Part 7: Thoughts on Budgeting
The operations budget, while based in part on expenses, is also based on revenue projections. Clearly we would not knowingly budget to spend more than we expect to earn from a product or service and so we budget accordingly. In general, we do not expect to have a great deal of money left over from revenues received after deducting all the operating costs, i.e., the costs of providing services. What we do have left...and it is usually a very small percentage...we do not leave in operations accounts, we move into an account that contains all the positive balances from various operations.
Essentially, capital budget funds come from these assets, ones that are left in the organization after all expenses are deducted. This includes not only operating expenses, but such expenses as depreciation, interest paid, taxes, etc. What is left is usually a pool of money call unrestricted net assets as we can do what we wish with them, up to a point. What is generally done is that the funds are used to replace outdated major equipment, expand existing services, and develop new product lines.
So, we expect operations to pay for themselves through the revenue we generate and we use the resources left to continue to grow our operations. We do this for various reasons. Sometimes we simply do this to remain competitive. In one place I worked, the L&D area was dismal, old and un-renovated, and no one care because most of the mothers were Medicaid recipients. Then another nearby hospital opened a state-of-the-art LDRP center and all the Medicaid moms went there. Despite the fact that the revenue was low on a per-patient basis, losing ALL of it was a blow. My hospital had to create an L&D area that was just as up-to-date in order to regain market share. Similarly, if we want to keep our primary referral sources, usually physicians and payers, we need to have the kind of environment and equipment they expect.
I wish we could allocate those funds back into operations and add to staffing ratios and so on, but you will find other compelling realities exist in the executive offices that require senior administration to make some difficult financial decisions.
Do you feel ready to do this?