Welcome to My New Healthcare Management Blog

Ruben Moreno Iglesias

Introduction

Capital budgeting is a planning practice often used to gauge if an organization should pursue a long-term expenditure, investment, or a significant capital venture. Organizational executives tend to integrate investment appraisals and capital budgeting knowledge in making critical investment decisions like equipment or machinery (Smith & Wheeler, 2006). Healthcare managers need to comprehend the fundamental aspects regarding capital budgeting that policymakers can apply when making decisions relating to capital budget as well as scrutinizing prospective projects.

Healthcare financial management regarding capital budgeting

Smith & Wheeler (2006) argue that capital budgeting remains an important tool necessary for the survival of healthcare institutions. The need for capital budgeting follows the ever-increasing costs and the steadily diminishing revenue, which generally affects the basis of healthcare. These complexities require informed decision making and a plan that would get utilized to budget. Making decisions concerning capital administration and management entails an extensive analysis of an organization’s operating cash flow. It is essential to understand the effects of capital budgeting on healthcare institution practices. For-profit healthcare organizations are usually likely to remain more efficient compared to not-for-profit healthcare institutions because of the tendency of for-profit healthcare institutions to acquire nonprofit healthcare institutions leading to capital budgeting efficiency.

Stakeholders in healthcare institutions possess a more significant role in all processes and aspects of capital budgeting. Smith & Wheeler (2006) contend that healthcare organizations must learn the significance of identifying, implementing, monitoring, and evaluating long-term investments. The criteria for getting paid back remains the primary method applied in assessing long-term healthcare institutional projects. Most hospitals tend not to deal appropriately with the consequences of inflation; nevertheless, such healthcare institutions need to execute post audits. Various governments and insurance firms continue to remain stringent on funding and reimbursements to healthcare institutions. Healthcare managed organizations also keep pressurizing healthcare institutions to provide high quality and affordable services. It is of the essence, therefore, to ensure that the limited available resources get optimally utilized through efficient and effective resource allocation for long-term healthcare projects.

Payne (2015) admits that the effective distribution of resources in the capital budgeting systems would often improve the capabilities of managing the ever-growing costs, heightened competition, as well as the stringent reimbursements. For example, healthcare organizations keep updating and renovating their equipment to cope up with the stiff competition in the health sector. The majority of healthcare providers in many nations have put in place automated health records systems with the aim and potential of improving communication processes between the hospitals and the clients. There exist healthcare institutions that have invented ways to minimize costs, attract and keep staff members through the investment into facilities like daycare. Such daycare amenities are meant to serve the employees’ children and act as a plan for capital budgeting. According to Health Resources and Services Administration (2016), other healthcare institutions have set up pharmacy information systems to enhance the billing systems, facilitate inventory administration, as well as observe the pharmacist’s cost-saving objective.

Capital budgeting assists business establishments in structuring their budgets and takes into account the fixed assets like magnetic resonance imaging and cardiac unit equipment. The initial step to creating an operational capital budget involves the formation of a long-term objective through conducting a comprehensive system evaluation. It is the responsibility of the relevant financial administrators to clearly understand the objectives and goals of the healthcare organization by displaying their abilities to examine beneficial development projects. Secondly, it would be crucial for a healthcare organization to identify innovative investment undertakings that meet its future aspirations (Mukherjee, 2016). Such ventures ought to gear towards structuring up the organization into remaining as an essential participant in the industry. The next step would be to understand the significance of future organizational cash flows. Such statements of cash flows would enable the healthcare institution to manage what goes out and what comes in.

The sharing of ideas and information among executive administrators of a healthcare facility is the next vital step in the process of capital budgeting. Sharing varied opinions among organizational executives and the subsequent rejection, acceptance, or adoption of such ideas remains critical in incorporating different proposals that would further propel healthy discussions concerning what is suitable for an organization (Mukherjee, 2016). The next stage of capital budgeting would encompass the execution of expenditures. Such expenditures would get regulated and monitored cautiously all through the life cycle of an organizational venture. Finally, corporate projects need to get implemented through prioritization to ensure that the most urgent needs are settled first and in a proper sequence. The priorities would consider projects intended to minimize future organizational operating costs, improving the safety and health of patients, and bolstering the facility’s efficiency.

A summary of Capital Budgeting Process

Source: Business Jargons (n.d.).

The importance of management to comprehend capital budgets and formulation in testing the sensitivity of the forecasts regarding alternative scenarios, such as slowdowns in collections and declines in revenues

The primary basis of financial administration in healthcare establishments is to make sure that the departmental objectives get aligned to the organization’s entire strategic plan and ensuring execution of operations within the projected budgetary limits. Healthcare managers need to have proper knowledge of financial principles like operating and capital budgets, financial statements as well as how to explore such information to derive an informed opinion in making major business decisions. Mukherjee (2016) acknowledges that proper and informed budgeting ensures that an organization remains active and solvent.

In the majority of the developed nations, the cost of healthcare consistently surpasses the yearly Gross Domestic Product. Besides, the resources meant for healthcare services increasingly get competitive and scarce. Understanding capital budgets is, therefore, vital for the administrators of healthcare institutions to realize the various dynamics that may influence and have an impact on making decisions regarding capital or operating budgets (Mukherjee, 2016). In the United States, for example, departmental budgets usually depend on various institutional factors like shareholder investment, the possibility to get a return on investment from projects, and the exposure to new technologies. Other factors would include the coding and billing practices, the composition of Medicare or Medicaid clients and privately insured payers, the ability to increase capital, as well as the general effects of competition on the healthcare industry, among others.

When managers in healthcare organizations possess the elementary knowledge of the cost component in a budget, such managers would be able to differentiate between a capital budget and an operating budget (Smith & Wheeler, 2006). The differentiation enables managers to understand the reason why and how the administrators, trustees, executives, accountants, as well as other shareholders, arrive at decisions. Capital planning and budgeting remain increasingly significant because of the heightened competition and concentration on an organization’s lasting stability. The process of capital budgeting, to a greater extent, usually help healthcare administrators to determine the value of pursuing an expenditure or investment. Decision-makers regularly assess investment opportunities in distinguishing among the proposed projects to prioritize them in order of viability when making investment decisions. It is always necessary to incorporate the costs accrued from human resource expenditures, equipment maintenance, and ongoing care into capital proposals, budgets, and conclusions. 

Healthcare administrators must compete effectively with additional capital project plans by presenting an accurate picture of the agreed-upon project, with a justification to back the proposed budget, and making sure that all the associated costs of the project remain realistic. Healthcare establishments frequently undergo significant expenses to provide services and operate the equipment. Correct examination of such costs plus the consideration of other factors would assist in ensuring that the entire capital budget proposal is suitably competitive when compared against other plans. Smith & Wheeler (2006) agree that, understanding the necessary factors required for consideration when making a capital budget decision is vital to ensuring that the decision-makers consider all available alternatives entirely and reasonably.

According to Cleverly, Song, & Cleverly (2011), the categories of data that ought to get analyzed and integrated into capital budgeting should include an examination of the available alternatives, cost data, prior performance, resource availability, benefits data, as well as an extensive exploration of the risk projection. A comprehensive plan that has supporting data makes the process of decision making to remain steadfast and less likely to get rejected. Also, accurately analyzing costs would assist in averting the realized overheads from being significantly higher compared to the initial projection.

References

Business Jargons. (n.d.). Capital Budgeting Process. [Online] Retrieved from https://businessjargons.com/capital-budgeting-process.html

Cleverly, W. O., Song, P. H., & Cleverly, J. O. (2011). Essentials of Health Care Finance (7^th Ed.). Columbus, OH: Jones and Barlett Learning.

Health Resources and Services Administration. (2016). How do I prepare a budget? U.S Department of Health and Human Services: Health Information Technology. [Online] Retrieved from http://www.hrsa.gov/healthit/toolbox/RuralHealthITtoolbox/Financing/preparebudget.html

Mukherjee, T. K. (2016). The Capital Budgeting Process of Healthcare Organizations: A review of Surveys, Journal of healthcare management, 58-77.

Payne, C. T. (2015). Capital ideas for healthcare in 2015, healthcare financial management, 64-71.

Smith, D. G., & Wheeler, J. R. C. (2006). Capital budgeting practices in hospitals. International Journal of Healthcare Technology and Management, 7(1/2), 117-128.