Flexible budget example in healthcare

Operating and Capital Budget

A budget is a plan expressed in dollar amounts that acts as a road map to carry out an organization’s objectives, strategies and assumptions. There are different types of budgets that healthcare organization use to manage its financial and managerial goals and obligations.

Discuss the difference between an operating budget and a capital budget. What are the steps in creating each budget?

Fixation of Salary

One of the decisions that a healthcare finance manager has to make is whether to allow budgets to change over the course of a reporting period. A budget that never changes is called static, while a budget that changes based on actual activity is called flexible. Both approaches offer advantages and disadvantages for the healthcare organization.

Refer to the lecture, Static and Flexible Budgets below, An Example. In the example of the walk-in clinic, if you had the option of retaining the nurse practitioner on a salary, what salary would you offer? Why?

Static and Flexible Budgets, An Example

Let’s assume a walk-in medical clinic offers a routine medical procedure and incurs the following costs:

Suppose management estimates for budgetary purposes that 3,600 patients will be treated in a year. Under a static budget, this translates to 300 patients each month and the estimated total monthly costs are:

Using a flexible budget, it is a simple matter to calculate total estimated cost at different output levels and evaluate performance. If 380 medical procedures were actually performed during the month then the budgeted monthly cost should be:

As you can see there is a difference of $4,320 between the static budget and the flexible budget estimated costs for the same month. Let's take the example one step further. What if the actual costs for the month totaled $27,000? The difference between the budget and the actual—called variance—would be $4,800 under the static budget but only $480 under the flexible budget. That's why flexible budgeting makes so much more sense to use—management is then comparing apples to apples, not apples to oranges.

Variance reporting in traditional or static budgets seldom, if ever, provides meaningful or useful information upon which appropriate management decisions can be based. More about variance analysis next.