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Module 2: Management and Administration

Process

Module 2.2: Budgeting and Material management


Learning Objectives

Overall objective is to understand about the concept of coordination,


allocation of resources and general planning for operations and
procurement in hospital settings, nursing educational institutions,
community centers as well as in research areas of nursing.

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Learning Outcome

At the end of this module the students will be able to:


Define budgeting and material management
Describe the concept of budgeting
List down major types of budgeting
Mention the features of budgeting
Draw the process of budgeting
Identify the cost and profit
Explain different types of cost
Recognize properties of good budgeting process
Enumerate budget for performance evaluation
Explain the material planning
Discuss the procurement process

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List of Topics

Budgeting
Components of budgeting
Major types of budgeting
Purposes of budgeting
Budgeting process
Features of sound budgeting system
Master budget
Need for budgeting skills
Cost & Profit
Salary Budget
Properties of Good Budgeting Process
Material Management
Functions of Material Management

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List of Topics

Material Planning
Aims of material planning
Purposes of material planning
Basic Principles of material planning
Elements of material planning
Procurement
Procurement cycle
Methods of procurement process
Procurement of equipments
Points to remember while purchasing
Storage
Summary
References

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Introduction

Healthcare organizations are increasingly focused on cost containment


and efficacious use of financial resources.

Todays nursing leaders require budgeting knowledge in order to


efficiently manage operations in the patient care environment and meet
financial targets.

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Meaning & Definition

Budgets used to carry out organizational goals. The budget includes


proposed earnings and A budget is a detailed financial plan,
expenditures as well as details about how resources( money, time, and
people) will be acquired and used. The purpose of the budget is to
project future plans and costs.

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Components of Budgeting

Sales Inventory
projections needs

Business New
trends competition

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Major Types of Budgeting

Operating budget deals primarily with salaries, supplies, and


contractual services It is the financial plan for the day to day activities
of the organization containing a statement of expected revenues and
expenses for the fiscal year.

Revenue Budget includes expected income based on volume and mix


of patients, rates, and discounts.

Expense Budget includes salary and non salary items that reflect
patient care objectives and planned activities for the nursing unit.

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Purposes of Budgeting

Forces Management Planning

Motivation

Evaluation and control

Communication

Coordination

Education

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The Budgeting Process

Strategic
Plan
Monitoring of
Actual
Long Term Activity
Objectives

Short Term
Objectives
Comparison of
Actual &
Short Term Planned
Plan

Investigation
Budgets

Corrective
Feedback Action
Features of A Sound Budgetary System

Participative budgeting
Frequent feedback on performance
Realistic standards
Controllability
Flexible budgeting
Multiple measures of performance
Monetary and nonmonetary incentives

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The Master Budget

Sales

Production

Purchases (Direct materials)

Labor

Manufacturing overhead

Administrative

Cash

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Why A Nurse Should Need Budgeting Skills?

Absolutely essential management skill


Financial viability
Quality patient care
Unit operational efficiency
Staff satisfaction
Leadership expectation
Most nurse managers do not come into the job with these skills

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Cost and Profit

Cost Center: The smallest area for which costs are accumulated. They
may produce revenue, such as laboratory and radiology or not produce
revenue, such as nursing.

Profit Center: A unit where performance is measured in terms of


profit the difference between revenues and expenses.

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Classification of Costs

Fixed Costs expenses that remain the same such as rent or insurance
premiums.

Variable Costs expenses that change with changes in volume and


acuity.

Mixed Costs may vary with volume but not directly.

Direct Costs affect patient care.

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Salary (Personnel) Budget

The personnel budget projects the salary costs that will be paid and
charged to the cost center. It accounts for replacement of staff for
benefit time, overtime, shift differentials, orientation, on-call hours,
bonuses and premiums, and salary increases.

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Properties of A Good Budget Process

Should provide a common framework for discussion of objectives and


strategies
Documents the operational plan to achieve the goals
Provides for an appropriate allocation of resources
Proactive, not reactive
Budget must be tied to strategy
Budget should be a plan for the attainment of needed resources, not
for limiting amounts that can be spent
Critical success factors must receive adequate funding, regardless of
financial condition
Improves allocation of resources

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Properties of A Good Budget Process
Should be collaborative, with free flow of information
Strategy, goals come from above
Upper management has better understanding of strategy
Resource requirements come from lower levels, based on assigned
objectives
Operating managers have better understanding of resource needs
Budget should help develop process understanding
What is done, and why?
Understand the interdependencies among activities
Identify resource drivers
Focus on resources needed, not cost
Operating managers should identify the quantities of resources
needed
Accounting should translate into monetary amounts
Managers may not know the cost of the resources requested

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Properties of A Good Budget Process

Budget should not be a reward/penalty system


Achievement of organization-wide goals must take precedence over
empire building
Appropriate funding of activities is more important than rewarding
past success or penalizing past failures
Flexible budget

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Properties of A Good Budget Process

Recognizes that planning, control, and evaluation are different, require


different tools

Original budget is a plan for operations


Actual operations may deviate from plan, either intentionally or
unintentionally
Usually cannot be used effectively for evaluation of results

Control and evaluation require apples to apples comparison


Flexible budget

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Properties of A Good Budget Process

Goals should be reasonable, attainable

Overly ambitious goals are detrimental


System can only produce to its capabilities
Negative impact on employees

Stretch goals are fine if attainable, and resources are provided

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Properties of A Good Budget Process

Should seek to minimize game playing

Padding the budget


Overestimation of resource needs
Results in misallocation of resources

Budget slack
Underestimating achievable goals
Goals are easily achieved
May not reach desired level of achievement

Surpassing goals may strain other areas

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Properties of A Good Budget Process

The budget should not be an end in itself


Budget should be used to guide operations
Avoid institutionalized budgeting
Mechanical, little thought given to the process
Lacks relevance to organizations plan or problems
Serves no purpose other than to keep employees busy during budget
preparation season
Okay to adjust prior year budget for expected changes

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Budgets for Performance Evaluation

Static budget is of little use


Conditions may change, requiring deviation from original plans
Pointless to compare initial plan to final results when determining
appropriateness of resource use
Given what was achieved, what resources should have been
consumed

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Budgets for Performance Evaluation

Flexible budget is better for control, evaluation


Sets milestones
Can be tailored to actual operating results
Variances have more meaning when determining whether resource
use was efficient or not
Still want explanations for deviations from plan

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Budgets for Performance Evaluation

Variances
Quantity variances
Evaluate reasonableness of the amount of resources consumed
given the output achieved
Price variances
Evaluate the cost of the resources consumed
Both are needed for adequate understanding of results
Evaluations must be done carefully
Budgets are based on estimates, guesses, assumptions and lies
Actual results are based on reality

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Material Management - Introduction

To spend money is easy , To spend it well is hard - Wesley C Michel.


Material management is a scientific technique, concerned with
planning, organizing and controlling the flow of materials from their
initial purchase through internal operations to the service point through
distribution.
The material management in the health care system is concerned with
providing the drugs, supplies and equipment needed by health
personnel to deliver health services..
About 40 percent of the funds in the health care system are used up for
providing materials.
It is of great importance that materials of right quality are supplied to
the consumers.

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Material Management - Functions

Planning for materials


Demand estimation
Purchasing
Inventory management
Inbound traffic
Warehousing and stores
Incoming quality control

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Material Planning

"Material planning is the scientific way of determining the requirements


that goes into meeting production needs within the economic
investment policies. - Gopalakrishnan & Sunderasan.

It is done at all stages and all levels of management. Material planning


is based on certain feedback information and reviews.

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AIM of Material Management Planning

The
Right
quality

Right
For the
quantity
Right

TO
of
cost
supplies

GET
At the At the
Right Right
place time

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Purpose of Material Management Planning

To gain economy in purchasing


To satisfy the demand during period of replenishment
To carry reserve stock to avoid stock out
To stabilize fluctuations in consumption
To provide reasonable level of client services

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Principles of Material Management Planning
Planning
Organizing
Staffing
Directing
Controlling
Reporting
Budgeting
Sound purchasing methods
Skillful and hard poised negotiations
Effective purchase system
Should be simple
Must not increase other costs
Simple inventory control programme

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Elements of Material Management Planning

Demand estimation

Identify the needed items

Calculate from the trends in Consumption

Review with resource constraints

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Procurement

Objectives of Procurement System:

Acquire needed supplies as inexpensively as possible


Obtain high quality supplies
Assure prompt and dependable delivery
Distribute the procurement workload to avoid period of idleness and
overwork
Optimize inventory management through scientific procurement
procedures.

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Procurement Cycle

Review
selection
Receipt and Determine needed
inspection quantities

Monitor order Reconcile needs and


status funds

Specify contract Choose procurement


terms method
Select
suppliers

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Procurement Process Methods and Negotiation Strategies

Open Tender Spot Purchase Risk Purchase

Restricted Or Many Suppliers


Limited Tender Rate Contract Strategy

Negotiated Direct Few Suppliers


Procurement Procurement Strategy

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Procurement of Equipments

Latest technology
Availability of maintenance and repair facility, with minimum down
time
Post warranty repair at reasonable cost
Upgradeability
Reputed manufacturer
Availability of consumables
Low operating costs
Installation
Proper installation as per guidelines

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Points To Remember While Purchasing

Proper specification
Invite quotations from reputed firms
Comparison of offers based on basic price, freight and insurance, taxes
and levies
Quantity and payment discounts
Payment terms
Delivery period, guarantee

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Storage

Store must be of adequate space


Materials must be stored in an appropriate place in a correct way
Group wise and alphabetical arrangement helps in identification and
retrieval
First-in, first-out principle to be followed
Monitor expiry date
Follow two bin or double shelf system, to avoid stock outs
Reserve bin should contain stock that will cover lead time and a small
safety stock

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Summary

Budget is a financial plan of government for definite period and is said


to be a numerical statement expressing the plans, policies and goals of
an organization for a definite period of future.
The major types of budgeting is operating/revenue budget, the process
of good budgeting can be analyzed by various way.
Material management is an important management tool which will be
very useful in getting the right quality and right quantity of supplies at
right time.
Having good inventory control and adopting sound methods of
condemnation and disposal will improve the efficiency of the
organization.
Principles of material management and procurement are applicable to
every organization as well as individuals.

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