Healthcare Operational Budgeting – Sample



Healthcare Operational Budgeting

Operational and Capital Budgeting

According to Dunham-Taylor and Pinczuk (2006), the primary difference between operational and capital budget is that the former is the budget covering day-day unit costs like repair and maintenance, temporary and regular workers’ wages, equipment rentals, dues and subscriptions education and travel, office and medical supplies. On the other hand, the latter refers to the budget covering the activities like buying long-term equipment, buildings, and land and is usually separately funded from grants, internal savings, and capital campaigns.

Capital budgeting also refers to the process whereby managers provide their spending rationale regarding expensive long term equipment is for their units. There is also a difference relating to the justification of the two budgets. For example, a manager has to justify a capital budget by convincing the financier that new and improved equipment exists and needs to be acquired, however, is expensive, or that necessary equipment has become obsolete or broken hence needs replacement (Dunham-Taylor & Pinczuk, 2006). On the other hand, in most organizations, managers do not need to justify their operational expenditures as they are necessary and are the automatic part of management.

Sources of Budget Variance

Variances occur in budgets when at the end of a financial period or quarter. There is a difference between the actual amount budgeted for or projections in the budgetary document and the actual amount spent in the activities planned. The primary sources of budget variance in the context of healthcare organizations according to Penner (2004) include the changes in the number and the utilization of health services provided and the change in the efficiency of reimbursement collection and billing. Also, changes in hourly wage rates, variations in service unit numbers like patient visits or patient days and modifications in the enrolled population size (Penner, 2004). According to Penner, the variances caused by utilization may be controlled or monitored through quality improvement techniques and clinical guidelines that reduce inpatient readmissions, complications, and the length of stay.

Having flexible budgets also helps in identification and monitoring the sources of rate variance such as fixed cost variations. Efficiency variance may also be monitored through strategies like reduction in hospital staff supervision and training and also the improvement of scheduling efficiency in controlling personnel productivitydifferences. However, budget variances may occur due to the errors or inaccuracies in budgeting, changes in economic conditions and the job performance of managers. The main reasons why it is necessary to investigate budget variances are to correct the errors or variations, to help in improving other organizational aspects and areas, and to assist in early intervention to avoid future financial mess or constraints.

Calculation of Nursing Hours

According to Dunham-Taylor and Pinczuk (2006), nursing hours per patient day includes parameters like education and orientation, worked time, indirect care by clinical educator, nurse manager and unit secretary, and direct care from nursing staff. To calculate the unit-specific total patient days or the number of the required patient care providers for a particular area, the intensity of care, and patients volume need to be ascertained.

Fixed and Variable Costs

Fixed costs in healthcare budgeting refer to those expenses that represent definite amounts on the expenditures that remain constant and rarely change. An example of this value is a lease of a part of the premises used by a healthcare unit. The organization will be paying a fixed amount of rent at least for some time unless the landlord increases the amount payable. Such costs are valuable as they help prevent unnecessary variances and also make the planning process easier. Another example of a fixed cost is minimum staffing.

On the other hand, a variable cost is an expense that changes or varies depending on the volume or level of activities (Dunham-Taylor & Pinczuk, 2006). An example of a variable cost in healthcare organizations is staffing over and above the minimum. The staffing required at any given time will reduce or grow with the increase or decrease in volume, that is, patient visits, acuity, and hours or days.


Dunham-Taylor, J., & Pinczuk, J. Z. (2006). Healthcare Financial management for nurse managers: Merging the heart with the dollar. Sudbury, MA: Jones & Bartlett Publishers.>

Penner, S. J. (2004). Introduction to the health care economics & financial management: Fundamental concepts with practical applications. Philadelphia, PA: Lippincott Williams & Wilkins.