Module 7

1. Module 7 Review of Financial Statements

2. Review of Financial Statements • After the budget is created, submitted, and approved there is a need to monitor the budget for compliance • Tools that organizations use to monitor budgets • Variance Analysis • Financial Balance Sheets • FTE/Productivity Reports

3. Review of Financial Statements • Variance Analysis may have four different types of information to review • Price or rate • Efficiency • Volume • Intensity

4. Review of Financial Statements • Price or Rate Variance • Difference between the price actually paid and the budgeted price multiplied by the actual quantity used. • Example: Dietary department produces 1500 patient meals. Budgeted volume was 1600 meals with a budgeted price for $16.00. To produce the meals the department used 180 hours of labor and paid $16.50 per hour. Price Variance = ($16.50 - $16.00) x 180hours = $90.00 variance. • Unfavorable because the price for the meals was higher than budget. Problem because even though the department served more, the price per meal was higher. More is not necessarily better. • Need to review why the price was higher • ? Staff needed to deliver extra meals on overtime or just additional hours

5. Review of Financial Statements • Efficiency Variance • Indicates the productivity in producing. Determined by multiplying the difference between the actual quantity used and the standard quantity by the standard price. • Efficiency variance = (Actual quantity – budgeted quantity) x budgeted price • Using the Dietary Department example, the budgeted quantity refers to the labor hours which is based on both the variable and fixed hours for the entire department. The budgeted labor hours is 155 hours • (180 hours – 155 hours) x $16 = $400 • The department used 25 more hours of labor than expected and cost $400 more. • Need to again to review why more hours were used is it just due to the volume or another factor such as the orientation of new staff.

6. Review of Financial Statements • Volume Variance • Reflects the difference between the expected output and the actual output. • Volume variance = Budgeted volume – Actual volume • Example with the Dietary Department. • 1600 – 1500 = 100 meals • What caused the increase in meals? • Increase patient volume • Meal changes causing additional meals to be prepared

7. Review of Financial Statements • Intensity Variance • Difference is the difference between the quantity of units actually delivered and the quantity necessary or required. • Example: the standard is for each patient to receive 3 meals a day. Within one 30 day month on a 25 bed unit you would expect 2250 meals to be served. Anything less or more would be a variance. • Need to determine why the volume was either higher or lower then the expected volume • Individuals not on unit or status changed and did not eat. • Change of meals causing additional meals to be prepared which leads to a increased activity

8. Review of Financial Statements • Review of Variance Analysis • Allows for managers to take corrective action for unfavorable variances • Department managers may not be responsible for some of the items • Volume Variance– Nurse managers are not responsible for increase or decrease in volume but need to acknowledge the effect the change has on operations • Price Variance – Responsibility limited to understanding the labor costs and the type of labor used and the associated cost.

9. Review of Financial Statements • Most organizations provide managers with monthly information on • Salary Budget with variance in individual mix of job categories, salary levels and hours worked. • Non-Salary Budget with the variance in individual line items • Overall Operating Budget combining both the salary and non salary budget. Can be on budget overall but be under budget on non-salary and over budget on salary budget.

10. Review of Financial Statements Example of Monthly Statement

11. Review of Financial Statements • Managerial responsibility is to review the monthly reports and be able to answer questions regarding variances. • Why was more spent in a specific line item? • Why is there no expenditure in an item that has a history of use? • Need to be able to identify trends and unusual patterns or items • Is the variance in one month or spread out over the year? • Is there a seasonal use of the item?

12. Review of Financial Statements • Most reports have monthly and YTD information. • An individual month may have variances but over time these variances can be corrected. • Are the items spread by month or by volume? • If spread by month and you have a high volume month there will be an expected variance • If spread by volume there will be different budgeted monthly amounts based on price for unit of service • Important for information to be presented as soon as possible. The further away from the expenditures the less managers will be able to explain the variances. Most financials are available by mid-month of the following month.

13. Review of Financial Statements • Balance sheet • High Level Organizational Report that compares Assets and Liabilities • Assets • Current Assets – Items that are expected to be exchanges for cash or consumed during the year. • Cash and Cash Equivalents • Cash – coin, currency, and available deposited funds at banks. • Cash Equivalents – include savings accounts, certificates of deposit, and other market securities • Accounts Receivable – represent legally enforceable claims on customers for prior goods or services.

14. Review of Financial Statements • Liabilities – These are obligations that are expected to require payment in cash during the coming year • Accounts Payable – Counterpart of accounts receivable. Represent the organizations promise to pay money for goods or services it has received. • Accrued Liabilities – Obligations that result from prior operations. Legal obligation to make future payment. • Current portion of Long-Term Debt – represents the amount of principal that will be repaid on the indebtedness within the coming year. • Noncurrent Liabilities – include obligations that will not require payment in cash for at least one year or more.

15. Review of Financial Statements • Example of Balance Sheet • Divided into Assets and Liabilities • Individual items within each category have dollar value assigned.

16. Review of Financial Statements • Used mostly in organizational financial discussions • Can be reviewed with managers on monthly basis • Indicate the financial success of the organization

17. Review of Financial Statements • FTE/Productivity Reports • Comparison of the budgets FTE’s versus the actual usage. • No relationship to the salary utilized. • Considers the mix of the staff and may be compared to standards regarding ratios or minimal staffing.

18. Review of Financial Statements Example of FTE/Productivity Report

19. Review of Financial Statements • Allows for review of Volume and hours or FTE’s worked and paid. • Can compare against an established target ratio or hours per patient day. • Most FTE reports also include the salary with allows for an analysis of not only the hours but the dollars paid.

20. Review of Financial Statements • Overall reasons for use • Preparing budget for next year by understanding the causes of the variance • Controlling the costs during the current year. If review done on monthly basis trends can be identified and corrective action undertaken • Evaluation of managers in managing budgets.

21. Review of Financial Statements • Responsibility of the manager is to review the documents • Need to make sure that there is understanding of each of the items on the budget • Need to identify what is the cause of the variance and develop corrective action plans