Well, here we are again in the last quarter of the year (for those on a calendar year) and it’s time to start working on your budget for 2014. Well, at least for those that do budgets; which my experience has shown to be around 50% of the companies out there. I am not sure how or why the other 50% that don’t, think they are going to be successful for any period of time, but that is their decision. My comments/critiques here are geared toward those that do or are considering preparing a budget for 2014.
As has been the case since I first got into the consulting side of the game, I am utterly amazed to see that there are agency’s that still build their budget(s) based on a projected % change in revenues for the upcoming year: using Revenues as the primary driver of the Income Stmt (P&L). This was not an appropriate approach to budgeting 15+ years ago during cost-based reimbursement, and it is even more inappropriate under PPS (which, oh by the way, we have been under for over 13 years now!). And this approach (Revenues = driver) is utilized by many financial managers (whether employees or outside consultants) throughout the industry; in fact, I would go as far to say that a significant (if not vastly significant) % of those that do budgets follow this approach. I would also say that is why a significant % of those budgets that are prepared are almost immediately put into a file drawer and stay there until it is time to prepare the following year’s budget: that is, they provide little or no benefit to the management and operations of the agency that produced it; which means that you just went through a session of mental gymnastics and spent a fair amount of time on a project that is going to provide you little to no value going forward. From a ‘Cost-Benefit’ perspective, I’d say the agencies that don’t do a budget are better off because they didn’t waste the time on something that they will not use!
A budget is like anything else, you get out of it what you put into it. And if you are not preparing a budget; well, no effort will provide you with no value; and if you prepare a budget using Revenues as a Primary Driver; meaning using something with little to no thought, you will again get little, if any value out of your budgeting process: and that is why these types of budgets generally end up in a desk drawer until it is time to produce the following year’s budget. If you have internal financial managers that are promoting this approach to budgeting, you need to have them learn how to properly budget in the PPS (a service industry) environment, and if you have outside financial assistance (consultants) that apply this approach, my advice to you would be to RUN! Run away as fast as you can, because the budget process is benefiting someone, it’s just not you: the owner operator of the HHA. If you are not receiving value for that which you pay for, why do it? And yet I have seen agencies do this time and time again (on a plethora of issues, not just budgeting). If you do the same thing time and time again, why would you expect different results?
Again, in budgeting as with most anything, you only get out of it what you put into it. Budgeting is both a science and an art, and where many go wrong (Revenue = driver), is that they can to some extent apply the science (basic math) but they can’t harness the art (the ability to marry the science to real-world application: especially for a service-based industry). In school, most everybody (us financial types) learned how make budgets for an entity that produced widgets (a theoretical, yet tangible product, i.e., industry=manufacturing), even multiple-lines of widgets. Many still are stuck on the mechanics and fail to see how to apply to our industry; especially since we operate in a service industry and therefore never grasp how to appropriately produce budgets for the home health industry.
As I noted earlier, we operate in a service industry, not the manufacturing industry that our academic experience focused on. However, in a matter of speaking, we in home health do (strive to) manufacture something: Healthy Patients. Well, there is your driver: Patients! Patients become the driver of your revenues and expenses; in this way, your patients and your census become the starting point of your budget: NOT REVENUES! Revenues are a by-product of your patient-census, so to ignore your patient-census when budgeting is totally inappropriate (and I would say WRONG!).
Your budget is built on assumptions: no matter how appropriately or inappropriately you built your budget. Sometimes those assumptions are accurate sometimes they are not; but the closer one can make those assumptions to reality the better the budget will be. To increase that level of accuracy takes more detail, not less: meaning budgeting more specific items (e.g., drivers, revenues and expenses) not less. Your budget should be a tool that you use to compare and measure your actual results against, and to take this to a higher plane would require the development of a Forecaster (which is like your living budget) which becomes another resource of the agency that is comprised of both budget-projections as well as your Year-to-date actual results. A good Forecaster relies on a good budget as its foundation, but that is also a topic for another time as we’re talking budgets now. Again, as your budget is a tool to compare your actual results with, the better the appropriate data/information the better the comparisons can be, thereby improving management’s ability to make proper and timely decisions. If you start your budget with Revenues (which I said was wrong), then when you have differences between what you projected in your budget and your actual results all you have to help you manage your business is what the difference(s) is (are)! You have very little, if any indication why the difference exists! But, if you had started with patients (and even better would be patient census by payor category) and had a proper Chart of Accounts, you would have the start of the Holy Grail! You would be able to see what caused the differences in your revenue:
- Was it because your patient census changed (e.g., increased or decreased)?
- Was it because your payor ratio changed (e.g., % Medicare census increased or decreased)?
- Did you inaccurately project average reimbursement rates from any payor source (per avg pt)?
Starting your budget with patient census, you have this information and can readily identify what is happening (has happened) and you can more quickly adjust to these changes. Starting with revenues, you do not have this information and have to do a lot more work to identify what has happened and/or make decisions that may or may not be appropriate for what has transpired.
Expenses are the same way: try to take the base-driver of the expense as that upon which you build (not the expense itself) to the extent possible. Of course, this is much easier to do (in a manner of speaking) for direct costs than indirect (i.e., A&G) costs. Also, that is all contingent on the premise that you have properly identified and to some extent properly segregated (established individual accounts) your direct and indirect costs (which is not as common and/or accurate as you might think!). Your direct costs are of course those costs that you incur because of the ‘hands-on’ care provided to your clients (the patients) and your indirect costs are those costs that you realize that are incurred as an expense in support of your field staff (that provide patient care). Some examples of the drivers of direct costs would be: FTEs (this would also work for A&G staff); Visits; Payor Categories; Avg Miles/Visit; Wages (this would also work for A&G staff), etc… Again, use these drivers to build your budget upon and when discrepancies arise, you will have much more data/information from which to readily identify and to take timely, appropriate steps to address the issue.
With proper budgeting you are providing yourself with a very valuable tool with which to help you run and operate your agency in an efficient and profitable manner and when discrepancies do arise you will have within the budget itself, the data/information to help you make proper and timely business decisions. The ability to make proper and timely business decisions can help turn many situations into opportunities, that in the past you probably wouldn’t have considered opportunities.
Two other tools/activities that tie-in very closely with budgeting are a Forecaster (aka your Living Budget) and Financial Analysis (which is so much more than just identifying your Discipline Costs per Visit). See my website for additional information and keep alert for future posts in which I will talk more in detail about a Forecaster and Financial Analysis.
Also bear in mind that the more proficient that you become at the budgeting process, the more you are going to understand the relationships and correlations between the various aspects of your operations and how they impact your financial outcomes. And as you actively incorporate a Forecaster and/or (monthly) Financial Analysis, all the more will you grasp and understand these relationships. The more that you understand this, the better the overall manager you will be for your agency; which in turn will help you to more quickly and properly adjust for the regulations and changes that we must deal with in home health (e.g., each year’s Rule change; the conversion to ICD-10 in less than one-year; Pay-for-Performance, etc…).