Preparing and Managing an Operating Budget

Laconically, an operating budget is a roadmap which formally quantifies an organization’s goals or objectives – a plan for attaining strategic missions of an organization; it captures all the organization’s expenses and revenue over a period of time ( Angela, 2013 ). Nurse Managers utilize operating budgets to monitor supply costs as well as personnel. It is crucial for nurse managers to be conversant with every aspects of the operating budget since they are the ones closest to the patients and are familiar with the prerequisites for provision of quality healthcare services (Danna, 2017). According to Penner & Spencer (2012) staffing and scheduling for outpatient setting towards patient care are less complex compared to inpatient care. Drawing on the issue of inpatient nursing care, this paper aims at offering a detailed insight on how to prepare and manage an operating budget for an inpatient setting of a given organization. To achieve this objective the role of a nurse manager will be assumed in the preparation of an operating budget for a 35-bed hospital unit with 20 full-time equivalent (FTE) staff. Of note is that the nurse manager is mandated with the task of getting the budget under control as will be outlined in the proceeding sections. 

The Operating Budget 

Revenues and expenses are the main elements that constitute an operating budget. Revenues are gains to the organization which are derived from charges for inpatient care either paid through self-paid user fee or from insurance cover such as Medicaid and Medicare. The benchmark applied in measuring acuity is 8 hours per patient day (HPPD) ( Kirby, 2015). Based on patient acuity, the total HPPD required for the 35 patients is 280 hours daily as reported. The unit will be understaffed if direct hours are less than 280. In budgeting, distribution of staff is mandatory to ensure that more staff are allocated during evening shifts and busier day with few staff covering the night shift. The three shifts are to be covered by a total of 20 staff, each of them to cover full 8-hour shifts, thus the daily FTE is 20. A missing gap is evident if 280 direct hours is divided by 8 hours per shift which gives 35. Fifteen more staff must fill the gap, thus overtime or agency nurse hours must be accounted for in the budget as illustrated in table 1 below. It should be noted, as shown in table 1, that the calculation of FTEs for the month is different from the daily staffing reported. That is, direct hours is not utilized instead total paid productive and nonproductive hours are used since there is anticipation that staff will utilize nonproductive hours or sick leave in the course of the month. Total paid hours are divided by 

Table 1 35-Bed Hospital Unit Monthly Expenses, Performance Report and budgeting, April 2019 

Parameter	Calculation or Reporting	March 2019	April 2019  Proposed budget	Variance
Days in time period	Days in the month	30	30	-
Staffing of beds	Beds staffed for patient occupancy based on availability	35	35	-
Hours per patient day ( HPPD)	8 HPPD based on acuity requirements	8	8	-
Patient days	Sum of census count for time period	960	893	-67
Full Time Equivalent (FTEs)	(Total paid hours/320 hours) × 1.4 coverage factor	40.1	40.0	-0.1
Performance
Targeted Direct care hours	Days in a month × HPPD	7,680	8,160	480
Direct care hours scheduled	Total direct hours excluding overtime	3,848	4,800	952
Overtime hours	Total hours of paid overtime	3,832	3,372	-460
Total paid productive hours	Total direct hours and total paid overtime hours	7,696	8,172	476
Total paid nonproductive hours	Total paid hours other than direct care	1,700	1678	-22
Paid nonproductive (%)	Nonproductive hours/total paid hours	18.09%	17.0%	-1.09%
Total paid hours	All paid hours for direct care staff	9,396	9,873	477
Agency nurse hours	Total hours of agency nurses	24.0	16.0	-8.0
Average length of stay (ALOS)	Total patient days ÷ discharges	4.8	4.8	-
Discharges	Discharges + deaths + transfers off the unit	200	218	18
Bed turns	Discharges ÷ staffed beds	5.7	6.2	0.5
Expenses
Direct care scheduled wages	Hourly wage × hours	$123,136	153,600	30,464
Overtime wages	Hourly wage × 1.5	$183,936	161,856	-22,080
Nonproductive wages	Hourly wage × hours	$54,400	53,696	-704
Total hourly wages	Excluding agency nurses	$361,472	369,152	7,680
Agency nurse expense	Agency nurse hour × hourly expense	$1,680	1,120	560
Total employment cost (personnel expense)	Total hourly wages + agency expense	$363,152	370,272	7,120
Supplies		$30,000	37,000	7,000
Other non-personnel expenses		$40,000	38,000	-2,000
Total Non-personnel Expenses		$70,000	75,000	5,000
Total Expenses	Employment cost + non-personnel expenses	$433,152	445,272	12,120
Expenses per patient day	Total expenses ÷ patient days	$451.2	424.1	-27.1
Expenses per FTE	Total expenses ÷ FTEs	$10,801.8	11,131.8	330

FTE, full-time equivalent; HPPD, hours per patient day. 

328 hours, which signifies the 2 pay periods in the month. Coverage factor of 1.4 is used in the multiplication owing to the weekend coverage in the course of the month. In March 2019, 40.1 FTEs was required to cover all productive and nonproductive hours of the month. 

Nurse performance reported for the month of March 2019 is shown in table 1. The actual direct care hours reported for March 2019 is 3,848 based on the eight HPPD required. The total paid was reported at 9,396 hours after factoring for paid productive and nonproductive hours. From this report, nonproductive hours account for 18.09% of the total paid. The April 2019 budget targets the Penner & Spencer (2012) estimated nonproductive hours of 17%. Therefore, the budget for total nonproductive hours will be approximated at 1678 for the April 2019 given the total paid hours of 9873 as shown in table 1 above. Expenditure on overtime is relatively high in the budget owing to the fact that daily FTE is 20. Therefore overtime is budget at 3,372 with a variance of negative 460 from the previous month. The remaining gap to be filled by agency nurses as outlined in table 1 above during the course of the month. The target average length of stay (ALOS) aimed at in the April budget corresponds to 4.1 days, the overall US average figure reported by CDC & NCHS (2015). With a variance of -0.4 from the previous month, the ALOS budgeted for will ensure satisfactory flow of patients in the unit. 

Expenses for the unit is budgeted for as illustrated in the last sections of table 1. Hourly wage of $32 is applied for direct care and nonproductive hours, an estimate close to the 2014 median pay of $31.5 per hour (Healthcare Association of New York State, 2014). Overtime wages are estimated at $48 per hour (1.5 times $32) while the agency nurse wage is approximated at $70 per hour. In the preparation of the operating budget, salaries and wages for fixed workers such as nurse manager or clerk in addition to employee benefits (such as insurance cover) are not captured in the reporting and calculation of the current budget. 

The total monthly employment cost for the 35-bed hospital unit as reported for March 2019 is $363,152 with an overtime wages accounting for 50.65% of the t otal personnel costs, a relatively. The estimated budget for April 2019 targets a reduction in the overtime wages by 6.94% (overtime wages for April accounts for 43.71% of the total personnel cost. Medical supplies for patient care in addition to expenses on equipment maintenance and ambulance accounts for non-personnel cost as shown in table 1. Expenses per patient day and per FTE as also reported and budgeted for as illustrated in the table 1. 

Table 2 below illustrate the number of staff required over 24 hours, breaking it down to the number of nurses to be scheduled in every shift. Notably: “Total HPPD = number of patients × HPPD for each patient and Nurses per day = total HPPD ÷ hours per shift” (Kirby, 2015). 

Table 2 A 24-Hour Day Nurse Staffing In an 8-Hour Shift, April 2019 

Patients	35
HPPD	8
Total HPPD	280
Hours per shift	8
Nurses Needed Per Day	35
Busier day shift	14
Evening shift	12
Night shift	9

HPPD, hours per patient day. 

Table 3 Nurse Staffing for 7-Day and 24-Hour Coverage for 8-Hour Shifts 

Patients	35
HPPD	8
Total HPPD	280
Hours per shift	8
Nurses Needed Per Day	35
7-day and 24-hour coverage factor for  8-hour shifts	1.4
Nurses Needed Per Week	49

HPPD, hours per patient day. 

According to the calculations in table 3 above, the minimum number of nurses needed is 49 per week for the 35-bed hospital unit. This explains the high figures of overtime hours included in the operating budget in table 1 since the unit has only 20 full-time equivalent (FTE). 

Table 4 April 2019 Operating Budget – Statement of Revenue & Expenses 

March 2019 March 2019 Variance April 2019 

Budgeted ($) Actual ($) ($) Budgeted ($) 

Revenues Operating budget appropriation 437,350 425,000 -12,350 455,000 Expenses 

Total expenses 420,090 433,152 -13062 445,272 Deficit/surplus from operations 17,260 -8,152 9,728 

Explanation on How the Budget Was Designed and Created 

One of the simplest metric for assigning patients to a staff is hours per patient day. “Hours per patient day is a metric that is easy to use in determining budgeted full-time equivalents (FTE) and in comparing staffing across organizations” (Kirby, 2015, p.64). According to Kirby (2015), it can also be utilized in translating nursing cost per day as was illustrated in table 1 by obtaining a product of HPPD and the average wage expense for a given population of patients. Productive hours was obtained from the time that nurses were paid to deliver their services to patients, and is a measure nursing staff efficiency in care provision ( Penner & Spencer, 2012 ), the reason as to why it was included in the operating budget. In budgeting, productive hours was approximated from the direct care hours provided by inpatient nurses and the overtime offered in the service. The needed HPPD formed the basis for determination of direct care hours. The product of number of staff in every shift and the hours per shift constituted an estimate of the direct care hours in the budget. Notably, some indirect hours such as meetings, orientation or education were represented in the productive hours giving the variability seen in March 2019. Non-productive hours rose from paid hours for holidays, sick leave or vacations. The proportion of paid nonproductive hours of the total paid hours made up the nonproductive percent . With agency and overtime hours excluded, summation of paid productive and nonproductive hours constituted total paid hours. Owing to the high costs of nonproductive hours, the April budget aimed at lowering their costs as shown in table 1. Agency nurses who filled the gaps for employees under the umbrella of approved nonproductive time received full wages despite the absence of such employees. Notably, in the calculation of staff FTEs, agency nurses were not included. 

Overtime was reserved for nurses who worked for more than 8 hours per day (more than 40 hours per week). Overtime payments were more than the normal wages by 50%, explaining the 1.5 factor in the multiplication. The time for acute care was denoted as average length of stay (ALOS) – an indicator for efficient nursing care. Lower ALOS translates from few or no complications arising from nursing errors. According to Penner & Spencer (2012) ALOS is obtained when total patient days is divided by the number of discharges within a specified period of time, that is, 960 divide 200 giving 4.8 for March 2019 (see table 1). Bed turns was calculated by dividing admissions by the number of staffed beds, that is, 200 divide 35 giving 5.7 bed turns for March 2019, see table 1. 

Expenses 

In designing the operating budget in table 1, expenses that aided in achieving the organization’s primary purposes were captured. Operating budget expenses entail costs for staffing, supplies and other charges encountered in running the nursing unit (Danna, 2017). In essence, e xpenses were classified into personnel expenses (employment cost) and non-personnel (non-salary) expenses in the stated operating budget. Danna (2017) asserts that personnel expenses include both salaries and wages as well as costs accrued from overtime, holidays, orientation, and shift differentials among others. Evaluation of wages and salaries comprises of both productive a nd non-productive time. Danna (2017) comments, “productive time is the actual hours that the employee works (includes overtime hours) and is based on 2080 hours (1 full time equivalent, FTE),” the FTE stated in table 1 applied the principle of this assertion. Notably, expenses for an inpatient unit varies considerable depending on patient volume. Additionally, low inpatient census translates into low expenses specifically with reference to staffing and supplies. The monthly budget in table 1 was prepared with focus on variable operating expenses for a typical month included costs on supplies and staffing with overtime and agency nursing included to fill the gaps. Fixed operating expenses such as cost for equipment maintenance was also included. Total expenses was attained by summing both the personnel and non-personnel costs as illustrated in table 1. 

Revenues 

In the setting of healthcare service delivery, unlike expenses, the nurse manager has little control over the amounts of revenues generated. Nurses learn very little as pertains revenues in the healthcare industry. Nevertheless, revenue indicators are utilized in measuring nursing care; for instance, inpatient revenue per nursing FTE is a common indicator in the daily operations ( Penner & Spencer, 2012 ). Financing of healthcare emanates from various sources such as government funding, private insurance cover and out-of-pocket user fees. Thus, revenues are categorized based on sources such as self-pay, commercial insurers, Medicaid or Medicare. Nurse Manager has to appreciate that reimbursement of healthcare is variable since it is pegged on inpatient day, procedures performed, patients’ volume, and charges per patient (Hills et al., 2015). As stated by Mitton, Dionne & Donaldson (2014) i n budgeting, the role of nurse manager is to ensure relevant appropriation of revenues, always keeping the bottom line to negate arousal of deficits as was the case in March 2019, see table 4. 

Strategic Planning 

The strategy in designing the operational budget is to uphold efficiency in a cost containment fashion through setting of short term goals (Hill et al., 2015). Mitton, Dionne & Donaldson (2014) describe different perspectives for strategic planning in budgeting, namely: program budgeting and marginal analysis ( PBMA ), multi-criteria decision analysis (MCDA), and accountability for reasonableness (A4R). PBMA is founded on two concept, opportunity cost and the margin. In essences, nurse leaders to propose changes with less costs or maximum benefits in the planning process when weighed against set goals. MCDA utilizes as set of criteria for benefit scoring – a “symmetric negative-to-positive rating scale” for evaluating investment or disinvestment options. A4R advocates for fairness and legitimacy in the process of priority setting in the course of decision making (Mitton, Dionne & Donaldson, 2014). 

In nursing health care delivery services, improved teamwork is directly linked to increased patient staffing. Quality of care and reduced staff turnover is directly associated with increased patient staffing (Duffield et al., 2014). Key to determination of average nursing hours per patient day (NHPPD) is average daily census (ADC). Therefore, ADC should be actively analyzed in budgeting. In strategic planning, the target should be optimal nurse to patient ratio. Lower ratios have been associated with higher incidences of adverse patients’ outcomes. According to Duffield et al. (2014) a two percent decline in adverse patients’ outcome was noted with higher nurse staffing. Therefore, safe staffing in a cost-effective way must be the priority of every n urse executive – appropriate staff for right role in optimal numbers while saving dollars (Hill et al., 2015). Lastly, in strategic planning, nurse leaders need to embrace modern technology that would enhance communication across the facility and minimize wastage. 

An Approach to Ongoing Budget Management 

Upon preparation of operating budget, the nurse manager is mandated with the role of keeping other nurses on check to ensure they are mindful of expenses. Therefore, excessive expenses are cut down through avenues such as monitoring for abuse of nonproductive time, wastage of medical supplies, and poor handling of equipment in the nursing care. Organization’s efficiency or profitability to be achieved through reduction in length of stay (LOS) by ensuring quality nursing care to avert preventable complications. Appropriate bed turnaround time and length of stay betters inflow of patients since beds will be readily available for fresh admissions. Effective bed turns and turnaround time is pegged on discharging process. Nurses have to expedite discharges and maintain proper housekeeping to allow for efficient patient flow. 

Conclusion 

Preparation and management of an operating budget constitutes a fundamental role of nurse managers. Key to preparation of operating budget is balancing revenue against variable and fixed operational expenses. Personnel expenses must be monitored aggressively to prevent escalation of nonproductive expenses and consideration for variances is vital in the budgeting process. 

References 

Angela Gambino, B. S. N. (2013). The Nurse Manager's Guide to Budgeting and Finance. In Oncology Nursing Forum (Vol. 40, No. 6, p. 611). Oncology Nursing Society. 

Centers for Disease Control and Prevention (CDC) and National Center for Health Statistics (NCHS). (2015, September 30). FastStats hospital utilization . Retrieved from http://www.cdc.gov/nchs/fastats/hospital.htm 

Danna, D. (2017). Learning and mastering the operational budget . Retrieved from http://www.strategiesfornursemanagers.com/ce_detail/213520.cfm# 

Duffield, C. M., Roche, M. A., Homer, C., Buchan, J., & Dimitrelis, S. (2014). A comparative review of nurse turnover rates and costs across countries . Journal of Advanced Nursing, 70 (12), 2703–2712. 

Healthcare Association of New York State. (2014). Healthcare workforce: New roles for a changing healthcare delivery system. 2014 Nursing and Allied Professionals Workforce Survey Report . Retrieved from http://www.hanys.org/workforce/survey/reports/2014_nursing_allied_workforce_survey_report.pdf 

Hill, K. S., Higdon, K., Porter, B. W., Rutland, M. D., & Vela, D. K. (2015). Preserving staffing resources as a system: Nurses leading operations and efficiency initiatives. Nursing Economics , 33 (1), 26. 

Kirby, K. K. (2015). Hours per patient day: not the problem, nor the solution. Nursing Economics , 33 (1), 64. 

Mitton, C., Dionne, F., & Donaldson, C. (2014). Managing healthcare budgets in times of austerity: the role of program budgeting and marginal analysis. Applied health economics and health policy , 12 (2), 95-102. 

Penner, S. J., & Spencer, M. D. (2012). Acute care utilization, staffing and financial indicators. In K. T. Waxman (Ed.), Financial & business management for the doctor of nursing practice . New York, NY: Springer Publishing Company.