Question

Build a capital budget for your lab as if you were the new manager taking over. List the equipment that you would like to purchase and the time frame in which you'd like to purchase. What are the expected costs? Remember, costs associated with purchasing equipment are not solely the equipment, but installation, time, training, SOP writing, etc must be taken into account. Be as detailed as possible.

Answer 1

The budget is a short-term plan for the future. To get down to the basics, the purpose of a budget is to establish a forecast of revenues and expenditures to guide one’s efforts during the next fiscal period (either a calendar year or a fiscal year, which often begins July 1). For example, according to Harry Baguma, director, Biomedics Products, Ltd., his firm’s budgeting process begins with a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the company and its product lines by managers of Biomedics’ various departments. This is the basis of determining the funding needs of Biomedics’ product lines. Consultations are held with accounting personnel and management to make sure that all cross-cutting issues are addressed in the budget.

Budget Impacts

Strategic Plan, Operational Plan and Pro-forma – New programs – Expanded programs – Reduced or discontinued programs – Revenue/profit goals – Last Year’s Budget and Management Reports

Budget Calendar

Phase 1: Planning

• Review strategic plan • Create wish lists • Prioritize within the department

Phase 2: Budget Negotiation

• Negotiate preliminary budget with administration

Phase 3: Submission & Approval

• Submit final budget to administration • Receive approved budget

Budget Components

• Capital • Income • Personnel • Operating (Supply & Expense) • Indirect expenses (Overhead)

Capital Budget

This is the purchase of asset that has expected useful life of more than one year. The purchase is reflected on the hospital’ s balance sheet. The actual purchase is not calculated into profit or loss for the year. It does, however, appear in the operational budget of the laboratory and is an expense item listed as Depreciation.

Justification

Why do we need this new instrument? • Necessary to meet governmental requirements • Necessary for patient or employee safety • Replace item in order to continue operation • Provide marked improvement in patient care • Enhance productivity and/or reduce costs • Improve patient or employee satisfaction • Improve operating efficiency • Improve quality

Technology Assessment

Why is this instrument the best? • Measure Clinical Utility - does the technology make a difference in patient management or outcome? • Do the clinicians want or need the new technology? Need the clinicians input. • Is the technology accurate, sensitive and reproducible?

Equipment Costs

How much will this cost? • Instrument costs – Depreciation – Maintenance – Calibration – Quality Control – Space – Utilities – Hook-up – Installation

How much will this cost?

Labor Costs – Direct – Indirect • Material Costs – Reagents – Pipettes – Paper – Indirect

Return on Investment (ROI) ROI = (gain from investment minus cost of investment) divided by cost of investment Acquisition Options ( financing decisions) – Purchase – Lease – Reagent Rental (Cost per test) – Used Equipment

Sources of Revenue

Current and Estimates for Coming Year – Medicare (In/Out Pt, A/B) – Medicaid – Private Insurance – Managed Care including ACO – Professional (Management) Fee – Other (Incentives, HIT, PQRS, etc ) – MINUS Discounts and contractual allowances

Relevant Factors

Evaluation of current workload and productivity • Expected workload • Changes in productivity • Changes in staffing/scheduling • Changes to accommodate new or expanded programs

This is similar to capital justification plus… • Increased workload and productivity • Improved service (e.g., decreased TAT) • Decreased length of stay • Increased revenue or decreased cost (e.g., reference test in house)

Supplies and Expenses

This includes • Reagents • Supplies • Purchased services (blood, reference lab) • Maintenance • Physician fees • Education/travel • QA • Depreciation • Leases • Transfers to other departments • Rent and utilities for satellite labs • Marketing • Transportation and communication costs • Computer costs • Safety

Indirect Expense Budget

Common overhead expenses allocated to the laboratory • Space (Buildings and maintenance). Based on square feet. • Utilities - based on square feet • Hospital Administration - based on % of revenue • Personnel Services - based on % of Personnel budget • Purchasing services - based on % of Operating budget

Balancing the budget requires that income = expense. Often the fee schedule and rates must be modified. Cost-driven Pricing Method – Gross expected revenue - deductions and allowances - budgeted direct and indirect expenses = net revenue – Net revenue plus profit (5-10%) = adjusted gross revenue – Adjust current fees to meet new adjusted gross revenue

Test Cost Analysis may be needed when introducing new procedures • Prime Cost – instrument cost including maintenance – direct material costs – direct labor costs • Indirect Costs – general laboratory supplies – indirect labor (supervision/training) – other indirect (research)

Laboratory Overhead – Specimen collection & processing – Result reporting – Laboratory Information System – Laboratory management and direction – Continuing Education - School of Medical Technology – Quality Assurance – Marketing – Communication – Depreciation • Hospital Allocated Overhead • Total Test cost = Sum of all the above

Having the actual spending come close to the budgeted amount suggests that the managers understand their business and its spending requirements. If their actual spending is dramatically above or below that budgeted, this suggests they aren’t controlling the R&D process. Their performance evaluations and salary raises could suffer as a result. Some people, including novice managers, think their superiors will be pleased if the actual spending of their group is substantially under-budget. However, spending drastically under one’s budget can result in understaffing, low morale and poor productivity from overworked staff members. Understaffing of your department often results in missed deadlines and opportunities.

Staff members’ perspectives

It is usually helpful to include staff members in the budgeting process or at least to make them aware of its progress. They might have useful ideas on the need for new equipment or additional staffing. They could perform some of the work associated with budgeting, such as pricing equipment being considered for purchase and determining the need for various optional instrument features. Inclusion in the budgeting process can make them feel part of the team and may improve morale.

Sales representatives and members of lab service groups can ask customers to describe problems they need solved and to estimate their tech service needs for the coming year. Feedback can be used to help determine needed funding for the coming year.

Internal customers of the laboratory often make recommendations concerning the laboratory spending required to meet their goals, and then review the budget. These customers include operating divisions of the company, such as sales and marketing groups, developmental products groups, and production plant personnel.

The final stages

Once all the required input is collected, all the proposed projects—research, development, plant support and technical support—can be grouped into three categories: essential, nice to do, and do only after the first two categories are budgeted. Then, based on these work estimates, lab managers can draw up and submit a budget. This approach is effective in funding an RD&T (Research, Development & Technology Transfer) program

focused on customer needs. It also helps lab managers develop fallback positions. Should higher-level managers require budget cuts, lab managers can delete some of the third-category projects (to be funded only after the first two categories are funded) from the budget. This can eliminate tedious, sometimes acrimonious budget disagreements with higher-level managers.

Typically budgets are then reviewed by higher-level managers. Committees of senior managers at a laboratory may review the overall laboratory budget before it is sent to high-level research managers and personnel in the office of the organization’s chief financial officer (CFO). The CFO’s office in large companies typically includes financial analysts who specialize in creating and managing budgets.