HMP 740 CH 8

organizational planning, budgeting

_______________ usually focuses on the long term big picture, while ________________ address the details of planning for the immediate future and through the control mecahnism ensures that current performance is consistent with organizational plans and go

strategic plan

plans and budgets are developed within the framework of the _____________
- A document that defines the business long term direction along with the resources needed to get there
- focus on org vision and priorities in response to a changing environment

values statement

- values represent core priorities or beliefs of an org that define the org's culture
- includes 4-6 basic beliefs that underly the org

mission statement

defines org's overall purpose and reason for existence
- describes what the org does and for whom
conforms to the values statement
- somewhat different between for profit and not for profit
- must operate in manner consistent with financial viability

vision statement

Brief, single sentence statements describing the desired position of the org at a future point in time
- provides goal that motivates managers, employees' nd medical staff to work together to achieve it
- developed concurrently with mission statement

operational planning (five year plan)

- provides a road map for executing the orgs strategic plan
- gives more detailed guidance for the short term that whats contained in the strategic plan
- operating plan contains near term objectives and detailed guidance to meet them
- usually a 5 year h

organizational goals

- specific aims that management strives to attain
- usually qualitative, non measurable

organizational objectives

since org goals are qualitative, they're unsuitable for specific measurable targets, however ______________ are quantitative in nature and can be measured
- precise targets for managers to shoot for, challenging yet attainable
- often used a basis for man

financial planning

- focuses on financial condition, capital investments, and financing at the org level
- review of business's current financial condition, providing starting point for remainder of the financial plan
- next is capital budget, outlining plans for capital in

financial plan

section 1 - overview of financial future
section 2 - current accounts management, includes management of current assets and current liabilities, including revenue cycle management
- short term operating benchmarks
section 3 - budgeting and control
- provi


- ties together planning and control functions
- detailed plans expressed in dollar terms that specify how resources will be obtained and sued during a specified future period of time
- rely heavily on revenues and cost estimates
- more managerial tools t

variance analysis

Technique used in budgeting in which realized values are compared with budgeted values to help control operations
- used when actual results fall short of the specified budget, _________ is used to identify the areas that caused subpar performance
- focus

budget timing

- most orgs have quarterly budgets to adjust to adverse trends, and some also have monthly, weekly, or daily budgets

out years

years beyond next budget year
- many orgs have budgets for one or more of these years beyond the budget year because they are more closely aligned with financial planning than with operational control

conventional budgeting approach

- previous budget used as the starting point for creating ne budget
- assumes that prior budgets were base don operational rationality, so have issue of determining what minor changes must be made to the previous budget to account for changes in operating

zero based budgeting

- starts with clean slate, starting with a budget of zero
- must then justify every line in budget
- superior to convention al budgeting, but more managerial resources are required
- many health orgs use conventional budgeting but then use zero based budg

bottom up approach (participatory)

- budgets developed first by department or program managers
- encourages maximum involvement by junior managers
- then reviewed by finance department and compiled into org budget
- then must be approved by senior management
- soeptime impractical to have

middle out budgeting

being experimented with now
- hybrid budgeting

top down approach

- expeditious, but often results in less commitment among junior managers and employees than bottom up approach, due to limiting involvement and communication
- little negotiation occurs between junior and senior managers

budgets formats

- most orgs have master budget as well as many other budgets
- not specified by external parties in the form of GAAP, os content an reformat is dictated by the org's mission and structure and by managerial preferences
- used formally or informally at all

statistics budget


revenue budget

- derived form data in the stats budget
- combine patient volume and reimbursement data to develop revenue forecast
- considers pricing strategy, FFS contracts, and and private pay patients as well as teens in inflation and third party payer reimbursement

expense budget

- derived form data in the stats budget
- focuses on costs of providing services
- divided into labor and non labor components
- expenses broken down into fixed and variable components

operating budget

The basic budget of an org in that it sets the profit target for the budget period
- sets financial goals for the clinic
- flows from rev and expenses budgets in Largs orgs
- data found in static, rev, and expense budgets used to create operating budget i

volume projection

give managers a starting point for making revenue and cost estimates

FFS total visits


Capitated total visits


patient base


FFS revenue


Capitated revenue


labor costs per visit


supplies expense (on a per visit basis)


expense per visit (forecasted variable costs)


total costs


contribution margin





difference between actual (realized) value and the budgeted value (often called standard)
- many variances are controllable (can be corrected by managerial actions)

variance analysis goal

to uncover cause of operational problems that they can be corrected and avoided in the future

static budget

A budget that is prepared at the beginning of a planning period.
- the original approved budget unadjusted for differences between planned and actual (realized) patient volumes
- starting point for analysis

flexible budget


flexible budget profit


standard value

the profit goal as expressed in the budget

total variance (also profit variance)


revenue variance


cost variance




volume variance


price variance


profit variance components

- decomposed into revenue variance and cost variance

revenue variance components

- decomposes into volume variance and price variance

cost variance components

- decomposed into volume variance and management variance

management variance


labor variance components ?

efficiency variance (the portion caused by productivity) problems and the rate variance (portion aused by wage rate) overages?

management variance components

labor variance, fixed costs, and supplies variance

efficiency variance


supplies variance


usage variance


rate variance


labor variance


fixed cost variance


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END CH 8 --> START CH 17

financial statement analysis

The process of using data contained in financial statements to make judgements about a business' financial condition
- applied to historical data, which reflect the results of past material decisions, and to forecasted data, which make up the road map to

operating indicator analysis

process of using operating indicators to help explain a business financial condition
- tells the "why" of the business' financial condition
- goes one step beyond financial statement analysis by examining operating variables with the goal of explaining a

generally accepted accounting standards require

four financial statements:
1) income statements
2)statement of changes in equity
3) balance sheet
4) statement of cash flows
- give pic of org's operations and financial position
- starting place for analyzing and org's financial condition

cash flows statement

- tells whether org's core operations are profitable or not, how much capital firm raised, and how this capital was used, and what impact operating and financing decisions had on the firm's cash position
- drives financial condition
- help to figure out i

net cash flow from operations


capital expenditures

can be investment in property and equipment (under investing cash flow)

$4293 on capital expenditures is likely a small amount considering thatdepreciation is $4130, so the hsopiatl spent only slightly more than its depreciation on new fixed assets than. likely that capital expenditures were more to replace worn-out and obsol


non operating income

also unrestricted contributions and investment income

pay off

repayment of LT debt, repayment of notes payable, and capital lease principal repayment are all used to ______ previously incurred long term debt, short term debt, and capital lease obligation

net decrease in cash (net cash outflow)


ending cash and equivalents


good uses of operating cash flow (just some examples that aren't alarming)

purchase replacement fixed assets, invest in short term securities, and pay off notes payable and long term debt

operating losses

can be covered by financing transactions such as borrowing or selling new common stock (if investor owned) at least in the short run

financial ratio analysis

the process of creating and analyzing ratios from financial statements (income and balance sheet) and other data to help assess a business financial condition
- provides financial weaknesses and strengths, tells whether business has been improving or dete

industry average ratios

available from many sources like optum360

profitability ratios

a group of ratios that measure different dimensions of a business profitability
- show the combined effects of liquidity, asset management, and debt management on operating results

total margin (total profit margin)


total revenues


operating margin


ROA (return on assets)


ROE (return on equity)


liquidity ratios

ratios that measure the ability of a business to to meet its short-term cash obligations as they come due
- liquidity is the first corner of most managers and the major concern of firm's creditors --> will business be able to meet its cash obligations as

current ratio


DCOH (days cash on hand)


cash budget (in CH 16)

primary tool used by managers to ensure liquidity

debt management (capital structure) ratios

A group of ratios that measure the extent of a business's financial leverage (capital structure)
- the extent to which an org uses debt financing (is financed with debt), or financial leverage, is an important measure of financial performance
- also revea

capitalization ratios

- these ratios use balance sheet data to determine the extent to which borrowed funds have been used to finance assets

coverage ratios

- income statement data are used to determine the extent to which fixed financial charges are covered by reported profits
- often better measures of firms debt utilization that capitalization ratios as cap ratios discriminate between low interest rate deb

debt ratio (total debt to total assets ratio) (capitalization ratio)


D to E (debt to equity ratio)


debt-to-capitalization ratio (capitalization ratio)


TIE (times interest earned ratio) (coverage ratio)



not for profit EBIT = net income + interest expense
for profit EBIT = net income + interest expense + taxes
- earnings before interest and taxes

cash flow coverage ratio (coverage ratio)


after tax

- investor owned firms must make principal repayments with after tax dollars and hence must earn more pretax dollars to both pay taxes and make up the principal repayment
- "grossed-up" amount, or the amount of pretax dollars needed to cover require

asset management (activity) ratios

Financial statement analysis ratios that measure how effectively a firm, or the firms managers, are managing or using its assets
- measure how effectively a business's assets are being utilized
- helps answer if amount of each set reported on balance shee

FAT/o (fixed asset turnover ratio) (also called fixed asset utilization ratio)



most asset values listed on the balance sheet reflect ______ costs rather than current market values
- inflation and depreciation have caused the values of many assets that were purchased in the past to be seriously understated
- this means that if an old

TAT/o (total asset turnover ratio)


average collection period (ACP)(days in patient accounts receivable)(DCO - days sales outstanding)


average age of plant


comparative and trend analysis

- when conducting financial ratio analysis, the value of a particular ratio, in the absence of other info, reveals almost nothing about a business financial condition
- additional data always needed to interpret ratio analysis results

comparative analysis

The comparison of key financial and operational measures or ratios of one business with those of comparable businesses or industry averages, also called benchmarking
- org's ratios are compared to average ratios for the industry

trend analysis

another ratio analysis method in which the trend of a single ratio is analyzed over time
- gives clues about whether or not a business's financial situation is improving, holding content, or deteriorating

Du pont analysis


total margin


equity multiplier


common size analysis

A technique to analyze a business financial statements that expresses the year-to-year changes in income statement items and balance accounts as percentages
- facilitates comparisons between firms of different sizes and for a single firm over time
- all i

percentage change analysis

A technique to analyze a business financial statements that expresses the year to year changes in income statement items and balance accounts as percentages
- percentage changes in the individual items on the balance sheet accounts and income statement it

thorough financial statement analysis

includes a du pont analysis to provide an overview, and then includes several different techniques such as ratio, common size, and percentage change analysis

operating indicators

Ratios that focus on operating data rather than financial data
- often calculated in raw and adjusted forms

profit per discharge (profit operating indicator)


net price per discharge (price operating indicator)


occupancy rate (percentage) (volume operating indicator)


ALOS (average length of stay)


all patient case-mix index

*lower indicates less intense services and...?
- one of several intensity-of-service indicators
- many hospitals have a Medicare case-mix index and an all patient case mix index
- case mix based on diagnoses --> more complex treatments get a higher value

inpatient FTEs per occupied bed


salary per FTE


inflation accounting

accounting systems designed to correct problems arising form historical cost accounting under inflation
(see text p.1028)

limitations of financial ratio and operating indicator analysis

- hard to develop meaningful comparative data in healthcare businesses that operate a number of different services in different lines of business
- second, hard to generalize whether a single ratio is good or bad without additional info (ex: high current

benchmarking (comparative analysis)

technique of comparing ratios against selected standards, or comparing the performance of one company with a group of benchmark companies, often industry leaders and primary competitors
- the comparative ratios are called benchmarks
- allows hospitals man

key performance indicators and dashboards (KPIs) (p. 1033)

A financial statement ratio or operating indicator that is considered by management to be critical to mission success
- used to help solve data overload and timeliness problems
- KPIs are a limited number of financial and operating indicator metrics that


A common way to present an org's KPIs (key performance indicators)
- allow managers to monitor the business most important financial and operating metrics on a regular basis in a form that is easy to read and interpret

financial condition analysis problems

- development of comparative data
- interpretation of results
- inflation effects



market value ratios

- focuses on stockholder metrics
- give managers an indication of what investors think of the firm's past performance and future prospects as indicated by stock price
- if firm's liquidity, asset management, debt management, and profitability ratios are a

price/earnings ratio


market/book ratio


economic value added (EVA)


EVA improved by

1) increasing revenues and decreasing costs, hence increasing NOPAT
2) decreasing the amount of assets used to create NOPAT
3) decreasing the business's capital costs

actual budget


negative (-) is ____, positive (+) is _____

bad, good

salary expense variance


supplies variance