Description operating budget
Government fee-for-services reimbursement 3 000 000
Private payers 1 100 000
Annual fund-raiser 180 000
Grants department 1 200 000
TOTAL REVENUE 5 480 000
Direct Expenses: Annual salaries 1 500 000
Annual benefits 240 000
Annual rent 960 000
Annual insurance 45 000
Annual overhead 180 000
Annual supplies 60 000
Indirect Expenses: Annual depreciation 780000
Annual Expenses (3,765, 000)
NET PROFIT 1,715,000
Explain the process for creating an operating budget and its importance
The basic step in the preparation of an operating budget is the projection or the determination of the revenue expected from different sources e.g. from the government, grants, fundraisers, etc. This helps in providing information on how much the organization intends to receive within a specific period. The step entails estimation of the expenses that the organization will incur. These expenses as shown in the above table can be classified as either direct or indirect. With the revenues and the expenses identified, the next step is the determination or prediction of the organizations profit or loss (Nowicki, 2004).
One of the main importance of an operating budget is that helps in the management of the current expenses. From the budget, essential items can be distinguished from non-essential items and thus the available resources can appropriately be utilized. The other benefit of preparing an operating budget is that it enhances the element of accountability in an organization. This is because it shows or provides guidance on how resources of an organization should be utilized. Failure to stick to the budgeted costs and expenses could be an indicator of inefficiencies on the side of the management of the employees.
The other significance of an operating budget is that it helps the management make projections of both future expenses and future revenues. Based on such predictions, the management can make critical decisions that would positively influence the performance of the company. For instance, if the net profit is projected to decline as compared to previous periods, the management may decide to increase the efficiency of its operations to reduce the expenses. The adherence to the operating budget can also facilitate the creations of reserves emanating from the ability to reduce expenditure as well as reduce misappropriation.
Explain how revenues and expenses are grouped for planning and control in the financial statements.
Revenues and expenses are critical when it comes to planning and controlling. A hospital is likely to receive payments from different institutions such as the government, private health management organizations, insurance companies, etc. In this respect, determining the main sources of revenue helps an organization to plan regarding when the revenues are received among other aspects (Nowicki, 2004). On the other hand, the grouping of the expenses helps the management to determine ways through which they can reduce or control such expenses. For instance, the fixed cost may be hard to control, but other indirect costs can be reduced.
Explain the differences between cash and accrual financial systems
The accrual and cash financial systems defer from one another based on the point of time when revenue or expenses are recognized. The accrual financial system recognizes revenue and payment when these are either earned or incurred. Conversely, the cash financial system recognizes revenue and expenses when these are received or paid out respectively (Zelman, 2014).
Nowicki, M. (2004). The financial management of hospitals and healthcare organizations. Health Administration Press.
Zelman, W. N. (2014). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications. San Francisco: Jossey-Bass.
If you are the original author of this essay and no longer wish to have it published on the ProEssays website, please click below to request its removal:
- Application Example for Managing Research Methods Module
- Performance Requirements of Project Management
- Issues in Social Work
- Risks in the Banking Industry
- Critical Thinking Example on 8-Step Process for Leading Change by Kotter
- Biology Report Example: Mitosis vs. Meiosis. Axial and Appendicular Skeletons.
- Paper on Investment Issues: Efficient Market Hypothesis Framework
- Religious Leadership Research Paper
- Financial Key Performance Indicators - Essay Sample
- Personal Request of a Better Grade
- The Equal Rights Amendment
- Meditation and Consciousness Research Paper