Question

You are the administrator of the medical - surgical department. Review the transcripts from the budget meeting and recent voicemails from your CFO and, using the available information and resources, develop an operating budget for your department. Your budget should include a 2-4 page document with an accompanying Excel spreadsheet (available in the classroom) that: Provides the revenue and expenses through the current month of the current year. Estimates the revenue and expenses for the rest of the current fiscal year based on the assumptions provided in the transcript documents. Prepares a budget for the next fiscal year. Service Line Break Even Analysis Memo Transcript of the VOICEMAIL FROM George Costanza (CFO): Hi, it's George. I hear you're working on a budget for the Med-Surg department for FY 2019. I'd like you to come to the budget meeting this afternoon, because I'm going to be sharing some numbers that are likely to have an impact on your budget. I've sent you the year-to-date statements through December, the overall budget for the year, and the year-to-date budget variance for your department. Take a look at them, and bring them with you to the meeting. See you later! Transcript from BUDGET MEETING: George C., CFO Hi, everyone. Thanks for coming. We've got some important numbers to go through and a big challenge to respond to, so I think we better get started. Jerry, Vice President of Operations That sounds ominous. Newman, Vice President of Medical Support Well, can we at least get an idea of how we're doing year-to-date before you go to the 40,000-foot level? George I think you might need to hear this first. Here's the situation: The hospital has to cut operating expenses by 5 percent for next fiscal year. Kramer, Director of Clinical Operations I'm sorry, did you say 5 percent? Operating expenses? George That's right. Jerry That's a big ask. We're already operating awfully lean. George Agreed. But it's the situation we're in. I'll get to the reasons, but based on what I'm going to go over, I just want everyone to keep in mind that we can't make assumptions we were making before. So let me give you an overview of the budget and the year-to-date numbers, and I think you'll see why we're going to have to make those cuts. Now, last year, for the entire hospital, we assumed that we would see $1.2 billion in total patient revenue. But as you can see, for half the year, we've only hit just over $607 million. By this point in the year, we should be over $612 million. So already in terms of total patient revenue, we've got a deficit of nearly $5 million that we didn't expect. The problem is made worse when we see that other operating revenue is also under budget by $1.5 million. I believe that recent efforts in the billing department coupled with some of the solid work by the c-suite team on physician engagement and external marketing are going to have an impact on the revenue side of things. We’re also currently negotiating with a couple of our primary commercial payers, but those negotiations remain uncertain. All things considered, I’m hoping for about a 5% bump on the revenue side for FY 19. Our operating expenses are fairly close to target so far this year, but given the situation with uncertain revenue, we will need to try to find some additional cost savings opportunities. I want to be reasonably conservative in case market conditions change or negotiations with our payers don’t go as expected. Newman Wow. Well, okay, so that's the reality. What's the timeline? How long do we have to make these cuts? George Well, implementation is obviously by June 30 since the next fiscal year starts July 1. The board will approve the new budget probably by mid-June, but all the negotiation at the unit and department level will be going on this month. In your proposal, think through the cuts that are being proposed. Do you simply want to take a ‘salami slice’ cut across all areas of expense? Or, are there areas where it might make more sense to protect while others are more flexible? Since this is a simulation, you won’t know everything that you normally would about the organization, the people involved, etc. However, think through what the second and third order effects are of a budget cut and provide some commentary regarding what other issues might surface and/or may need to be addressed as a result'

Med/Surg Department Budget
	FY 2018 YTD (Jul - Dec)	FY 2018 Budget	FY 2018 Variance TYD
OPERATING REVENUE:
Inpatient Revenue	$ 23,123,516	$       50,000,000	$   (1,876,484)
TOTAL PATIENT SERVICES REVENUE	$ 23,123,516	$       50,000,000	$   (1,876,484)
OPERATING EXPENSES
Salaries and Wages	$ 12,157,632	$       23,000,000	$       657,632
Employee Benefits	$    3,040,408	$         5,750,000	$       165,408
Professional Fees	$       250,160	$            400,000	$         50,160
Supplies	$    5,883,497	$       10,000,000	$       883,497
Purchased Services - Utilities	$         27,456	$              50,000	$           2,456
Purchased Services - Other	$         23,484	$              50,000	$          (1,516)
Insurance	$         57,315	$            105,000	$           4,815
License and Taxes	$         21,456	$              40,000	$           1,456
Other Direct Expenses	$       972,157	$         1,500,000	$       222,157
TOTAL OPERATING EXPENSES	$ 22,433,565	$       40,895,000	$    1,986,065
NET REVENUE OR (EXPENSE)	$       689,951	$         9,105,000	$   (3,862,549)

Answer 1

Most Important Point to note that - Number mentioned in the Question is not matching with Chart Number .

In the Question mentioned revenue shortfall of $ 612 Mio where as in the chart ( Table form attached) in he question is showing overall FY Budget $50 Mio .so first half shortfall would be $1.8 Mio

So there is mismatch of number . I will explain you logic of budget preparation on the basis of chart ( table format number ) . To solve any question m most important part is logic , Number can change accordingly

Compete Budget HALF Year 2018 ( Budget vs Actual with variance )+ FY 2018 position ( Budget vs Actual) with Variance + remarks - to understand % wise Variance movement and impact on Bottom line

		Med /Surg Deptt Budget
Operating revenue	FY 2018 ( July to Dec)-$	Budget 2018 ( July to Dec)-$	Variance ( Half Year)-$	FY 2018 (Actual)-$	Budget FY 2018 -$	Variance ( Full Year)-$	Var% on Actual	Remarks
Inpatient Revenue	2,31,23,516	2,50,00,000	-18,76,484	4,62,47,032	5,00,00,000	-37,52,968.0	-8%	Revenue trend showing 5% down
Salaries and Wages	1,21,57,632	1,15,00,000	6,57,632	2,43,15,264	2,30,00,000	13,15,264.0	5%	Salary cost increased by 5%
Employee Benefits	30,40,408	28,75,000	1,65,408	60,80,816	57,50,000	3,30,816.0	5%	Employee Benefit cost increased by 5%
Professional Fees	2,50,160	2,00,000	50,160	5,00,320	4,00,000	1,00,320.0	20%	excessive high Crossed Major var 20%
Supplies	58,83,497	50,00,000	8,83,497	1,17,66,994	1,00,00,000	17,66,994.0	15%	Supplies another bigger one -15%+Vr
Purchased Services - Utilities	27,546	25,000	2,546	55,092	50,000	5,092.0	9%
Purchased Services - Other	23,484	25,000	-1,516	46,968	50,000	-3,032.0	-6%	Overall purchased cost slightly increased
nsurance	57,315	52,500	4,815	1,14,630	1,05,000	9,630.0	8%
License and Taxe	21,456	20,000	1,456	42,912	40,000	2,912.0	7%
Other Direct Expenses	9,72,157	7,50,000	2,22,157	19,44,314	15,00,000	4,44,314.0	23%	Excess increase in Current year
Total Operating Expenses	2,24,33,655	2,04,47,500	19,86,155	4,48,67,310	4,08,95,000	39,72,310	9%	Overall Operating Cost has increased by 9%
Net Revenue- Margin	6,89,861	2,50,00,000	-2,43,10,139	13,79,722	5,00,00,000	-4,86,20,278.0	Excess , cost overrun eaten up Margin as compared with Budget

FY 2019 Budget - Management wants at least 5% revenue growth in coming year + 5% decrease in Operating Cost .

As mentioned above , We already incurred $ 44.87 Mio cost as operation , Management target to reduce 5% in coming year so tentative Operating cost would be $ 42.62 Mio

While preparing budget for FY 19 , we have factor the above 5% across all category of cost , please see revised budgeted number and tentative Budgeted Profit

Operating revenue	FY 2018 (Actual)-$	Budget FY 2019 -$	Remarks
Inpatient Revenue	4,62,47,032	4,85,59,384	Revenue Increased by at least 5% in coming year( On the basisof 2018 FY Actual)
Operating Cost
Salaries and Wages	2,43,15,264	2,30,99,501	to maintain 5% reduction in FY 19
Employee Benefits	60,80,816	57,76,775
Professional Fees	5,00,320	4,75,304
Supplies	1,17,66,994	1,11,78,644
Purchased Services - Utilities	55,092	52,337
Purchased Services - Other	46,968	44,620
nsurance	1,14,630	1,08,899
License and Taxe	42,912	40,766
Other Direct Expenses	19,44,314	18,47,098
Total Operating Expenses	4,48,67,310	4,26,23,945	Overall Operating Cost manage to down by 5%
Net Revenue- Margin	13,79,722	59,35,439	Improved Budgeted Margin after considering above factor