Lynn, M., and Madison, R. (2004). A closer look at rolling budgets: the challenges associated with an effective implementation of rolling b
Manage budgets and financial plans
September 24, 2020Green criminology
September 24, 2020Lynn, M., and Madison, R. (2004). A closer look at rolling budgets: the challenges associated with an effective implementation of rolling b
Introduction
In managerial control systems, the budgeting process forms a core component that should never be ignored. Planning, coordination and control of a given system if based on the resources available. Budgeting allocates resources in a manner that the best results are obtained in a given timeframe. In nursing, human resource should be coordinated in a manner that quality health care is achieved. However, there are other factors such as hospital facilities, provision of drugs and equipment which ought to be put into consideration to achieve the set objectives. The concept of scarcity and choice is prominent in the health sector and so the budgeting process is used to allocate scarce resources in a manner that the best returns are realized.
Budgeting has been criticized by a number of practitioners who suggest that they bring more costs than benefits (Cieslak & Kalling, 2007, p. 3). However, for performance evaluation, budgets are needed to have a link between the strategic plan set and the financial obligations that needs to be met (Sivabalan, Booth, Malmi & Brown, 2009). This paper will compare two budgeting approaches, fixed budget which computes one best estimate considering the amount of finance available and obligations against flexible budget which assumes that actual results may vary and hence has a provision where budgeting can be done at different financial volumes and obligations (Webster, Gans, Milburn & Simmons, 2007).
Budget Types
A flexible budget is used to show different costs at various levels of activity. According to Barasa, Molyneux, English & Cleary (2014) it is important to have a list of priorities while drafting a budget to be used in a hospital setting. Nurses are likely to attain managerial positions in healthcare facilities so the priorities used in this case will be customized to such a setting. Health policy and planning relies on budgeting since the planning done has to be linked to a given financial ability. The process of setting priorities focuses on various levels which include the national level (macro), bedside (micro level) and institutional level (meso level) (Barasa, Molyneux, English & Cleary, 2014). The three levels solely rely on the available resources against the priorities which need to be addressed. Though there is a link between them, they often stand independently with hospital management having the ultimate role to decide on the operations of the hospital. According to McKneally et al. (1997) priority setting refers to the way resources are distributed in a setting where programs are competing. These programs are aimed at improving the quality of health care and/or the welfare of medical staff in an institution.
Taking expenses to be the variable, expenses can be classified into three; – fixed, semi variable and variable. It is the role of the budgeting section to know which expenses are bound to change over time and hence develop strategies that will cover that. Therefore, an intelligent classification of the set expenses is done and allocation done in a way that they are all addressed. However, it is very hard to have an accurate classification of expenses and assuming they will not change over time. Market forces tend to change the amount of money allocated to different roles. The only expense that can be projected with close accuracy is human capital and fixed assets. Maintenance fee for fixed assets can be done with close accuracy since its routine. Human capital rarely changes and the salaries rarely change with time.
Therefore, for each level of output, a flexible budget will show the expenses required. The budget will give the user different options for different levels of output or with different amount of finances. It is the role of a nursing manager to evaluate the finances available and select the budget that will fit the expected output. A flexible budget is prepared using the fixed budget at the end of a given period. A fixed budget has to be prepared to show the expenses for a given output. Using it, a flexible budget is prepared by considering changes on either extreme in terms of expenses. Unlike in fixed budgeting where variable cost per unit of output is not developed, a flexible budget needs it to show the output with different costs. It is easier to prepare a flexible budget using a fixe budget which shows how different factors affect the process of health care delivery.
A fixed budget assumes that the conditions affecting output will remain constant. Costs affect output. If there are enough finances to cater for various costs such as human capital, hospital beds, drugs, hospital equipment, the hospital will have the capacity to handle a large number of patients. In fixed budgeting, the assumption is that these factors are static in the given time bound by the budget. This is not often the case and hence can lead to poor service delivery especially in a situation where the budget underestimates the number of patients who will seek medical assistance from the facility in a given period. Forecast happens well when there is room for adjustment. While planning for the future, a certain trend has to be considered to have a rough estimate of the costs in future against the number of people who may need services from the set facility. This calls for a flexible budget that can accommodate the changes. Health care management therefore prefer flexible budgets compared to fixed budgets in their work.
Comparison
| Fixed Budget | Flexible Budget |
| A fixed budget cannot be adjusted in a situation where level of activity in a hospital facility changes. Considering that it does not work with variables but fixed values, it becomes increasingly hard to adjust any variable as in flexible budgets. The output set is achieved using a single stream of resources and costs. | A flexible budget can be quickly adjusted if the level of activity exceeds the projections made. Costs are incurred if level of activity increases. In a hospital setting. Level of activity can be caused by increased number of patients who in turn calls for an increase in hospital staffing, bed space, hospital equipment and at times more buildings. A fixed budget should have space for such adjustments. |
| A fixed budget is not designed to change under any conditions. It is prepared by considering the priorities at a given time and hence the budget is us used to address such priorities. It is not preferred on the basis that priorities change over time. For instance, there could be an influx of patients at a given season when the budget is being prepared. The budget will therefore use that to plan for increased number of patients and hence more allocation will be focused on handling the huge number. However, if the number changes, the budget will not be efficient. | A flexible budget is designed to change with changing variables in cost and expected output. A given unit of output is yielded with a specific unit of cost. Therefore, in a situation where there are more patients, the budget can be consulted to establish the specific unit in cost that needs to be put into the system to address the change. |
| In a fixed budget, costs are not classified by the nature of their variability. This creates the fixed nature it has. | In a flexible budget, each cost is treated as a variable. Changing each variable will yield a different unit in terms of output. The variables interact in manner that the best results will be achieved. |
| Does not account for market forces in terms of demand and supply which often has an effect on costs. | Takes into account that market forces affect demand and supply hence costs are bound to change. With costs being treated as variables, the process becomes easy to project the changes with changing variables. |
How a Flexible Budget would be used by a master’s prepared nurse leader in a health care setting
As a nurse leader, when preparing a budget, I have to make a number of assumptions in terms of costs and the output required. Output is based on the number of patients the facility is supposed to handle while the costs have to take care of human capital, equipment, and space all which have a role in delivery of quality health care. I would use a flexible budget since it allows for adjustments in case there are changes in costs or expectations in terms of output. According to Raju & Gidu (2015) a flexible budget of expenditure shall be adapted to foreseeable changes which may arise in the volume of activity carried out by the institution and also adapts several different volumes of work units (p. 3). The health care sector keeps on changing with different forces affecting the process of service delivery significantly. Therefore, unless for a short period of time, working with a static budget would be inefficient.
The budget would be used in planning how to allocate scarce resources to fit the requirements in the institution. The concept of scarcity if present in any economic setting and as a manager, it is important to be in a position where I can allocate scarce resources to fit the patient number that the facility is handling. However, the planning should be based on the future and with the changing variables the budget should be highly flexible. Therefore, I would use the budget in planning, allocating and coordinating the way resources are directed to give the desired output. According to Lynn & Madison (2004) a rolling budget can be put in place since it operates closely to a flexible budget. Such budgets take care of the changing technology and business environment which may have an effect on the health care facility. James, Robert & Lee (2009) argues that there should be communication between administrators and other stakeholders in an institution when drafting a budget. Communication ensures that the administration makes informed decisions taking into account all the considerations that ought to be made.
References
Barasa, E. W., Molyneux, S., English, M., and Cleary, S. (2014). Setting healthcare priorities in hospitals: review of empirical studies. Health Policy Planning, KEMRI-Welcome Trust Research program.
Cieslak, K., and Kalling, T. (2007). Reasons behind contemporary use of budgets. Paper for NFF Conference in Bergen, 1-8.
James, F., Robert, O., Lee, Pelton, M. (2009). Creating a flexible budget process. Academe, 95(6), p. 29-30.
Lynn, M., and Madison, R. (2004). A closer look at rolling budgets: the challenges associated with an effective implementation of rolling budgets are management challenges, and software technology can only become part of the solution when managers are ready to use it to enhance their decision making. Management Accounting Quarterly, 6(1).
McKneally, M., Dickens, B., Meslin, E., and Singer, P. (1997). Bioethics for clinicians: resource allocation. Canadian Medical Association Journal. 157:163-167.
Radu, M., and Giju, G. C. (2015). TRhe flexible budget-basic tool of the management control in the economic entities. Economic sciences, 14(1), 1-8.
Sivabalan, P., Booth, P., Malmi, T., and Brown, D. A. (2009). An exploratory study of operational reasons to budget. Accounting and Finance, 49(4), 849-871.
Webster, L. A. H., Gans, D. N., Milburn, J., and Simmons, F. R. (2007). Financial management. Vol. 3. London: Medical Group management Association. p. 50.
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