# Financial Management - Professor Frazier by hcj

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```									Budgeting
Budgeting Defined

• Process of converting the operating plan into
monetary terms.
• Budgets become the control standard against
which performance is measured.
• The budget process is an excellent
opportunity for the financial manager to
educate nonfinancial department managers.
Prerequisites to Budgets

• Sound organizational chart
• Well-defined chart of accounts
• Prompt and accurate accounting system
• Comprehensive management information
system
• Budget director
• Budget committee
• Budget manual and budget calendar
Types of Budgets

•   Top-down versus bottom-up
•   Incremental versus zero-based
•   Comprehensive versus limited-in-scope
•   Fixed versus flexible
•   Discreet versus continuous
Steps in the Budgeting Process

14) project volumes
-forecasting volumes
-forecast content--description of specific situation in
question
-expert opinion
-Delphi techniques
-Delbecq techniques
-questionnaires
-permanent panels
-PERT analysis
-causal models
-time series models
Steps in the Budgeting Process

14) project volumes
-forecasting volumes
-forecast content--description of specific situation in
question
-forecast rationale--explanation of how the situation will
progress from its current state to its forecasted state
Steps in the Budgeting Process

15) Convert volumes into revenues
Steps in the Budgeting Process

16) Convert volumes into expense
requirements
-review staffing mix
-review skill mix
-review cost-of-living raise policy
-review merit raise policy
-review bonus policy
Steps in the Budgeting Process

17) Adjust revenues and expenses as
necessary
Evaluating Budget Performance

• Variance Analysis--comparing actual
performance to budget.
– Revenue variance
– Expense variance
Budgeting Exercise

• Review the budgeting exercise, Problem
12.1, on p. 268 of the text
Budgeting Exercise

STEP 13--PROJECT VOLUMES

1. Calculate the current volume for each x-ray procedure

Hand x-ray          1,100 x .50             550
Foot x-ray         1,100 x .20             220
Forearm x-ray        1,100 x .30             330
Budgeting Exercise

STEP 13--PROJECT VOLUMES

2. Convert the current volumes to RVUs

Procedure     Minutes    Minutes/GCD     RVUs/     Volume   Total RVUs
Procedure
Hand x-ray       5           5/5          1         550        550

Foot x-ray       15          15/5         3         220        660

Forearm x-ray      30          30/5         6         330       1,980

3,190
Budgeting Exercise

STEP 13--PROJECT VOLUMES

3. Calculate the projected volume for each x-ray procedure (1,100 DRG
250 x .091 increase = 1,200 DRG 250)

Hand x-ray               1,200 x .50                  600

Foot x-ray              1,200 x .20                  240

Forearm x-ray             1,200 x .30                  360
Budgeting Exercise

4. Convert the projected volumes to RVUs

Procedure     Minutes   Minutes/GCD        RVUs/     Volume   Total RVUs
Procedure
Hand x-ray       5           5/5            1         600        600

Foot x-ray       15         15/5            3         240        720

Forearm x-ray      30         30/5            6         360       2,160

3,480
Budgeting Exercise
STEP 14--CONVERT PROJECTED VOLUMES INTO PROJECTED REVENUES

•    Calculate projected gross and net revenues by payer

MEDICARE

Procedure      Projected     Projected       %       Gross     Contractual     Net
Charge        Volume                Revenue    Allowance     Revenue
Hand x-ray        \$75           600         .45      \$20,250       .20       \$16,200

Foot x-ray        285           240         .45      \$30,780       .20       \$24,624

Forearm x-ray      450           360         .45      \$72,900       .20       \$58,320

\$123,930                 \$99,144
Budgeting Exercise
STEP 14--CONVERT PROJECTED VOLUMES INTO PROJECTED
REVENUES

1. Calculate projected gross and net revenues by payer

MEDICAID

Procedure      Projected   Projected   %      Gross      Contractual     Net
Charge      Volume           Revenue     Allowance     Revenue
Hand x-ray       \$75         600       .35    \$15,750        .15       \$13,388

Foot x-ray       285         240       .35    23,940         .15       20,349

Forearm x-ray     450         360       .35    56,700         .15       48,195

\$96,390                  \$81,932
Budgeting Exercise

STEP 14--CONVERT PROJECTED VOLUMES INTO PROJECTED REVENUES

1. Calculate projected gross and net revenues by payer

MANAGED CARE

Procedure      Projected   Projected   %      Gross     Contractual     Net
Charge      Volume           Revenue    Allowance     Revenue
Hand x-ray       \$75         600       .15   \$6,750         .30       \$4,725
Foot x-ray       285         240       .15   10,260         .30        7,182

Forearm x-ray     450         360       .15   24,300         .30       17,010

\$41,310                  \$28,917
Budgeting Exercise
STEP 14--CONVERT PROJECTED VOLUMES INTO PROJECTED REVENUES

1. Calculate projected gross and net revenues by payer

SELF-PAY

Procedure      Projected   Projected   %      Gross      Contractual     Net
Charge      Volume           Revenue     Allowance     Revenue
Hand x-ray       \$75         600       .05    \$2,250         .10        \$2,025

Foot x-ray       285         240       .05    3,420          .10        3,078

Forearm x-ray     450         360       .05    8,100          .10        7,290

\$13,770                   \$12,393

Total                                     \$275,400                  \$222,386
Budgeting Exercise

STEP 15--CONVERT PROJECTED VOLUMES INTO PROJECTED EXPENSES

1. Calculate current expenses per RVU

\$225,000 x .25 = 56,250 ÷ 3,190 = 17.63 labor expense/RVU

\$185,000 x .25 = 46,250 ÷ 3,190 = 14.50 supply expense/RVU

\$375,000 x .25 = 93,750 ÷ 3,190 = 29.39 overhead expense/RVU
Budgeting Exercise

STEP 15--CONVERT PROJECTED VOLUMES INTO PROJECTED
EXPENSES

2. Calculate projected expenses per RVU

Projected labor expense            = 17.63 + 5% = 18.51

Projected supply expense           = 14.50 + 6% = 15.37

Projected overhead expense         = 29.39 + 0% = 29.39

Total expense per RVU                           \$63.27
Budgeting Exercise
STEP 15--CONVERT PROJECTED VOLUMES INTO PROJECTED
EXPENSES

3. Calculate projected expenses per procedure

Procedure        Projected RVUs        Projected   Total Projected
Expense/RVU      Expense
Hand x-ray             600                \$63.27      \$37,962

Foot x-ray            720                63.27        45,554

Forearm x-ray          2,160               63.27       136,663

Total                                             \$220,179
Budgeting Exercise

STEP 16--ADJUST REVENUES AND EXPENSES AS NECESSARY

1. Determine initial gain/loss

Net Revenues                  \$222,386
Expenses                       220,179
Gain/(Loss)                   \$ 2,207
Budgeting Exercise

STEP 16--ADJUST REVENUES AND EXPENSES AS NECESSARY

2. Make adjustments, first to revenues, then to expenses

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