By far the most common business budget, this budget spells out plans for revenues and operating expenses. It reflects the anticipated income from the sales of products and services, by providing direct patient care.
Although a hospital may get other operating and no operating revenues such as income from rentals, royalties or other miscellaneous sources, the revenue generated out of direct patient care furnishes the principal income to support operating expenses and yield profits. Patient service revenues generate from:
i. Providing “hotel” services, viz. bed, room, diet, housekeeping, etc.
ii. Providing professional and other support services, viz. X-rays, pathology, etc. to operating, and
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iii. Providing professional and other supportive and ancillary services to outpatients.
Prediction of revenues can have an element of speculation even with good quality data. The net operating revenue is obtained by adding other sources of income to the net patient service revenue predicted. Patient service revenue is proportional to the volume of work anticipated.
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Expense budgets can be as numerous as the expenses classifications in an enterprise, such as staff, labour, medical consumables, general stores, equipment, maintenance, rent, water, power, office supplies, travel, and many others. Sometimes the department head budgets only the major items, with other items lumped together in one control summary.
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The process of developing expense budget requires an estimate of the department’s work load, and translation of the work load into resource requirements.
The budgeting process should encourage department heads to offer the best estimate of the direct cost to operate their departments.
Revenue and expenses budgets can be prepared in relation to “responsibility centers” in the hospital.
Examples of responsibility centres in a hospital are the various professional departments (medical, surgical, paediatrics, obstetrics and gynecology, emergency, etc.), Supportive services departments (X-ray, laboratory, ECG, labour rooms, operation theatre, pharmacy), and ancillary services (dietary, laundry etc.).
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In a responsibility centre approach to budgeting, accounting systems have to be built around the responsibility structure of the hospital.
Responsibility accounting is defined as,
“A system of accounting tailored to an organisation so that costs are accumulated and reported by centres of responsibility within the organisation”.
Each of these centres of responsibility is charged only with the costs for which it is responsible and over which it has control.