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A Budget is a financial plan for the forthcoming year, which is drawn up to help an organization whether it is private or governmental, to achieve its objectives. The main reason of this report is to provide a new strategic planning and control, for income and expenditure and capital investment to St. Edith Memorial Hospital, in order to avoid deficits and wrong capital investment decision in the future financial year of the hospital.
GENERAL BACKGROUND OF ST. EDITH HOSPITAL:
The St. Edith Memorial Hospital is located in North American City, which serving stable population. Its general purpose hospital, revenues come from Government grants (central and local) and Medical Insurance Companies. Basically, the hospital constituted the following departments; Administration department, Medical & Pharmaceutical departments and Information Technology & Communication (IT & Communications) department.
The information or data is gathered from the present situation of the hospital, by using SWOT analysis tool (see page 1). Because the SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities and Threats involved in an organization. And comparison is going to be carrying out between St. Edith and Neighbouring Hospital. Since the income and expenditure of both two hospitals are given for comparison.
RESULT OR FINDINGS:
The following table represent income and expenditure of St. Edith and Neighbouring Hospital for the year 2004 respectively.
Analysis Of Data:
Quantitative Dimensional Analysis between St. Edith and Neighbouring Hospital.
Base on the above table, the performance of the Neighbouring hospital is better and good comparing with St. Edith hospital. Only IT & Communication expenses shown good performance (-), while is not priority in the general objective of the hospital.
Drugs spent per patients:
St. Edith = 25,000 = £2.35
Neighbouring = 30,000 = £2.36
Variable Cost per patients:
St. Edith = 7,000 = 0.66p
Neighbouring = 12,000 = 0.94p
Discussion and interpretation of data:
The total revenue received by St. Edith in the year 2004, is £115,000, while the total expenditure is £125,000. This resulted a deficit of £(10,000). Compared with Neighbouring hospital with total income of £170,000, while the total expenditure £145,000, this result a surplus of £25,000
The deficit incurred by St. Edith in 2004 as result of decrease in its Revenue and increase in its expenditure. What are the causes? The answer is lack of use of Budget and Budgetary and Control process.
Budgetary and control process and practice
The budgetary process is an integral part of both planning and control. Too often budgets are associated with negative, penny-pinching control activities whereas the full process is much broader and more positive than that. Budgeting is about making plans for the future, implementing those plans and monitoring activities to see whether they conform to the plan.
Budgetary control relates to the establishment of budgets relating the responsibilities of budget holders the needs of a policy. Budgetary control also relates to the continuous comparison of actual with budgeted results: it does this to try to ensure that the objectives of that policy are achieved; or to provide a basis for the change of those objectives.
In summary, a budget is a statement setting out the monetary, numerical or non quantitative aspects of an organisation's plans for the coming year. Budgetary control is the analysis of what happened when those plans came to be put into practice, and what the organisation did or did not do to correct for any variations from these plans.
The following is shown best practice of budgetary and control processes
MONITORING & REVIEW
How does the St. Edith hospital prepare budgetary and control process:
They way the management of St. Edith prepare their own budget is, the powerful group in each departments present their own needs which would not help to achieve the main objectives of the Hospital.
Every organization has a mission or purpose, which are aims to accomplish. Strategic planning is the process of defining the primary objectives of the organization and determining a course of action or devising a strategy to achieve those objectives
Objectives of any organization is first step of good budgetary control process, but, all the departments of St. Edith Memorial hospital are neglect or forgot the main objectives of the hospital and concentrating on their own departmental needs.
How does this compare with the best practice?
Budgets are often used to exert a degree of control over the costs of the business, in an attempt to achieve gains in efficiency. Base on the table: 1, by comparison between St. Edith Hospital and Neighbouring Hospital, the best practice is very-very poor.
What would be the most appropriate process for the St. Edith?
Here, I suggest that, to implement the use of ZERO BASED BUDGET, because it is often used in an economic recession or downturn, when money is not readily available and organization wish to make cutbacks in its expenditure.
Zero budgets help the organization to identify those departments which require large amount of essential capital investment and day-to-day expenditure, as well as identifying those departments which require a minimal expenditure.
Use of Cost Centre:
A cost centre is an area of an organization where costs can be identified as being incurred, like; labour cost, material and capital expenditure.
The reasons used of cost centre are
Allowing the organization sees which department and staffs are spending the most money.
To see if the departments and staff are generating enough benefit for the business with money the have spend.
CONCLUSIONS AND RECOMMENDATIONS:
Basically, there are two purposes of budget. One - being to provide a map of where the organisation and its constituent parts intend to go. Two - being to form a basis for control.
Every organisation has a mission or purpose, which is what aims to accomplish. Strategic planning is the process of defining the primary objectives of the organisation and determining a course of action or devising a strategy to achieve those objectives.
There are many other factors that a business will need to take into consideration when appraising an investment project, other than the financial (quantitative) factors.
Qualitative factors such as the objectives of the organisation must be considered at all times, because the main objectives of St. Edith included; profession (medical, surgical, ethical) staffs, modern medical equipments and facilities in order to attract its clients and stakeholders.
The internal and external environment needs to be considered before any decision can be taken regarding a proposed investment project. Neighbouring hospital is competitor to the hospital, staff and patients are moving away to the neighbouring hospital, measurable action need to be taking, in order to bring staff and patients back.
Other factors include the state of the economy, for instance reduction in grant from government; it may be dangerous of attempt to improve new projects or unnecessary expenditure at the present situation.
Finally, for the any future investment decision, the hospital will also need to consider the amount of finance that is available for capital appraisal. And next year budget is better to use Zero Based Budget and also is good to use marginal costing and cost-volume-profit analysis (CVP Analysis) to return the income and expenditure to break even for next year budget.
COMPUTATION OF RATIO ANALYSIS
Labour Cost (2004) = 55,000 x 100 = 47.8%
Labour Cost (2003) = 53,000 x 100 = 44.9%
Depreciation (2004) = 20,000 x 100 = 17.4%
Depreciation (2003) = 19,000 x 100 = 16.1%
Drugs (2004) = 25,000 x100 = 21.7%
Drugs (2003) = 22,000 x 100 = 18.6%
IT & C (2004) = 3,000 x 100 = 2.6%
IT & C (2003) = 2,000 x 100 = 1.6%
Other Variable (2004) = 7,000 x 100 = 6.01%
Other Variable (2003) = 7,000 x 100 = 5.9%
Fixed Cost (2004) = 15,000 x 100 = 13.04%
Fixed Cost (2003) = 15,000 x 100 = 12.7%
The above table is indicating differences between income and expenditure of the St. Edith Memorial for the year 2004 and 2003. Base on the year 2003 the 0% represent neither surplus nor deficit. While for the year 2004 is indicating excess of expenditure over income by 8.55% meaning it is a deficit. Comparing with above table, the expenditures are increased by the certain percentage from 2003 to 2004, this is reason why the hospital gets a deficits.
Break Even Point = Fixed Cost
Contribution per Unit
Where: Fixed Cost = £93,000
Contribution per unit = Total Revenue per unit - Variable cost per unit
Total revenue per unit = Total Revenue
Total revenue per unit = £115,000 = £10.79812207
Variable cost per unit = Total variable cost
Variable cost per unit = £32,000 = £3.004694836
Break even points (patients) = £93,000 = 11,933 patients
10.7981 - 3.0047
Margin of Safety = Actual Patients - Break even patients x 100
Break even patients
Margin of Safety = 11,933 - 10650 x 100 = 10.75%
Where: Fixed cost = £89,000
Total revenue per unit = £118,000 = £10.82568807
Variable cost per unit = £29,000 = £2.660550459
Break even points (patients) = £89,000 = 10,900 patients
10.8256 - 2.6605
PROFIT AND LOSS FORCAST USING MARGINAL COSTING
St. Edith Memorial Hospital Income Statement for the Year 2004
Total Revenue (11,933 x £10.798)
Less: Variable Cost (11,933 X 3.0046)
Less: Fixed Cost
St. Edith Memorial Hospital Income Statement for the Year 2003
Total Revenue (10,900 x 10.8256)
Less: variable cost (10,900 x 2.6605)
Less: Fixed Cost
ST. EDITH BREAK EVEN CHART 2004
Based on the above break even chart of St. Edith is indicating that, the hospital to achieve break even the most attend at least 11,933 patients.
Improvement of St. Edith Financial and Medical Performance
Contribution performance, because it represent the amount of moneys which are available to contribute toward covering the fixed costs of the hospital.
There is increase of staff of the St. Edith hospital by 3.09%, while decrease of staff of Neighbouring hospital to 4.3% in the year 2004.
Where an organisation fails to reach its Break even point, like St. Edith in 2004, one of the three should be consider; increase in revenue or decrease in cost and or both.
As I said in the part two (2) of this assignment, is good to the hospital to use marginal costing and CVP Analysis for next year budget, the above profit and loss forecasts are examples for Budget plan.
Marginal costing techniques are used for short term decision-making purposes, requiring that all costs be identified as either fixed or variable.
Cost-volume-profit analysis is particularly helpful in assisting management to make decisions.
Therefore, base on the above profit and loss forecast, the management of St. Edith memorial hospital can be used it as the draft for next year (2005) budget plan.