Nursing Finance Chapt. 13-18

Front 1

13. Common Sizing (aka vertical analysis)

Back 1

involves converting dollar amounts to percentages.
Puts data on the same relative basis
converting $ to % allows comparison

Front 2

13 Trend analysis (aka Horizontal analysis)

Back 2

Compares figures over several time periods
$ converted to % for comparison
Comparison is across time

Front 3

13. ComparativeAnalyzing Operating Data

Back 3

involves vertical and horizontal analysis where $ are converted to %

Front 4

Forecast

Back 4

to calculate or predict some future event or condition, usually as a result of study and analysis of available pertinent data
Forecasted data are information used for purposes of planning for the future.
its prospective (future)

Front 5

13. Forecasting

Back 5

1. short range (next year)
2. Intermediate range (five years from today)
3. long range (the next decade and beyond)
*information and forecast assumptions directly affect the results of forecasts

Front 6

13. Forecasting Approaches

Back 6

Level 1 - derives from the personnel who are directly involved in the dept or unit. They know the operation and can provide important ground-level detail
Level 2- comes from electronic and statistical info. including trend analysis.
Level 3 - represents executive-level judgment that is typically applied to a preliminary rough draft of the forecast.

Front 7

13. Common Types of Forecasts in Healthcare Organizations

Back 7

1. Revenue forecasts
2. Staffing forecasts
3. Operating expense forecasts

Front 8

13. Operating Revenue Forecasts

Back 8

are inputs into the operating budget

Front 9

13. Forecasting Results: Assumptions affect

Back 9

Assumptions are the basis of the numbers in your forecast
1. Computing a staff requirement of 3 lab techs requires an assumption
2. Computing the salary and fringe benefits for each of the techs requires another assumption
3. When the salary and fringe benefit dollars are computed for the 3 lab techs, the resulting figure becomes part of your forecast.

Front 10

13. Forecasting Results

Back 10

1. Utilization changes
2. Patient Mix changes
3. Contractual Allowance Changes
4. Trend Analysis
5. Payer Changes

Front 11

13. Utilization Assumptions

Back 11

changes can occur that need to be taken into account in forecasting

Front 12

13. Patient Mix Assumptions

Back 12

whether the individual is a Medicare pt; a Medicaid pt; a pt covered by private ins; or a private pay pt
knowing this allows the appropriate payments to be associated with the svc utilization assumption

Front 13

13. Contractual Allowance Assumptions

Back 13

1. Gross Charge: a uniform charge generally greater than most expected payments received for the svc. Invalid to use to forecast revenue
2. Allowed Charge: Net amount that the particular payer's contract or participation agreement will recognize, or "allow" for a certain svc
3. Contractual Allowance: difference (between the gross charge and the allowed charge) that is recorded as a reduction of the gross charge within the accounting cycle

Front 14

13. Trend Analysis Assumptions

Back 14

using trend analysis to compare data between and among years and to see the trends.

Front 15

13. Payer Change Assumptions

Back 15

if regulatory requirements for payment are made this year, then that fact has to be taken into account

Front 16

13. Staffing Forecasts

Back 16

inputs into the operating budget.

Front 17

13. Staffing Forecast Considerations

Back 17

1. Controllable vs Non-controllable Expenses
2. Required Minimum Staff Levels
3. Labor Market Issues in Staffing Forecasts

Front 18

13. Controllable vs Non-Controllable Expenses

Back 18

controllable costs are subject to a manager's own decision making, whereas noncontrollable costs are outside that manager's power. Difficult to make staffing forecasts with accuracy if non-controllable expenses are included in the forecast.

Front 19

13. Required Minimum Staff Levels

Back 19

regulatory healthcare standards may set minimum staff levels for providing svc in a particular unit. these minimum levels cannot be ignored in the forecast process

Front 20

13. Labor Market Issues in Staffing Forecasts

Back 20

The status of local labor market has a direct impact on staffing forecasts. The impact is in dollars- supply and demand rules the salary-often forgotten in staffing forecast assumptions

Front 21

13. Staffing Forecast Components

Back 21

Four components of the staffing forecast
1. Scheduling Requirements
2. Master Staffing Plan
3. Annualized Master Staffing Plan
4. FTEs required per shift from master staffing plan x ANNUAL FACTOR - Annualized FTEs
all equals the Staffing Forecast

Front 22

13. Scheduling Requirements

Back 22

should encompass all hours and days required to cover each position.

Front 23

13. Master Staffing Plan

Back 23

should include all units and all hours and days required to cover all positions within the units

Front 24

13. Computation Sequence to Annualize the Master Staffing Plan

Back 24

1. Compute productive and nonproductive days and net paid days
2. Convert Net paid days worked to an Annual factor (total days in the business year divided by net paid days worked equals a factor)
3. Calculate the Annual FTEs using the Factors

Front 25

13. Capacity Level Issues in Forecasting

Back 25

in healthcare it relates to services
1. Space and Equipment Availability- the ability to provide svcs is automatically limited by the availability of both space and the proper equip. to provide certain specific services. forecasts need to take a realistic view of these capacity levels
2. Staffing Availability - getting the amount of staff necessary at an ideal level is difficult. forecasting assumptions take these difficulties into account

Front 26

13. What the Accuracy of a Forecast takes

Back 26

rests on the strength of its assumptions

Front 27

Chapter 14 Using Comparative Data

Back 27

Managers use comparative data to set common ground for planning, control and decision-making purposes

True comparability needs to meet three criteria:

1. Consistency
2. Verification
3. Monetary Unit Measurement

Front 28

14. Time Period

Back 28

three elements

1. Time Periods
2. Consistent Methodology
3. Inflation fac

Front 29

14.Verification

Back 29

ask these 3 questions
1. can this data be verified
2. is the data reasonable
3. if an objective, qualified person reviewed the data, would she or he arrive at the same conclusion and/or results

Front 30

14. Monetary Unit Measurement

Back 30

ask this question:
Is all the information being prepared or under review measured by the same monetary unit

Front 31

14. Uses of Comparative Data

Back 31

make sure the data you are receiving or preparing is appropriate for comparison
1. Compare current expenses to current budget
2. compare current actual expenses to prior periods in own organization
3. compare to other organizations
4. compare to industry

Front 32

14. Compare current expenses to current budget

Back 32

this format reflects both dollars and percentages

Front 33

14. Compare Current Actual Expenses to Prior Periods in own organization

Back 33

Use Trend Analysis

Front 34

14. Compare to other organizations

Back 34

Common sizing allows comparison of your organization to other similar organizations

Front 35

14. Compare to Industry Standards

Back 35

the use of industry standards is of particular use for decision making because it positions the particular organization within a large grouping of facilities that provide a similar set of services

Front 36

14. Annualizing

Back 36

sets out the actual 10-mth expenses for a unit by comparing to a 12-mth so expenses need to be converted, or annulized to a 12-mth basis

Front 37

14. Inflation Factors

Back 37

inflation means" an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level." An inflation factor is used to compute the effect of inflation- the rate of inflation is available from a government source

Front 38

14. Currency Measures

Back 38

must make sure all are in the same currency
usually use U S dollar foreign exchange rates as of a certain date

Front 39

14. Standardized Measures

Back 39

aid comparability. especially assist in performance measurement. ex> Managed care plans may use a standard of measures that apply to every physician who contracts with the plan
Also electronic medical records depend upon standardized input.

Front 40

Chapter 15 Operating Budgets

Back 40

the budget is the instrument through which activities are quantified in financial terms

Front 41

15, Capital Expenditures Budget

Back 41

Deal with capital expenditures for
the organization (not operating
revenues or expenses)

vs an operating budget (12 mth), this budget may cover the next year as well, but are linked into a more futuristic view, may cover a 5-10 year period

Front 42

15. Flexible Budget

Back 42

is created using budgeted revenue and /or budgeted cost amounts. it can be adjusted. looks toward a range of activity or volume. addresses workloads, control and planning. can be used to review the prior performance

Front 43

15 Responsibility Center

Back 43

the manager is responsible for a particular set of activities.
1. cost centers- manager responsible for controlling cost
2. profit centers: manager responsible for both costs and revenues

Front 44

15 Static Budget

Back 44

based on a single level of operations, that single level is never adjusted. used
Actual-Static Budget = static budget
Results amt variance
may be used to plan- represent a goal for the budget period.

Front 45

15 Budget Assumptions

Back 45

forecasting workload is a critical part of building a budget. i.e. expected volume,

Front 46

15. Budget Process Objectives

Back 46

1.Written expression, quantified, of policies
and plans
2. Basis to evaluate financial performance
according to policies and plans
3.Useful tool for cost control
4. Creation of cost awareness throughout
the organization

Front 47

15. Transactions outside the
operating budget may include:

Back 47

Grants received by the
organization
Foundation transactions
Transactions outside the
operating budget may include:
So if transactions are “outside”, they
would not be part of the operating
budget.

Front 48

15. Identifiable versus Allocated
Budget Costs

Back 48

Within a departmental budget
certain costs will be specifically
identifiable while others will be
allocated instead

Front 49

15. Regarding Identifiable versus
Allocated Budget Costs:

Back 49

Mostly identifiable = Direct patient care and
supporting patient care
Usually allocated = general and
administrative expense and patient related
expense
Maybe not included at all in a manager’s
budget = financial related expense

Front 50

15. Fixed versus Variable Costs

Back 50

Variable cost rises or falls in
proportion to a rise or fall in volume*
Fixed cost does not change even
though volume rises or falls within a
wide range

* Examples of volume: number of
procedures or number of patient days.

Front 51

15. Building an Operating
Budget: Preparation

Back 51

Plan
Gather information
Prepare input
Construct/submit draft version of budget
Make required revisions to draft
Present preliminary budget
Make required revisions to preliminary
Submit final budget

Construction elements include:
Format to be used
Budget scope
Available resources
Levels of review
Time frame

Front 52

15 Building an Operating
Budget: Construction

Back 52

Budget Information Sources include:
For the Operating Expenditures Plan:
Operating Revenue Forecast
Staffing Plan or Forecast
Other Operating Expenses

For the Preliminary Operating Budget:
Capacity Level Checkpoints

Regarding Budget Assumptions:

A series of assumptions are made
during construction; many key
assumptions are within forecasts used
for the budget construction process

Sufficient information at the proper
level of detail is essential

Budget Computations should be:
Supported by their assumptions

Capable of being replicated or
reproduced by another qualified
individual

Comparable

Budget assumptions and computations are
intertwined in the construction process.

Front 53

15 Budget Review: To review a budget, the manager
needs to know

Back 53

How the budget report
format is constructed

How to annualize partial
year expenses

Front 54

15 Building Budgets

Back 54

The budget process should begin with
a review of the strategy and
objectives.

Remember, building a budget means
making a series of assumptions.

To build a budget, a manager must consider:

The workload forecast (it must tie into the
forecasted volume)

Whether budget projects will use
resources during the budget period.

Whether budget operations will be placed
under unusual or inconvenient
circumstances during the budget period
(remodeling, for example).

Front 55

Chapter 16. CAPITAL EXPENDITURE
BUDGETS

Back 55

Because capital expenditures generally
acquire long lasting assets,
capital expenditure budgets usually
involve long-term financial issues.

Capital expenditure budgets are also sometimes
known as “capital spending plans”

Front 56

16. vs. Operating Budgets

Back 56

Operating budgets, on the other hand,
usually deal with short-term revenues
and expenses that are necessary to
operate the facility.

Front 57

16. Creating the Budget

Back 57

Capital expenditure budgets are often
created in two parts:

Spending for assets already acquired, and
Spending for new capital assets.

Front 58

16. Cash Flow Concept: Budget Construction and
The Cash Flow Analysis Concept

Back 58

A cash flow analysis illustrates how the
project’s cash is expected to move over a
period of time.
When constructing a capital expenditure
budget, the cash flow analysis should be
cumulative.

Front 59

16. Cash Flow Reporting Methods

Back 59

Cash flow reporting for this purpose
typically uses one of four methods:

1. Payback Method - a length of time rquired for the cash coming in from an investment to equal the amt of cash originaly spent when acquired
2, Accounting Rate of Return - unadjusted r of r. - an unsophisticatd return on inestment method, the answer for which is an estimate containing no precision
3. Net Present Value- NPV - is a discounted cash flow method.
4. Internal Rate of Return- IRR a return on investment method, defined as the rate of interest that discounts future net inflows down to the amt invested.

Front 60

16. Budget Inputs: Capital Expenditure Budget Construction
with Operating Budget Inputs

Back 60

If the operating budget proposal would
require additional capital equipment
and/or space renovations, then capital
expenditure budget inputs may have to be
included to recognize the impact of these
operations proposals

Front 61

16. Startup Cost Concept: Budget Construction and
The Startup Cost Concept

Back 61

On the other hand, if the capital
expenditures budget proposal includes
operational expenses, management often
requires that startup costs also be
considered.

Front 62

16. Funding Request Process

Back 62

The process of funding capital expenditure
requests (a.k.a. proposals) varies case-bycase depending upon the particular
organization.

Front 63

16. Capital Expenditure Proposals: Funding Proposals Types Include:

Back 63

Acquiring new equipment

Upgrading existing equipment

Replacing existing equipment with
new equipment

Funding new programs

Funding expansion of existing programs

Acquiring capital assets for future use.

Front 64

16. Rationing Available Capital

Back 64

Only a limited amount of capital is usually
available for capital expenditures, so
rationing is necessary.

Three factors will probably be considered:

Necessity for the request
Cost of capital to the organization
Return that could be realized on
alternative investments

Front 65

16 Evaluating Capital
Expenditure Proposals

Back 65

Because rationing is necessary,
evaluating the proposals is a method
of allocating the available capital.

Subjective or
Objective: Scoring all proposals received; then
Ranking the higher-scoring proposals. - more desirable

Front 66

Chapter 17: VARIANCE ANALYSIS AND
SENSITIVITY ANALYSIS

Back 66

A variance is the difference between
standard and actual prices and
quantities.

Flexible budgeting variance analysis
provides a method to get more
information about the composition of
departmental expenses.

Front 67

17. Variance Analysis

Back 67

This method subdivides variance into
3 types:
Volume
Use (or quantity)
Spending (or price)

Front 68

17. Volume variance represents

Back 68

Portion of the overall variance caused by a
difference between the expected workload and
the actual workload.

Calculated as the difference between the total
budgeted cost,* expected workload and the
amount that would have been budgeted had the
actual workload been known in advance.

* Defined as standard hours for actual production.

Front 69

17. Use (or quantity) variance represents

Back 69

Portion of the overall variance caused by a
difference between the budgeted and actual
quantity of input needed per unit of output.

Calculated as the difference between the
actual quantity of inputs used per unit of output
multiplied by the actual output level and the
budgeted unit price.

Front 70

17. Spending (or price) variance represents

Back 70

Portion of the overall variance caused by a
difference between the the actual and
expected price of an input.

Calculated as the difference between the
actual and budgeted unit price (or hourly
rate) multiplied by the actual quantity of
labor consumed (or supplies, etc.) per unit
of output and by the actual output level

Front 71

17. 2-variance

Back 71

2-variance compares volume variance
to budgeted costs*

Front 72

17. 3-variance analysis

Back 72

3-variance compares volume variance,
use variance, and spending variance.

Front 73

17. Variance Analysis & Budgets

Back 73

Variance analysis can be applied
to both flexible budgets and
to static budgets.

Front 74

17. Flexible Budgets

Back 74

Are based on a level of operation that
will change. In other words, the level of
operations — or volume — is adjusted to
show change during the budget period.
It is adjusted, or flexed - therefore it is “flexible”.

Front 75

17. Static Budgets

Back 75

Are essentially based on a single
level of operations. That level of
operations — or volume — is never
adjusted during the budget period.

It doesn’t move - therefore it is “static

Front 76

17. Sensitivity Analysis

Back 76

Sensitivity analysis is a
“what if” proposition.

It answers questions about what may
happen if major assumptions change or if
certain predicted events do no occur.

Front 77

17. Forecasts should almost always be
subjected to sensitivity analysis.

Back 77

Because a forecast views the future, and
the future can never be absolutely
predicted, forecasts will always contain a
degree of uncertainty.

Forecasts should almost always be
subjected to sensitivity analysis.

So the “what-if” analyses become
important to the manager’s decisionmaking.

Front 78

17. A common example of sensitivity
analysis is computing three levels of
forecast revenue:

Back 78

Basic (planned & most likely)
High (best case)
Low (worst case)

Front 79

17. Sensitivity Analysis Tools

Back 79

Manager’s tools involving sensitivity
analysis include:

Contribution margin & the
contribution income statement

Target operating income (using
the contribution margin method)

Finding the break-even point (using
the contribution margin method)

Front 80

17. Contribution Margin

Back 80

contribution
margin is the difference between
revenue and variable costs.

The remaining difference is then
available for fixed costs and
operating income.

Front 81

17. Target Operating Income Using
the Contribution Margin Method

Back 81

A target operating income computation
allows the manager to determine how
many units must be sold to yield a
particular operating income

Front 82

Break-Even Point Using the
Contribution Margin Method

Back 82

The break-even point is the point at
which operating revenues and costs
equal each other and operating
income is zero

Front 83

Chapter 18: ESTIMATES, BENCHMARKING
& OTHER MEASUREMENT TOOLS

Back 83

Estimate: mplies a judgment, considered
or casual, that precedes or takes
the place of actual measuring
or counting or testing out

Amount
Value
Size

Front 84

18. Estimates

Back 84

The first question should be:
“Is it capable of being estimated?

If so, using an estimate often involves a
trade-off, such as gaining a quick answer
that is less accurate.

So relying on estimates for input to
reports means sacrificing some degree
of accuracy.

Front 85

18. Estimates

Back 85

Four common uses of estimates
are typically due to:

Timeliness considerations
Cost/Benefit considerations
Lack of data
Internal monthly statements

Front 86

18. The Scope of Estimates

Back 86

Estimates can be extremely general, or
they can reflect considerable judgment
and well-thought-out detail

Front 87

18. Other commonly used computations
are actually estimates

Back 87

the weighted average
inventory cost

Front 88

18. Performance Measures

Back 88

A variety of performance measures must
be in place for the organization.
Many types of such measures are
available. Generally different
organizations lean toward using one
type over another

Front 89

18. Adjusted performance measures over time.

Back 89

We have previously discussed the
advantages of comparative analysis
— the comparison of various time
periods, one to another. Measures
that compare performance over
various time periods are especially
effective.

Front 90

18. Financial Benchmarking

Back 90

Benchmarking is the continuous process
of measuring products, services, and
activities against the best levels of
performance.

The best levels may be found inside the organization or
outside it.

Front 91

18. There are 3 types of benchmarks

Back 91

A financial variable reported in an
accounting system.

A financial variable not reported in an
accounting system.

A nonfinancial variable.

There are 3 types of benchmarks

Benchmarks are used to measure performance gaps.

Front 92

18. How do you benchmark? Three
possible methods include:

Back 92

Studying the methods and results of your
prime competitors;

Examining the process of noncompetitors
with a world-class reputation; or

Analyzing processes within your own
organization that are worthwhile to
replicate.

Front 93

18. Benchmarking

Back 93

Financial benchmarking compares
financial measure among
benchmarking groups. It is the most
common type of peer group method
used in health care.
Benchmarking

(Statistical benchmarking is another
related method.)

Front 94

18. Measurement Tools

Back 94

Pareto analysis is a measurement tool
based on the Pareto Principle.

The Pareto Principle is often called the
“80/20 Rule.”

For example, “80% of an organization’s problems are caused by 20% of the possible causes.

Front 95

18. Pareto Analysis

Back 95

is an analytical tool that
aids managers to improve some steps in
a process.

The analysis quantifies these steps
through construction of a Pareto
diagram.

Front 96

Reporting by quartiles

Back 96

is an effective way
to show ranges of either financial or
statistical results.

Quartiles are based on a quantitative
method of computation and can effectively
illustrate a variety of performance measures.