Question

how can healthcare managers cash, operational, and capital

budgeting? what financial statement analysis are most important for the healthcare industry to evaluate actual versus expected performance and provide indicators of future performance?

Answer 1

Cash Budgeting in Health care:

Cash is one of the most precious assets held by health systems, the decisions about cash balances are strategic, and that most systems aim to increase cash balances to levels that permit access to capital markets on more favorable terms. Manager should routinely prepare monthly cash budgets, the health care entity can project cash inflow/outflow or position with anticipated cash insufficiencies and surpluses. The budget should be compared each month to actual results to evaluate performance. The magnitude and timing of cash flows is much too critical to be left to chance.

Operational Budgeting in healthcare:  Manager has to decide when to use which operational budgeting approach, the two major operating budget approaches are the fixed and the flexible operating budget methodologies.The flexible operating budget is useful in performance measurement, useful in businesses where the costs are closely aligned with activity levels, and is a more efficient budgeting approach.The fixed operating budget minimizes overuse, misuse and underuse of organizational resources. As such, its application ensures accountability and the efficient use of resources. Organizations with few variable costs may find the fixed operating budget approach inapplicable. The operating budget helps in planning the expenses and revenues of the future fiscal years or years in a healthcare organization. It itemizes the revenues and expenses of an organization after the consideration of different factors and the analysis of past records to predict the future.

Capital Budgeting in health care:

Health care organization  must continually expand services to keep up with changing technology and demand, this is achieved primarily through the purchase of new equipment, renovations of old equipment, or the development of new service programs. Such asset acquisition yields future cash inflows, so they represent a substantial form of investment for hospitals. Deciding how to spend your capital budget is determining how the investment will pay off regarding your facility’s goals. Manager must be able to demonstrate the ROI of each investment for it to be strategically sound. Calculating ROI might sound obvious, but there are plenty of expenditures that seem attractive but may not be essential.

Following are the indicators which are most important to judge the actual versus budget and the future performance of the health care organization :

1. Days cash on hand. Cash budget Actual Vs. budget comparison can be done here as days cash on hand is a liquidity measure. It represents the number of days an organization could support its operating expenses without collecting any additional cash.

2. Debt to capitalization. Debt to capitalization is a measure of financial leverage and reflects the organization's level of debt compared to its cumulative earnings or funds balance.

3. Capital spending. Here capital budgets comes into picture . Capital spending measures the organization's level of capital expenditures as a percentage of annual depreciation expense.

4. Operating EBIDA margin. This metric indicates the organization's profitability from daily operating activities excluding capital-related decisions and interest and depreciation expense.An operational budget helps in keeping track of companies operational and profitability targets.