Financial Management HPI4007 Case 1 Lecture + Learning Goals
1. What is organization master budget (budget types and budget elements/components)?
The budget: is one of the most important documents of a healthcare organization and is a central
document of the planning and control cycle. It does not only serve as a planning document that
identifies revenues and resources needed for an organization to achieve its goals and objectives but
also as a control document that allows an organization to monitor the actual revenues generated and
its use of resources against what was planned (Zellman, 2014).
A budget can be defined as ‘a tool used to relate planned resource consumption to a period of time’
(Mellett et al. 1993).
This definition highlights the three main features of a budget:
− It is a plan that is developed before an event has occurred;
− It can include a broad range of resources – not just money;
− It relates to a specific period of time.
➔ Budgets are used at many levels in health care, from the national down to the level of
provider units. The exact levels and ways in which budgets are determined will depend
on the financing system in operation in the country concerned.
(Internal) Budget: plan of how organization resources should be used in a given period of time
• Mostly is this period one year
What is included?
• It gives an overview of expected costs for certain activities (e.g. hospital days, diagnostics)
• Revenues (income) to cover these costs
• It is both a plan (how will financial resources will flow) and
management instrument (consists of several elements)
• Variance is expected (in reality there will be deviation from budget
plan)
In this lecture, we will focus on internal budget.
• However, most organizations also have an external budget
• Internal budget: in literature also sometimes called ‘’master budget’’
• External budget: mechanism for organization funding (how does an
organization get funding from the outside?)
• Mostly funded by Ministry, ‘’out of pocket payments’’ and health insurance companies
Internal budget: a lot of resources will go to healthcare staff in a healthcare organization. Other parts
are devoted to equipment etc
-Staff budget: how many f.t.e., level of staff, vacancies and holidays
-Non staff budget: drugs, medical supplies, heating, electricity etc (=smaller part of budget)
Master budget/Organization budget/Budget: plan of how organization resources should be used in
a given period of time (mostly 1 year in healthcare organizations).
• Which costs are expected to be incurred by a set of activities and which income is expected
to cover these costs
1
, Budget elements/components:
The master budget consists of several elements/components:
1. Statistic budget: contains projections of expected production quantities (=basis for other
components of the internal budget)
-For example: how many hospital days?
2. Operating budget: net result at the end of budget period and consists of:
-Expense operating budget (1): how many expenses it will have over a period
-Revenue operating budget (2): how many revenue it will have over a period
3. Cash budget: based on the operating budgets,
but only projects cash flows
-Indicated when there is ’excess cash’’ or
organization ‘’need to borrow’’
-The cash budget consists of cash inflow (1) and
outflow (2)
4. Capital budget: the plan for acquiring long-term
assets (equipment), consists of
-Purchasing new capital assets (1): new
equipment that organization does not yet have
-Replacement of existing capital assets (2):
outdated equipment
Statistic budget influences all other budgets and revenue
budget comes both from patients and non-patient related service (like hospital restaurant).
Organizational approaches (Zellman, 2014)
-Participatory approach (triangle of organization)
2. What is the role (importance) of the budget for the organization?
Most healthcare organizations rely on traditional budget. However there are some limitations of
traditional budgets. Therefore we see some variation from traditional to innovative budgets (e.g.
rolling budgets and mixed forms). Some limitations are:
-Time consuming
-Focus on cost reduction an5d not on value creation
-Less adaptive
-New methods are more flexible, integrated, iterative, decentralize and involvement of staff
The importance of the budget:
• Gives information on expected income/expenses
• Forewarns of potential shortfalls in the resources
• Forces managers to set priorities
• Forces managers to make commitments
• Allows managers to analyse efficiency
Functions of the budget (4):
1. Distribution: budget helps to allocate the organization resources in an efficient manner
2. Authorization: it helps top managers to set rules and impose their vision and objectives on
the entire organization
3. Communication: it provides information for further analysis and management decision-
making
2
1. What is organization master budget (budget types and budget elements/components)?
The budget: is one of the most important documents of a healthcare organization and is a central
document of the planning and control cycle. It does not only serve as a planning document that
identifies revenues and resources needed for an organization to achieve its goals and objectives but
also as a control document that allows an organization to monitor the actual revenues generated and
its use of resources against what was planned (Zellman, 2014).
A budget can be defined as ‘a tool used to relate planned resource consumption to a period of time’
(Mellett et al. 1993).
This definition highlights the three main features of a budget:
− It is a plan that is developed before an event has occurred;
− It can include a broad range of resources – not just money;
− It relates to a specific period of time.
➔ Budgets are used at many levels in health care, from the national down to the level of
provider units. The exact levels and ways in which budgets are determined will depend
on the financing system in operation in the country concerned.
(Internal) Budget: plan of how organization resources should be used in a given period of time
• Mostly is this period one year
What is included?
• It gives an overview of expected costs for certain activities (e.g. hospital days, diagnostics)
• Revenues (income) to cover these costs
• It is both a plan (how will financial resources will flow) and
management instrument (consists of several elements)
• Variance is expected (in reality there will be deviation from budget
plan)
In this lecture, we will focus on internal budget.
• However, most organizations also have an external budget
• Internal budget: in literature also sometimes called ‘’master budget’’
• External budget: mechanism for organization funding (how does an
organization get funding from the outside?)
• Mostly funded by Ministry, ‘’out of pocket payments’’ and health insurance companies
Internal budget: a lot of resources will go to healthcare staff in a healthcare organization. Other parts
are devoted to equipment etc
-Staff budget: how many f.t.e., level of staff, vacancies and holidays
-Non staff budget: drugs, medical supplies, heating, electricity etc (=smaller part of budget)
Master budget/Organization budget/Budget: plan of how organization resources should be used in
a given period of time (mostly 1 year in healthcare organizations).
• Which costs are expected to be incurred by a set of activities and which income is expected
to cover these costs
1
, Budget elements/components:
The master budget consists of several elements/components:
1. Statistic budget: contains projections of expected production quantities (=basis for other
components of the internal budget)
-For example: how many hospital days?
2. Operating budget: net result at the end of budget period and consists of:
-Expense operating budget (1): how many expenses it will have over a period
-Revenue operating budget (2): how many revenue it will have over a period
3. Cash budget: based on the operating budgets,
but only projects cash flows
-Indicated when there is ’excess cash’’ or
organization ‘’need to borrow’’
-The cash budget consists of cash inflow (1) and
outflow (2)
4. Capital budget: the plan for acquiring long-term
assets (equipment), consists of
-Purchasing new capital assets (1): new
equipment that organization does not yet have
-Replacement of existing capital assets (2):
outdated equipment
Statistic budget influences all other budgets and revenue
budget comes both from patients and non-patient related service (like hospital restaurant).
Organizational approaches (Zellman, 2014)
-Participatory approach (triangle of organization)
2. What is the role (importance) of the budget for the organization?
Most healthcare organizations rely on traditional budget. However there are some limitations of
traditional budgets. Therefore we see some variation from traditional to innovative budgets (e.g.
rolling budgets and mixed forms). Some limitations are:
-Time consuming
-Focus on cost reduction an5d not on value creation
-Less adaptive
-New methods are more flexible, integrated, iterative, decentralize and involvement of staff
The importance of the budget:
• Gives information on expected income/expenses
• Forewarns of potential shortfalls in the resources
• Forces managers to set priorities
• Forces managers to make commitments
• Allows managers to analyse efficiency
Functions of the budget (4):
1. Distribution: budget helps to allocate the organization resources in an efficient manner
2. Authorization: it helps top managers to set rules and impose their vision and objectives on
the entire organization
3. Communication: it provides information for further analysis and management decision-
making
2
