Developing An Operating Budget: Theory And Practice

Developing An Operating Budgettheory And Practicewhen Creating A Budg

Developing an operating budget involves understanding its purpose, the phases of its development, the different models used, factors that cause variances, and how management addresses these variances. It also includes strategies for facilitating participation in the budgeting process and understanding unique aspects of budgeting in for-profit and not-for-profit hospitals. Additionally, the role of contributions in NFP hospitals and regulatory oversight by charities bureaus are essential considerations in the budgeting process.

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Developing an operating budget is a fundamental process in organizational management, serving as both a planning and control tool. The primary purpose of a budget is to provide a financial framework that guides an organization’s operations, aligns its strategic objectives with resource allocation, and serves as a benchmark for evaluating actual performance. In essence, a budget functions as a financial blueprint that helps managers make informed decisions, anticipate future needs, and measure progress towards organizational goals (Higgins, 2012).

A comprehensive budget encapsulates both planning and control aspects. As a planning document, it forecasts revenues and expenses, setting targets for various departments and establishing expectations for future performance. As a control document, it enables supervision by comparing actual financial outcomes against projected figures, thereby identifying variances that require managerial intervention (Mikesell, 2012). The dual role underscores the importance of the budget in maintaining organizational accountability and financial health.

The development of a budget typically unfolds through multiple phases. Initially, strategic planning frames the overall goals and priorities, guiding fiscal planning. The next phase involves consolidating revenue projections and estimating expenses based on historical data, current trends, and future assumptions. Departments then prepare their respective budgets, which are integrated into an organizational-wide draft budget. This process often includes review cycles and adjustments before final approval. Variability in budgets can stem from economic conditions, changes in funding, shifts in service demand, or unforeseen expenses (Davis & Mears, 2010).

Different budgeting models are employed depending on organizational needs. Traditional incremental budgeting adjusts previous periods' budgets based on a fixed percentage or specific drivers. Zero-based budgeting requires justifying all expenses anew each period, promoting cost discipline (Mikesell, 2012). Beyond these, activity-based budgeting focuses on costs associated with specific activities, offering a detailed understanding of resource utilization (Clinton & Schmidgall, 2019). Selection of a model depends on organizational culture, complexity, and management objectives.

Factors influencing variances include economic fluctuations, policy changes, operational efficiency, and external funding sources. For example, a sudden increase in demand for services or funding cuts can cause significant deviations from initial budgets. Management should proactively analyze variances, understand their causes, and implement corrective actions such as cost reductions, reallocations, or revised revenue projections. Regular variance analysis enhances financial control and ensures organizational agility (Higgins, 2012).

Effective management facilitates a participatory approach by involving departmental managers and key stakeholders in the budgeting process. Such inclusion fosters ownership, enhances accuracy, and improves commitment to financial targets. Techniques such as collaborative workshops, transparent communication, and feedback mechanisms are vital. Participatory budgeting also encourages shared responsibility, aligning departmental goals with organizational strategy (Davis & Mears, 2010).

The budgeting approach varies notably between for-profit and not-for-profit hospitals. For-profit entities primarily focus on revenue maximization, cost efficiency, and profitability, with budgets aligned to shareholder interests. In contrast, NFP hospitals allocate resources to fulfill their mission, emphasizing community service and patient care. Contributions, although essential, play a different role in NFP budgeting—expected donations and grants are often incorporated as revenue sources but are less predictable than patient revenues (Zelman, McLaughlin, & Gynda, 2000).

Budgeting contributions in NFP hospitals is appropriate if they are a significant part of revenue expectations. However, reliance on unpredictable gifts necessitates conservative projections and contingency planning. State charities bureaus oversee NFP hospital activities to ensure transparency and accountability, typically reviewing financial statements and fundraising practices (New York State Office of the Attorney General, 2012). These agencies help maintain public trust and ensure that charitable funds are used appropriately, influencing the hospital’s budgeting process through regulatory compliance.

In conclusion, developing an operating budget is a dynamic process that balances planning and control, requiring careful analysis of various factors and stakeholder involvement. Models differ based on organizational strategy, and understanding external oversight ensures transparency and accountability. Whether in for-profit or NFP contexts, effective budgeting enhances organizational performance and sustainability.

References

• Clinton, M., & Schmidgall, R. (2019). Hospitality Facilities Management and Design. John Wiley & Sons.
• Davis, P., & Mears, J. (2010). Budgeting in Healthcare: Strategic Planning and Financial Control. Health Administration Press.
• Higgins, J. M. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Mikesell, J. L. (2012). Fiscal Administration: Analysis and Applications for the Public Sector. Thomson Wadsworth.
• New York State Office of the Attorney General. (2012). CharitiesNYS.com. Retrieved from https://www.charitiesnys.com
• Zelman, W. N., McLaughlin, C. G., & Gynda, J. (2000). Financial Management of Health Services Organizations. Health Professions Press.