Question

A budget is a plan expressed in dollar amounts that acts as a road map to carry out an organization’s objectives, strategies and assumptions. There are different types of budgets that healthcare organization use to manage its financial and managerial goals and obligations.

Discuss the difference between an operating budget and a capital budget. What are the steps in creating each budget?

Answer 1

Operating budget is a short period budget typically for monthly, seasonally or yearly. The manager or the analyst first estimates the revenue for the coming year through forecasting techniques. From this Expense budget is prepared considering cost of raw materials ,labor, overhead etc is reduced as expense. The value will be mostly based on the actual value and will be conservative. Based on the difference in past sales per month or per season these estimates varies to reduce errors of budgeting. Even a yearly monitored budget has to be monitored atleast monthly. Operation budget deals with short term viability

Capital budgets are long term budget usually for 1 year or longer. The reason for the budget will be for expansion or for replacement. It is an estimate which shows about the investment in the future. Since Capital budgeting cant always relay on past data, viability check, sensitivity analysis etc need to be carried out for the future cashflows that the new project or replacement can bring to the company. Based on these values budgeting amount and decisions are made. It also represent the source of fundings and purchases of fixed assets.