Effective Budgeting
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| Budget | A business tool used for effective resource management
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| Resource Management | Justification of resources for expected results
Cost-accounting
Identifies, defines, measures, reports, and analyzes the elements of costs associated with providing a unit of output (test)
Assigns allocated costs to that test
Constant justification
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| Operating Budget (A tool for lab managers throughout the year) | Overall plan for coordination of resources
A plan for identification of resources and expenditures
A plan for projections
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| Operating Budget | A Communication tool to be used with internal and external customers
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| Types of Operating Budgets | Fixed; Flexible; Program; Appropriation; Rolling
Zero-based
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| Fixed Budget | Assumes a single level of activity and the entire budget is built around that level; not a tool to monitor and control resources during change.
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| Flexible Budget | Reflects expected lab revenue and expenses and it anticipates changes
Expenses: fixed and variable
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| Program Budget | Based on a specific program matrix
Includes related activities, services, staffing, and equipment related to the program
Used for short term planning
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| Appropriation Budget | Outside agency reviews the budget in detail & authorizes specific dollars; Common in government; Dependent on outside source of funds
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| Rolling Budget | A continuous budget that is updated periodically in preparation for the next budget cycle; A rolling budget for a 12-month period is reviewed & revised quarterly; used for cash projections
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| Zero-based Budget | Reviewed annually
Re-evaluates all activities to decide whether to eliminate or fund
Project approval based on funding levels and availability as determined by priorities
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| Lease vs. Purchase | Lump sum capital not available
Monthly payments spread over time
Based on purchase price plus interest, taxes, insurance, maintenance
No money down
100% financing @ fixed rate
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| Reagent Rental Agreement | Cost of instrument included in the reagent cost charged by vendor
No capital costs
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| Successful Budgets | Clear goals and objectives that guide resource allocation
Detailed statistical data, economic trends, accurate information about clients
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| Successful Budgets | Define budget period and procedures for development of the budget
Reports to identify actual financial and statistical information for comparison with the budget and for variance analysis
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| Three Segments for the Complete Budget | Income forecasting
Expense budget
Cash flow projections
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| Common Budgeting Problems | Losing sight of objectives; Overbudgeting
Not enough revenue; Other variances indicating something is wrong with the budget
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| Solutions | Focus decisions toward clear objectives; Think of the Budget as a standard and focus performance against it; Analyze monthly variances; Identify ways to reduce expenses or increase income
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| Historical-based Budgeting | Budgeting above 100% of the previous year
Total monies spent in previous year is divided by 12
Add a percentage for inflation for upcoming year
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| Variance Explanation | Go back to the original assumption
Identify real problems, offer solutions
Use the Budget as a guideline and process that monitors
Don’t lay blame on previous years
Don’t ask for a budget increase for this year based on last year’s failure
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| Budget Justification | Compare the budget to the actual expenses
Determine the accuracy of the forecast
Use Budgeting Standards
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| Budgeting Standards | Review and prepare justifications monthly; Present recommendations for corrective action;
Make sure that the actual results are not manipulated; Make all staff aware of budgetary limits and goals
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| Percent Variance | (YTD-Forecast)/Forecast
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| Variance | YTD- Forecast
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| Four phases in budget preparation | Development of Goals; Budget Assumptions; Forecast of Expenses; Monitoring
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| Phase I: Development of Goals | important that the goals developed by the laboratory are in line with the organizations mission statement and strategic objectives.
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| Phase II: Budget Assumptions | The organization projects a budget based on past earnings, cash flow, and changes in state or federal laws affecting reimbursement; lab formulates budget assumptions on annual test volume and revenue generated
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| Phase III: Forecast of Expenses | Capital Expense vs. Operational Expense;
Justification categories and priority of need Prior to any capital purchase, it is wise to do a 5-yr cost analysis comparing the cost of your current system to the cost of newer technology.
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| Capital Expenditures | calculated for a 3-yr cycle and are considered investments; Justification categories and priority of need are required when evaluating capital expenditures
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| Justification Categories | Replacement; New Equipment;Cost Reduction
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| Priority of Need | Essential; Necessary; Desirable; Other
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| Cash Purchase | advantageous for equipment expected to keep for > 5 yrs.
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| Equipment Lease | often used with an open system – you pay a monthly fee for the use of the equipment but are free to shop for the most economical reagent system
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| Reagent Rental | require the purchase of a fixed volume of a specific manufacturer’s reagents. The cost for the use of the equipment is calculated into the reagent cost
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| Prior to any capital purchase, it is wise to do a 5-yr cost analysis comparing the cost of your current system to the cost of newer technology. | Equipment cost; Cost of service contract; Reagent cost; Technologist time; Cost to the client/patient; Medicare reimbursement
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| Operational Expenses | encompass a 12-month cycle and is just what the name implies – the expenses required to operate a lab.
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| chart of accounts | Expenditures are grouped into categories: Salaries including cost of benefits
Reference lab fees
Education and travel
Departmental fees
Transfusion service operating cost & blood supply cost
Purchased service and maintenance
Other direct expenses
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| Phase IV: Monitoring | expense reports are reviewed monthly for budget variances.
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| Budget variances | Increased volume; Vendor price increase; Changes in policy and procedure
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| Cost per Test/Cost per Unit of Service important because: | Evaluating different methodologies
To formulate managed health agreements whereby the hospital offers service at a discount
Calculating the amount of free community service
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| Instrumentation Impact on Lab Costs | Capital acquisition; Consumables; Cost per reportable; Direct costs; DRGs; Fixed costs; Lease; Marginal cost analysis; Operational efficiency; Price protection; Service Contract;
Variable costs; Workstation consolidation
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| Capital Acquisition | The purchase or lease/rental of clinical laboratory instrumentation
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| Consumables | Disposable supplies used to produce test results
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| Cost per Reportable | All direct costs directly related to producing a patient test result
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| Direct Costs | Only those costs incurred as a direct result of producing a test result. Indirect costs, such as administrative costs, would not be included in this calculation.
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| DRGs (Diagnosis-Related Groups) | A prospective payment system used by Medicare to classify all hospitalized patients into one of approx. 500 diagnosis-related groups. The hospital receives a fixed payment per DRG to cover operating costs.
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| Fixed Costs | Costs that do not vary as test volume increases. Examples are rental payment, interest on debt, depreciation of equipment, and wages of a skeleton staff that would be employed as long as the hospital stayed in business even if it produced nothing.
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| Lease | A contract that allows for the renting of instrumentation for a specified time under specified terms.
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| Marginal Cost Analysis | The additional cost incurred as output expands. It is cost associated with producing an additional patient test result.
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| Operational Efficiency | Making the fullest utilization of available inputs. Alternatively, minimizing the use of inputs to produce the desired level of test results.
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| Price Protection | An agreement whereby the vendor agrees to limit price increases by an agreed-upon amount during the term of the agreement.
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| Service Contract | Contracts whereby the vendor agrees to supply maintenance and repair of instrumentation. A contract could cover response time and hours and days (i.e. including weekends) during which the services will be provided.
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| Variable Costs | Costs that change as output (i.e. test volume) fluctuates.
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| Workstation Consolidation | Reducing the number of laboratory instruments needed to meet testing demands.
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| Determining the Cost of a Test | All direct costs to produce a reportable patient result; Cost per test vs Cost per reportable; Determine total number of tests to be performed per month; reagent costs; monthly costs for supplies; cost per month for the capital and service of the analyzer
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| Technology helps minimize operating costs through | Barcode readers for patient id and reagents
Enhanced data management capabilities
Broad test menus
On-board quality control
Fully automated counting analyzers
Interfacing with host computer
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