Budgeting/

Management by Objectives
Report

In partial fulfillment of the

requirements in
Advanced Nursing Management

Joy April M. De Leon, R.N.

BUDGETING

Budgeting entails the entire process of constructing and using budgets, which are detailed plans
for obtaining and using financial resources during a specified period of time. In general, budgets
rely heavily on revenue and cost estimates.

The field of public budgeting, which has a unique set of guidelines, applies to budgeting within
governmental entities. In particular, federal, state, and local governments prepare budgets that
are used to translate policy into plans for implementation. Within local public health agencies,
budgets are used to allocate resources to programs and services, as well as to those
administrative activities needed to support the mission-related programs and services.

Managers must think of budgets not as accounting tools but as managerial tools. Budgets are
more important to program and service line managers than to the financial staff because budgets
provide the means to plan and communicate operational expectations within an organization.
Every manager within an organization must be aware of the plans made by other managers and
by the organization as a whole, and budgets provide a way to communicate these plans. In other
words, the budgeting process and the resultant final budget allow senior managers to allocate
financial resources within an organization.

Key Concept: Budgeting Planning, communication, and

Budgeting can be defined simply as planning for allocation are important purposes of the
how much money you have and how it is spent. budgeting process, but perhaps the
The purpose of budgeting for organizations is greatest value of budgeting is that it
essentially the same as budgeting for families (or
establishes financial benchmarks for
individuals). However, the complexities in large
organizations with many programs and services control. When compared to actual
make the budgeting process more difficult and time results, budgets provide managers with
consuming. Budgeting plays an important role in
feedback about the financial and
organizations because it is the primary tool for
senior managers both to allocate resources to meet operational performance of a
mission needs and to monitor operations to ensure department, a program, a contract, or
that those needs are met.
the organization as a whole. Such
comparisons help managers evaluate the performance of individual activities within an
organization.

Finally, budgets inform managers about what needs to be done to improve performance. When
actual results fall short of those specified in the budget, managers must identify the areas that
caused the sub-par performance. In this way, managerial resources can be brought to bear on
those areas of operations that offer the most promise for financial improvement.

In addition, the information developed by comparing actual results with expected (planned)
results (the control process) is useful in improving the overall accuracy of the planning process.
Managers want to meet budget targets, and hence most managers will think long and hard when
those targets are being developed.

PURPOSE OF BUDGETING

Budgeting serves a number of purposes:

a. Planning
A budgeting process forces a business to look to the future. This is essential for survival
since it stops management from relying on ad hoc or poorly co-ordinated planning.

b. Control
Actual results are compared against the budget and action is taken as appropriate.

c. Communication
The budget is a formal communication channel that allows junior and senior managers to
converse.

d. Coordination
The budget allows co-ordination of all parts of the business towards a common corporate
goal.
 e. Evaluation
Responsibility accounting divides the organisation into budget centres, each of which has
a manager who is responsible for its performance. The budget may be used to evaluate
the actions of a manager within the business in terms of the costs and revenues over
which they have control.

f. Motivation
The budget may be used as a target for managers to aim for. Reward should be given for
operating within or under budgeted levels of expenditure. This acts as a motivator for
managers.

g. Authorization
The budget acts as a formal method of authorisation to a manager for expenditure, hiring
staff and the pursuit of plans contained within the budget.

h. Delegation
Managers may be involved in setting the budget. Extra responsibility may motivate the
managers. Management involvement may also result in more realistic targets.

BUDGET

A budget is a quantitative statement, usually in monetary terms, of the plans and expectations of
a defined area over a specified period of time. Budgets provide a foundation for managing and
evaluating financial performance. Budgets provide a foundation for managing and evaluating
financial performance. Budget detail how resources (money, time, people) will be acquired and
used to support planned services within the defined period of time. The budgets purpose is to
allow management to project action plans and their economic impact on the future so that
objectives of the organization are coordinated and met.
BUDGETING DECISIONS
Managers must make several decisions regarding the budgeting process, including these three
most important ones: (1) general approach to the process, (2) timing of the budget(s), and (3) the
forecast basis.

General Approach
Because budgets affect virtually everyone in the organization, and individuals' reactions to the
budgeting process can have considerable influence on an organization's overall effectiveness, it
is wise to carefully consider how the budgeting process takes place.

In the bottom-up approach, budgets are developed first by department or program or service
managers. Presumably, such individuals are most knowledgeable about the needs of their
respective activities. Next, the subunit budgets are submitted to the administrative services
department for review and incorporation into the organizational budget, which then must be
approved by senior management. Unfortunately, the aggregation of the sub-unit budgets often
results in an organizational budget that is not financially feasible. In such cases, the subunit
budgets are sent back to the initial preparers for revision. This starts a negotiation process aimed
at creating a budget that is acceptable to all parties or at least to as many parties as possible.
A more authoritarian approach to budgeting is the top-down approach, in which little negotiation
takes place between sub-unit and senior managers. Here, the budget is developed by the
administrative (finance) staff and then, after approval by senior management, sent to sub-unit
managers for implementation. Activities managers may have some input into the process, but not
nearly as much as in the bottom-up approach.

The top-down approach has the advantages of being relatively expeditious and reflecting top
management's perspective from the start. However, because it limits involvement and
communication, the top-down approach often results in less commitment among sub-unit
managers and employees than does the bottom-up approach. Most people will perform better and
make greater attempts to achieve budgetary goals if they have played a prominent role in setting
those goals in the first place. The idea of participatory budgeting is to involve as many managers,
and even employees, as possible in the budgeting process.
Timing
Virtually all public health organizations have annual budgets, which set the standards for the
coming year. The problem with an annual cycle is that it does not allow managers to detect
adverse trends quickly enough to affect annual results. Thus, most organizations also have
quarterly budgets, while many have monthly or even weekly budgets.

Not all budget types or sub-units within an organization have to use the same timing pattern.
Additionally, many organizations prepare budgets for one or more out years, which are more
closely aligned with financial planning than with operational control.

Forecast Basis
Traditionally, public health organizations have used the conventional (incremental) approach to
budgeting as the forecast basis. In this approach, the previous budget is used as the starting point
for creating the new budget. Each line on the old budget is examined, and then adjustments are
made to reflect changes in circumstances.

Key Concept: Conventional Versus Zero-Based Under conventional budgeting, many

Budgeting budget changes are applied more or

Conventional (incremental) budgeting is based on less equally across all activities. For
the assumption that the previous budget accurately example, employee compensation
reflects mission needs and related revenues and might be assumed to increase at the
costs. Thus, relatively minor changes are made to
each new budget to reflect any changes in same inflation rate for all activities
circumstances, such as increased labor rates. In within an organization. In essence,
zero-based budgeting, each budget starts with a conventional budgeting assumes that
clean slate, and all costs and potential revenues
prior budgets are valid (make sound
must be justified anew. Conventional budgeting is
less costly to perform, but any errors and economic sense), so it focuses on
inefficiencies existing in the budget tend to reoccur determining the adjustments (typically
year after year. Zero-based budgeting is more time
minor) that must be made to account
consuming and hence costly, but usually it
produces a more realistic, and hence effective, for changes in the operating
budget. environment.
As its name implies, zero-based budgeting starts with a clean slate. Thus, all subunits begin with
a budget of zero. Subunit managers then must fully justify every expense item (i.e., labor,
equipment, space utilized, supplies used, and the like) on the basis of expected volume of
services provided. In effect, activities must justify their contribution (positive or negative) to the
organization's mission and financial condition each budget period. In some situations, subunit
managers must prepare budgets that show the impact of alternative funding (resource allocation)
levels. Senior management, then, can use this information to make rational decisions about
where cuts should be made in the event of financial constraints.

Conceptually, zero-based budgeting is superior to conventional budgeting, but the managerial

resources required for zero-based budgeting far exceed those required for conventional
budgeting. Zero-based budgeting is most useful at organizations facing financial constraints,
because this approach to budgeting forces organizations to implement cost-control efforts on a
more or less continuous basis.

The performance hierarchy

Organizations have a planning hierarchy:

Strategic planning is long term, looks at the whole organisation and defines resource
requirements. For example, to develop new products in response to changing customer
needs.
 Tactical planning is medium term, looks at the department / divisional level and specifies
how to use resources. For example, to train staff to deal with the challenges that this new
product presents.
Operational planning is very short term, very detailed and is mainly concerned with
control. Most budgeting activities fall within operational planning and control. For
example, a budget is set for the new product to include advertising expenditure, sales
forecasts, labour and material expenditure etc.

The aim is that if a manager achieves short-term budgetary targets (operational plans) then there
is more chance of meeting tactical goals and ultimately success for strategic plans.

The achievement of budgetary plans will impact on the eventual achievement of the tactical and
strategic plans. However, budgets should also be flexible in order to meet the changing needs of
the business.

APPROACHES TO BUDGETING

Budgets may be developed in various formats depending on how the department is viewed by
administration. They may be considered:

Cost centers are organizational sub-units that incur costs but do not directly generate
revenues. For example, the administrative units in a local public health department, such
as facilities and finance, are cost centers. Managers of cost centers are held responsible
only for the costs of running their departments (staffing, supply).
Revenue centers are organizations with managers responsible for generating revenues
(patient volumes)
Profit centers are organizational sub-units that generate revenues as well as costs, so their
managers can be held accountable for profitability (revenues exceed cost).
Investment centers are organizations with managers responsible for generating revenues
and managing costs and capital equipment.
The organization may choose various approaches or combinations of them, for requesting
departmental managers to prepare their budget requests. These approaches are incremental (line-
by-line), zero-based, fixed and variable.

Incremental Budget
An incremental budget starts with the previous period's budget or actual results and adds (or
subtracts) an incremental amount to cover inflation and other known changes.

It is suitable for stable businesses, where costs are not expected to change significantly. There
should be good cost control and limited discretionary costs.

Zero-Based Budgeting
A method of budgeting that requires each cost element to be specifically justified, as though the
activities to which the budget relates were being undertaken for the first time. Without approval,
the budget allowance is zero.
It is suitable for:
Allocating resources in areas were spend is discretionary, i.e. non-essential. For example,
research and development, advertising and training.
public sector organisations such as local authorities.

Implementation of ZBB

There are four distinct stages in the implementation of ZBB:

(1) Managers should specify, for their responsibility centres, those activities that can be
individually evaluated.
(2) Each of the individual activities is then described in a decision package. The decision
package should state the costs and revenues expected from the given activity. It should be drawn
up in such a way that the package can be evaluated and ranked against other packages.
(3) Each decision package is evaluated and ranked usually using cost/benefit analysis.
(4) The resources are then allocated to the various packages.
Fixed or Variable Budgets
Budgets also can be categorized as fixed or variable. Budgets are considered fixed budgets when
the budgeted amounts are set without regard to changes that may occur during the year, such as
patient volume or program activities that have an impact on the cost assumptions originally used
for the coming year. In contrast, 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.

TYPES OF BUDGETS

Operating Budget
For large organizations, the operating budget is a combination of the revenue and expense
budgets. Conversely, small organizations, and subunits such as programs and services, often will
not prepare formal revenue and expense budgets. Rather, they will use volume, revenue, and cost
data directly to prepare a single operating budget. Operating budgets can, and are, prepared at
multiple levels within organizations. Thus, operating budgets typically are prepared for entire
organizations, departments, programs, service lines, and at any other level that makes sense for
managerial monitoring and control.

Revenue Budget
In private healthcare organizations, such as for-profit and not-for-profit non-public hospitals, the
starting point for the budgeting process is the volume forecast, because virtually all revenues
stem directly from the provision of services.

The portion of revenues that is directly tied to fee-based services is based on volume and
reimbursement data rather than appropriations. Operating revenues typically are forecasted by
department, program, and/or service and then aggregated to obtain the total operating revenues
for the organization.
In addition to operating revenues and appropriations, other revenues (e.g., contributions and
interest income on temporary cash investments) must be forecasted. Note that in all revenue
forecasts, timing is important. Thus, the revenue budget must forecast not only the amount of
revenue but also the time it is expected to occurtypically by month, quarter, and year.

Expense Budget
Key Concept: Budget Types Like the operating revenues portion of
The revenue budget contains the organizations (or the revenue budget, the expense budget
subunits) sources of revenues, while the expense is driven by the volume of services
budget focuses on the expenses of the budget unit.
provided. However, here the focus is on
Large organizations typically have separate
revenue and expense budgets, while smaller the costs of providing services. Similar
entities, such as programs and services, typically to the revenue budget, the expense
create only a single operating budget that contains
budget is a compilation of expense
both revenues and expenses.
forecasts by department, program, or
service.

The expense budget typically is divided into labor and non-labor components. Labor expenses
include salaries, wages, and fringe benefits, including travel and education. Non-labor
components include expenses associated with such items as equipment leases, utilities, and
administrative and medical supplies.

Capital Budget
The capital budget is an important component of the plan to meet the organizations long term
goals. This budget identifies physical renovations, new constructions, and or new replacement
equipment planned within a speficief time period. Organizations define capital items based on
certain condiions or criteria. Usually, capital items must have an expected performance of 1 year
or more and exceed a certain dollar value, such as $500 or $1000. The capital budget is limited to
a specified amount and decisions need to be made how best to allocate available funds. Priority
is given to those items needed most. Not all items that fall under capiral budget will necessarily
get feunding in a given year.
TIMETABLE FOR THE BUDGETING PROCESS
Depending on the size and complexity of the organization, the budgeting process takes 2-6
months. The process begins with the first-level manager. The individual at this level of
management may or may not have formalized budget responsibilities, but he or she is key to
identifying needed resources for the upcoming budget period.

The manager seeks information from staff about areas of needed improvement or change and
reviews unit productivity and the need for updated technology or supplies. The manager uses this
information to prepare the first draft of the budget proposal.

Depending on the levels of organizational management, this proposal ascends through the
managerial hierarchy. Each subsequent manager evaluates the budget proposal, making
adjustments as needed. By the time the budget is approved by executive management, significant
changes to the original proposal usually have been made.

The final step in the process is approval by a governing board, such as board of directors or
designated shareholders. Typically, the budget process timetable is structures so that the budget
is approved a few months before the beginning of the new fiscal year.
MANAGEMENT BY OBJETIVES

Management by objectives (MBO) is a systematic and organized approach that allows

management to focus on achievable goals and to attain the best possible results from available
resources.

It aims to increase organizational performance by aligning goals and subordinate objectives

throughout the organization. Ideally, employees get strong input to identify their objectives, time
lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach
objectives.

Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book 'The
Practice of Management'. In the 90s, Peter Drucker himself decreased the significance of this
organization management method, when he said: "It's just another tool. It is not the great cure for
management inefficiency... Management by Objectives works if you know the objectives, 90%
of the time you don't."

CORE CONCEPTS
According to Drucker managers should "avoid the activity trap", getting so involved in their day
to day activities that they forget their main purpose or objective. Instead of just a few top
managers, all managers should:
participate in the strategic planning process, in order to improve the implementability of
the plan, and
implement a range of performance systems, designed to help the organization stay on the
right track.

MANAGERIAL FOCUS
MBO managers focus on the result, not the activity. They delegate tasks by "negotiating a
contract of goals" with their subordinates without dictating a detailed roadmap for
implementation. Management by Objectives (MBO) is about setting yourself objectives and then
breaking these down into more specific goals or key results.
MAIN PRINCIPLE
The principle behind Management by Objectives (MBO) is to make sure that everybody within
the organization has a clear understanding of the aims, or objectives, of that organization, as well
as awareness of their own roles and responsibilities in achieving those aims. The complete MBO
system is to get managers and empowered employees acting to implement and achieve their
plans, which automatically achieve those of the organization.

WHERE TO USE MBO

The MBO style is appropriate for knowledge-based enterprises when your staff is competent. It
is appropriate in situations where you wish to build employees' management and self-leadership
skills and tap their entrepreneurial creativity, tacit knowledge and initiative.
Management by Objectives (MBO) is also used by chief executives of multinational corporations
(MNCs) for their country managers abroad.

SETTING OBJECTIVES
For Management by Objectives (MBO) to be effective, individual managers must understand the
specific objectives of their job and how those objectives fit in with the overall company
objectives set by the board of directors.

The managers of the various units or sub-units, or sections of an organization should know not
only the objectives of their unit but should also actively participate in setting these objectives and
make responsibility for them.

The review mechanism enables leaders to measure the performance of their managers, especially
in the key result areas: marketing; innovation; human organization; financial resources; physical
resources; productivity; social responsibility; and profit requirements.

BALANCE BETWEEN MANAGEMENT AND EMPLOYEE EMPOWERMENT

The balance between management and employee empowerment has to be struck, not by thinkers,
but by practicing managers. Turning their aims into successful actions, forces managers to
master five basic operations:
 setting objectives,
organizing the group,
motivating and communicating,
measuring performance, and
developing people, including yourself.

These Management by Objectives (MBO) operations are all compatible with empowerment, if
you follow the main principle of decentralization: telling people what is to be done, but letting
them achieve it their own way. To make the principle work well, people need to be able to
develop personally. Further, different people have different hierarchy of needs and, thus, need to
be managed differently if they are to perform well and achieve their potential.

Empowerment recognizes "the demise" of the command-and-control system, but remains a term
of power and rank. A manager should view members of his or her team much as a conductor
regards the players in the orchestra, as individuals whose particular skills contribute to the
success of the enterprise. While people are still subordinates, the superior is increasingly
dependent on the subordinates for getting results in their area of responsibility, where they have
the requisite knowledge. In turn, these subordinates depend on their superior for direction and
"above all, to define what the 'score' if for the entire organization, that is, what are standards and
values, performance and results."

INDIVIDUAL RESPONSIBILITY
Management by Objectives (MBO) creates a link between top manager's strategic thinking and
the strategy's implementation lower down. Responsibility for objectives is passed from the
organization to its individual members. It is especially important for knowledge-based
organizations where all members have to be able to control their own work by feeding back from
their results to their objectives.

Management by objectives is achieved through self-control, the tool of effectiveness. Today the
worker is a self-manager, whose decisions are of decisive importance for results.
In such an organization, management has to ask each employee three questions:
What should we hold you accountable for?
What information do you need?
What information do you owe the rest of us?

MBO PRINCIPLES

Cascading of organizational goals and objectives

Specific objectives for each member
Participative decision making
Explicit time period
Performance evaluation and feedback
TYPES OF OBJECTIVES

Routine objectives
Innovation objectives
Improvement objectives

The objectives must be:

focused on a result, not an activity
consistent
specific
measurable
related to time
attainable

MBO STRATEGY: THREE BASIC PARTS

1. All individuals within an organization are assigned a special set of objectives that they try to
reach during a normal operating period. These objectives are mutually set and agreed upon by
individuals and their managers.

2. Performance reviews are conducted periodically to determine how close individuals are to
attaining their objectives.

3. Rewards are given to individuals on the basis of how close they come to reaching their goals.

SIX MBO STAGES

1. Define corporate objectives at board level

2. Analyze management tasks and devise formal job specifications, which allocate
responsibilities and decisions to individual managers
3. Set performance standards
4. Agree and set specific objectives
5. Align individual targets with corporate objectives
6. Establish a management information system to monitor achievements against objectives

8 KEY RESULT AREAS WHERE MANAGERS MUST PURSUE CLEAR OBJECTIVES

1. Marketing
2. Innovation
3. Human organization
4. Financial resources
5. Physical resources
6. Productivity
7. Social responsibility
8. Profit requirements

MBO: KEY ADVANTAGES AND DISADVANTAGES

Advantages

MBO programs continually emphasize what should be done in an organization to achieve

organizational goals.
MBO process secures employee commitment to attaining organizational goals.
Disadvantages

The development of objectives can be time consuming, leaving both managers and employees
less time in which to do their actual work.

The elaborate written goals, careful communication of goals, and detailed performance
evaluation required in an MBO program increase the volume of paperwork in an organization.