Paper Example on Creating an Operating Budget

Paper Type:  Course work
Pages:  3
Wordcount:  551 Words
Date:  2021-04-01

Description operating budget


Government fee-for-services reimbursement 3 000 000

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Private payers 1 100 000

Annual fund-raiser 180 000

Grants department 1 200 000



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.

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