Effective Budgeting in the Laboratory: increased fees, purchase of

Practical Tips additional proficiency tests, etc.?

- Do increased expenditures for the
“An appropriate budget comes with an send-out tests to the reference
appropriate understanding and knowledge laboratory warrant investigation of
of financial management combined with the bringing testing in-house?
integrity and honesty of the manager.” - If any tests are brought in-house, is
– Carmen Del Toro there an increase in the testing
section’s budget (reagents,
Effective Budgeting personnel, consumables, etc.) and a
- Within reason, the laboratory corresponding decrease in the
manager must be able to accurately sendout account?
forecast expenses for anticipated
patient and test volumes and to a The Budget Process
lesser extent, revenues. - Resource management is different
- The budget is a forecast- a best from resource allocation because it
guess estimate of anticipated includes accountability for results.
volumes, revenues and expenses. Managers are asked to justify
- Most test volumes, revenues and resources needed in terms of
expenses should be able to be expected results; therefore cost
reasonably estimated by tracking accounting is an important tool to
past expenses, reviewing vendor accomplish this objective on an on-
contracts and accurately projecting going basis.
growth.
- The operating budget is a tool for
The Budget Process laboratory managers to use
- A variance is the difference between throughout the year. It is the
the actual and projected (budgeted) calculated best- guess estimate of
volume, revenue or expense. revenue and expenditures the
- Variances can be positive or laboratory is expected to realize for
negative. a 12 month period of time, the fiscal
- The laboratory manager must be year.
able to investigate & justify any
variance from the forecasted budget. Types of Operating Budgets
● Fixed
Questions for Budget Preparation ● Flexible
- What are the projected test volumes ● Program
for the upcoming budget period? ● Appropriation
- How much did the laboratory spend ● Rolling
on reagents, consumables, ● Incremental
proficiency testing, licensing fees, ● Zero-based
maintenance contracts, etc., last
year? Are there any changes such
as changes to the test menu,
Fixed Budget Incremental Budget
- Assumes a single level of activity - Address only changes such as new
and the entire budget is built around equipment, new positions, and new
that level. programs.
- A fixed budget is not a tool to - Based on the assumption that
monitor and control resources during existing operations are essential to
change. the process and are working at peak
performance.
Flexible Budget
- Reflects expected lab revenue and Zero-Based Budget
expenses and it anticipates - Reviewed annually
changes. - Re-evaluates all activities to decide
- A tool for controlling costs: points out whether to eliminate or fund
the priority expenses and its - Project approval is based on fund
variances. availability
- Funding levels are determined by
Program Budget priorities
- Based on a specific program matrix
- Includes related activities, services, Budgeting: Costs
- staffing, and equipment related to - Costs can behave as fixed or as
the program variable.
- Used for short term planning - Total Costs = Fixed Costs + Variable
Costs
Appropriation Budget - Average Cost Per Test = Total
- Common in government Costs/# Tests
organizations - The average cost per test decreases
- Dependent on outside source of as volume increases (up to a certain
funds volume at which point additional staff
- Outside agency reviews the budget will need to be hired as the volume
in detail & authorizes specific dollars will reach a point that exceeds the
capacity of the existing staff).
Rolling Budget
- A continuous budget that is updated The Successful Budget Process
periodically in preparation for the - Clear goals and objectives that can
next budget cycle. guide the resource allocation.
- A rolling budget for a 12-month - Project volumes or obtain
period is reviewed & revised projections from senior
quarterly. administration.
- This type of budget is used for cash - Convert volumes into revenue
projections and is frequently (mostly for outpatients).
updated. - Convert volumes into expense
requirements.
 - Detailed statistical data, economic budget is due to be submitted for
trends, and accurate information review.
about existing and potential clients. - There may be many levels of
- A defined budget period and reviews and approvals
procedures for development of the
budget. Recognize and Utilize Resources
- Reports to identify actual financial - There should be past budgets the
and statistical information for laboratory manager can use as a
comparison with the budget and for guide, as most laboratories have
variance analysis. been operating for a number of
- There are three important segments years.
for the complete budget: income - If you have never prepared a budget
forecasting, expense budget, and before, request assistance from
cash flow projections. someone familiar with the budgeting
- The variance analysis will capture process, such as someone in
changes and trends in the finance or another manager.
marketplace that affect the - The finance department may provide
operation. templates and computer applications
- Analyzing variances will improve the such as spreadsheets.
quality of the original forecasts, point - Utilize section supervisors & frontline
out changes in operation, and offer a technologists.
means of asking why goals were not
met. Review Financial Reports
- The organization’s finance
Tips for a Successful Budget Process department should provide reports
1. Start early that can be used for financial
2. Recognize and utilize resources analysis throughout the year.
3. Review financial reports - The laboratory manager should
4. Predict or obtain predictions of future properly justify all variances, both
test volumes negative and positive.
5. Predict or obtain expense increases - The expense reports should be
6. Provide documentation reviewed periodically.
7. Compare the proposed budget to the
existing one Predict or Obtain Predictions
- In many cases, predictions of future
Start Early volumes will be provided by senior
- Starting early is a bit of a misnomer management to department
as the budgeting process does not managers at the start of the
“end,” per se, as expenses are budgeting process.
tracked and variances are analyzed - This is often advantageous, as
on a continual basis. senior management is aware of all
- The organization will usually set changes in the departments or
deadlines as to when the drafted services in the organization.
 - In addition, outside factors, such as Common Budget Problems and Possible
the state of the economy, will factor Solutions
into projecting future volumes. - Budgeting above 100% of the
previous year is known as
Predict or Obtain Expense Increases historical-based budgeting and is the
- Unless under contract for a fixed easiest way to budget without major
price, most vendors adjust pricing for effort. Accepting this approach
inflation on an annual basis. builds lack of control into the
- Price increases are generally in the process and encourages further
2 – 4% range and should be spending.
factored into the cost of reagents, - No matter how carefully the budget
consumables, blood and blood is analyzed and prepared, it is not
products, etc . possible to prevent a superior from
- The human resources or personnel changing the budget. However,
in the laboratory usually receive an proper and sufficient documentation
adjustment to pay as well, be it in of justification will reduce capricious
the form of a cost of living increase, budget reductions.
merit raise or combination of both.
How to Avoid Losing Sight of the
Provide Documentation Purpose of Budgeting
- Documentation should accompany - Focus decisions toward clear
all significant adjustments to the objectives.
budget. - The budget is a standard; focus
- Historically, organizations have performance against it.
tracked and trended data such as - Involve the staff by communicating
volumes, revenues and expenses on goals, and seek input from the staff
an internal basis. for cost reductions.
- Many organizations are now - Analyze monthly variances.
incorporating external benchmarking - Periodically analyze the services of
into their productivity comparisons. the laboratory for ways to reduce
expenses and improve income.
Compare Proposed Budget With Existing
- Senior administration realizes Ensuring Approval for your Budget
emergencies and unexpected - Present a strong case based on
occurrences can happen in sound assumptions.
operating a business, just as in - Do not defend a budget that has
running a household. been changed randomly.
- Proper planning, including accurate - Use discretion in discussing any
record-keeping and realistic issue with a superior. Know when to
projections, can help minimize the accept their answer, and above all
impact these events have in causing remain composed.
variances to a budget.
How to Explain Variances
- Always go back to the assumption
when writing a variance explanation,
and base it on a comparison.
- Realize that some variances are
expected (i.e. a variance in workload
which should correlate with an
increase or decrease in test
volumes.
- Identify real problems and
recommend solutions and recognize
that the budgeting process is a tool
that monitors.
- The budget is only a guideline and
estimate.

What to Avoid in Explaining Variances

- Don’t try to excuse the previous
year’s excessive variances by
referring to a previous period.
- Confront the problems that exist
each year.
- Don’t ask for a budget increase this
year based on not being able to
meet last year’s budget.
- Try not to use weak assumptions. It
leads to an inability to identify or
explain problems.

Surviving Budget Justification

Explanation
● Follow the organizational format.
● Ensure the data used to develop the
budget is accurate.
● Make sure you have evidence to
support your data.
● Review & Practice.