Building an annual budget requires a massive, coordinated effort across the entire organization, from department managers to senior executives. By the time the budget is complete, 20–30% of stakeholders’ time has been invested over the course of 4–6 months to piece together a complicated set of assumptions, projections, and approvals, most of which are outdated even before the budget is implemented. Knowing that the underlying components are outdated, many stakeholders consider the resulting budget flawed or completely irrelevant.
Many organizations are desperate for a new approach and have taken steps toward a more advanced planning approach to ensure financial accountability. Industry leaders are launching new financial planning frameworks that rethink the established approach to deliver a more accurate and agile financial plan. The objective is to create a plan that remains relevant despite a rapidly changing environment. The plan must be effective for all levels of the organization, whether clinical managers who drive cost reductions or senior executives who make strategic long-term financial decisions.
Here are a few key lessons that industry leaders have discovered as they rebuilt their budget processes.
If your goal is an accurate budget, you’re missing the point
Expect the unexpected and realize that a perfect financial plan doesn’t exist. Your financial plan will never be 100% accurate. Recognize the true objectives of your organization’s financial planning process. For example, studying the validity of service line volume predictions from last year’s budget cycle may not improve your decision-making process. What’s more valuable is a model that is agile enough to quickly adjust to the most up-to-date business conditions, identify risks faster, and help make more informed decisions.
The plan developed during a typical budgeting process is a point-in-time estimate that comes together over the course of 4–6 months. It’s not surprising that the outputs aren’t perfect. If one of your key objectives is to hold managers and others accountable to the financial viability of your organization, measuring performance against a target based on outdated assumptions is obviously a mistake. However, if you hold stakeholders accountable by measuring them against a model that incorporates the most up-to-date information, you can start to drive a meaningful dialogue about corrective actions.
Holding front line managers to targets they cannot control will erode your team’s credibility
Holding managers accountable to targets outside their direct area of influence, such as total expense, can result in a flurry of excuses. To drive accountability, finance teams must collaborate with front-line managers to identify the day-to-day decisions that have a significant financial impact.
For example, finance can’t hold managers responsible for overall salary expenses if those managers aren’t responsible for the merit increase. Instead, hold managers accountable to labor hours per procedure. Rather than spending time explaining that the patient volume forecast was wrong, managers can focus on volume and mix-agnostic ratios that are not invalidated by faulty volume assumptions made 12 months earlier. Shift the standards by which you measure and track performance for your clinical operations staff to maximize meaningful conversations and drive alignment and engagement.
To build a plan that lasts, leverage your cost data
Many organizations have leveraged unit of service (UOS) department metrics to flex budget targets throughout the year, attempting to maintain relevance amid changing business conditions. For example, you have $100 in variable supply expense resulting from 10 patient days (UOS). In a traditional budget, you might plan for the same $100, assuming 10 patient days is the best estimate for the upcoming year. However, if patient days jump to 15, your actual expenses would be closer to $150. With a traditional budget, a manager might need to spend time explaining the 50% variance in expenses ($150 actual – $100 estimate), whereas in a flexed budget the target is flexed based on the higher-than-expected volumes, which keeps the volumes in line with the expected cost per patient day.
While flexing targets with UOS metrics is an improvement over fixed targets, flexed targets don’t reflect the significant financial impact that patient mix can have on a department’s expenses. Patients with different diagnoses, acuity, and payers (to name a few) all have a significant financial impact that is not reflected in targets flexed by a single UOS (patient days in the example above). The single UOS model’s inaccuracy opens the door for clinical managers to easily invalidate their targets due to the impact of patient mix variance on the supplies and procedures that your organization uses.
We developed patient activity flexing to account for the impact of patient mix on the front-line manager’s financial targets. Informed by up-to-date cost accounting data, patient activity flexing calculates variable labor and supply expenses based on the actual cost per patient per procedure. With patient activity flexing, managers can plan in terms they understand and aim for targets that remain relevant as patient volumes and mix deviate from the initial plan.