from the income statement.
Answer: b. Net income from the income statement.
The statement of cash flows starts with net income taken directly from the income
statement.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
32
Self-Assessment
Why is cash management important for a business?
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
33
Chapter 8
Budgets
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Chapter Objectives
(1 of 2)
After completing this chapter, you should be able to:
• Explain the different types of budgets commonly used by healthcare facilities:
1. Annual budget
2. Authorized personnel budget
3. Capital budget
4. Expenditure budget
5. Statistical budget
6. Revenue budget
7. Cash budget
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter Objectives
(2 of 2)
• Compare top-down (authoritarian) budgeting and bottom-up (participatory)
budgeting.
• Contrast incremental budgeting and zero-base budgeting.
• Discuss the process of amending the budget during the year, including the use
of budget controls and budget amendments.
• Explain the budget development process for smaller medical facilities.
• Demonstrate the ability to perform break-even analysis.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Introduction
• A budget is a plan, expressed in dollars, for a future period
− Predicts future demands for services
− Projects available financial resources
− Requires updates as conditions change
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
The Operating Budget
(1 of 3)
• Combines annual revenue budget and annual expenditure budget
− Expenditure budget
▪ Approved operating budgets for all departments
▪ Approved capital replacements and improvements
▪ Annual depreciation and amortization
− Revenue budget
▪ Projected revenues from medical services
▪ Projected non-patient revenues
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
Figure 8-1 Annual Budget
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
The Operating Budget
(2 of 3)
• Major cost headings for department budgets:
− Salaries and benefits
− Operating expenses
▪ Equipment rentals, continuing education costs, repairs, miscellaneous
costs
− Allocated costs
▪ Costs of operating departments that do not generate revenues
▪ Maintenance, utilities, insurance
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7
The Operating Budget
(3 of 3)
• Developing the operating budget
− Department managers project salaries and benefits based on current
expenses and projected changes.
− Department managers project expenses based on historical cost data,
recent experience, known increases in prices, and estimates of future costs.
− Department budgets are combined to create the operating budget.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8
Figure 8-3 An Example of an Operating
Budget Draft for a Nursing Department
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9
The Authorized Personnel Budget
• Regular full-time staffing for the healthcare facility is based on full-time
equivalent (FTE) positions.
− Standard is one employee working 8 hours per day, 5 days per week, 52
weeks per year (2,080 hours per year)
− Personnel requirements for departments are stated as number of FTEs even
if many positions are part-time
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
Figure 8-4 Authorized Personnel Budget
for a Nursing Department
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Capital Budget
(1 of 2)
• Schedules the purchase of assets with long useful lives
− Business defines the types of purchases that are considered capital
▪ Typical definition: cost > $2,500 and life > one year
− Business determines years of capital budget
▪ Typical spans: 5 to 10 years
− Review existing capital assets and their expected obsolescence dates
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
Capital Budget
(2 of 2)
− Estimate costs of capital assets that will need to be replaced
− Calculate total costs of capital asset replacements for each year of budget
− Determine how to pay for capital expenditures
▪ Internally generated funds
▪ Borrowing
• Capital budget updated annually
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
13
Statistical and Revenue Budgets
• Statistical budget projects revenues from services to patients
− All services listed
− Encounters: number of units of service to be provided
− Weight (multiple of a base charge) assigned to each service
• Revenue budget
− Uses statistical budget data times projected revenue per base charge
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Figure 8-5 An Example of a Statistical Budget
Used to Determine Patient Care Revenues
Based on Units of Services
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
15
Figure 8-6 A Sample
Revenue Budget Worksheet
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
The Cash Budget
• Addresses fluctuations of encounters and reimbursements
− Annual budget divided into monthly columns
− Monthly portions allocated based on past experience and known changes
− Some months may have negative cash flows
− Planning will allow facility to cover those months without borrowing
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17
Figure 8-7 An Example of a
Monthly Cash Budget
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18
Putting It All Together
• Statistical budget is first with its projected demand for services.
• Projections are made for revenues from medical services and other sources of
revenue.
• Expense budget is prepared based on personnel and operating costs needed to
meet the demand.
• Capital budget is prepared and first year of that budget included in annual
budget.
• Cash budget is prepared.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
Knowledge Check Activity 8.1
Which of the following budgets projects patient care revenues based on units of
service to be provided and established reimbursement rates?
a. Annual budget
b. Capital budget
c. Cash budget
d. Statistical budget
e. Revenue budget
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
20
Knowledge Check Activity 8.1: Answer
Which of the following budgets projects patient care revenues based on units of service to be
provided and established reimbursement rates?
a. Annual budget
b. Capital budget
c. Cash budget
d. Statistical budget
e. Revenue budget
Answer: d. Statistical budget
The statistical budget projects patient care revenues based on units of service to
be provided and established reimbursement rates.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Figure 8-8 A Flow Chart of the
Budgeting Process
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22
Budget Philosophies
(1 of 2)
Top-down Budgeting
• Top management controls budget with minimal input from unit managers
• Authoritarian budgeting
• Allows budgeting process to move quickly and smoothly
Bottom-up Budgeting
• Unit managers provide information on the unit’s operational needs
• Participatory budgeting
• Promotes understanding of the organization’s goals and financial limitations and
enhances the communication and cooperation between work units
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
Budget Philosophies
(2 of 2)
Incremental Budgeting
• Begins with authorized budget for the year and adds funds for inflation and
projected demands for services
Zero-base Budgeting (ZBB)
• Units must justify every aspect of their budgets from a base of zero
• Time consuming process
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24
Knowledge Check Activity 8.2
Which of the following budgeting philosophies starts with the current approved
budget and adds funds for inflation and projected demands for service?
a. Top-down budgeting
b. Bottom-up budgeting
c. Incremental budgeting
d. Zero-base budgeting
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
25
Knowledge Check Activity 8.2: Answer
Which of the following budgeting philosophies starts with the current approved budget
and adds funds for inflation and projected demands for service?
a. Top-down budgeting
b. Bottom-up budgeting
c. Incremental budgeting
d. Zero-base budgeting
Answer: c. Incremental budgeting
Incremental budgeting starts with the current approved budget and adds funds for
inflation and projected demands for service.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26
The Final Step: Balancing the Budget
• Operating revenues should cover operating expenditures plus debt service
payments and capital investments.
• Begin with a realistic revenue budget and make adjustments to the expenditure
budget to achieve balance.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27
Mid-Course Corrections
(1 of 2)
• Variance analysis: comparison of budged versus actual revenues and
expenditures
• Budget control: level of flexibility provided to unit managers in using budgeted
funds
− Line item control: most stringent; prohibits a unit manager from spending
funds from any line item where the expenditure would exceed the budget for
that individual line item
− Department budget control: most flexible; unit manager is authorized to use
any available funds within the total budget for the year, regardless of
whether any individual line items are overspent
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
Figure 8-9 Example of a Variance Analysis
Comparing the Projected to the Actual
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
29
Mid-Course Corrections
(2 of 2)
• Budget amendment: approval to move funds from one budget item to another
− Initiated by unit manager
− Approved by budget office
− Final approval from executive level
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30
Budgeting for Smaller Medical Facilities
• Budgeting provides early warning of financial problems
• Budgeting system can detect employee embezzlement
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
31
Five Steps to Developing an Effective Budget
(1 of 3)
Step One: Prepare a Chart of Accounts
• List of the names of accounts that a company uses in maintaining their books
• Set up by finance at the start of the business
• Reference numbers classify the accounts by type
Step Two: Track Historical Revenues and Costs
• Revenues and expenses from prior years are used to project the current year
budget, taking into consideration inflation and changes in medical practice.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
32
Five Steps to Developing an Effective Budget
(2 of 3)
Step Three: Benchmark Costs
• Designed to staff the facility with the appropriate number of employees for each
function
• Human resources responsible for competitive salaries and benefits
Step Four: Build the Annual Budget
• Consider changes in fees and reimbursement rates, economic changes in the
community, staffing levels, and pay changes
• Make adjustments to each item based on historical data and projections
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
33
Five Steps to Developing an Effective Budget
(3 of 3)
Step Five: Review the Monthly Budget
• Practice manager thoroughly analyzes the monthly expenses and reviews
important issues with the physician
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
34
Break-Even Analysis
• Allows the organization to calculate the number of units of service that need to
be provided to allow the organization to cover both fixed and variable costs.
• Price × Volume = Fixed Costs + (Variable Cost per Unit × Volume)
• Method
− Calculate fixed costs
− Calculate variable costs for each service
− Solve for volume
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
35
Knowledge Check Activity 8.3
Shady Lane Medical Center has total fixed costs of $292,500, variable costs
identified as $35 per unit, and revenue identified as $100 per unit. What is the
number of patients they need to see to break even?
a. 4,000
b. 4,500
c. 3,500
d. None of these answer choices are correct.
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
36
Knowledge Check Activity 8.3: Answer
Shady Lane Medical Center has total fixed costs of $292,500, variable costs identified as $35 per
unit, and revenue identified as $100 per unit. What is the number of patients they need to see to
break even?
a. 4,000
b. 4,500
c. 3,500
d. None of these answer choices are correct.
Answer: b. 4,500
• Price × Volume = Fixed Costs + (Variable Cost per Unit × Volume)
• $100 × Volume = $292,500 + ($35 × Volume)
• Volume = $292,500 ÷ ($100 – $30)
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
37
Self-Assessment
Why is it important to review the budget on a monthly basis?
Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.
38