Question

Define healthcare finance and provide an example of how it affects managers at all levels within the organization. Also, explain why budgets are important to all organizations and illustrate how different types of budgets are used.

Answer 1

A. Define healthcare finance

Healthcare finance is a branch of finance that helps patients and healthcare beneficiaries mobilize funs to pay for medical expenses in the short and long term.

B. Affect on managers at all levels within an organization

The primary role of finance in health services organizations, as in all businesses, is to plan for, acquire, and use resources to maximize the efficiency and value of the enterprise. To this end, managers need to be involved in the following scenarios:

1. Capital Investment Decision: Although capital investment is more important to senior management, managers at all levels must be concerned with the capital investment decision process. Such decisions, which are called capital budgeting decisions, focus on the acquisition of land, buildings, and equipment. They are the primary means by which businesses implement strategic plans, and hence they play a key role in an organization’s financial future.

2. Working Capital Management: An organization’s short-term assets, such as cash, marketable securities, receivables, and inventories, must be properly managed both to ensure operational effectiveness and to reduce costs. Generally, managers at all levels are involved to some extent in short-term asset management.

C. Importance of budgets to all organizations

A budget is a detailed plan, in dollar terms, of how a business and its subunits will acquire and utilize resources during a specified period of time. Budgets help businesses track and manage their resources. Only through carefully planning of budgets can an organization maximise revenue and minimise costs, and thus drive its P&L effectively.

D. Types of budgets and their use

1. Master budget: It is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health and combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate performance, in an individual as well as overall manner.

2. Operating Budget: It is a forecast and analysis of projected income and expenses over the course of a specified time period. They must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Managers compare these reports month after month to see if a company is overspending on supplies.

3. Cash Flow Budget: A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future.

4. Financial Budget: A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its spending relative to revenues from core operations.

5. Static Budget: A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue.