The Budgeting Process

Budgeting is the process of planning and controlling future

operations through comparing the actual results and planned
expectations. (Sullivan, 2005)

According to Marquis (2003), The nursing process provides a

model for the steps in budget planning. The first step is to assess
what needs to be covered in the budget. Second step is to
develop a plan or planning. The budget may be developed in
many ways. The third step is implementation where there is
ongoing monitoring and analysis to avoid inadequate or excess
funds. The last step is evaluation wherein the budget must be
reviewed periodically and modified as needed throughout the
duration.

According to Sullivan and Decker (2005), budgeting also

involves reviewing the established goals and objectives of the
organization and nursing, as these goals help in identifying the
organization’s priorities and direct the organization’s efforts. The
future should be anticipated and must gather the following
information:

• Demographics of the served population, community

influences as well as the competitors

• Sources of revenues like managed-care contracts, Phil

Health and commercial insurance companies

• Statistical data like the number of patient visits, average

length of stay and projected visits

• Projected salary increases and price increases

• Information about regulatory changes for the budgetary

period

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 • Organizational changes that result in salary and benefit
money being charger in the portion of unit

One of the major drawbacks of the budgeting process is that in

today’s volatile payment environment, management which
usually uses the past to project the future may be a poor
predictor of the future. (Sullivan, 2005)

Controlling depends on planning. This is the process of

comparing the actual results with the results projected in the
budget. Variance analysis and position control are the two
techniques for controlling budgetary performance. (Sullivan,
2005)

Approaches to Budgeting

According to Contino (2001), budgets may be developed in

various formats depending on how the department is viewed by
administration. Cost centers, revenue centers, profit centers and
investment centers may be considered. In cost centers, managers
are the one who are responsible for predicting, documenting, and
managing the costs (staffing, supplies) of the department while
on the revenue centers, the managers are responsible for
generating revenues which are the patient volumes. In profit
centers, the managers are responsible for generating revenues
and managing costs so that the department shows a profit. On
the investment center, managers are the one who are responsible
for generating revenues and managing costs and capital
equipment or assets. But usually the nursing units apply cost
centers, but they may also be viewed as other centers.

According to Sullivan (2005), the approaches to budgeting

are incremental budgeting, zero-based budgeting, and fixed or

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variable budgeting. The organization may choose these various
approaches, or combination of them for requesting departmental
managers to prepare their budget requests.

Incremental Budgeting

Incremental or Flat-percentage increase or line-by-line

method is the simplest method for budgeting. It is done by
multiplying current year expenses by a certain figure which is
usually inflation rate or consumer price index this method arrives
at the budget for the coming year. This methos is quick and
simple however it generally inefficient and discourages cost
efficiency and does not need to prioritize programs and services.
(Marquis, 2003)

Zero-Based Budgeting

This type of budgeting approach assumes the base for

projecting next year’s budget is zero. The managers are required
to justify all programs and activities regardless of the level of
expenditure in previous years. It must t be justified under the
current environment and it’s fit with the organization’s objectives.
This approach is very time consuming, organizations may not use
this process every year. An adaptation of this approach is to start
the budget with a lower base, and then the managers have to
justify any budgetary expenses requested above the “lower
base”. (Sullivan, 2005)

Fixed or Variable Budgets

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 Budgets can also be categorized as fixed or variable. Fixed
budgets are when the budgeted amounts are set without regard
to changes that may occur during the year like patient volume or
program activities, that have an impact on the cost assumptions
originally used for the coming next year. Variable budgets are
developed with the understanding that adjustments to the budget
may be made during the year based on changes in revenues,
patient census, utilization of supplies, and other expenses.
(Sullivan & Decker, 2005, p. 174)

The Operating Budget

The revenue budget or the annual budget is the

organization’s statement of expected revenues and expenses for
the coming year. It coincides with the fiscal year of the
organization (12-month, January to December—or another time
frame). The operating budget may be broken down into smaller
periods of 6-months or quarters. (Sullivan, 2005)

The Revenue Budget

This represents the patient care income expected for the

budget period. The health care payers are the common ones who
pay a predetermined rate based on discounts or allowances.
Revenue projections for the next year are based on the volume
and mix of patients, rates ad discounts that will prevail during the
budget period. (Sullivan, 2005)

The Expense Budget

This consists of salary and nonsalary items. This

comprehensive and thorough expense budget should reflect the

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activities and patient care objectives established for the nursing
unit and take into consideration all available information
regarding the next year’s expectations. (Sullivan, 2005)

Cost centers are the smallest area of activity within an

organization for which costs are accumulated. (e.g. nursing unit)
Costs are commonly classified into two, fixed or variable. Fixed
costs are defined as expenses that remain the same for the
budget period regardless of the activity level of the organization
(i.e. rental payments and insurance premiums). Variable costs are
expenses that depend on and change in direct proportion to
patient volume and acuity (i.e. patient care supply expenses)
therefore if more patients are admitted in the nursing unit, more
supplies will be used causing higher supply expenses. (Sullivan,
2005)

Expenditures may also be direct costs in which expenses

directly affect the patient care or indirect costs are those that are
necessary but do not directly affect the patient care (i.e.
housekeeping personnel salary). (Sullivan, 2005, p.175)

Determining the Salary (Personnel) Budget

According to Sullivan and Decker (2005), the salary or

personnel budget projects the salary costs that will be paid and
charged to the cost center in the budget period and is related to
the manager’s ability to supervise and lead the staff.

Factors that affect budget:

1. Benefits

After the number of required full-time equivalent (FTE) is

determined, it is also necessary to determine how many FTEs are
necessary to replace personnel for benefit time like vacation,
holidays, personal days, and so on. This factor can be calculated
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by determining the average number of vacation days, paid
holidays, personal days, bereavement days, or other days off with
pay that the organization provides and the average number of
sick days per employee as experienced by the cost center.
(Sullivan & Decker, 2005, p.176)

To determine FTEs required for replacement:

1. Determine the hours of replacement time per

individual

BENEFIT TIME HOURS/SHIFT REPLACEME

NT HOURS
15 vacation days x 8 hours = 120
8 holidays x 8 hours = 64
4 personal days x 8 hours = 32
5 sick days x 8 hours = 40
Total = 256

2. Then determine FTE requirement. Divide

replacement time by annual (40 hours a week
multiplied by 52 weeks a year= 2080)

FTE base 256 / 2080 = 0.12

2. Shift Differentials

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 Most facilities use a set of percentage to determine shift
differential. For example, 10% for 7-3 and 3-11 shift, 15% per 11-
7am shift, 20% for weekends and holidays. if the hourly rate is
P200.00, for instance, then the cost for a nurse working at 11-7
am shift would be P200.00 plus P30.00 for each hour worked. On
an 8-hout shift, the total cost would be P1840.00. (Sullivan &
Decker,2005, p.176)

3. Overtime

Fluctuations in workload, patient volume, variability in

admission patterns, and temporary replacement of staff due to
illness or time off all create overtime in the nursing unit. (Sullivan
& Decker,2005, p.176)

To determine overtime costs:

1. Multiply average salary for classification P200.00/ hour

By factor x 1.50

To obtain overtime rate P300.00

2. Multiply average overtime hours 35 (per 2-

week pay period)

By overtime rate x P300.00

To obtain expenditure/pay period P10,

500.00

3. Multiply number of pay periods 26

By overtime expenditure x P10, 500.00

To obtain annual overtime costs P273,

000.00

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 Apparently, overtime can rapidly deplete finite budget
allocated to a nursing unit. The nurse manager should explore
options such as using part time workers in order to keep the cost
per hour more in line with the regular hourly rates. (Sullivan &
Decker,2005, pp.176-177)

4. On-call Hours

If the nursing unit uses a paid on-call system, the

approximate number of hours that employees are put on call for a
year should be estimated and that cost added to the budget. The
numbers of hours on call are paid at a flat rate per hour. (Sullivan
& Decker,2005, p.177)

5. Premiums

A fixed amount is added to the base hourly rate of eligible

personnel. for example, P100 is added from the base of
P200/hour. If the employee is full time and works 2080 hours a
year, the annual new salary would be P624,000 (P300 x 2080).
(Sullivan & Decker,2005, p.177)

6. Salary Increase

Merit increase or cost-of-living raises also need to be

factored into budget projections. These increases are usually
calculated on base pay. (Sullivan & Decker,2005, p.177)

7. Additional Considerations

a. Changes in technology

Changes in patient care technology or introduction of new

equipment may influence number, skill, or time that the unit
personnel may spend in becoming oriented to the new equipment
and operating and maintaining it later. (Sullivan & Decker,2005,
p.177)

b. Changes in Clinical supports

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 Departments such as the dietary or laboratory may provide
the nursing unit with support in performing certain tasks, such as
transport of specimens. Any change in the level of support they
provide should be reviewed, and quantify the effect of such
change on the unit’s staffing levels for the next year’s budget.
(Sullivan & Decker,2005, p.177)

c. Changes in Regulatory requirements

The Joint Commission on Accreditation for Healthcare

Organizations (JCAHO) and government regulations help establish
the number and level of nursing personnel for specific clinical
units to maintain safety requirements. (Sullivan & Decker,2005,
p.177)

d. Changes in delivery systems

Changes in the method of delivering care or staff mix (RNs,

LPNs, unlicensed assistive personnel) also will affect staffing
patterns for the next year. Thus, orientation and additional
workload needs should also be considered. (Sullivan &
Decker,2005, p.177)

Managing the Supply and Nonsalary Expense Budget

The supply and nonsalary expense budget identifies patient-

related supplies needed to operate the nursing unit. In order to
calculate for the use of supplies for the next year, an analysis of
the current expense pattern and a determination of its
applicability for the next budget period should be performed first.
For example, if patient days for a particular type of patient are
projected to multiply and cause a 5% percent increase in the use
of IV solutions, this increase should be addressed in the budget
request by requesting an additional 5% for intravenous solution
supplies for the next year. (Sullivan & Decker,2005, p.177-178)

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 To determine price increase due to an inflation rate, take the
estimated total ending expense for the year and multiply it by the
inflationary factor.

For example:

Multiply current total line item expenses P10, 000

By inflation factor plus 1.0 x 1.05

----------------

P 10 ,500

The Capital Budget

The capital budget enables to meet the long term goals of

the organization. It identifies physical renovations, new
construction, and new or replacement equipment planned within
the budget period. Capital items are usually must have an
expected performance of 1 year or more and exceed a certain
dollar value (e.g. $500 or $1000). It can also be designed with a
time horizon longer than 1 year, i.e. 3, 5, 10 or beyond (Sullivan
and Decker, 2005, p.178). According to Zimmermann (2002),
examples of capital expense items may be a magnetic resonance
imager, defibrillator, or a patient bed (p. 43). These items are
usually major investments and reduce the flexibility in budget
because it takes a long time to recover the costs. For instance, a
patient may be charged per treatment or per day of use of
equipment, but it may take many months or even years to
recover the cost of the equipment (Tomey, 2004, p. 238).

Accordingly, nurse manager is responsible for assisting in

selecting and determining the amount of equipment needed
(Sullivan and Decker, 2005, p.178).

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 The impact of the new equipment on the unit’s expenses
(e.g. number of staff needed to run the equipment, use of
supplies, and maintenance costs) needs to be considered as part
of the operating budget, however. For example, if monitoring
equipment is being requested, the cost of ECG paper and
electrodes should be determined, documented, and included in
the supply budget. Likewise, the need for additional nursing and
nonnursing personnel to operate the new equipment, additional
workload, and training of personnel should be quantified for the
next year’s budget (Sullivan and Decker, 2005, p.178).

Monitoring Budgetary Performance during the Year

Nurse Managers receive a monthly report prepared by the

accounting department summarizing the expenses for the
department. On Box no. 1, this account shows expense line items
with the budgeted amount, actual expenditure, variance, from
budget, and the percentage from the budgeted amount that such
variance represents. Commonly these monthly reports also show
the comparison between actual year-to-date results and the year-
to-date budget (Sullivan and Decker, 2005, p.178-179).

Variance is the difference between the amounts that were

budgeted for specific revenue or cost and the actual revenue or
cost that resulted during the course of activities. Variance might
occur in the actual cost of delivering patient care for a certain
expense line item in a specified period of time. Nurse managers
are commonly asked to justify the reason for variances and
present an action plan to reduce or eliminate these variances
(Sullivan and Decker, 2005, p.179).

Box no. 1

11
Cont. Box no. 1

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Variance Analysis

According to Huber (2006), variance (difference) between

budgeted and actual expenses is determined to identify problem
areas, enhance control, and make timely adjustments. The
variance difference between actual and budgeted (planned)
performance needs to be analyzed to determine the cause so that
nurses can take the appropriate action. Causes of variance can be
from a combination of causes (p.777). Nurse manager must
review the activity level of the unit for the same period to
determine the causes of variance. There may have been
increases in census or patient acuity that generated additional
expense in salary and supplies (Sullivan and Decker, 2005,
p.179). When discrepancies are found between actual
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performance and the budget, management must determine the
cause of variation to make appropriate adjustments for future
plans.

Sullivan and Decker (2005) stated that “it is important to

relate the variance to its impact on the organization in terms of
revenues and expenses to determine when a variance is
favorable or unfavorable”. In addition she states “if more earnings
came in than expected, the variance is favorable; if less, the
variance is negative. Likewise, if less was spent than expected,
the variance is favorable; if more was spent, the variance is
negative.” For instance, the nurse manager might receive the
following expense report:

This expense variance is considered unfavorable because

the actual expense was greater than the budget. In this example,
more money was spent on medical/surgical supplies than was
projected in the budget. If the variance percentage of the actual
budget amount is not presented in the reports, it can be
calculates as follows:

Divide the solar variance by the budget amount, then

multiply by 100:

$2,398

$34,560 = 0.069

0.069 x 100 = 6.9% over budget

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Salary Variances
With salary expenditures, variances may occur in volume,
efficiency, or rate. Typically these factors are related and have
an impact on each other (Sullivan and Decker, 2005, p.179).

Volume Variances
When there is difference in the budgeted and actual
workload requirements as would occur with increases in patient
days it will result as volume variance. An unfavorable volume
variance will result with an increase in the actual number of
patient days will increase the salary expense.(Sullivan and
Decker, 2005, p.179). In other words this causes the department
to spend more money than was budgeted.

Efficiency Variance
Efficiency variance, also called quantity or use variance
reflects the difference between budgeted and actual nursing care
hours provided. Patient acuity, nursing skill, unit management,
technology, and productivity all affect the number of patient care
hours actually provided versus the original number planned or
required. Penner (2003) also defined this variance as the
difference between the budget and actual amounts of non-
personnel or personnel inputs used per time period or service
unit. Efficiency is achieved by maximizing the production of goods
or services while minimizing the resources required (p. 102).

Rate Variances

Rate variance (also referred to as price variance) is the

difference between the budget and actual cost of personnel or
non-personnel items in an expense budget report (Penner, 2003,
p. 101). It also reflects the difference in budgeted and actual
hourly rates paid. A favorable rate variance may reflect the use
of new employees who were paid lower salaries. Unfavorable rate
variance may reflect unanticipated salary increases or increased

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use of personnel paid at higher wages, such as agency personnel
(Sullivan and Decker, 2005, p.180).

Nonsalary Expenditure Variances

Nonsalary expenditure variances may be due to changes in
patient volume, patient mix, supply quantities or prices paid.
New, additional, or more expensive supplies used at the nursing
unit because of technology changes or new regulations also could
influence expenditure totals (Sullivan and Decker, 2005, p.180).

Position Control

To compare actual numbers of employees to the number of

budgeted FTEs for the nursing unit, position control is used. The
position control is a list of approved, budgeted FTE positions for
the nursing cost center. The positions are displayed by category
or job classification, such as nurse manager, RNs, LPNs, and so
on. The nurse manager updates the position control with
employee names and FTE factors for each individual with respect
to personnel changes, new hires, and resignations that take place
during the year. A major cause of exceeding the labor budget
often is too high a nursing mix (i.e., using RNs when LPNs are
appropriate) or high use of contract personnel to fill vacant
positions. A position control tool can help managers avoid this
problem (Sullivan and Decker, 2005, p.180).

Staff Impact on Budgetary Performance

Personnel can also affect the organization’s finances.

Negative variance can result due to misuse of sick time, excessive
overtime or turnover, and wasteful use of resources. As a nurse
manager our responsibility would be more on explaining the unit’s
goals, the organization’s financial goals, and how each individual
is responsible for helping the organization meet those goals.
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Furthermore, organizations have implemented a number of
different programs and incentives for increasing employee
awareness and minimizing costs such as techniques to decrease
absenteeism and turnover which may be instituted. Displaying
equipment costs on supply stickers or requisitions and indicating
medication costs on medication sheets increase staff awareness
of costs (Sullivan and Decker, 2005, p.180).

Future Trends

According to Sullivan and Decker (2005), the major trend in

financial management of health care organizations is the shift
from a revenue-based to a cost-based accounting system. With
this shift, the managed care, the focus is on decreasing costs to
maintain adequate profit margins in an era of diminishing
compensation. Payment us prospectively determined in a
competitive arrangement between provider and payer.

Organizations are strongly motivated to be cost-effective in

an effort to be a low-cost provider of health care. And this trend
has a very serious implications into nursing for nursing is
considered a cost, and not a source of revenue. This is a
challenge to nursing to be consistently cost-conscious and to
measure, manage and document nursing cost-effectiveness in
this financial environment. (Sullivan & Decker, 2005, p. 180)

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Related Articles

The Federal Stimulus Package and the 2010 Budget

Proposal

-Annemarie Mannion

(Please refer to appendix A)

Summary

Recently, American Recovery Act of 2009, also known as the

stimulus package, and the 2010 federal budget proposal are first
steps in long-awaited endeavor for reducing critical shortages of
nurses and other health care workers. A report from American
Nurses Association (ANA) presented that the plan includes $11.46
billion for strengthening the health care workforce, including $500
million for investments such as Title VIII nurse training programs.
Title VIII programs are the leading source of federal funding for
nursing education. This includes Nursing Education Loan
Repayment Program, and the Nurse Education, Practice, and
Retention Program, which awards will be given to schools and
nurses at the associate’s and bachelor’s degree levels. In
addition, the package sets billion of dollars for the funding on
several health institutions. Several organizations (i.e. ANA and
American Association of Colleges of Nursing supports the Obama
administration’s initiatives. However, Charles Idelson, a
spokesperson for the California Nurses Association would have
preferred to spend the budget on providing care and nursing
education. Furthermore, $3.6 trillion budget proposal for fiscal
year 2010, $630 billion reserve fund to help finance universal
health coverage and $330 million for the shortage of health care
providers in undeserved areas.

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Reaction

It is pleasing to hear the plan that was reported in this article

specifically the stimulus package and the 2010 federal budget
proposal in resolving the United States’ shortages of nurses and
health care workers. In relation to our topic “Budgeting and
Managing Resources” in nursing management, nursing has been
considered as costly and needs to have funding and as a nurse
manager our responsibilities would be problem solving and
professional development in connection in the shortages of
nurses and health care workers in the country (in the US). As
nurse managers, we have to be skillful enough in utilizing the
budgeted plan for health care by the government. We have to be
competent enough in choosing the appropriate approach on
budgeting in order to be productive from the allocated funds
given by the government. According to Sullivan and Decker
(2005), controlling will be an effective way in comparing the
actual expenditures from the results projected in the budget and
it can be achieved by the two techniques such as variance
analysis and position control. By measuring the differences
between actual and budgeted results, we can monitor if the funds
are expend appropriately; in a sense that the variance is
favorable.

From our point of view, as presented in the article, the

American health care is now in crisis, with the demand of nurses
and other health care workers. The US government is trying to
resolve this problem by allocating funds to address the shortages
of health care workers. On the other hand, we are hoping that our
government (Republic of the Philippines) would also be as
supportive and empathetic as the US government in resolving the
country’s problem on health care, specifically giving jobs to
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unemployed nurses in the country. Yes, we have an opposite
problem with the US government in terms of nurses’ allocation.

Therefore, nurse managers should have business knowledge,

skills, and attitude on human resource, strategic planning and
understanding on budget reports, to name a few. Also, nurse
managers must establish strong working relationships with the
finance personnel, with their respective organization. Nurse
managers across the country must perform leadership functions
of governance and decision-making within organization, like
dealing with staffing, financial, and problems of patients and staff
members swiftly.

Using Nusrsing Intensity for Medicare Billing and Value-

Based Purchasing –Carol A. Watson, PhD, RN, CENP

(please refer to Appendix B)

Summary

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Reaction

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