LUNA GOCO COLLEGES, INC.

DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
Module 10
Financial Skills for Nurse Managers and Administrators
Objectives
After working on this module, you should be able to:
1. Define the purpose of a budget;
2. Explain the budget preparation process;
3. Differentiate the types of budgets;
4. Discuss cost concepts and controls;
5. Explain the concept of costing out nursing services; and
6. Describe methods in costing out nursing services.
The scope of financial responsibilities for nurse managers and administrators varies among organizations
and agencies. However, the need for financial skills remains constant. Such skills are crucial since emphasis
is now on financial performance and viability (if not profitability) in health care institutions. Working through
the budgeting process and understanding the processes involved are critical to effective and responsible
managing. In addition, it is important to under- stand how budgets can affect other aspects of business and
how budgets can be impacted.
What is a Budget?
Budgeting is a planning as well as a control process. This is so because a budget is a plan for the allocation
of resources and a control for ensuring that results (expressed in quantitative terms) are in accordance with
the plans. Budgets determine what resources will be used by the different units of the agency, by whom,
when, and for what purpose.
A budget is usually prepared for one fiscal year, subdivided into monthly, quarterly, or semiannual periods.
Middle managers are usually the ones who prepare the unit budgets; top management and the board of
directors may prepare the long-term budgets for periods of 3 to 5 years.
The budget preparation process
According to Hoffman (1984), a budget is the financial definition of an organization’s vision and strategies to
implement that vision through allocation of monetary resources. A budget establishes the financial
expectations of the unit or organization and serves as the standard against which they are measured. Also,
the budget serves as a control measure when management determines whether the financial expectations
will enable the organization or unit to attain the goals and objectives set by its planning processes.
There are three steps in the budget preparation process, namely: corporate strategy development, making
projections, and operational planning.
1. Corporate strategy development. During the strategic planning process, a parallel financial process is
done, namely, budget forecasting of expenses and revenues for specified periods of time based on alternative
proposed strategies. Budget forecasting is done for worst, typical and best case scenarios: Financial
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
forecasts are important in considering which goals and objectives will require resource allocation as priorities
and options are deliberated on.
2. Making projections. Projections for units of the organization are based on past records of delivery of
services. They are made through trend analysis. Trend analysis examines the pattern of a phenomenon
(service unit) over time. Average number of visits by category (short, intermediate, long) are used as service
units for ambulatory care units and the like. Clinical units define service units depending on service provided:
operating rooms use minutes, radio-therapy services use type of x-ray, and dietary services use type of meal
served, etc.
A nurse manager or administrator must predict the number of service units to be provided. Common factors
used are the average number of patient days for inpatient services, and patient-hours for short term units.
A simple forecasting trend analysis makes use of a line graph with units of time across the bottom (X axis)
and units of service along the perpendicular line (Y axis). The number of units delivered for each time period
is then plotted. The nurse manager studies where the dots cluster around a line. If a linear trend can be
detected, a line can be drawn and possible projections derived from the position at future time points. The
nurse manager can consult an expert or marketing colleague who can test for fit and determine whether the
fit is linear or curved by using inferential statistics, such as regression.

3. Operational planning. The preparation of budgets requires managers to solicit the participation of many
individuals and spend many hours in the iterative process of submission, review, and adjustments. The
budget preparation process may take 4 to 6 months of activity, after which it is submitted to the board of
directors/trustees for approval.
Often it is senior management that reviews and revises the budgeting manual that outlines the steps to follow
and the forms to standardize information. After review and revision, the rest of the organization involved in
the budgeting process can take appropriate and timely action in the budget’s development. The different
activities are arranged in sequence with a timetable (due dates) for each step in the budget preparation
process. In more progressive health care organizations, unit managers are the ones who develop projections
and subsequent revisions for operating budgets, capital budgets and cash budgets.
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
Robnett and Schaub-Rimel (1998) suggest that operating guidelines to be included in the budget preparation
manual should address:
A. Operating decisions made, such as salary increases, projected change in total employment, adjustments
in rates charged, and addition, deletion, or modification of services or products offered b. Assumptions about
the external environment, particularly its financial impact from the effect of the projected level of reimburse-
ments; the impact of changes in activities of competitors; and im- pact of rules and regulations on gross
revenues
c. Assumptions about operations, such as length of hospital stay, number of patient visits, and expected
changes in level of demand for services or products
After completing the unit projections for each type of budget, a series of meetings of managers by division is
then held to continue work on the budget (called technical budget meetings), as well as for executive
managers (called administrative budget meetings). It is in the administrative meetings that budgetary
priorities are ranked and then communicated to unit managers.
Unit managers then review and revise their budgets and resource specifications in line with priorities and
new projections of volume. Senior management then develops the operating, capital, and cash budgets for
the organization. The iterative process of budget preparation may involve several rounds before goals,
priorities, resources and projected volume are aligned. Once budget integration is complete, after the final
administrative review, the budget is ready for the board’s approval. It is stressed that preparation of next
year’s budget begins with submission and approval of the current year’s budget.

Types of Budgets
Marriner-Tomey (1996) describes the different types of budget thus:
1. Operating, or revenue and expense budgets. The operating budget gives an overview of the agency’s
functions by projecting the planned operations and service estimates usually for the incoming year. The
operating budget yields an input-output analysis of expected revenues and expenses. The nurse manager
and administrator needs to project both controllable and uncontrollable expenses. The following items are
usually included in the operating budget: personnel salaries, employee benefits, unit hospital supplies, office
supplies, utilities (power, water), rent, housekeeping, laundry service, drugs, pharmaceuticals, repairs and
maintenance, depreciation, in service education and training, travel to professional meetings, educational
updates and leaves, subscriptions (when allowed), dues and membership funds (when allowed).
2. Capital expenditure budgets are items that entail large investments and take a long time to recover. It is
usually the hospital director or administrator who sets the plan for capital expenses, which includes: physical
changes such as expansion, major renovation, major equipment and inventories. The nurse manager may
request in writing for a capital item, stating its justification.
3. Cash budgets are planned to ensure a liquid position, making cash available as needed, and to use extra
funds profitably. Using the cash budget, the nurse manager estimates the amount of money to be collected
from clients and other sources and allocates that cash to expenditures. If the cash budget is well-planned, it
will provide cash as needed and give interest on excess funds.
4. Labor, or personnel budgets refer to the estimate of the direct cost of labor necessary to carry on the
agency’s activities to meet its objectives. Personnel budget determines the recruitment, hiring, assignment,
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
layoff, and discharge of personnel. The nurse manager determines the number and skills of the staff needed
for a particular unit. The current staffing pattern, the number of unfilled positions, and last year’s reports can
provide a base for examination and proposal.
5. Flexible budgets cover variable expenses that are unpredictable and can be determined only after change
has begun. Flexible budgets show the effect of changes in volume of business on expense items. Nurse
managers can do periodic budget reviews to compensate for changes.
6. Strategic planning budgets cover 3 to 5 years, and may be program focused, citing all the benefits and
costs associated with a particular program. Business plans give details for proposed services, projects, or
programs, as well as information to assess the financial feasibility of the plan. The business plan links the
objectives of the project to the organization’s strategic plan.
Other concepts related to budgeting
1. The nurse manager relying on the historical approach to budgeting may observe that there are more
cases of accidents and fracture during the summer months, and an increase in respiratory diseases and
gastroenteritis during the rainy season. Also during the summer months, there are more circumcisions for
young boys and immunization for children in general. The nurse can plot in a graph the high and low volumes
of services and thus predict the supplies to stock and determine the staff pattern needed.
2. Zero-based budgeting looks closely into each program or service which must be justified each time funds
are requested. Management decides what will be done, what will not be done, and how much of an activity
will be implemented. The nurse manager can identify the activity, state the purpose, list related activities,
outline alternative ways of performing activities, and give the cost of the resources needed. He or she then
prepares a decision package including the list of activities that make up a program, the total cost, a description
of what level of service can be performed at various levels of funding, and the consequences of including or
excluding them from the budget.
These decision packages are then ranked in order of decreasing benefits to the agency or organization and
consequently are reviewed in order of rank for funding. Resources are allocated based on the priority of the
decision package. Zero-based budgeting forces nurse man- agers and administrators to set priorities and
justify resources.
3. A moving budget is used when forecasting is difficult to do; it plans for a year and at the end of each
month, another month is added to replace the one just completed. It is an annual budget revised monthly;
when the January budget is completed, the January budget for the next year is added to the moving budget.
4. A supplementary monthly budget is prepared to allow some flexibility to the basic budget; it is done
based on the volume of business forecast for a particular month.
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
Cost Concepts and Controls
It is very important that nurse managers and administrators understand cost control and develop policies and
procedures that keep cost in line with operating revenues. For a more detailed discussion of the concepts
mentioned, refer to any basic accounting textbook. Robnett and Schaub- Rimel (1998) give four categories
of cost concept:
1. Asset Valuation
• Historical/replacement
• Cash/accrual
2. Managerial Control
• Controllable/noncontrollable
• Direct/indirect
• Committed/noncommitted Budgeted/actual
[Link] Making
• Sunk cost
• Incremental cost
• Opportunity cost
• Avoidable or escapable costs
4. Volume
• Fixed costs
• Variable costs
• Semi-fixed or semi-variable costs
• Step costs
When possible, there must be a correct valuation of the organization’s assets to know whether the results of
operations are increasing the value of the assets and to have a basis for attracting investors to add capital
when needed.
We know that budgeted costs are the operating costs planned for the next fiscal period given assumed
levels of activity. Actual costs are those actually incurred from the operations. Administrators can compare
actual with budgeted cost to determine the quality of performance at each level of the organization. Logically,
huge variances from the budget are cues that the organization may be in trouble.
Managers and administrators use cost concepts in making decisions regarding adding, deleting or modifying
a service. A computerized billing system is an example of sunk cost. It is cost incurred that cannot be
undone; and is not a factor for consideration of whether to delete a particular service. Its purchase should
not be charged against a replacement decision.
On the other hand, when the manager or administrator is deciding whether to invest in a new service, it is
important to evaluate what the new service will contribute to the organization. Is this contribution sufficiently
large to support the risk associated with the investment of resources?
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
In examining the behavior of costs as the volume of operations change, the nurse manager or administrator
must keep in mind that these observed behaviors hold true only for a relevant range of volumes and a specific
range of time.
The rent of a building is a fixed cost that does not change with the volume of services. But consumption of
supplies would be a variable cost because it is affected by the volume of services.
The concept of break-even analysis requires the nurse manager/administrator to understand what costs are
involved in providing the new ser- vice, their relationship to changes in volume, and what volume is needed
to achieve a break-even volume. The break-even volume is the number of units at which total revenues equal
total costs (total fixed costs plus total variable costs). After doing the break-even analysis, the manager then
answers the question, will the organization achieve this volume? In the same vein, if the organization is not
attaining a positive excess of revenues over expenses, the manager or administrator may do a break-even
analysis to see what volume is needed to reach break-even, or the specific peso amount of excess revenues
over expenses above break-even desired.
Costing Out Nursing Services
There are problems identified with costing of nursing services. These problems include a lack of compatibility
of data used, multiple definitions of costs, lack of common variables that affect nursing care and the difficulty
of identifying levels of care and expected outcomes.
There is a need for models to describe the relationships between cost, quality, and price of nursing services.
These can be threshed out in meetings where nursing administrators and managers, staff, educators and
researchers can work together and arrive at a criterion for cost effective and quality nursing services.
Interviews with local nurse executives as well as a review of U.K. and U.S. literature on nursing administration
point out similar significant benefits to costing out nursing services. Marriner-Tomey (1996) sums up the
benefits to costing out nursing services as follows:
1. Nursing can be viewed as a revenue-generating center rather than a cost.
2. Hospitals can charge for services and receive compensation for services that they provide, thus maximizing
profit.
3. Fees for services help enhance the professionalism of nurses.
4. Charging for nursing services makes it possible for the client to pay for what services he or she gets.
5. Clients start to realize that direct care has a price value. This helps them to understand cost of services as
well as value services they receive.
6. Costing out nursing services fires up productivity by visualizing productivity measures to enhance the use
of human resources, contain costs, and maintain quality.
7. There is better budget control of the nursing department (the biggest department budget 40-60 percent of
the entire agency), through a cost accounting system that facilitates better assessment and control of
resources.
8. Costing out nursing services is a positive sign of progress, leadership and innovation, and can help the
agency survive in a rapidly changing environment.
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT
Methods of costing nursing services
There are four methods used for costing nursing services in hospitals:
1. Per diem or cost per day of service
2. Costs per diagnosis
3. Cost of relative intensity of measures (RIMS)
4. Patient classification systems (costs per nursing workload)
The oldest method used for rate setting and reimbursements is the per diem method. To compute for the
average nursing care cost per patient, the total nursing cost is divided by the number of patient days for a
specific period. Nursing costs include salary and fringe benefits for staff and administrative nursing personnel.
The per diem method relates nursing costs directly to length of stay but does not discriminate patient needs,
differences in diagnosis and specific care required, or provide information for care given. These per diem
costs can be calculated for the entire nursing service or for individual cost centers.
Medical diagnosis and/or the nursing diagnosis is used to identify patient groupings. These groupings have
specific nursing care requirements which translate into nursing costs.
To allocate nursing resources, Relative Intensity Measures (RIMS) were developed in New Jersey to
address the complaint that DRGs (diagnosis related groups) inadequately represent variability of nursing
care requirements. One RIM is one minute of nursing resource use. RIMS are costed and allocated to DRG
case-mix categories in three steps:
1. The cost of RIM is calculated by dividing the total nursing costs for a hospital by the total minutes of care
estimated or nursing resources used to provide care to all patients.
2. The number of minutes used by the total hospital population, including adjustments for downtime, such as
sick leaves and vacation time, is calculated.
3. The cost of care for each patient is determined by multiplying the RIMS by the minutes of care required by
the patient as estimated by an equation. Length of stay is the best predictor of nursing time required.
Costs per nursing workload is measured by calculating the cost of the nursing component of room rate.
Cost accounting methods allow calculations for whole patient care units and for individual patients.
Consequently, it is possible to charge individual patients for the cost of nursing. This method is difficult
because there is no standardized nursing practice and there is limited retrievability of data that can be
analyzed.

SAQ
Answer the ff questions and post it on the comment section of this module:
1. What is the importance of costing nursing service?
2. What do you think is the most viable way of costing nursing services, based on your own work setting?
3. What other system of costing nursing services do you know? Describe.
LUNA GOCO COLLEGES, INC.
DEPARTMENT OF NURSING
NURSING LEADERSHIP AND MANAGEMENT