1. MANAGING BUDGETS Ian Jones Head of Management Accounts 1

2. Areas to cover Approaches to budget setting Budget Management in practice Differences in approach to the Private Sector Budget setting principles Role of the Budget Manager Understanding Finance Reports Case study 2

3. 3 Approaches to Budget Setting Incremental Based Budgeting Zero Based Budgeting Activity Based Budgeting

4. 4 Incremental Budgeting (1) Based on previous year budget Incremental adjustments for: –Pay adjustments e.g. increments and pay awards –Non pay inflation –Other cost pressures –Service changes and new developments

5. 5 Incremental Budgeting (2)

6. 6 Zero Based Budgeting Start with a “Blank Sheet” Specify all potential services to be provided Identify income / funding sources Services compete for funding Compare cost and benefits for each service Prioritise and select service options Match resources required to deliver selected options Option of rolling budget with reviews every few years Can also be used for new services

7. 7 Activity Based Budgeting Focuses on outputs –Identify income source / customers –Determine the services/activities to be delivered –Determine the level (quantity) of each service / activity –Determine the ‘quality’ of service –Determine the unit cost –COST x ACTIVITY = BUDGET Service Line Management How does this fit with cash limited budgets?

8. 8 Different Budget Approaches What are the advantages and disadvantages of each approach to budgeting? Incremental Zero Based Activity Based

9. Incremental Budgets Pros  Simple  Stability and Consistency  Fairness  Visibility of Changes  Supports resource allocations & ring fenced budgets Cons  Potentially out of date budgets  Changing priorities not reflected  Can encourage spending & risk of budgetary slack  Provides no incentive for change 9

10. Zero Based Budgets Pros  Ensures a careful evaluation of services and costs  Encourages a questioning attitude  Eliminates wastage and slack  Resources linked to results and needs  Useful for service departments where output is difficult to identify Cons  Complex and time consuming  Requires decision packages to be defined  Focus on short term  Conflict 10

11. Activity Based Budgets Pros  Links cost and activity  Link to strategic goals  Benchmarking opportunities - cost efficiencies  Gives a view of complete services Cons  Can be complex to set up  Need to understand ‘cost drivers’  Activity collection requirements  Potential data quality issues  Large volumes of information may be overwhelming 11

12. Budget Management in Practice All large public sector organisations start from Incremental Budgeting  Large element of fixed costs  Labour intensive – labour costs relatively fixed in the short term  WG Resources are tracked on an incremental basis Tempered with elements of:  Zero based budgeting e.g. commissioning reviews, repatriation reviews, restructuring, estate rationalisation, etc  Activity based budgeting – the NHS experimenting with service line management 12

13. Budget Setting – Difference to the Private Sector The Private Sector is market driven and will usually start with expected sales activity to determine income and costs. Public Sector income is relatively stable with Governmental allocations Private vs Public Sectors differ in terms of their drivers for their strategic direction Private sector – profit/growth as their first considerations Public Sector – public need, refined by ‘value for money’, affordability, etc Flexibility in private sector – need to respond quickly to changing market conditions 13

14. 14 BCUHB Budget Setting Principles Clinically-led organisation Corporate ownership of how savings targets are shared Deficits remain where they currently lie Pace in achieving savings targets is always critical If schemes are not in place by default, savings targets are removed from budgets – 80% pay, 20% non pay Supporting Decision Making –Financial analysis by health care programme budgets –marginal analysis – the incremental cost of change –Service Line Reporting – specialty / service costs –Locality Reporting

15. Role of the Budget Manager Managing within the resources approved by the Health Board The role of Standing Financial Instructions –Must produce balanced financial plans –Delegated Authority and Accountability Value for Money (Economy, Efficiency and Effectiveness) Appropriateness Financial control - accuracy of payments and income 15

16. 16 Implications of Overspends Accountable Officer position (Chief Executive) Welsh Govt potential cover from other “votes” Payback implications Cash Implications South London Healthcare NHS Trust –“Unsustainable Provider Regime” –Appointment of Special Administrator –Central decision making –Development of sustainable services

17. 17 Financial Reports Revenue position by BCP and Corporate Function – July 2012

18. 18 Financial Reporting – Building Blocks Budgets - the financial plan Actual income and expenditure –Departmental Income –Pay –Non Pay Variances –Underspends / Favourable –Overspends / Adverse Financial periods Staffing WTE / FTE – reports show the current month

19. 19 Financial Reporting – Analysis Financial Coding Cost Centres –A defined area or location e.g. ward, department, community team, GP practice –The costs it incurs can be readily identifiable –Can be grouped together into management areas e.g. CPGs –“Where” the expenditure is incurred Subjectives –Type of expenditure –AfC Band of pay, type of non-pay or income Accuracy of coding supports financial control

20. 20 CPG Summary Report

21. 21 Detailed Finance Report

22. 22 More Detailed Information Available Staffing Information –Staffing Report –ESR Pay Analysis –E-Rostering Information Non-Pay –Transaction details by supplier –Purchase order line item details Income –Full invoice details –Payment analysis –Please pass on any invoicing details to finance!

23. 23 Service Line Reporting Expenditure charged to “Cost Centres “ - a defined area or location e.g. ward, department Allocate costs directly to service lines (e.g. specialties) Collect remaining costs into “Cost Pools” E.g. Wards, Theatres, Pathology, Radiology, Pharmacy Identify cost drivers for each cost pool E.g. Ward occupancy stats, Theatre times, Path & Rad details Apportion Costs to –Specialties and patient setting (inpatients, day cases, outpatients etc) Patient Level Costing

24. CASE STUDY Detail Finance Report and Financial Forecast 24

25. 25 Detailed Finance Report

26. 26 Case Study - Questions What are your observations for the following areas and how would you make your year end forecast for each of these areas? –Income –Medical Pay –Senior Nurse Pay –Nursing Pay –Non Pay What are some of the possible areas for ‘cash releasing efficiency savings’?

27. 27 Questions - continued Feedback on the support provided by management accounting teams –What are the good points –Where can we improve Use of centralised helpdesk?

28. 28 Case Study - Income

29. 29 Case Study – Medical Pay

30. 30 Case Study – Nursing Pay

31. 31 Case Study – Non Pay

32. 32 Case Study – Summary

33. 33 Finally…. Feedback on the support provided by management accounting teams –Good points –Where can we improve Use of centralised helpdesk? Ian Jones Head of Management Accounts ian.jones9@wales.nhs.uk Tel: (01978) 727099 (WHTN 1814 7099)