Types of Budget and Budgeting Methods in Nursing Management

The Types of Budget and Budgeting Methods in Nursing Management. The federal budget consists of a revenue budget and a capital budget. While the revenue budget consists of revenue and current/non-development expenses, the capital budget includes both capital revenue and development expenses.

What are Types of Budget and Budgeting Methods in Nursing Management

There are two basic types of healthcare budgets that affect care: capital budgets and operating budgets. Capital budgets are used to plan investments and improvements to fixed assets that depreciate or appreciate over time. Capital is something tangible, such as buildings or computers.
Budgets can be classified in time terms as follows:

a) long-term budget

b) short-term budget

c) continuous budget.

Long-term budget: A budget established for an extended period is called a long-term budget. The period is typically 5 to 10 years.

The four main types of budgets and budgeting methods. Organizations use four common types of budgets:

(1) incremental budgeting

(2) activity-based budgeting

(3) value-based budgeting

(4) zero-based budgeting

Types Of Budget

The budget process is basically the same, no matter the budget, and in fact, different budgets are needed for different purposes, although they are generally prepared at the same time because decisions about one type of budget may impact another. There are three major types of budgets that comprise a nursing budget: operating budget, personnel budget, and capital budget.

Operating Budget

The operating budget is the overall plan for a nursing department and accounts for expenses and revenues related to the day-to-day operation of the nursing unit for a fiscal year, which is a 12-month period that either typically coincides with the calendar year or runs from July 1 to June 30. The operating budget includes all unit expenses (e.g., costs related to providing care to patients) and revenues (e.g., income from providing such services).

Expenses

Expenses include the total cost of running the nursing unit. The two main categories of expenses are as follows: personnel salaries, which include normal wages, over time, paid holidays, benefits, shift differentials, and other paid time; and non salary expenses, which include medical and surgical supplies, office supplies, equipment rental, and repair and maintenance of equipment. Expenses are typically broken down into line items, which represent specific categories of costs such as office supplies, surgical supplies, and medications. Common expenses or costs included in the operating budget are either fixed or variable and can be direct or indirect:

Fixed expenses do not change over the budget period, regardless of the volume of patients or activity level of the organization. Examples of fixed expenses include administrative salaries, rental or mortgage payments, insurance premiums, utilities, and taxes.
Variable expenses fluctuate depending on patient volume and acuity or on activity level of the organization. Examples of variable expenses include patient care supplies, medications, linen, and food. If the number or acuity level of patients increases, more supplies, medications, linens, and food will be needed, resulting in higher variable expenses. The personnel budget is also an example of a variable expense because staffing can vary depending on the patient census and level of acuity.
Direct expenses directly affect patient care and include the costs of providing patient care. Examples of direct expenses include personnel salaries, medical and surgical supplies, and medications.
Indirect expenses are necessary for daily operations of the organization but do not affect patient care. Examples of indirect expenses include utilities, building maintenance, and salaries of ancillary staff members such as security guards or parking attendants.

Revenues

Revenue is income from services provided and varies depending on the type of unit and organization. Although nursing is not considered a revenue-producing industry, revenue is generated and is projected for a nursing unit from the average daily census (ADC) or number of procedures done. Nursing revenue in a hospital is included with the room charges. However, nursing revenue can be generated in other ways, such as by patient visits or procedures (Anderson & Danna, 2013). Other sources of revenue can include grants, donations, gifts, third-party payers, Medicaid, Medicare, and income from gift shops, parking fees, and vending machines.

Personnel Budget

The personnel budget allocates expenses related to nursing personnel. This budget is part of the operating budget and is typically the largest budget in the organization. This budget is also very time-consuming to establish and manage. The personnel budget is directly related to the ability of nurse leaders and managers to supervise their staff and requires vigilant monitoring of fluctuating patient census and acuity to avoid overstaffing or understaffing (Marquis & Huston, 2012).

Nurse leaders and managers must consider the staffing needs and staffing plan for the unit when developing the fiscal budget. The personnel budget includes expenses for regular salaries, hourly differentials, overtime, and nonproductive time. To develop the personnel budget, nurse leaders and managers must consider some of the core staffing. First, they must deter mine the full-time equivalents (FTEs) needed to staff their unit to maintain safe, quality patient care for 24 hours per day, 7 days per week, 52 weeks per year (Finkler & McHugh, 2008). An FTE position equals 40 work hours per week for 52 weeks a year, or 2,080 hours per year.

Next, the nurse leader and manager must forecast staffing needs based on the ADC. The ADC provides a measure of the unit activity and is calculated by averaging the census at midnight each day over a period of time. In forecasting FTEs, the nurse leader and manager must also consider staffing for days off and calculate non productive time (i.e., paid time when staff members are not providing patient care) to determine an estimate of the number of FTEs needed to replace staff.

Once FTEs are determined, they must be converted to dollar values to make realistic cost-effective decisions in the budget process (Rohloff, 2006). When con verting FTEs to costs, the hourly rate, shift differentials, projected overtime, and orientation time must be considered. Again, the nurse leader and manager refers to the previous year to forecast these additional labor costs. Finally, workload must be used as the basis for quantifying the productive hours needed to deliver nursing care.

Workload is measured differently depending on the clinical setting (e.g., in the operating room, it is based on minutes per surgical case; and in home care, it is measured by the number of nursing visits per month). Although tools to measure workload in outpatient and ambulatory care centers are limited, numerous tools are available to measure workload in the acute care setting (Dickson, Cramer, & Peckham, 2010). How workload in acute care settings is measured varies depending on how the organization calculates workload measures and the type of unit and agency.

For example, in a hospital medical-surgical unit, workload may be based on acuity by using a patient classification system. The ANA National Database of Nursing Quality Indicators provides an alternative to using patient acuity systems to determine staffing by instead using NHPPD. The measure is considered a reliable metric for establishing staffing and scheduling patterns (National Database of Nursing Quality Indicators, 2010). Using NHPPD based on the previous budget year to forecast staffing needs for the upcoming year is an appropriate and cost-effective approach (Porter-O’Grady & Malloch, 2013; Twigg, Geelhoed, Bremner, & Duffield, 2013).

Capital Budget

The capital budget includes equipment, furniture, technology hardware and software, and building renovations, and it is separate from the operating and personnel budget processes. The minimum value of a capital item can vary depending on the organization, and any item costing less than the minimum is considered a routine expense.

Typically, items that are included in the capital budget have a minimum value of $1,000 and have an expected performance life of more than 1 year. To compile a capital budget, nurse leaders and managers should seek input from staff to identify items that meet the cost limit and have a multiyear life. In addition, nurse leaders and managers must develop an understanding of the financial implications of leasing versus purchasing equipment, the expected life of equipment, and estimated costs of maintenance (Contino, 2004).

Other considerations include projected patient needs, how the budget will affect revenues and expenses, and funds available. Once the decision is made regarding the needed capital items or assets, the request goes through a separate review and approval process at the organizational level (Finkler & McHugh, 2008).

Budgeting Methods

Different health-care organizations may use different budgeting methods. The type of method is determined by the administration and aligns with the organization’s mission and goals. The three common types of budgeting methods are incremental budgeting, performance budgeting, and zero-based budgeting.

Incremental Budgeting

Also called the flat-percentage method, incremental budgeting involves multiplying the current year’s budget by a predetermined figure based on the cost of living, consumer price index, or inflation rate and then using that number to project for the next fiscal year. The major advantages of incremental budgeting are that it is very simple and it requires little expertise (Marquis & Huston, 2015).

However, this method is inefficient and does not encourage prioritization of needs for the future, nor does it facilitate motivation to contain costs. Incremental budgeting is commonly used in determining household or personal budgets because those budgets are usually based on annual income and are adjusted according to increases in annual income.

Performance Budgeting

Performance budgeting emphasizes outcomes and results rather than activities and out puts. Typical budgeting processes do not reflect goals related to cost-effectiveness, patient safety, and quality of nursing care. Performance budgeting, also called outcome budgeting, can help determine the amount of money needed to provide value-added nursing care, non–value-added nursing care, and quality nursing care, as well as to ensure patient and staff satisfaction and to control costs.

Performance budgeting measures multiple outcomes of the nursing unit. Rather than focusing on the resources used, it provides a picture of where resources are used and their relationship with the goals of the nursing unit as well as the organization (Finkler & McHugh, 2008). Although performance budgeting can be time consuming, by using this method of budgeting, nurse leaders and managers can easily demonstrate quality of nursing care and its relation to budget cuts. Performance budgeting evolves from the operating budget and links outcomes to the consumption of financial resources.

Zero-Based Budgeting

In zero-based budgeting, nurse leaders and managers start the budget from zero each year as if each item or program was brand new. Zero-based budgeting requires nurse leaders and managers to prioritize and justify or rejustify requested funds meticulously on an annual basis. Supporting rationale must be provided for each planned revenue and expense. The goal is to have zero funds left at the end of the fiscal year. Therefore, rather than basing the budget on the past year, nurse leaders and managers are required to provide a rationale for all expenditures (Finkler, Jones, & Kovner, 2014).

The advantage of zero-based budgeting is that it forces managers to set priorities, avoid waste, use resources efficiently, and seek input from peers and staff in the process (Marquis & Huston, 2012). Zero-based budgeting also encourages communication and coordination between managers and their staff. A major disadvantage of zero-based budgeting is that it is labor intensive.

In addition, zero-based budgeting requires nurse leaders and managers to have special training in the budget process. Zero-based budgeting uses decision packages to assist nurse leaders and managers in the process of prioritizing and justifying budget needs. The elements of decision packages include the following (Marquis & Huston, 2015, p. 216):

Listing all current and proposed objectives or activities in the department
Identifying alternative plans for carrying out activities
Determining the costs of each alternative
Identifying the consequences of continuing or discontinuing an activity

Conclusion

The budget process is ongoing and cyclical, much like the nursing process. When planning a budget, nurse leaders and managers are required to think ahead, anticipate changes, establish goals, and coordinate realistic plans. An important element to the budgeting process is forecasting. Nurse leaders and managers must have a clear understanding of the following to manage their unit budgets effectively: the budgeted ADC for the unit, the process the organization uses to measure unit productivity, the organization’s policies, and the state regulations (Waxman, 2005).

Involving staff nurses in the budget process helps them understand the relationship between health-care costs and delivery of safe, quality patient care. Additionally, nurse leaders and managers who maintain transparency in the budget process and encourage staff participation in managing cost-effective work practices foster positive nurse outcomes. Nurse leaders and managers as well as staff must engage in the process by identifying patient outcomes and eliminate interventions that do not add value to those outcomes. The budget process is ongoing and requires all nurses to strive for cost containment without jeopardizing safe, quality patient care.

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