Hospital Budget

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 Introduction
The development of a sound hospital budget is fast
becoming a matter of paramount importance in
hospital administration.
Hospitals receiving grants, donations or budgetary
allocations
Hospital raise funds & estimate requirements
continuously
Expenses on various operations.
Check whether they are proceeding as per the
budgetary estimates.

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 Objectives
At the end of this presentation the learners will be
able to:
Define budget ,hospital budgeting & budget balance.
Discuss the importance of budgeting
Describe types of budgeting
Discuss the budget process
Explain the different step in the hospital budget
formulation

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 Budget

A budget (from old French bougette, purse) is a

financial plan and a list of all planned expenses and
revenues.

In other terms, a budget is an organizational plan

stated in monetary terms.

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 Hospital Budgeting

Hospital budgeting is the process of creating a plan

to spend hospital revenues.

Creating this spending plan allows to determine in

advance whether hospital will have enough money
to do its operations.

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 Cont
Budgeting is simply balancing hospital expenses with
hospital revenues.
If you don't have enough money to do everything
you would like to do, then you can use this planning
process to prioritize your spending and focus your
money on the things that are most important to you.

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 Sources & Objects of Budget

Receipts/Revenue Expenditure
Taxes Recurrent costs
Borrowing Capital costs.
Privatization Proceeds
Grants in Aid
Income from services
Share from the
government

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 Recurrent costs

Recurrent costs refer to the costs which you are

incurring annually to keep the system running, e.g.
salaries, drugs and any other consumables.

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 Capital/developmental Costs
Refer to costs that are incurred on a fixed asset.

An asset with a life span of more than one year, e.g.

x-rays, machines, ambulances, and weighing scales.

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 Budget balance

The budget balance is the difference between

revenues and spending.
A positive balance is called budget surplus
A negative balance is called budget deficit.

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 Importance of Budgeting
Provide a forecast of revenues and expenditures.
Enable the actual financial operation of the hospital
to be measured against the forecast.
Establish the cost constraint for the hospital
operations
helps to aid the planning of actual operations.
To control resources
To evaluate the performance of managers

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 Types of Budgeting

There are two basic types of budgeting that are

used in hospital.
Incremental or Conventional budgeting
Zero Based Budgeting

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 Conventional or Incremental Budget
Conventional budget or incremental budget is
prepared on the previous year figures.

It assumes that whatever has happened in the

previous year will continue with some changes.

It does not take in to account any changes in the

situation.

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The Formula
Incremental budgeting starts by using the
expenditures from the previous year as
estimated expenses for the current fiscal year.
Increments of varied amounts are then added
or subtracted to these expenses to show a
budget increase or decrease for the coming
fiscal year over the previous fiscal year.
This type of budgeting functions best in large
organizations that have set funding and little
fluctuation

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CONVENTIONAL BUDGET

Previous year figures

Manager

Incremental Charges / Additions

Budgets

Top management

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 Advantages of Incremental Budget
Funding stability. If a program requires funding for
multiple years in order to achieve a certain outcome,
incremental budgeting is structured to ensure that
funds will keep flowing to the program.
The budget is stable and change is gradual.
Operational stability. This approach ensures that
departments are operated in a consistent and stable
manner for long periods of time
Managers can operate their departments on a
consistent basis.

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 The system is relatively simple to operate and
easy to understand.

Conflicts should be avoided if departments

can be seen to be treated similarly.

Co-ordination between budgets is easier to

achieve.
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 Disadvantages of Incremental Budget
Incremental in nature. It assumes only minor changes
from the preceding period, when in fact there may
be major structural changes in the business or its
environment that call for much more significant
budget changes

Assumes activities and methods of working will

continue in the same way.

No incentive for developing new ideas.

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 The budget may become out of date

Budgetary slack: is the deliberate under-estimation of

budgeted revenue or over-estimation of budgeted
expenses. This allows managers a much better chance
of "making their numbers," which is particularly
important for them if performance appraisals and
bonuses are tied to the achievement of budgeted
numbers.

Managers tend to build too little revenue growth and

excessive expenses into incremental budgets, so that
they will always have favourable variances

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ZERO BASED BUDGETING

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 Zero Based Budgeting

Every line item of the budget must be approved,

rather than only changes. During the review process,
no reference is made to the previous level of
expenditure

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 Zero Based Budgeting
In zero based budgeting, every department function
is reviewed comprehensively and all expenditures
must be approved, rather than only increases.

This process requires the budget request justified in

complete detail by each program starting from the
Zero base.

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 Advantages of ZBB
Efficient allocation of resources, as it is based on
needs and benefits rather than history.
Drives managers to find cost effective ways to
improve operations.
Detects inflated budgets.
Identifies and eliminates wasteful and obsolete
operations.
Helps in identifying areas of wasteful expenditure,
and if desired, can also be used for suggesting
alternative courses of action

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 Disadvantages of ZBB
More time-consuming than incremental budgeting.
Justifying every line item can be problematic for
departments.
Requires specific training, due to increased
complexity vs. incremental budgeting.
In a large organization, the amount of information
backing up the budgeting process may be
overwhelming

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 Budget Process
Budget process includes the following:
Budget formulation
Budget enactment
Budget execution
Audit

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 1) Budget formulation
Budget formulation: policy setting & preparation of
proposals by the executive

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 2) Budget enactment

Budget enactment: policy consideration and formal

legislative authorization of the budget.

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 3) Budget execution

Budget execution: implementation in such a way to

assure that expenditures reflect the enacted budget

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 Audit

Audit: examination and verification of actual

receipts and expenditures estimated in the
enactment

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Budget Control Process

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 Hospital Budget Process

As a shortcut to budget making, the financial

performance of previous some months is obtained, and
for the remaining months of the year & some
percentage allowances for inflation are added to it to
make up the years forecast.
This is the system generally followed in many hospitals.
The budget process needs to be very well-understood
by the hospital administrator & finance officer.
However, all departments must get actively involved in
the preparation of the budget.

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 Important steps in hospital budget process

The first step in the budget process is for the hospital

administrator to prepare assumptions, in statistical
terms, about the kinds of services (outputs) the
hospital expects to provide (produce), i.e. prepare a
quantitative expression of the plans of the hospital,
e.g. patient days of service, by specialties, number of
procedures by departments like pathology, radiology,
physiotherapy, etc. number of outpatient visits, and
so on.

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 Conti.

The second step is for the hospital administrator to

prepare the economic forecasts in respect of new
developments, or other factors, that can affect the
hospitals income or expenditure during the budget
period, such as new services by neighboring
hospitals, specialists and super specialists likely to
join or leave the hospitals, inflation factors on
materials and supplies, and any new government
regulations.

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 Conti.

The third step is for the hospital administration to

outline the budget goals and policies as per the
directives of the governing board and in consultation
with the finance officer, which will constitute a
tentative outline of the financial plan.

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 Conti

The fourth step is for the Finance Officer to prepare a

budget package incorporating written instructions
regarding the framework for the budgeting process,
procedures to be followed, accompanied by
illustrative forms and calculations, also containing
the goals and policies, assumptions, schedules and
past data applicable to the department.
He passes on the budget package to all department
heads to enable them to prepare preliminary draft of
their budget.
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 Conti.

The fifth step is for each department head to analyze

financial and statistical data generated by his
department as well as provided to him by the
administration or finance department, to critically
assess the departments operations and
performance, and develop indices for planning and
control.
He reviews the budget plan, develops departmental
goals and objectives, and prepares the departmental
expense budget.
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 Conti

In the sixth step, the summary of each departments

budget records, the commitments and statements
made between the administration and the
department head, and also includes observation of
the Finance Officer.

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 Conti

The seventh step is for the Finance Officer to

develop the departments revenue budget,
summarize departmental expense budget, and
forward the departments budget hearing
summary to the concerned department head.

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 Conti.

The eighth step is for the Finance Officer to prepare a

preliminary operating revenue budget for the whole
hospital, by summarizing and collating the individual
departments budgets.
If the expected revenue does not cover the budget
expense, price increases may become necessary. If
price increases are not acceptable, the finance
officer may propose areas, functions or categories of
budgeted expenses that can be cut.

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 Conti

The ninth step is for the Finance Officer to

summarize the total budget into a proper
budget format including statistical summaries.

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 Conti

In the final step, the budget is presented by the

Finance Officer to the governing board or board of
trustees or to the finance committee for their
approval.
The budget is then adopted by the board or the
committee with revisions if necessary. It is later
communicated to all department heads and other
concerned persons.

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 References
Sheffrin, Steven M. (2003). Economics: Principles in
Action. Upper Saddle River, New Jersey 07458:
Pearson Prentice Hall. p. 502. ISBN 0-13-063085-3.
Cliche, P. (2012). Budget, in L. Ct and J.-F. Savard
(eds.), Encyclopedic Dictionary of Public
Administration,
[online], http://www.dictionnaire.enap.ca/Dictionnai
re/en/home.aspx

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 References
Public Budgeting and Financial Management,
Florida International University, Retrieved
November 21, 2013
Higgs, Robert (2008). "Government Growth".
In David R. Henderson (ed.). Concise
Encyclopedia of Economics (2nd ed.).
Indianapolis: Library of Economics and
Liberty. ISBN 978

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