Management Essentials Series

2021

Fundamentals

of Financial

Management

Definition of Financial Management

2

An Effective Financial Management Process

Course Content

An effective financial management process sits

on the core of a highly functioning organization.

Modules

Course Overview

Budgeting

✓ A quantified financial plan,

✓ Used by department managers to track

actual and planned expenditures.

Financial Accounting

✓ Measures and records business

transactions,

✓ Used by BOH, regulators, suppliers,

LHOs, department and program

managers.

• Define critical components and

processes of budgeting that

maximize LHD operations.

• Identify components of the

accounting cycle and those

processes for ensuring financial

reporting accuracy.

• Perform ratio analysis to evaluate

LHD and program performance.

• Describe the role of the LHO in the

budgeting and accounting processes.

By the end of this course you

will be able to:

What are the fundamentals of

financial management?

3

Introductions

Briefly introduce yourself:

• Name,

• Years as LHO,

• Key benefits or concerns of your LHD accounting and

budgeting process,

• 1 thing you wished you had learned earlier in your

career,

• Expectations for the course.

Key contacts that you’d like to remember:

1. _______________________________________

2. _______________________________________

3. _______________________________________

4. _______________________________________

5. _______________________________________

6. _______________________________________

7. _______________________________________

8. _______________________________________

9. _______________________________________

10. _______________________________________

4

Module 1:

Introduction to Budgeting

At the conclusion of the module, participants will be able to:

• Describe the purpose of financial budgets.

• Describe expectations of stakeholders.

• Define the types of budgeting: surplus, deficit and break-even.

• Use some tips for helping you develop a budget.

5

Are the following statements True or False?

Pre-Test

1) The purpose of a budget is to keep the LHD from spending money.

2) The accounting and budgeting functions are similar in that they both

require transparency.

3) The budget reflects a consensus of residents’ preferences, board

governance philosophy, and staff concerns about strategic priorities.

4) LHOs should always favor the break-even type of budget because the

customer expects revenue to equal expenses.

5) Benchmarking other LHDs is a good tool, but not for LHDs because

revenue sources and sizes vary significantly across LHDs.

T/F?

Planning is the design of a desired future and of

effective ways of bringing it about. …

Thus there are three attitudes toward the future,

which, ordered from the most to the least

prevalent are:

a) wait and see,

b) predict and prepare,

c) make it happen.

Key Points:

• Modern corporate planning owes much to operations research and systems theory. A

pioneer in that field, Russell L. Ackoff, worked closely with General Electric, Anheuser-

Busch, and other major corporations. The first of his 4 books on the subject,

A Concept of Corporate Planning, had a major effect.

• In his book, Dr. Ackoff defined planning as “the design of a desired future and of effective

ways of bringing it about.” He further said, “Thus there are three attitudes toward the

future, which, ordered from the most to the least prevalent are a) wait and see, b) predict

and prepare, c) make it happen.”

Russell L. Ackoff on Planning

6

Introduction to Budgeting

A budget is a

quantitative

expression of a

plan for a

defined period

of time.

CIMA Official

Terminology,

2005

The Best Friend of This Dog Asked to Buy a Cat…

Sorry, I did the math, the cat is

not in the budget!

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Positive connotations:

Negative connotations:

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Why is budgeting important to the LHO?

• Ensure the LHD pays for all

necessary expenses,

• Allocate revenue to cover expenses,

• Fund the activities of the LHD's

strategic plan,

• Govern or control spending for a

fiscal year,

• Guidance to staff to manage

expenditures.

Revenue

Expenses

“Our only problem

is figuring out how

to switch these.”

Key Points:

• Budget information is needed at both the revenue and at the line-item expense level.

Estimating and matching line-item expenses to revenue is important, because it helps

LHOs determine whether they have enough money to fund operations and expand the

business, if need be. Without a budget, the LHO runs the risk of spending more money

than it is taking in or, conversely, not spending enough money to grow the business and

compete for funds.

• Budgets must include rent or mortgage payments, utility bills, payroll and if required,

interest and tax payments.

8

Internal Stakeholders Require Information

Key Points:

• Internal stakeholders

require information

because they want

answers to questions

about LHD

performance.

9

Budget Questions Asked of the LHO

What are questions the LHO is asked, in reference to the budget?

Example question: Are budgets realistic, factual, and attainable?

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

Key Points:

• Budgets should provide information for stakeholders. This means the answers to their

questions should be obvious or readily available in a budget review.

• Program and grant administrators, health commissioners, County auditors, and

vendors will look to LHD budgets to get answers to questions like those listed below.

10

External Stakeholders Require Information

Goals of Budgeting for the LHD

What are goals of budgeting?

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

• _________________________________________________________

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Types of Budgets

Surplus BudgetBreak-even BudgetDeficit Budget

Key Points:

To address budget variances caused by cash flow delays and variances in line item

expenses, planners may use these 3 types of budgets.

• Deficit, where revenues are less than expenses.

• Break-even, where revenues and expenses are the same.

• Surplus, where revenues exceed expenses.

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What type of budget will address the example goal?

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•To react to anticipated but unusual events.

•To invest in a new strategy, e.g., to fund preparation activities for accreditation.

Organizational

Programmatic

•To give non permanent staff raises,

•To fund an unexpected delay in receiving funds,

•To use reserve (excess funds from prior year’s surplus).

•To serve more people,

•To train staff to increase effectiveness.

Break-even Deficit Surplus

Key Point:

LHO’s should make their case for budgeting and funding based on their strategic plan,

organizational requirements, and programmatic goals.

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Break-even (Balance) Budget

• When: Revenues equal Expenses.

• Why?

o To ensure a balanced budget,

o To react to a forecast of slow growth

in expense increases.

Key Points:

Break-even is the most common budget.

• Planners anticipate that revenue and expenditures will be the same for the year.

• Some planners believe this is a message to funders, that the LHD can manage to a

balanced budget.

• Also, some planners send the message to the staff, that a balanced budget is the

goal for all to follow.

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Surplus Budget

• When: Revenues exceed Expenses.

• Why?

Healthy organizations require cash reserves, which means they

must generate excess cash in at least some of the years.

• ______________________________________

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• ______________________________________

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• ______________________________________

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• ______________________________________

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Are there limitations on cash reserves?

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Deficit Budget

• When: Revenues are less than Expenses.

• Why?

o Reserves (net assets) from previous

years will be used.

15

Key Points:

• A deficit budget is created when the LHD has accumulated excess reserves from prior

years and the planner wants to finally use the funds for what the excess was

anticipated to accomplish.

• If a deficit is planned, it’s important that decision-makers and budget-approvers

recognize that the net assets from previous years’ surpluses will be drawn down.

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USVI LHD use of Surplus and Deficit Budgets

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• Given a Ceiling for Expenditures

o Only Break-even Budgets are planned

o Surplus and Deficit Budgets are not planned

• Surplus

o When under spend the ceiling

o Funds can be encumbered/reserved for use in the following year

o Used on another program in current year

• Deficit

o When exceed spending ceiling

o Funds must be captured from other programs that are at a surplus

o Cost reduction efforts must be implemented

Key Points:

Effective monthly budget reviews keep the surplus or deficit activity under control.

What are some best practices that will help LHOs plan the LHD budget?

Discussion:

Best Practices to Help Plan the LHD Budget

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Are the following statements True or False?

Pre-Test Follow-Up

1) The purpose of a budget is to keep the LHD from spending money.

2) The accounting and budgeting functions are similar in that they both

require transparency.

3) The budget reflects a consensus of residents’ preferences, board

governance philosophy, and staff concerns about strategic priorities.

4) LHOs should always favor the break-even type of budget because

the customer expects revenue to equal expenses.

5) Benchmarking other LHDs is a good tool, but not for LHDs because

revenue sources and sizes vary significantly across LHDs.

T/F

18

• To provide

answers about

LHD

performance,

• To make

financial

decisions on

allocation of

funds.

• To provide

funds to keep

the business up

and running,

• To fund

strategic and

program plans,

• To set goals,

• To fund

emergencies,

• To assess

performance.

Summary of Module 1: Introduction to Budgeting

Purpose Stakeholder

Expectations

• Deficit:

▪ Expense >

Revenue

• Break-even:

▪ Expense =

Revenue

• Surplus:

▪ Expense <

Revenue

• Benchmark,

• Historical

performance,

• Look to cut

costs,

• Review monthly.

Types of

Budgets Best Practice

What’s Next?: Module 2: The Budget Process