At this time each year, many critical access hospitals (CAHs) are in the midst of their budgeting process. Ensuring your facility has an accurate projection of revenues and expenses is imperative, especially as providers emerge into the post-COVID environment. Therefore, it is essential to consider best practices and ways to establish more precise financial forecasts. 

Who should be involved?

Creating a budget should be collaborative, involving key decision-makers within the facility. Input is required from those with the greatest knowledge of departmental trends and the changes anticipated in future periods. Sharing a narrative can help management better understand sub-level budgets.

How to Create a Budget

The budget should be based on the strategic and operational initiatives identified by the organization. This is key to driving financial sustainability. By projecting income and costs, facilities can better plan for capital projects and purchases, adding or removing service lines, and more.

As a starting point, department leaders can obtain historical financial information for the past several years to use as a guide for the coming year’s budget. Depending on the year-over-year fluctuations, it might be best to plan an average of previous years or apply a percentage increase to a single prior year. If a department’s revenue and expenses have shown consistent increases or decreases over time, applying a similar percentage increase or decrease to the actual prior year data could be the best estimate to use.

Using an average of several prior years could be the best estimate in situations where revenues and expenses have fluctuated without any discernable pattern. Material events, such as the COVID-19 pandemic, must be considered and factored into calculations. For instance, a facility may not factor 2020 values into its budget decisions as a result of the year being considered an outlier due to COVID-19.

Another method to consider is to estimate revenues based on expected service line stats, payor mix, and reimbursement. This can be incorporated into an overall service line budgeted income statement that includes revenues and expected contractual and direct expenses. Depending on the complexity, overhead allocations can be made to the service lines and departments. Forecasting based on expected volumes can also be expanded into a flexible budgeting process, meaning at certain points in the year, expectations can be adjusted based on the current year’s volume trends.

Prioritize Purchases + Projects

One of the most important goals of the process is planning for capital purchases and projects. A list of possible purchases should be gathered by management and assigned a priority. Those capital items with the highest priority can be factored into the budget for the coming fiscal year. In contrast, lower-priority items can be earmarked for the future. While determining priority can be subjective, those items with the most potential to positively affect cash flows should be ranked higher, along with any assets needed to provide excellent patient care and carry out the facility’s day-to-day operations.

Establish Deadlines

Deadlines should be set for department leaders to have draft budgets completed to allow for adequate review time by management. After an initial review, a meeting may be needed to address questions and finalize. To allow enough time for analysis, you should start several weeks or months prior to the final due date.

This exercise can be time-consuming and requires cooperation from personnel throughout the facility. However, properly completing the budget is a valuable exercise that will pay off in the long run. Some providers will find one approach to be the most effective. Other providers may use a combination of methods to achieve their goals.

Having an accurate budget in place will assist management in making operational decisions that support strategic business goals. Please contact us if you have any questions about the process or how to get started.