NUR 521 Operational Budget Presentation
Sample Answer for NUR 521 Operational Budget Presentation
Introduction/Overview
Health care facilities offer different patient care services to patients. In the process, they earn revenue and incur costs that vary with the service type and duration of treatment, among other factors. Since these facilities should operate seamlessly and avoid losses, budgeting is critical. Broadly, budgeting involves a reasonable estimate of revenue and expenses for a particular period. To understand various budgeting principles and terminologies, this presentation will explore four main areas relating to budgeting and an organization’s financial performance. They include revenue and cost concepts, breakeven analysis, and a detailed comparison of operational and capital budgets while giving practical examples where necessary.
Revenue Concepts
Like other organizations, health care facilities generate revenue. Broadly, revenue represents the earnings received from the sale of products or services. In healthcare provision, revenue is usually generated from medical services. The concept of revenue consists of three main variables: total revenue, average revenue, and marginal revenue. According to Ahuja (2022), total revenue is the total income of an organization obtained from multiplying the number of products sold/services offered and the price of each. The average revenue is the revenue per unit of output sold. Marginal revenue refers to additional revenue that an organization generates from selling an additional unit of output (Ahuja, 2022). A suitable example is the increase in revenue after adding a nurse to a unit to increase the number of patients served.
Sources of Revenue
As large businesses with huge responsibilities, health care facilities require a lot of money to operate efficiently. Health care revenue comes from two main sources: government sources and private payers (American Institute for Healthcare Management, 2021). Government sources include the Medicare program, which insures the aged and disabled and Medicaid program for needy individuals and families. Private pay includes payment for medical services that health care facilities receive from patients or their families. Operating revenue usually comes from private pay; that is, providing medical services, such as tests, sale of drugs, and payment for treatment. Thus, it is the largest and most important source of an organization’s revenue.
Cost Concepts
Health care organizations incur many expenses daily. In health care economics, cost represents the amount of payment made to acquire a product or service. For instance, the nursing staff must be paid for regular and overtime work. Cost concepts can be classified according to the nature of expenses, which includes outlay and opportunity cost. Outlay costs include rent of premises and electricity, while an opportunity cost is what an organization loses by choosing among alternatives (Handley & Hollander, 2019). Direct costs include commissions, while depreciation is a suitable example of indirect costs. Accounting costs include cash paid directly for resources, while economic costs combine products’ gains and losses.
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Incremental costs are the changes encountered in future costs when health care facilities make certain decisions. For example, deciding to expand their scope of service will be associated with some cost (incremental). Redish et al. (2022) described sunk costs are charges/payments that cannot be recovered, such as research and advertisement costs. Payer-based costs include private and social costs. Private cost is what is incurred when an individual consumes or produces something, while social cost is incurred by the entire society, such as after policy changes. Variability-based costs include fixed and variable costs. Fixed costs remain constant as the volume of services offered changes. Variable costs vary with the output.
Break-even Analysis
Health care organizations should practice safe business. From a financial perspective, break-even analysis involves calculating an entity’s safety margin based on revenues and costs involved in doing business. As Ross (2022) explained, break-even analysis shows the number of products needed to cover the production costs. The implication is that the organization will have zero profit or loss at the break-even point (BEP). The BEP is obtained by dividing the fixed costs by the contributing margin (sales price per unit –variable cost per unit). The standard period for breaking even is 6-18 months. A longer period signifies a considerable risk and necessary adjustments should be made.
Break-Even Analysis: Importance
After assessing what break-even analysis involves and its calculation, it is important to explore relevance/application in organizations. Firstly, break-even analysis is crucial for financial decision-making. It guides organizations on expansion and increasing production to ensure they make sound decisions. Secondly, break-even analysis helps organizations identify areas where they can reduce costs. Doing so allows organizations to increase profitability and expand their operation scale. Break-even analysis is also a valuable performance assessment tool. It is critical in helping organizations to determine the feasibility of their current and projected goals. Lastly, organizations can set appropriate prices for their services and products since break-even analysis provides a comprehensive view of the cost structure.
Operational Vs. Capital Budgets
The best way to understand the difference between operational and capital budgets is to examine what each entails and the purpose. An operating budget projects the day-to-day expenses and revenues that a health care organization requires to deliver its services (Ross, 2022). In health care facilities, operating budgets cover personnel and a facility’s annual operating costs. Nursing staffing consumes the largest portion of an operating budget. On the other hand, capital budgeting is dedicated to long-term investments, particularly durable assets. Examples in health care facilities include office space/buildings, computers, robotic surgical systems, and other equipment for long-term use. These assets are usually expensive but durable.
Several other attributes can help to differentiate operational and capital budgets in more detail. Typically, the costs in an operating budget return year after year, while those in capital budgeting take a longer period (usually more than three years). Secondly, the funds in an operational budget are allocated to regular expenses like salaries, repairs, and staffing needs. This implies that the operational budget is, to a significant extent, about utilities, while the capital budget is about funding durable goods (Ross, 2022). Thirdly, the items in a capital budget may gain or lose value over time. For instance, medical equipment is likely to lose value while clinical office space s its value.
Summary
In conclusion, it is crucial to recap the presentation’s major points. Revenue is broadly about what an organization earns and could be classified into total, average, and marginal revenue. Costs are expenses incurred regularly or for long-term assets. They can be classified by nature, traceability, purpose, and other ways. They include direct costs, opportunity costs, fixed costs, and social costs. The other important financial terminology covered in the presentation is break-even analysis. It demonstrates the units of production needed to cover the production cost. Lastly, it is important to know that operational budgets cover day-to-day expenses and revenues while capital budgeting focuses on an organization’s long-term investments, like medical equipment and buildings.
References
•Ahuja, H. L. (2022). Modern microeconomics: theory and applications, 19th Edition. S Chand & Company Limited.
•American Institute for Healthcare Management. (2021). Revenues (inflow). https://www.amihm.org/revenues-inflow/#:~:text=Revenue%20represents%20amounts%20earned%20by,by%20rendering%20services%20to%20patients.&text=Healthcare%20revenue%20comes%20from%20governmental%20sources%20and%20private%20payers.
•Handley, N., & Hollander, J. E. (2019). Opportunity cost: the hidden toll of seeking health care. Health Affairs Forefront. https://www.healthaffairs.org/do/10.1377/forefront.20190429.592190
•Redish, A. D., Abram, S. V., Cunningham, P. J., Duin, A. A., Durand-de Cuttoli, R., Kazinka, R., … & Sweis, B. M. (2022). Sunk cost sensitivity during change-of-mind decisions is informed by both the spent and remaining costs. Communications Biology, 5(1), 1337. https://doi.org/10.1038/s42003-022-04235-6
•Ross, T. K. (2022). Baker’s health care finance: basic tools for nonfinancial Managers. Jones & Bartlett Learning.
•Trenaman, L., Pearson, S. D., & Hoch, J. S. (2020). How are incremental cost-effectiveness, contextual considerations, and other benefits viewed in health technology assessment recommendations in the United States?. Value in Health, 23(5), 576-584. https://doi.org/10.1016/j.jval.2020.01.011
Nurse leaders have the responsibility to not only lead their team of nurses through changes and practices, but to also ensure that their actions fall within the organization’s budget. This can be a difficult task because most nurse leaders are not formally educated on budgeting and learn on the fly, however, there are some tricks that nurse leaders can learn from to ensure they stay within budget. The American Nurses Association (2024) points out that in order for a nurse leader to get their capital purchase approved, they must “review budgets from past years, analyze ongoing trends, and consider current needs.” These are helpful instructions for nurse leaders to focus on when attempting to plan for a capital purchase. This information can aid nurse leaders in having all necessary information prior to getting their capital purchases approved.
It is also important for nurse leaders to have a flexible budget because a “flexible budget is more likely to get approved because it demonstrates a company’s proactive adaptability to real-time market changes, optimizing resource allocation and mitigating risks”(Russell, 2023). Nurse leaders can ensure their budget is flexible by reviewing their organization’s costs regularly and adjusting their allocations and spending based on their budget usage (Russell, 2023). Analyzing their budget regularly also allows more up-to-date and accurate data to be used to make future purchase decisions. It is also important for nurse leaders who are not formally trained in finances to cross check their budget with any compliance teams to “ensure all regulatory requirements are met” before finalizing and submitting their budget proposal (Russell, 2023). One other thing that nurse leaders can do to ensure the capital purchase gets approved is to fully educate their team of stakeholders of the capital purchase because “a well-informed team can make more accurate budget forecasts and understand the importance of adhering to the budget”(Russell, 2023).
Resources
American Nurses Association. (2024). Financial Management Skills for Nurse Managers. ANA. https://www.nursingworld.org/content-hub/resources/nursing-leadership/nursing-financial-management/
Russell, B. (2023). Breaking down the budgeting process: 7 things you need to get your budget approved. https://www.cubesoftware.com/blog/budgeting-process