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What are the different methods used for calculating budgets?

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A budget is a financial plan that outlines the resources an entity foresees using for a particular time period. The master budget encompasses all the departmental budgets. Based on the organization's strategic goals and vision, the master budget is the actual statement of projected revenues and expenditures for the entire hospital.

Different organizations may have different budgeting practices. With some systems, nurse managers are handed a budget and asked to review, edit, and return it by a certain date; others are expected to perform the "zero-based budget method," or ZBB, requiring the manager to build a budget from scratch.

ZBB is the most effective and widely used method for budgeting. It consists of calculating projected costs by line item from the bottom up. In other words, rather than looking at the budget history, the new budget is built upon calculated assumptions. By using this method, you can analyze data and consider alternatives rather than relying solely on the previous year's numbers.

Flat percentage increase begins with a predetermined percentage, which is provided to you. This percentage is then added to the current actual number to determine the budget number. By figuring out the annualized number, you can then move to the next step. Multiply the annualized expense by the predetermined percentage to calculate next year's increase. Add the increase to the annualized expense to reach the total expenses you can plan to pay for the next year.

Although this method is quick and easy, it does not take into consideration productivity, nor does it require analysis. It is important for you to look at the entire picture and learn from the previous year's experiences to produce a credible, realistic budget.

Computer budgeting software is another way to calculate budgets by using sophisticated computer software. Budgeting software has come a long way and is fairly user-friendly. Depending on the software, programs can be fairly expensive, so don't be discouraged if your hospital is not equipped with the software. The most important thing to remember is if your organization is willing to purchase such software, make sure your finance department approves it.

-- KT Wazman, DNP, MBA, RN, CNL

(November 2009)