Chapter 1: Financial Management in Context



Best Practice Financial Managment

By Kenneth Kaufman

Concept Five

Strategic Budgeting

David Herren

July 19, 2007

Outline

The budgeting process is often brings to mind many negative connotations. It can be very time consuming and prevent the financial management team from supporting key strategic needs. This sort of misapplication of organizational resources cannot be tolerated in the current healthcare environment. Correct strategic budgeting is characterized by the integration of strategic and financial planning, capital planning, and a “connected” budget development process.

Eight Key Steps of Strategic Budgeting

1. Develop the strategic and financial plans

a. During the first several months of the fiscal year, senior executives provide the impetus for the strategic budgeting process by defining or revising the organization’s strategic and financial goals.

2. Communicate objectives

a. Executives communicate with department managers throughout the organization about strategic and financial goals, related operating imperatives and how these were generated.

3. Obtain/provide feedback about targets

a. Executives give department managers the opportunity to provide feedback on the key assumptions underlying the strategic and financial targets.

4. Develop a first-pass budget

a. Incorporating feedback from Step 3, the senior team revises and translates volume projections into an overall financial and capital plan that delineates specific financial targets consistent with identified strategic imperatives.

5. Review the first-pass budget

a. Department managers are asked to review the first-pass budgets that include their department-specific targets. They identify necessary exceptions and define specific, measurable alternatives that will offset such exceptions.

6. Make adjustments and finalize the budget

a. The finance team works with department managers to adjust the budget to reflect the financial effect of issues and alternatives. The budget may then be finalized. This step occurs approximately one month before the final budget is submitted for board approval.

7. Use the budget as a management tool

a. The budget provides very precise guidance to all levels of the organization and is used on a regular basis. This connection must remain throughout the year to be maximally effective.

8. Restart the cycle

a. After the close of one fiscal year, the cycle recommences.

Best Practice Strategic Budgeting Software

• Updated software is essential to strategic budgeting. The software must have several key characteristics to be effective. They are:

o 1. Flexibility – must address a variety of operations with today’s healthcare organization.

o 2. The ability to evolve – the software must be able to grow with the needs of the organization and deliver over the long term.

o 3. Calculating power – the software must be able to easily accommodate numerous types of complex calculations.

o 4. Security - Management must be able to control distribution and access o the confidential information supported by the software.

o 5. Analytical capability – The software must be able to integrate the strategic and financial planning processes with the budgeting process.

o 6. Flexible reporting – the software must be totally flexible with reporting. From the user must be able to “slice and dice” the data to create reports that focus on the topics at hand.

o 7. Ease of use – it must be comfortable and sturdy ensuring that new users are not afraid of “breaking it.”

o 8. Ease of Maintenance – After the software is installed, maintenance should be minimal and easily accomplished on an ongoing basis.

Terms & Definitions

Capital Expenditures – purchases of land, buildings and equipment for operations of more that $500 that last for more than a year and are subject to depreciation.

OBRA – Omnibus Budget Reconciliation Act – moved capital costs to prospective payment over a ten year implementation period.

Tax Reform Act of 1986 – lowered the tax-deductibility for charitable gifts and restricted or increased the cost of acquiring capital through tax-exempt markets.

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