16Jones Leadership(F)-ch 16 268 1/14/07 3:48 PM Page 268 Skills for Being an Effective Manager Calculation Average Daily Census (ADC) x NHPPD x 365 = Required Productive Hours Budget Definitions ■ 30 x x 365 = 87,600 productive hours Productive Hours to FTEs 87600 / 1800 = 48.7 FTEs* ■ Productive FTE = 2080 paid hours – nonproductive hours 2080 – 280 = 1800 productive hours *see Budget Definitions for further explanation of FTE ■ FIGURE 16-1 Nursing Hours per Patient Day (NHPPD) 1872 hours/year Finance generally reflects these nurses as 0.9 FTE (Rohloff, 2006) The FTE calculates the paid hours until the FTE hours of 2080 (or less if a 36-hour week) are reached These hours are paid but not necessarily worked Each accumulation of 2080 includes productive (actually worked) and nonproductive (holiday, vacation, sick) hours The nonproductive hours are also called paid time off Nonproductive hours become a significant budget calculation because it is time that must have staff coverage, an additional cost Nonproductive calculations are dependent on benefit time off and vary from employer to employer and personnel category For example, nonproductive time for a registered nurse may include three weeks of vacation, four holidays, and three education days This is 28 nonproductive days or 224 hours Nonproductive time for budget purposes is projected yearly during the planning phase of budget preparation It is based on the total number of FTEs in each personnel category and their respective nonproductive time based on benefit polices The salary costs are then calculated and added to the budget The assessment phase also entails forecasting and calculating the projected patient days for the new budget period Projected patient days are based on historical trends, new programs approved for implementation, changes in care delivery, and reimbursement levels For example, last year’s actual days in post partum were 5250 The new budget is using these days and new patient days that reflect the addition of two nurse midwives who have been given privileges to care for and deliver patients For the new budget year, it is projected that 600 new patient days will result from these new practition- ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Accrual: An accounting method that records expenses as they happen and revenue as it is earned In nursing, vacation time is accrued as the employee earns it This is usually recorded directly on an employee’s pay stub in the pay period or month earned Bottom line: An expression that discusses the income of an organization that is the result of revenue (money earned) minus expenses: revenue - expenses ϭ income (bottom line) Direct cost: Items that can be directly attributed to a cost center and related to the service delivered For example, salaries of personnel and clerical supplies for a particular patient care unit are direct costs Expense: This is the amount of money an organization spends to produce its services or products For example, wages are an expense to produce patient care Fiscal year: A business accounting period It is usually 12 months and is used to report fiscal activity of an organization This accounting period can start at any month of the year and end 12 months later For example, it may begin November and end the following October 31, 20XX (the next year) For-profit: An organization established with the intention of making a profit to share with owners or stockholders Full-time equivalent (FTE): An FTE is the equivalent of the cost of one full-time employee working for year In general practice, this is calculated as 40 hours per week for 52 weeks per year, or a total of 2080 paid hours per year The 2080 hours include productive (actually worked) and nonproductive time (vacation, sick, holiday, education) More than one employee may work to reach 2080 hours to make up the FTE Indirect costs: These costs may not be directly related to the cost center but are for the good of the organization as a whole For example, costs for an advertisement for nursing positions and for housekeeping of public areas are indirect costs Nonproductive: Time not worked but for which the employee receives remuneration, e.g., pay for vacation and sick days Not-for-profit: An organization that does not have shareholders and reinvests its profits into the business Position control: A monitoring tool to compare actual numbers of FTE employees with the number of FTEs budgeted for the cost center Productive: Time actually worked by an employee Revenue: The amount of money the organization receives for its services or product 16Jones Leadership(F)-ch 16 1/14/07 3:48 PM Page 269 Budgeting ers The projected patient days for the new budget year will be 5850 (5250 ϩ 600) Planning The second step in the budgeting process is to develop a plan The length of time that the budget is to cover must be determined, and this time frame is the budget cycle Budgets are usually developed to cover a 12-month period, known as a fiscal year The fiscal year may or may not coincide with the calendar year A fiscal budget year is broken down into quarters and typically further subdivided into months Most budgets are created for a 1-year period; when the budget period is over, the budget planning process starts anew Although a yearly budget is the most common budget, a perpetual budget may be utilized A perpetual budget is a continual process by which a budget is created each month so that a continuous 12 months of future budget are always available In the planning phase, the required personnel and supply costs are calculated for the projected patient days This work is completed using a computerized spreadsheet application The nurse manager begins the planning process by reviewing past budget history to determine average supply costs and the number of patient days or the average daily census for the unit The nurse manager needs to determine if there will be any significant changes within the unit’s supplies, either quantity utilized or if there will be any new supplies or an increase in current supplies related to patient volume, acuity, or diagnosis/procedure specific care For example, a surgeon has joined the staff and will be performing a highly specialized robotic procedure The surgeon is projected to perform 1500 procedures per year The addition of this patient population will thereby: (1) significantly increase the patient days and the average daily census that should be budgeted for the unit, (2) increase the acuity of the patients cared for by the nursing staff, and (3) result in the nurse manager ordering high-cost specialty supplies to care for this patient population Table 16-1 presents the remaining activities in the planning phase These activities take the budget plan through its review and approval process The budget process begins with the organization setting a direction and ends with implementation This time frame is usu- 269 ally about months The activities from budget spreadsheet to final budget listed in Table 16-1 are the mechanics and review process of a budget Usually the budget parameters are given to the manager as a spreadsheet application, which is the working document for the manager’s cost center The budget is presented to the reviewers; when it meets the operating standards set in the planning phase by revenue and expenses, it goes forward to the board of trustees for the last review After action is taken by the board, the budget is returned to the manager for implementation Implementation The third step is to implement the budget Prior to implementing the budget, the nurse manager should thoroughly review the final budget and be certain that the budget is fully understood The nurse manager will typically meet with her direct supervisor and a member of the finance department to generate the budget for the fiscal year Being actively involved in the process allows the nurse manager to communicate information about their unit while learning the facility budget creation, approval, and implementation process A nurse manager who is inexperienced in the area of budgeting should carefully review the budget for her area and ensure that a thorough review of the facility budget process is provided in order to establish a solid understanding of budgeting The nurse manager should take the initiative to inquire about areas of the budget about which she or her staff members have questions During the implementation step of the budget process, the nurse manager must be actively involved in monitoring and analyzing budget activity to remain within the budgeted parameters and to avoid inadequate or excess funds at the end of the budget period The nurse manager should review the approved budget for the fiscal year with the unit staff It is especially important for the nurse manager to explain any changes from the previous year’s budget The staff needs to understand projected changes in staffing, patient population, and supply usage The more the staff understands the budgetary goals and the plans to carry out those goals, the more likely the goal will be attained The manager generally is accountable for deviations in the department’s budget Some deviation 16Jones Leadership(F)-ch 16 270 1/14/07 3:48 PM Page 270 Skills for Being an Effective Manager TABLE 16-1 Budget Preparation Process ACTIVITY RESPONSIBILITY Organization Organizational Plans Senior Management Direction Objectives for Fiscal Year Senior Management Preparation Care Standard/NHPPD Nurse/Patient Ratio Patient Days by Unit Current Position Control Projected Patient Days New Programs Supply Projections Budget Spreadsheet Current Data to Spreadsheet Presentation of Budget Draft Refine Budget Document Budget Presentation to Finance Budget Review Organization Budget to Board Final Budget to Manager Unit/Dept Manager Policy/Historical Legislation Finance/Budget Manager Human Resources Finance/Budget Manager Senior Management Finance/Budget Manager Finance/Budget Manager Unit/Dept Manager Director/CNO Manager Manager &/or CNO Finance/Budget Manager CFO/CNO CFO/CNO Implementation of budget for new fiscal year Unit/Dept Manager Ongoing review of budget for new fiscal year Manager, CNO, finance A B Planning & Assessment C Implementation D Evaluation CFO ϭ Chief Financial Officer CNO ϭ Chief Nursing Officer from the proposed budget can be anticipated, but large deviations must be examined for possible causes, and corrective action must be taken Box 16-2 lists the rules of budgeting that managers live by These rules or guidelines are the basic underpinnings that most organizations believe to be essential for sound fiscal responsibility Budgets should be prepared, explained, and monitored by the same person who will be accountable for compliance with the budget This person understands the workings of this budget best This also means that expenses are charged to the cost center (e.g., patient unit) that incurred them (spent the money) and are under the control of the manager Within operating budgets for a cost center there are salary, supply, and equipment dollars These dollars can be used only in these designated areas and cannot be carried over to the next budget year if not spent Changes from the budget as planned are called variance and must be explained to the department head and have steps taken to correct them Evaluation The fourth step is evaluation The budget should be reviewed regularly to determine the level of adherence to the budgeted figures The fiscal budget should be reviewed as often as daily when the newly 16Jones Leadership(F)-ch 16 1/14/07 3:48 PM Page 271 Budgeting 271 Box 16-2 TYPES OF BUDGETS Rules of Budgeting The operating budget is a combination of the revenue and expense budget It is a forecast of the revenue that is expected to be earned during the defined budget period and the expenses incurred to earn the revenue during the same period The personnel costs are a significant part of this budget This budget is a plan for the unit’s or organization’s daily operating revenue and expenses It includes the workload budget (FTEs); units of service, such as patients days or visits; and expense budgets with personnel costs, supplies, equipment, and overhead A program budget contains all the items that are a cost in a particular care delivery program This type of budgeting is frequently completed for new programs and expansions of existing programs of care or services This is usually completed in the early phases of fiscal planning and budget preparation If the new program is approved for implementation during the budget review process, then its budget becomes part of the operating budget Capital budgets summarize the anticipated purchases for the fiscal year and usually have a dollar minimum cost to be included (e.g Ͼ $300) The life span of equipment projected during this phase of budget planning is usually longer than or more years The capital budget is separate from the everyday operating budget, and the funds for these purchases are usually released by the finance department when available for approved purchases The cash budget predicts expected revenue and payments for resource or cash outflow An example of cash outflow is the payment of salaries for work performed This budget, is monitored carefully to ensure adequate cash to pay bills in a timely manner and reduce the necessity to borrow funds to pay bills ■ ■ ■ ■ ■ ■ Manager accountable for budget, must prepare budget Expenses charged to cost center that spent the money Expenses under control of manager Unspent budgeted funds not carry over to next fiscal year Funds not transfer between salary, supplies, or capital equipment money Variance explanation also requires a corrective plan of action approved budget is implemented If variances from the approved projected budget are present, the nurse manager must react quickly by examining the budget closely The nurse manager should determine what areas within the budget are either above or below the projected budgeted amount This is accomplished by comparing the projected budgeted amount with the actual amount spent Modifications in spending should be made throughout the budget period to accommodate for any deviation, and corrective measures should be put in place to bring the year-to-date total into the projected targeted amount The budget process is continual and cyclical in nature As the evaluation step is being completed, the nurse manager has begun to assess any deviations from the budget, thereby beginning the cycle once again (Fig 16-2) Steps in the Budget Process Planning Evaluation Assessment Imp lementation FIGURE 16-2 Steps in the budget process Supply Budget Supply budget predicts the use of medical-surgical supply costs based on predicted case mix of patients for the upcoming fiscal year The supply budget includes the expense of all supplies that are utilized on the nursing unit to provide patient care Supplies are the area of the budget in which managers must be actively involved and can make adjustments to remain within the budget The supply budget reflects expenses that change in response to the 16Jones Leadership(F)-ch 16 272 1/14/07 3:48 PM Page 272 Skills for Being an Effective Manager volume of service, above or below the budgeted census, and changes in acuity, requiring more, fewer, or completely different supplies Controlling the number of supplies used in excess or in a wasteful manner is the responsibility of the nurse manager This is not an easy task; it requires involvement of all staff members at all levels Nurse managers must be thoroughly knowledgeable of the supplies that are stocked on their unit, the amount that each supply costs, and the volume of each supply that is used Each health-care organization will have a different system to ensure that supplies are available for use as well as for tracking the amount used The nurse manager needs to control the amount of supplies that are available in her department as well as how these supplies are used Supplies should be researched to determine their usefulness Ask the question: is this supply being utilized in the intended manner? Examine supplies that are frequently used and that result in highvolume usage, therefore high cost Is there a way to decrease the amount of a supply that is used without affecting the quality of care? For example, if the manufacturer recommends applying one incontinence pad to a bed, and an employee applies four incontinence pads, it results in an unnecessary expense that can be prevented or controlled Perhaps buying one pad of a larger size is cheaper than using two to four pads of a smaller, cheaper vendor Look at prepackaged supplies As with many convenience items, these can come with a higher price tag If prepackaged supplies are being utilized, is every supply item that is included in the package being used? If not, compare cost with convenience; does the expense of the prepackaged supply outweigh the convenience? Monitoring the supply process within the department must be an ongoing effort This is not a singleperson effort The nurse manager must educate employees on the importance of utilizing supplies efficiently and encourage them to become actively involved in this cost-saving effort THE NURSE MANAGER’S ROLE IN BUDGETING not sought or valued Today, health-care organizations have recognized the importance of nursing involvement in the budget process Nursing budgets generally encompass the most personnel expenses and are responsible for the largest share of the total overall expenses in health-care organizations It is imperative that nurse managers gain expertise in fiscal planning and the budget process Budgeting is a challenging managerial task because it involves both planning and control functions A nurse manager must perfect the ability to balance planning skills with control skills Planning requires an innovative approach to the situation, whereas control can be perceived as restrictive or essentially negative and conservative in nature In order for a nurse manager to utilize these skills successfully, he must be able to bring balance innovative and conservative view points A nurse manager could be tempted to request the latest and greatest supplies, furniture, equipment, or increased staffing levels as part of the fiscal planning process for the next fiscal budget The nurse manager must prioritize what is essential for his unit’s functioning in order to deliver high-quality patient care The nurse manager must ask for what is really necessary or utilize his planning skills while balancing this with control functions or not asking for what would be above what is necessary This balance entails the ability to look forward or forecast future activities and anticipate what may be needed as well as the ability to look to the past to reflect upon what has already occurred The manager needs to model scenarios that can change the forecasted numbers What if scenarios offer a snapshot of what may happen if change occurs in the projected patient days, the case mix index, the availability of staff, or reduction in services offered Forecasting is the selection of the scenario that fits the environment best Success in budgeting requires thoughtful and deliberate forecasting along with the balancing act of planning and controlling The staff needs to understand how the budget was planned and its role in using the resources wisely to reach successful outcomes for the patients and the organization VARIANCE ANALYSIS Historically, nursing management played a limited role in fiscal planning within health-care organizations The department of nursing was considered to be non—income-producing; therefore, input was After comparing the budget report, the approved budgeted figure with the actual amount spent, the manager determines if expenses are within, over, or ... year’s budget The staff needs to understand projected changes in staffing, patient population, and supply usage The more the staff understands the budgetary goals and the plans to carry out those goals,... budgeting requires thoughtful and deliberate forecasting along with the balancing act of planning and controlling The staff needs to understand how the budget was planned and its role in using the... for the patients and the organization VARIANCE ANALYSIS Historically, nursing management played a limited role in fiscal planning within health-care organizations The department of nursing was considered