BUDGETING PROCESS
BUDGETING
PROCESS
Introduction
- Definition:
Budgeting is a systematic process of preparing a financial plan that
estimates income and expenditure over a specified period (usually one
year).
- Purpose
in hospitals:
- To
allocate scarce resources effectively.
- To
coordinate activities across departments.
- To
act as a control tool for monitoring performance.
- Importance:
- Healthcare
organizations face rising costs, variable patient inflows, and limited
resources. Budgeting helps forecast needs and prevent financial crises.
- Process:
Forecasting → Planning → Allocation → Implementation → Control.
- Definition:
A budget manual is a comprehensive document containing guidelines,
procedures, forms, and responsibilities related to budget preparation and
implementation.
- Contents:
- Objectives
and scope of the budget system.
- Organizational
structure and authority levels.
- Timeline
for preparation and approval.
- Standardized
forms/templates for uniformity.
- Responsibilities
of various departments.
- Purpose:
Ensures consistency, accountability, and efficiency in the budgeting
process.
Budget Administration
- Key
aspects:
- Establishment
of a budget committee (administrators, finance officers,
departmental heads).
- Formulation
of policies and procedures.
- Coordination
of departmental inputs.
- Approval
and monitoring by senior management.
- Role
in hospitals:
- Facilitates
decision-making regarding manpower, equipment purchase, building
expansion, and service delivery.
- Ensures
alignment of budget with hospital’s mission and patient care objectives.
Functional Budgets
Functional budgets are individual budgets prepared for
specific hospital functions:
- Nursing
budget – staffing, consumables, training.
- Pharmacy
budget – drugs, procurement, storage,
wastage control.
- Operation
theatre budget – equipment maintenance, surgical
supplies.
- Diagnostic
services budget – lab reagents, imaging consumables.
- Support
services budget – housekeeping, dietary, transport.
- Purpose:
Provide clarity and accountability within each department.
Types of Budgets
- Operating
Budget – For day-to-day running expenses
and income.
Example: Salaries, medicines, OPD income. - Capital
Budget – For long-term investments in
assets.
Example: New building, MRI machine. - Cash
Budget – For planning cash inflows and
outflows.
Example: Monthly cash needed for salaries, medicine purchase. - Master
Budget – The overall combined budget of the
hospital.
Example: Final approved annual hospital budget.
Mechanics of Budget Preparation
Steps in hospital budgeting:
- Forecasting
patient volume (OPD visits, admissions, surgeries).
- Estimating
income (from services, insurance,
donations, government grants).
- Projecting
expenses (salaries, consumables, maintenance,
utilities).
- Setting
priorities based on hospital goals.
- Negotiation
with departments to finalize allocations.
- Approval
by governing body/board.
- Implementation
and monitoring.
Income of Hospital
- Internal
sources:
- Patient
service revenue (OPD, IPD, surgeries, diagnostics).
- Pharmacy
sales.
- Canteen
and other service charges.
- External
sources:
- Government
grants and subsidies.
- Insurance
reimbursements.
- Donations,
CSR funds, endowments.
- Research
grants and teaching fees (in teaching hospitals).
Pattern of Hospital Expenses
- Fixed
costs: Salaries, building rent, insurance, equipment
depreciation.
- Variable
costs: Medicines, consumables, food, utilities
(electricity, water).
- Semi-variable
costs: Maintenance, administrative overheads.
- Other
expenses: Training, community health
outreach, marketing.
Liabilities and Assets of Hospital
- Assets:
- Fixed:
Land, buildings, equipment, furniture.
- Current:
Cash, receivables, inventories.
- Liabilities:
- Current:
Creditors, unpaid bills, salaries payable.
- Long-term:
Bank loans, mortgages, lease obligations.
- Net
worth = Assets – Liabilities.
Cash Planning
- Ensures
hospital has sufficient liquidity to meet obligations.
- Involves
preparing a cash budget showing inflows (patient bills, grants,
insurance claims) and outflows (salaries, purchases, utilities).
- Helps
avoid problems of underfunding and over-borrowing.
- Definition:
Continuous comparison of actual results with budgeted targets to control
performance.
- Tools
used:
- Variance
analysis (favorable/unfavorable).
- Key
performance indicators (KPIs).
- Responsibility
accounting (department-wise performance).
- Benefits:
Identifies inefficiencies, prevents overspending, and supports corrective
action.
Departmental Budgets
- Each
department prepares its own budget based on expected workload and
resources required.
- Examples:
- Radiology
department: Equipment maintenance, films,
contrast media.
- ICU:
Critical care drugs, ventilator maintenance.
- Housekeeping:
Cleaning materials, staff wages.
- Promotes
accountability and cost consciousness at the departmental level.
Problems in Budgeting
- Uncertainty
in patient inflow (seasonal epidemics,
emergencies).
- Difficulty
in revenue forecasting (insurance delays, government
reimbursements).
- Inflation
and rising healthcare costs.
- Resistance
from staff (departments may exaggerate needs).
- Data
inaccuracy due to poor medical record systems.
- Lack
of financial expertise in healthcare professionals.
- Delayed
approvals from authorities.
Post Audit of Investment Projects
- Definition:
A review conducted after capital investment (new building, MRI machine
purchase) to evaluate whether projected benefits were achieved.
- Objectives:
- Verify
accuracy of assumptions (cost, patient volume, revenue).
- Assess
return on investment (ROI).
- Identify
causes of deviation (technical issues, poor utilization).
- Provide
lessons for future projects.
- Method:
Compare actual costs & outcomes with projected figures; prepare a
post-audit report for management.
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