- Created on Monday, 02 December 2002 13:06
- Written by Susan Capparelle
Last month we learned about the importance of a budget, the different types of budgets, i.e. capital and operations, and the initial steps to take when creating a budget like gathering the necessary information in our 'tool kit.' This month we'll be taking a deeper look into how to prepare a budget with our specialist Donna Mitchell, educational instructor and in-house consultant for Marion General Hospital in Marion, Indiana.When preparing a budget keep in mind that budgets may differ in detail depending on the business involved, but all budgets follow certain procedural steps in preparation.
IMPORTANCE OF BUDGETS FOR NOT-FOR-PROFIT LAUNDRIES -- I.E. HOSPITAL, NURSING HOMES
If you are a non-revenue producing department or cost center, then basically the revenue producing departments have to produce enough to cover your expenses, explains Mitchell. So it becomes very critical that a non-revenue producing departments hold their costs in line. "Even though they're not seeing a direct one to one correlation to money being earned to their expenses, the cost produced by their department or the expense produced by their department is going to reduce the bottom line income. That's why it's important to stick to a budget for non-revenue producing departments. The more cost effective they are, the more money the organization makes."
REVENUE PRODUCING LAUNDRIES
"When doing a budget making projections about how much money (revenue) can be generated using existing facilities and staff at current prices is the first step," said Mitchell. The next step is to compute expenses. Then compare revenue to expenses. The primary objective of any business is to earn more revenue than is spent on expenses, i.e. make a profit.
Different steps in the budget process may need to be revisited and adjusted until the desired profit has been achieved, according to Mitchell. For example, to increase revenue you may need to increase sales/services or you may need to increase the price of your product, or both. To decrease expenses you may want to decrease wages or the number of employees or reduce the cost of supplies or overhead expenditures. Once you get the net income (profit) where you want it, the budget then becomes a management tool to monitor operational activity and answer questions like, "Are we doing the things we need to do, the way we need to do them to achieve the net income (profit) the organization needs to survive?"
THE OPERATIONAL BUDGET
Using the Operational Budget as an example, let's take a look at some of the basic preparation steps. First you will have to have the statistical budget and the statistical assumptions. These statistical estimates or predictions will drive the operational budget, according to Mitchell.
"Once a manager knows an estimated volume of business, he/she has the first piece of information necessary to start to develop a revenue budget and an expense budget," she said. "A change in a volume statistic can affect both the revenue budget and the expense budget."
The second step is to use the statistical budget along with the current fee structure (what you are charging for your services or products) to calculate what the expected revenue will be. Fee structure information should be available from the accounting department.
Step three determines those items that will reduce the expected revenue i.e. discounts, etc. Step four looks at salary and wages and uses core staffing requirements, proposed operational changes, historical date and personal experience to develop a budget for worked hours and paid hours.
"A miscalculation on salary expense can break a business," said Mitchell. Unfortunately salaries and wages are also one the hardest items to budget for because of all the variables they contain such as, core staffing requirements, overtime, vacation time, sick time, productive time, non-productive time, wage increases, vacancies, staff reductions, staff increases, new positions, positions eliminated, job class changes, pay class changes, bonuses, hour increases and hour decreases.
By applying salary and wage scales, bonus structures, and proposed wage increases/decreases the hourly budget is converted to a dollar value. This is done by determining the number of hours (productive and non-productive) to be paid to the employees for the budgeted time frame. As part of the budget assumptions accounting usually provides an average hourly wage for the business.
Finally, using a spreadsheet, you will have to look at each expense category as a separate calculation using historical data, current information, statistical information, cost factors and other budgetary assumptions. The basic summation of all this is; revenue minus revenue deductions minus expenses equals net income.
WHEN IS A BUDGET SUCCESSFUL?
"A budget does not succeed or fail. Only people succeed or fail," said Mitchell, who believes that success or failure results from how managers use the budget. If they throw it into a drawer and only pull it out the next time they have to prepare a budget instead of using it as an on-going monitoring tool then the process has been a waste of time and money, she suggests.
"I have worked with managers who have struggled with trying to 'see the big picture'," she said. "They are very good at handling details but could not seem to make the operation run smoothly. Working through the budgeting process helped them to begin to see how everything fits together and (they) came to understand that what affects one process will eventually affect the whole operation. Conversely, I have worked with managers who were so focused on end results they failed to see there were improvements that could be made. If they reached their quotas, that was good enough. During the budget process as they began to analyze activity, they began to question process and in some cases discovered ways to improve efficiency, reduce cost and exceed their quotas." According to Mitchell, if doing monthly comparisons between actual activity and budgeted activity creates cost awareness and greater accountability through the organization, provides a reliable mechanism for Senior Management to track operations and helps managers to track and understand the causes of shifts, variances and changes in operational activity, then the budget has served its purpose.
It's important to remember that budgeting is an on-going process. Taking time each month to really analyze actual departmental activity, make notes on variance and document what action was taken will save you a lot of time later on. It will also provide valuable information for managing your department more effectively. As a final word of advice Mitchell says 'don't try and be superman or superwoman. Recognize your limitations and ask for help.' You are part of a team after all.'
CREATING A BUDGET
- Do your homework! If you use incomplete, inaccurate or just wrong information, the resulting budget is useless.
- Allow enough time. Gathering information, analyzing information, doing projections, number crunching and reviewingfor reasonability all take time.
- Understand how your operation really works. How things worked when you worked the line or the floor may not be how they work today. Knowing the difference between official policy and procedure and what's really happening is critical.
- Keep accurate records and documentation. If you don't document changes, shifts or variances in department operations how will you track trends over time? If you don't keep records how will you remember what happened 10 months ago and know if it should be reflected in the budget?
- Do the math. A budget is a mathematical statement. You will have to "crunch the numbers".
- Ask for help. As a departmental manager, your training and strengths are probably not in budgeting. So ask for help from those who do have this training.
PART I of this story is available here.
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