1. Budget Performance
and Profitability:
Do Budgets Matter?
Abstract summary of the dissertation
by Mark Slyter

2. Page 1 of 2
Budget Performance and Profitability: Do Budgets Matter?
By Mark F. Slyter, DSc, MHSA, FACHE | markslyter.com
There is a near-universal assumption in both practice and literature
that greater accuracy and management to the budget improves profitability
(Libby & Lindsay, 2010; Umapathy, 1987). Prior to the dissertation study
“How Well Do Hospital’s Budget Operating Results? The Relationship
Between Budget Variances and Operating Margin,” by Mark Slyter, this
assumption has gone untested and we know little about the wisdom of such
an assumption.
The study applied a regression model to a longitudinal dataset for the years 1987-2013 (27
years) from the State of Washington. The database was comprised of 115 acute care hospitals
represented in one or more years as well as hospital characteristics of ownership, system
membership, bed size, and urban or rural locations. Washington requires hospitals to submit both
budget and year end reporting. The study tested the relationship between budget variances and
operating margin.
The results of this study indicate greater accuracy in forecasting and/or tighter management
to the budget, or favorably exceeding it, leads to improved profitability. The study also provided an
expected and measurable impact of these budget variances to the operating margin. More
specifically, smaller unfavorable budget variances are associated with greater operating margins
while greater favorable budget variances are associated with greater operating margins. A single
standard deviation reduction in unfavorable revenue (4.9% budget variance) and expense (7.0%
budget variance) increases operating margin by 5.2% and 6.3%, respectively. An equivalent
favorable deviation in revenue (6.7% budget variance) and expense (6.8% budget variance)
increases operating margin by 3.2% and 2.7%, respectively (see Figure 1).
Do budgets matter? Yes. Managers can improve hospitals’ operating margins by first
prioritizing the reduction and/or eliminating unfavorable variances, and second increasing favorable
variances.

3. Page 2 of 2
Figure 1. Favorable and unfavorable budget variance impact on operating margin (B is the
Unstandardized Coefficient in the studies regression model).
Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of
North-American budgeting practice. Management accounting research, 21(1), 56-75.
Umapathy, S. (1987). Current budgeting practices in U.S. industry: The state of the art. New York,
NY: Quorum Books.
Author: Mark Slyter, DSc, MHSA, FACHE is a senior healthcare executive who creates and
executes breakthrough strategies that revitalize organizations at an accelerated pace. Delivered
operating margin gains from 17% to 650% and generated $40M+ in net income turnarounds
through process and performance enhancements during 20-year career at leading health systems and
hospitals. Produced substantial improvements across a balanced scorecard in areas of quality,
finance, value, growth and patient, employee and physician satisfaction. Rallies key stakeholders to
embrace new approaches and achieve a culture of excellence in patient-centered care.
Areas of expertise: Strategic Planning & Execution, Quality Enhancement, Process Improvement,
Evidence-Based Management, Culture Transformation, Team Building, Partnership Development,
Government Affairs, Governance & Board Relations, Physician Relations, Employee Engagement,
Community Relations
Standard
Deviation B
Favorable
Revenue 0.067 × 47.453 = 3.2 %
Expense 0.068 × 39.734 = 2.7 %
Volume 0.073 × 5.811 = 0.4 %
Unfavorable
Revenue 0.049 × -105.620 = -5.2 %
Expense 0.070 × -89.532 = -6.3 %
Volume 0.060 × -9.623 = -0.6 %
5%
Deviation B
Favorable
Revenue 0.050 × 47.453 = 2.4 %
Expense 0.050 × 39.734 = 2.0 %
Volume 0.050 × 5.811 = 0.3 %
Unfavorable
Revenue 0.050 × -105.620 = -5.3 %
Expense 0.050 × -89.532 = -4.5 %
Volume 0.050 × -9.623 = -0.5 %
A 1 standard deviation unfavorable
expense budget variance reduces the
operating margin by 6.3%, lowering the
4% example to a -2.3% operating margin.
A 5% favorable expense budget variance
improves the operating margin by 2.0%,
raising the 4% example to a 6.0%
operating margin.
A 5% unfavorable expense budget
variance reduces the operating margin by
4.5%, lowering the 4% example to a -
0.5% operating margin.
Operating
Margin
Impact
Budget
Variances
Example using a 4% operating margin
and all other factors constant:
A 1 standard deviation favorable expense
budget variance improves the operating
margin by 2.7%, raising the 4% example
to a 6.7% operating margin.
Budget
Variances
Operating
Margin
Impact
Example using a 4% operating margin
and all other factors constant: