Financial Management

Dr.Shahzad A.Daula
Director
Sanabil Health Services Lahore

2
What is Financial Management?
• … planning, organizing, directing
and controlling the financial
activities of an organization
–referstotheefficientandeffective
managementofmoney(funds)insucha
mannerastoachievethegoalsofthe
organization

3
Financial Management for Different Sectors
“The difference between financial
management in the public and private
sectors is that in public agencies you
get a bag full of money at the beginning
of the year and are told to spend it. In
private enterprise you get an empty
money bag at the beginning of the year
and are told to fill it!”
Michael Read

Financial Management for Different Sectors …
Government Organizations
Private Enterprises
The NGOs
Can spend
the money
allocated
Should keep some for admin and
spend the balance for the goals
Should generate
return on money
given and retain the
capital
4

5
Importance of Financial Management!
Rise in health expenditure because of:
• The changing character of service
• Technology development
• Changing health status
• Increasing proliferation of specialties
• Defensive medicine (consumer protection)
• Lack of awareness of economy and
productivity

6
Accounting Vs Financial Management
Financial management provides the
theory, concepts, and tools necessary to
help managers make better financial
decisions
Accounting an activity that managers
engage in to record and report financial
transactions and data in financial (Rs)
terms

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Financial Vs Fiscal Management
• For our purposes:
– Fiscal management is limited to the
management of the funds, etc. during
the institution’s twelve-month fiscal year
(1st July to 30th June in Pakistan)
– Financial management includes fiscal
management and goes beyond just a
twelve-month period

Building Blocks of Financial Management
• Good financial management covers
the interrelated areas of:
A. Financial planning – estimates of income
and expenditure / Budget formation
B. Accounting – methodical recording of
income and expenditure
C. Financial monitoring – generation of
periodical reports and returns of
account
D. .Financial Audit
Planning
&
Control
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Control

A: What is a budget?
• A formalized plan describing the use and
source of financial and operating
resources over a given time period
• A plan that describes authorized
expenses for a specified period of time
– Derived from Latin word ‘Bague’ and French
word ‘Bougette’ means small leather bag
10

11
Budget as a Planning Tool
• Budgeting is an integral and critical step in
the Planning Cycle
• Budget is a political document, expressing
policy decisions and commitments about
priorities of programs
• In it simplest form, it is stated in terms of
income and expenses and incorporates:
– A formal written statement
– of management plans for the future
– expressed in financial terms

Budget as a Control Tool
• Budgetary Control
– Establishing checks and balance to ensure that
the institution is not living beyond its means
– provides a means of evaluating performance
• Potential causes of significant deviations from
budget include:
– Budget was poorly conceived
– Conditions have changed since the budget was
prepared
– Managers have done a particularly good or poor job
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Budgeting Approaches
a): Incremental Budgeting (Conventional)
– A budgeting approach that assumes the
starting point for each budget item is the
amount spent on it in the previous budget
– Does not take into account any changes in the
situation
– Whatever amount spent last year assumed to
be sanctioned without analyzing whether it is
really required
• Less costly but may not be strategically sound
– usually out of sync with the current
happenings in the system 13

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b): Zero-based Budgeting (ZBB)
• A budgeting approach that assumes the
starting point for each budget item is Zero
– budgeting starts from a ‘zero base’
• Essential feature is a review of the
necessity of each expenditure element/
activity as part of the budgeting process
• Every function within organization is
analyzed for its needs and costs – all
expenses are justified for each new period

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B: Zero-based Budgeting (ZBB)…
• Budgets are then built around what is
needed for the upcoming period,
regardless of whether the budget is
higher or lower than the previous one
• Identifies alternative and efficient
methods of utilizing limited resources in
the effective attainment of selected
benefits
• More costly but more strategically sound

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Budgets -Types
• An Operational Budget is a financial tool
that outlines anticipated revenue and
expenses over a specified period / also
known as Recurrent Budget or on Macro /
Government level as Non-development
Budget
– Usually divided into Salary and Non-salary
components
– Includes line items such as wages, utilities, rent
or lease payments, consumables and taxes

Capital Budget
• Purpose is to plan for the acquisition of
land, buildings, and equipments for
expansion and/ or replacement
• Life of acquired items is beyond the
fiscal year
17

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How Capital Budgeting Interacts with
Operational Budgeting
• An increase in capital expenditures can
cause an increase in the operational
budget as the machines often require
maintenance
• While the purchase of the machines
comes out of the capital budget,
maintenance comes out of the operational
budget

Revenue Budget Capital Budget
Expenditure BudgetIncome Budget
 Hospital service
charges i.e. Beds, OTs,
OPD, Diagnostics,
Consultations
 Auxiliary services i.e.
Blood bank,
Ambulance, Canteen,
Telephone, Parking,
Chemist
 Miscellaneous i.e.
Rent, sale of scrap
 Investments i.e. FD’s,
Dividends
 Donations
 Grants
 Employee cost
• Management
• Medical
• Nursing
• Para medical
• Engineering
• Unskilled
• Admin and
accounts
 Materials &supplies
 Dietary services
 Maintenance
 Other hosp expenses
 Office expenses
 Interest
 Depreciation
Investment in longterm
assets
 Balance from revenue
budget
 Loans to finance
capital projects
 Disinvestment of
assets
Traditional Hospital Budget
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Budgets – Types …
• Development Budget: a detailed
statement outlining estimated project
costs to support the sponsored project –
a PC-I in government sector
• Master Budget: A combination of all the
lower-level budgets of various functional
areas in an organization
20

Budget Development: Steps
• Step 1: Begin preparations well before close of
the fiscal year
• Step 2: Prepare an outline of the
organization’s planned activities for the
upcoming year
• Step 3: Determine available funds
– (carry over balance from previous years, cash on hand and
funds in the bank, interest, etc.)
• Step 4: Estimate expected income and when it
is expected to be available

Budget Development: Steps …
• Step 5: Define needed expenses – get price
quotations on certain expenditures
• Step 6: Rank the order of expenditures by their
importance
– When doing this step the organization needs to consider which
activities are the wisest expenditure of funds
• Step 7: Negotiate, as necessary, eliminate less
essential expenditures or limit expenditures
• Step 8: Revise, review, coordinate, cross-reference,
and then assemble into a final budget;
– the budget must be flexible to anticipate conditions which mighthave
been overlooked during the planning process

B: Accounting
• … the systematic and comprehensive
recording of financial transactions
pertaining to an organization
• … also refers to the process of
summarizing, analyzing and reporting
these transactions to oversight agencies
and tax collection entities
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Accounting: Fundamentals
• Book Keeping
– A systemic method of recording financial
transactions in the book of accounts
• Cash Book (CB)
– a ledger in which receipts and payments of
money are recorded
• All transactions are to be recorded/ accounted for
properly on the day of their occurrence
• Debit and credit columns are side by side

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Accounting: Fundamentals …
• Cost Centre
– a part of an organization to which costs may
be charged for accounting purposes
• Revenue Centre
– Distinctly identifiable department, division, or
unit of an organization that generates revenue
through sale of services
• Private Rooms of hospital
• Diagnostic services

Cost or Revenue Centers ???
MedicalDepartments
ServiceDepartments
AdminDepartment
Out PatientDepartments
Ward
ICU,CCU,&NICU
OperationTheater
Pharmacy
Diagnostic&Radiology
Bio-Medical
Nursing
Purchase
EDP,HR
Maintenance
Marketing
Input=Investment/Expenses
26

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• Capital Expenditure
– Expenditure incurred for acquisition of assets
of a permanent or long-standing nature
• Overheads
– The costs pertaining to general services (e.g.
administration) which do not arise due to
operation of a given program

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• Income and Expenditure Statement
– Reflects the state of institution’s finances for a
stated period
• Balance Sheet
– A document which gives a picture of the
assets and liabilities and represents the
financial position of an institution on a
particular date

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The Balance Sheet
• The arrangement of assets in balance sheet:
– Long term assets: (buildings, all medical
equipments, non medical equipments like
furniture)
– Short term assets or current assets:
• Materials, Medicines and consumables used
in hospital operations
• Advances to suppliers and employees
• Receivable from corporate / insurance billing
• Deposits made with various authorities
• Cash and Bank Balances

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• The arrangement of liabilities in a balance
sheet
– Loans including long term loans, Equipment
Credit
– Short term loans (working capital loans and
suppliers balances)
– Pending Expenses / Taxes
Balance Sheet … Accounting: Fundamentals …

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Direct and Indirect Expenses
• Direct expenses: those expenses that are
directly associated with the patient, e.g.,
medical and surgical supplies and drugs
• Indirect expenses: items such as utilities
(gas, electric, phones) that are not directly
related to patient care

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Fixed and Variable Costs
• Fixed costs: those expenses that are
constant and are not related to productivity
or volume; e.g., building and equipment
depreciation, utilities, fringe benefits, and
administrative salaries
• Variable costs: fluctuate depending upon
the volume or census and types of care
required – bed occupancy

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• Profit
– determined by the relationship of income to
expenses
• Break-Even Analysis
– Breakeven Point
• The point at which income equals expenses
• Breakeven Point= Fixed Costs / (Price - Variable Costs)
– Breakeven Analysis
• Calculates the point at which income covers
expenses
• An indicator for the profitability of organization

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C: Financial Monitoring
• Daily Reports
– Income from inpatient admissions, private
rooms
– Income from outpatient visits admissions
– Income from diagnostics – Lab tests, X-rays,
CT Scan
• Monthly Reports
– Monthly statement of income & expenditure
with department-wise breakup

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Financial Monitoring …
• Quarterly Reports
– Statement of budget utilization for initiation of
corrective measures
• Annual Reports
– Income and expenditure statement covering all
aspects of previous financial year

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D: Audit
• … refers to any independent examination,
any objective assessment of something
– connotes comparison with some standard
– The essence of auditing is measuring
something against a good example to make a
critical, an evaluative, judgment
• Financial Audit: An official examination
of financial records to see that they are
true and correct

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Internal Audit
• Many government agencies have internal
audit agencies – to find problems in their
organization without waiting for the
external auditors
• To work, they need to have:
– Reporting authority high in the organization
– Adequate, clear authority, support and
resources, and the right to enter all parts of
the organization

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Financial and Compliance Audit
• Whether the financial statements of an
audited entity present fairly the financial
position and the results of financial
operations in accordance with generally
accepted accounting principles
• Whether the entity has complied with laws
and regulations that may have a material
effect upon the financial statements

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