1. Planning and Budgeting in Healthcare 1
Planning and Budgeting in Healthcare
By: Tomeka Lewis
Strayer University
Healthcare Finance
May 13, 2012

2. Planning and Budgeting in Healthcare 2
Planning and Budgeting in Healthcare
The purpose of this document is to discuss planning and budgeting in healthcare. The
focal point will be about Hatcher Orthodontics an area dental clinic where planning, budgeting
and financial management has helped this organization survives in a competitive market. The
turning point will discuss organizational objectives such as cost effectiveness for both the
consumer and the company. Hatcher Orthodontics will show a demonstration sample of their
assets and liabilities for a month and then a five year short term budget. This will exemplify
how financial management and good teamwork helps them continue to provide a world class
state of the art technology in a warm family–oriented environment. Finally, this paper will give
examples of formulas that can be used to track spending and profit for Hatcher Orthodontics and
address what is needed in the step by step planning, and financial management process. A time
value analysis, pertinent financial ratios, breakeven analysis and not present value will be
assessed to assist with choosing an investment that would be profitable for Hatcher Orthodontics.
The conclusion will reiterate the previously stated.
Planning and budgeting requires teamwork. It is a familiar duty of healthcare managers.
Preparing a budget and planning ahead helps managers prepare for the future and set
expectations. A budget allows access to financial performance and ensures that operations are
carried out as expected. Planning is creating a guide that prepares healthcare organizations
ahead of time. However, budgeting consist of accounting functions which creates a bridge
between planning and controlling the functions of the organization. A large amount of time is
spent on planning activities for budgeting which is usually for the immediate future. However,

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for long term financial budgets the best control mechanism is to ensure that organizational plans
and goals are in current performance and is consistent with the set expectations. There are two
types of budgets that managers at Hatcher Orthodontics will focus on; flexible budgets and
variance analysis. Both of these types of budgets will assist in controlling current operations for
the organization. These accounting tools will assist the accounting staff with preparing for
organizational financial goals that are long-term, or create a budget which is to be used in the
immediate future (Gapenski, 2012, pp. 253).
Budgeting and planning at Hatcher Orthodontics would need to take into consideration
the overall goal of the clinic. A strategic plan would be the first necessary step prior to
selecting pricing and servicewhich involves creating a values statement which is a list of core
values and beliefs which in most instances are four to six core priorities that are the guiding
light to the organizations plan. An example of the values statement would be;
1. Treat everyone with kindness and respect
2. Believe that there is hope for all relationships
3. To show empathy and sincerity in every level of care
4. Do always do the right thing in all situations
5. To maintain a high level of patience and perseverance with all patients
6. To provide a high quality of excellent healthcare at all times (Gapenski, 2012, p. 254).
The next part of the planning process would be to create a mission statement that is
consistent with the values statement. This statement provide a reason for the existence of
Hatcher Orthodontics and that consist of their desire to provide the highest level of
orthodontic treatment using state of the art diagnostic equipment at the lowest possible cost.

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This statement will help the organization employees receive the maximum from their benefits
and their stockholders as well (Gapenski, p. 254). The third step to be considered is the
vision statement which works along with the mission statement. This is just one sentence
that points out how the healthcare organization visions themselves in the future. The goal of
the vision statement is to motivate managers, employees, medical staff to work as a team to
promote a higher quality of care so that patients will return and recommend their services to
others in the community. These actions will ensure that the business will be viewed as the
regional leader for providing state of the art orthodontic services that is compassionate in a
healthy environment that promotes humanistic values. Using the values, mission and visions
statement gives managers the tools needed to build a framework that has specific goals and
accomplishments that will meet the expectations of the healthcare facility.
At Hatcher Orthodontics, they have a solid history combined of 125 year experience.
They are talented in creating healthy and happy smiles for their patients. Their specialty is to
create a comfortable environment that is friendly and family-like in many ways (Hatcher
Orthodontics, 2012,p.3)
This facility has a management, administrative, and clinical staff that possess good work
ethic and promotes teamwork. They work together to ensure that all organizational goals are
attained in a qualitative nature. They work hard at staying focused at achieving their
organizational goals by ensuring that their mission statement is achieved by providing the best
possible state of the art care and technology in a caring environment while giving all patients a
smile (Hatcher Orthodontics, 2012 p.2). Their organizational goals include providing patients
with patient satisfaction. They have established policies and corporate goals which are in place

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in efforts of meeting the demands of the industry. However, these goals can change at any given
time and can be challenging but not impossible to attain (Gapenski, 2012).
Hatcher Orthodontics, has established a written policy which lists the hours of operation
along with cancellations and any attached fees if proper notice of the 2nd cancellation is not
reported properly. In effort of keeping the services at reasonable pricing, they make several
payment options available to patients. These include in-house financing, MasterCard, Visa, cash
payments and multiple patient discounts. Prior to services rendered, each patient or the parent
sits down with the finance manager to discuss how the services will be paid for. If perhaps at
any time the family cannot continue the payment arrangements, there is no problem stopping
them and restarting at a later time. Hatcher Orthodontic service gives discount services to all
persons whether they have insurance or not. Most insurance are welcome for parents and their
children. Everyone working together to achieve the corporate goals which is why teamwork is
so vital to this dental facility. Organizational components have been set and consist of the team
of dentists, administrative health systems management, OSHA staff, financial management,
appointment setters and clinical staff. With these individualized services, the quality and patient
satisfaction, medical staff relations, human resource management, financial performance and
health systems management should be met without any delays. Organizational objectives should
be applied technology based on the needs of patient and to meet the competitive market in the
local business area.
According to Gapenski (2012), as part of maintaining a consistent financial condition, the
objectives for meeting monetary goals must have a starting point which is quantitative in nature
by specifying and targeting a specific market share that will bring a return of equity (ROE) (p.

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256). A list of goals permits the dental clinic to maintain a high performance level within a
highly competitive market area. Hatcher Orthodontics should strive to maintain or exceed their
current 10 percent operating margin, or increase the clinics debt ratio to 35 to 45 percent. This
task cannot be achieved by taking on new projects in this business because it will lower the profit
margin instead (p.256). Objectives of this sort allow managers the opportunity to be more
specific in choosing their targets. However, the targets must support the goals of the business
and bring revenue. For this reason objectives and goals should be chosen wisely and carefully so
that although they may be challenging, they can be achieved in a short time.
Operational planning is the next step in the planning process which should be the map to
the future of the business. The operation plan is a detailed guide that consists of a map of how
the objectives and goals of the business will be attained. Services and pricing are part key
elements of the organizations strategic plan. This operations plan will include a financial plan
and budget that can be short term which is one to five years, or long term which is up to ten
years. This plan allows the business to map out how they expect to progress within a specific
time frame. Most businesses use a five year time horizon. Financial planning at this point takes
place at the departmental level with technical assistance from all finance staff, planning and
marketing which supports the corporate plan.
At Hatchers Orthodontics the five year financial plan focal point would look at the
financial condition, investments and financing. Reviewing these components would give
managers and staff and idea or starting point as to how to proceed until the plan is completed.
Next would be the capital budget analysis outline which would consist of equipment purchases,

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lands and buildings are all part of the forecasted finance statements. The clinics future financing
plan is based on how to achieve the funding for the future of the organization.
Working Capital Management = asset – liabilities
This plan supports the overall day to day short term financial operations. For example; if
Hatcher has a working capital management of Payments
Patients Seen Credit Cards Cash Insurance Billing In House Financing Daily
Total Capital
30 $8,000 $3,000 $7,000 $12,000
$30,000
1. Daily Assets
2. Daily Liabilities
3. Financial statements
4. Forecasted expenses
5. External expenditures
a.Ongoing capital management
b. Working policy
c. Petty cash budget
6. Cash market and securities management
7. Inventory control
8. Revenue management
9. Short term financing
10. Credit card payments
11. Monthly Events budget
a. Employee Incentives
b. Patient Rewards Budgets
c. Staff Parties
12. Monthly Supplies and equipment
13. Budgeting and Control
a. Revenue budget
b. Expense budget
c. Operations budget

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14. Administration and Human Resource Management
15. Facilities Management (OSHA)
Hatcher Orthodontics Monthly Expenses Form
Mortgage $10000
Salaries/wages $_150000
Payroll expenses $_3000
Equipment leases (copiers, fax machines, telephone system, computer) $__1500__
Depreciation $__1000________
Supplies $ 25000
Inventory $_2100
Advertising $__300____
Utilities $_1000_____
Licenses/permits $_400
Insurance $__3000_
Accountant's fees $__5000_
Attorney's fees $_1500_
Dues/subscriptions/fees $_1100
Repairs/maintenance $_1000
Taxes $___2000
Loan payments $__10000
Other expenses $__2000______ (Start up Expenses, 2012, p. 1)
Monthly Liability Total = $ 219,900

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Section two of the financial process involves taking the working capital management which are
the profits for daily costs and multiply the total daily proft times (x) the number of working days
which are twenty.
$30,000 daily profit X 20 days = $600,000 is the Monthly Working Capital of Assets
Monthly Expenses Liability = $219,900
Revenue for the month is the Assets minus the liabilities
A-L=R
$600,000 - $219,900 = $ 380,100 Annual Profit = R X 12 = $4,561,200
The general idea is to make sure that this short term plan provides operating benchmarks for
all levels of management that also includes the financial goals of the business. Frequent
comparisons many be necessary. This budget provides an overview of detailed plans that were
expressed in dollar terms. It specifies how resources will be obtained and used during the five
year period. This budget is flexible and can be changed or amended at any given time for the
sake of meeting the needs of the patient and in effort of promoting a higher quality of care that
meet the competitive market of orthodontic clinics in the local area. In effort to attaining the
financial goals proposed each year, a budget must be in place for the sake of doing what needs to
be done to improve the performance of the organization and for improvement of finances.
There are many types of budgets that can be used in healthcare facilities. Conventional
budgets allow the organization to begin the starting point for the new budget with the old budget.
Each line on the old budget is reviewed and necessary adjustments made. The other budget is a
zero based budget which begins with a clean slate and everything must be justified and
accounted for (Gapenski, 2012, p. 261).

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A timed value analysis is a component used in healthcare systems to help management seek
a good way to invest a portion of their annual profit into a bank where it will be profitable. For
example if Hatcher Orthodontics took fifty percent of their annual profit which would be
approximately $2, 256,000 and placed it into a retirement account that offered interest at a seven
percent rate, then over a period of five years will rollover nearly five times the amount placed in
the investment account. Time value analysis allows Hatcher Orthodontics make good choices in
managing their profit by investing their dollars into an account that will make profit over time.
In the timed valued formula below is an example of how profitable it is to invest money to make
more money which is for the good of the business. This Modified return cash annuity will pay
the beneficiary the amount equal to the value of the account. The initial investment would be
$2,256,000 (Advisor World, 2009).
Time valued formula:
P = A (1+i)^n
P = The amount of money by end of n years and i interest rate
A = Initial investment
i = interest rates. If it is 7% put it as 0.07
n = number of years the investment take place which is 5
. P = $2,256,000 (1+0.07) 5
$12069600 = $2,256,000 (1+0.07) 5 (Yahoo, 2012, p. 1)
Investing is a vital part of the dental business. Every organization wants to make a good sound
decision as to how to make their money gain profit. A good investment for Hatcher
Orthodontics would be for retirement in the form of an annuity. Hatcher Orthodontics is

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privately owned and operated. They have to survive once the business is not there anymore. I
would suggest they place their money in an Annuity account that offers a 10 percent interest rate.
Using the net present value formula below can be used to see how the value of the dollar is today
versus years to come. According to (Wang, 2005), correctly measuring the value of an
investment that produces a stream of benefits is net present value. “The net present value of an
investment project is then defined as the sum over all time periods of discounted net benefits
(Wang, 2005 p.1).” NBt is net benefits in period t, and r is the discount rate. The lowered rate r
is the prevailing rate that allows money today to be traded for future dollars. It is the price listed
for dollars traded in different time periods between time periods, which is the "opportunity cost
for funds available for either investment or consumption. Formula (1) shows that costs and
benefits in all periods are first translated into net present value terms, using the discount rate r,
and then the separate net benefit terms are summed to give the value of the project (Wang
2005,p.1)”
Not present value formula (NPV) calculation already accounts for the best choice in
investing funds by discounting the basic benefits at discount rate r. Thus, any project with an
NPV>0, by definition, is of greater economic value than other existing investment opportunities.
if NPV = $x is greater than zero, then the project is worth $x more than other available
investment rates. The key point here is to consider a project with an NPV>0 is better than other
alternative economic investment opportunities and is deemed to be worth the investment.
Net Present Value Formula

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Pertinent financial ratios
Current Ratio = $600,000
$219,900
Net Working Capital = Current Assets - Current Liabilities
$600,000 - $219,900 = $380,100
_______________________________________________________________________

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ROA = Profit Margin X Assets Turnover Ratio
380,100 $380,100 $600,000 monthly
ROA = ------------------------ = -------------- X ------------------------
$600,000 $600,000 $380,100
Profit Margin = Net Income / Sales
Assets Turnover Ratio = Sales / Averages Total Assets (CPA Class. 2012)
Additionally, prior to making a sound decision about investments a breakeven analysis need to
take place happens when the cost of the organization is equal to the profit. When the finance
manager can accurately forecast the cost and expenses then it’s time to do the simple math. That
means that the total expenses and cost must be deducted from the profit. If the company finds
that it has broken even and suffered no loss or gain, then they need to take a closer look at how to
improve their profit. This calculation is critical to Hatcher Orthodontics when determining
margins. There is no room for unexpected cost that are unforeseen, nor is there room for
investments (Richards, 2012). Creating a pricing chart is a critical step in the breakeven analysis.
The unit price is what is being charged for each service. For example; Hatcher Orthodontics
gives the first retainer free when braces are removed. However, if the top or bottom need to be
replaced the unit price is within the range of $365.00 and above for either the top or bottom. So
when considering investing, this type of breakdown is needed before a decision to invest can be
considered (Hatcher Orthodontics, 2012).
The risk/return would have to be a tradeoff which would help the dentist sleep at night.
Some people take financial risks that are equivalent to jumping off a cliff and are not as worried.

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However others are afraid of taking financial risks. The main focus should be deciding the
amount of risk while remaining in a comfort zone financially. In the investing world the return is
always different than the initial investment. It could be more than expected or less. This part is
measured in statistics referred to as the standard deviation. The risk/trade off creates balance
between the lowest and highest possible return. The higher the standard deviation is on the scale,
the higher the chance of gaining for the investment. The best thing for Hatcher Orthodontics is
to only invest an amount that if they suffered loss from the investment, they can still survive and
be in a comfortable financial zone. That way financial risk would not cause the clinic financial
distress regardless of the return.
In closing, Hatcher Orthodontics is a dental clinics who specializes in creating healthy
smiles. Their organizational goals, objective, mission, vision statements and commitment is to
servicing the community in its local area. The corporations strategic plan is clearly identified in
effort of meeting the demands of the dental industry. The pricing is reasonable and competitive
with other orthodontic practices in the areas because give discounts and have various payment
arrangements available to all families. The dentists, managerial staff, financial and administrative
staff along with the clinical staff possess a combined 125 years’ experience which is clear that
the business is profitable and in a comfort zone financially. Their commitment to their patients
and the incentives they provide to both the staff and their clients shows that they share their
profit and maintain a positive relationship with their consumers. They even have rewards set
aside to give to patients who follow the protocol of brushing and keeping their smiles bright and
healthy. Planning and budgeting are vitals components of sound financial management and
promotes improvement as required when running a business. The managerial staff,
administrative staff, OSHA/Facilities, Cleaning/Supply and Clinical Staff at Hatcher

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Orthodontics work as a team to overcome challenges in effort of attaining their financial goals
and to continue to provide the state of the art services and technology in a friendly family
oriented environment.

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References
Advisor World (2009). Finding the Best Investments for Your Financial Portfolio. Retrieved on
May 12, 2012 from www.advisorworld.com.
CPA Class (2012). Retrieved on May 12, 2012 from http://www.cpaclass.com/fsa/ratio-01a.htm
Gapenski, L.C. (2012). Healthcare Finance: an introduction to accounting and financial
management, 5th Edition. Chicago, Illinois: Health Administration Press.
Hatcher Orthodontics (2012). Retrieved on May 11, 2012 from www.hatcherorthodontics.org.
Richard, Daniel (2012). How to do a Breakeven Analysis. Retrieved on May 12, 2012 from
http://entrepreneurs.about.com/od/businessplan/a/breakeven.htm
Wang, A. (2005) Key Concepts in Evaluating Outcomes of ATP Funding of Medical
TechnologiesJournal of Technology Transfer, VOL. 23 (2): 61-65. Retrieved May 12,
2012 From http://www.atp.nist.gov/eao/jtt/wang.htm