Question

As a new hired budget analyst, you were selected to work at the Swedish Hospital’s finance department. Currently the Hospital is planning its operating budget for the coming year. The budget will include operating, cash and flexible budget components. Capital budget was passed last year and needs not to be revisited. The hospital is noted for its three fine programs: oncology (cancer), cardiac (heart) and rhinoplasty

Revenue

The hospital managers have projected that next year they will have 200 patients. They expect 90 oncology patients, 50 cardiac patients, and 60 rhinoplasty patients.

The average charge, or list price, for oncology patients is $80,000. Cardiac patients will be charged an average of $50,000, and rhinoplasty will charge $55,000 per patient. However, the charges often are not the actual amounts ultimately received.

Assume that private insurance companies will pay the full charge of list price. However, Medicare and Medicaid rates will pay as follows: oncology patients - $60,000, cardiac patients - $35,000, and rhinoplasty patients - $30,000. Self-pay patients are expected to pay the full charge, but generally 20% of self-pay charges become a bad debt. Note that bad debts are treated as expense in health care. They may not be shown as a reduction in revenue: the full charge for self-pay patients is shown as revenue, and then bad debts are reflected as an expense. No payment for charity care is ever received, so charity care is not shown as a revenue or expense.

The payer mix is as follows:

	Private insurance	Medicare/Medicaid	Self-Pay	Charity
Oncology	50%	30%	15%	5%
Cardiac	50%	40%	5%	5%
Rhinoplasty	40%	20%	25%	15%

Gift shop is projected to earn $70,000 for the current year and is expected to remain the same. The hospital has an endowment that brings in an additional $500,000 in interest income per annum (per year). 

Expenditures

The hospital expects to employ workers in the following departments:

	Oncology	Cardiology	Rhinoplasty	Total
Managers	600,000	500,000	300,000	1,400,000
Staff	3,000,000	2,000,000	500,000	5,500,000
Total	3,600,000	2,500,000	800,000	6,900,000

Supplies are to be purchased throughout the year for the departments as follows:

	Total
Oncology	400,000
Cardiology	200,000
Rhinoplasty	200,000
Total	800,000

Assume that all supply use varies with the number of patients.

Swedish hospital currently pays rent on its buildings and equipment of $100,000 per year, paid quarterly at $25,000 each quarter. Rent is expected to remain unchanged next year.

Flexible budget

The hospital usually prepares a flexible budget as part of its annual master budget to assess the likely impact of patient volume variations on revenues and expenses. The salaries of managers are fixed costs (manager salaries do not change with the patient volume). The staff salaries are variable costs (expenses) in all areas. All salaries are paid in equal amounts each month. Variable salaries are paid in direct proportion to patient volume. Supplies vary in direct proportion to patient volume.

Essay 1. The Task:

1. Calculate patient revenue on accrual basis for the coming year. Sub-divide revenue by program, and within each program subdivide it by type of taxpayer.

2. Prepare a revenue budget based on all of the sources of revenue.

3. Calculate an expense budget on accrual basis for the coming year. The expenses should show main categories such as salaries and supplies.

 

Essay 2. The Task:

Prepare a flexible budget assuming patient volumes are 5 and 10 per cent higher and 5 and 10 per cent lower than expected. Also include the initially expected patient volume level in the flexible budget.

 

Case Study Section 3. Quarterly Cash Budget. 

Patients are expected to be treated and discharged throughout the year as follows.

Quarter 1 January-March	Quarter 2 April-June	Quarter 3 July-September	Quarter 4 October-December	Total
30%	30%	20%	20%	100%

Historically, Swedish has found that private insurance, pays the next quarter after the service; Medicare/Medicaid pay 1/2 in the next quarter and another 1/2 - two quarters following service, and self-pay patients pay 1/4 in three consecutive quarters after the service, whereas the remaining 1/4 payment is never received. Charity care is never collected. 

Assume that the above patient flow, payment rates, staffing and supplies purchases are the same as those projected in the budget for the coming year. Costs attributed to supplies and staffing are directly related to the number of patients served.

Assume that all interest earned by the endowment is received on the first day of the third month of the year. Assume that gift shop revenue is received in equal amounts each quarter. Assume that all management salaries are also paid equally each quarter.

Swedish plans to start next year with $150,000 in cash.  There is no carry over balance from the previous year. 

Essay 3. The Task: Prepare a cash budget for the coming year. It will help for you to prepare it in the following order:

1. Determine patient revenues by quarter, by type of payer, in the coming year (i.e. determine private insurance revenues for each quarter, Medicare/Medicaid revenues by quarter, and so on).

2. Determine cash collections by quarter for the coming year, using revenue information from part a).

3. Develop the cash budget by quarter:

1. Start with beginning cash.

2. Add cash receipts shown by source (i.e. patient revenue by payer, from an endowment and from the gift shop).

4. Deduct cash payments by line-item (i.e. salaries, supplies).

5. Do not include bad debt - a non-cash item. 

6. Estimate the amount of the loan you need to take, and the interest payments on the loan. 

7. When you generate enough cash - repay the loan in part or in full.  

8. Calculate available cash balance at the end of each quarter.

Answer 1

Answer - You will be changing your budget projection worksheet to reflect the changed value (Option - 1)

why not option 2 - The original data set would be affected when using scenario manager unless and until the original data has been created as a scenario

why not option 3 - Excel would automatically get updated when the sales unit figures are changed irrespective of scenario manager being used

why not option 4 - Using scenario manager changes the data set and does not update the same (i.e. there would be no trial of previously budgeted figures unless a scenario is created for the same)

Sales budget is the most important budget since all the other budgets such as Production budget, Material Purchase budget, cash flow budget, etc are dependent on the sales figure. When the sale projection changes the entire budget changes leading to different levels of production, purchase and cash flow requirements.

Illustration - A simple budget has been prepared for you reference (Assumptions to prepare the budget - one unit of raw material and one hour of labor is required to produce a unit & no opening stock, closing stock to be kept is 200 units & opening cash balance is 10,000 & selling price , labor rate and material price are 55, 10 and 15 respectively)

where 'less sales' is a scenario where we expect sales to be 900 units

where 'more sales' is a scenario where we expect sales to be 1200 units