Question

Answer the following: (Use the Excel Sheet attached)

1. What two changes to the budget process you followed would you make to improve the budget management of the clinic?
2. Provide two recommendations to the owners to try to improve the financial performance of the clinic.

	Pro Forma		Actual Results
	Year 2021		End of 2021		$ Variance	% Variance
Revenues
Private Insurance	$        610,000		$          552,750		$            (57,250)	-9.4%
Medicare	$        240,000		$          257,040		$              17,040	7.1%
Medicaid	$          30,000		$            58,950		$              28,950	96.5%
Self-pay	$          62,500		$            32,520		$            (29,980)	-48.0%
Total revenue	$        942,500		$          901,260		$            (41,240)	-4.4%
Expenses
Salaries and Benefits	$        702,000		$          707,109		$              (5,109)	-0.7%
Medical Supplies	$        140,000		$          140,216		$                  (216)	-0.2%
Administrative Supplies	$             8,000		$               7,526		$                    474	5.9%
Rent and Utilities	$          52,000		$            52,620		$                  (620)	-1.2%
Total expenses	$        902,000		$          907,471		$              (5,471)	-0.6%
Income/Loss	$          40,500		$            (6,211)		$            (35,769)

Answer 1

Two changes to the budget process

1. The budget should be compared based on actual level of activity. The static budget should be flexed to represent actual level of activity. Comparison of actual results with static budget is not meaningful since the level of activity will be different. Hence a flexible budget should be used which compares the actual results with budget on a like to like to basis. A flexible budgeting system helps in analysing variance and drawing up action plant to improve the results

2. The expenses should be segregated into variable expense and fixed expenses. Variable expenses are the expenses which are constant at per unit level or they vary with the sales revenue. Fixed expenses are the expenses which are constant at overall level and they do not change with the change in activity level or sales revenue. For example in the given case- part of salaries and medical supplies are variable cost which vary with sales. Rent and utilities are fixed expenses in nature. Variable expenses should be controlled at per unit level and fixed expenses should be controlled at absolute level.