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New approach to budgeting can improve bottom line
Flexible budget gives a true picture of performance
You've just finished reviewing the monthly financial statement for your agency, and you're pleased to see little variance in the projected expenses compared to actual expense. Does this mean your agency did well this month? Is your budgeting process really giving you accurate information that will allow you to identify steps to improve your bottom line in a timely manner?
You may not have done as well as you think if your budget is based on a traditional budgeting process, says Mark Sharp, CPA, partner at BKD, LLP, an accounting and consulting firm in Springfield, MO. "The traditional way to compare actual monthly expenses to budgeted expenses is to divide the annual expense by 12," he explains. The problem with this approach is that monthly variables such as volume, price, and productivity are not exactly the same each month, so your comparisons may not give you enough information to identify potential problems, he says. For example, if your nurses are salaried, their wages may be in line with the projected budget, but if your staff saw fewer patients during the month than projected, the wages are actually higher than they should be. Being able to evaluate wages in relation to number of visits gives a manager a chance to evaluate staffing levels if predicted volume levels were too high in the initial budget, he explains.
Sharp recommends the use of flexible budgeting to audit monthly expenses. "You still prepare an annual budget, but you also develop unit costs for expenses such as travel, wages, and supplies, he explains. "You may determine that travel costs run $4 per visit, and you anticipate 10,000 visits per year, so you budget $40,000 for travel for the year," he says. "In a traditional budget review, you would expect to see travel costs of $3,333 to cover 833 visits each month," he says. A flexible budget enables you to evaluate the travel costs according to actual volume. For example, your nurses may have only made 500 visits in the month, so you would expect to see $2,000 [$4 x 500 visits] in travel costs, he points out. If the travel costs exceed $2,000, you can investigate the reason for higher costs. A traditional budget that doesn't allow for flexing the costs would not identify higher than normal travel costs for the month, he points out.
The biggest advantage to using a flexible budget is that you have an opportunity to make timely operational adjustments if possible, says Sharp. "There may be situations that don't allow changes, but managers have the opportunity to identify accurate variances and take steps to address overages, if possible," he adds. For example, if travel costs are increasing, a manager can see if the increase is due to gasoline costs or due to the geographic area nurses are covering. While a home health manager can't make the cost of gasoline decrease, the manager can take a look at how nurses are scheduled and see if there is a way to group visits in a geographic area to decrease the number of miles driven between each patient, he says.
Switching to a flexible budget requires a great deal of education, says Mina Acquaye, RN, BSN, MPH, CHCE, CEO of Excell Home Care and Hospice in Oklahoma City. "It took me a while to see the value of flexible budgeting, and it has been a continuous education process for all of my management team during the past year," she admits.
Initially, the switch to flexible budgeting can result in surprises, says Acquaye. "When I was working with a static budget, my monthly figures looked great, but the flexible budget points out that my bottom line was not as strong as I thought," she says. Once the expenses were adjusted for volume and cost variances, Acquaye and her management team members were able to identify true costs.
Knowing her agency's true bottom line is important, because Acquaye's agency distributes performance bonuses based on the agency's financial performance. "I don't believe in blanket bonuses for everyone, so the flexible budget gives me an opportunity to see who is contributing to the success of the agency," she says.
Changing to a flexible budgeting process does require additional time up-front, admits Sharp. In addition to projecting annual costs and volumes, managers must develop unit costs for wages, travel costs, and supply costs, he points out. While this requires additional time, it makes monthly review of actual costs versus budgeted costs easier and more accurate, he says.
The first challenge to implementing flexible budgeting is making sure you have a system to collect the data, says Sharp. "Most agencies are collecting information such as numbers of visits, mileage, expenses, and salary costs, but they have to be able to collect the data in a timely manner," he says. Once the data are collected, identified in units, and put into the system, the monthly evaluation of the budgets is not time-consuming, he says.
Even though introduction of a flexible budget is not an easy task, Acquaye recommends that home health managers make the change. "Home health agencies need to know their actual costs now; we don't have time to wait to make changes," she says.
Sharp agrees and adds, "I believe the home health agencies will be challenged by many changes, including pay-for-performance, in the coming years. We need to look for ways to do business more efficiently and flexible budgeting is one tool that can be used."
Sources & resource
For more information about flexible budgeting, contact:
Mina Acquaye, RN, BSN, MPH, CHCE, CEO, Excell Home Care and Hospice, 1200 SW 104th, Suite D, Oklahoma City, OK 73139. Telephone: (405) 631-0521. Fax: (405) 631-2661. E-mail: firstname.lastname@example.org.
Mark Sharp, CPA, Partner, BKD LLP, Hammons Tower, 901 E. St. Louis St., Suite 1000, P.O. Box 1190, Springfield, MO 65801-1190. Phone: (417) 865-8701. Fax: (417) 865-0682. E-mail: email@example.com.
Resource: For a copy of Mark Sharp's presentation on this topic, go to www.nahc.com, select "meetings and conferences" from top navigation bar, then select "content from past conferences" on left navigational bar. Choose "2008 Annual Meeting and Exposition," then select "Education sessions and handouts" on left navigational bar. Go to session 203, "The Power of Flexible Budgeting in Home Care," and click on "download presentation."