Written by: Ezekiel Gacee
According to Baicker & Levy (2013), businesses have to rethink their business strategies and best practices amid the looming reduced reimbursements. At this point, hospitals and health organizations have to review their sending abilities to avoid antiquated tools that cannot work moving into the future.
Strategic planning can turn around the fortunes in the healthcare sector, where any dramatic changes in technology, reimbursements, and marketplace are the driving forces. In strategic planning, budgeting is perhaps one of the most crucial processes. As much as it appears like a straightforward activity, creating a budget has its challenges, mainly when dealing with middle-level and large organizations.
Elements of a Financial Plan
A financial plan entails a comprehensive evaluation based on the current and future financial position of an investor. The tools used to measure the financial state include; asset values, cash flows, and withdrawal options. A good financial plan should, therefore, contain:
- Financial goals: Financial goals are what define a sound financial plan. Without the goals, it would be extremely challenging to understand and map out a clear direction for a future investor. Some examples of financial goals include; college education funds, starting a business, and buying a home. It is essential to quantify financial goals so that they can acquire a milestone that can be tracked.
- Personal net worth: The measuring of liabilities and assets provides the trajectory through which financial goals can be achieved.
- Cash flow analysis: A proper analysis of the income and debt determines how much should be set aside for either saving or debt repayment. Without a cash-flow study, more funds could be allocated to areas that should not be a priority.
- Retirement strategy: During the retirement period, financial independence is essential, and planning guarantees retirement capital that is readily available for the rest of someone’s lifetime.
- Risk management plan: It is essential to identify all the risk areas that can lead to financial loss and, therefore, cover such risk.
When accounting for cost, there are two types of budget. One is the fixed budget and flexible budget.
- Fixed budget: A designated account is consistent throughout regardless of the levels of activity in that market. Fixed funds are mostly created for a constant production volume. This kind of account allows organizations to set aside revenue and expenses for a specific period. However, a limited budget has proven over time to be ineffective as organizations find themselves stuck when it comes to changing or revising the account to cover for future needs. A fixed budget operates under one stable condition ignoring other factors that could influence changes in an organization.
- Flexible budget: According to Potter & Diamond (1999), a flexible budget is not constant but instead responds to varying production levels or the utilization capacity. This budget can be revised to account for any changes in output. While drafting a flexible budget, there are three major segments, namely fixed, variable, and semi-variable costs. The semi-variable is further classified into two, namely; fixed and variable costs. A fixed budget is commonly used in organizations where there are various factors influencing production and sales. The market where a flexible account is used is characterized by high variability.
Defining Budget Variance
“Variance analysis assists organizers to track and collect the difference between what they had planned and the actual outcome” (Egenderhealth 2003). It is this mantra that organizations can track their spending. A perfect example of variance is when a new business budgets for $10000 in sales, but the actual balance turns out to be $8,000 at the end of the budget period. Variance is therefore calculated as the difference between the total sales and the projected amount in sales.
According to Esque (2003), the effect of variance on a business is best illustrated over a trend; this makes it more transparent; this ultimately helps understand why there were extensive variances during specific periods.
Different sectors only need two of three of the variances that affect them the most. For example, a manufacturing organization will be more focused on purchase price variance while a consulting business would be more interested in the labor efficiency variance.
Baicker K, Levy H. (2013). Coordination versus competition in health care reform. N Engl J Med; 369(9):789–91.
EngenderHealth. (, 2003). COPE® Handbook: A Process for Improving Quality in Health Services. Revised ed. New York: EngenderHealth,
Esque, T J. (2003). “Managing to Lead.” Performance Improvement, vol. 39, no. 2, 2000: 45–47. Potter, B., and Diamond, J. (1999) Guidelines for public expenditure management. Washington, DC: IMF