los trios ringbarkus (three ring circus) - hfma · the psychology is always do better than you...

Los Trios Ringbarkus

(Three ring circus)

Actuals, Budgets, Forecasts

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Surely actuals are self evident and don’t need instruction?

Hang on to that thought whilst we get Budget sorted

Budgets – what a monumental waste of time !!!!

We spend months and thousands of hours to construct what?

Is the amount of time and

effort spent on budgets

justified?

In a sense no but we are

going to spend a lot of time

on budgets

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What is the number one job of the CFO?

Do not . . . . run out of money !!!

Businesses (and CFOs) fail when they run out of cash

Your cash budget is much more important than your

operating budget

Pay attention to it and understand it

Cash budget

• Operating budget

• Non cash items

• Capital budget (self funded)

• Other balance sheet movements

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Operating budget at break even should give you around

1% cash surplus due to employee entitlements and yes

you can generally spend it.

In theory one day those entitlements will fall due and you

will need the cash to pay them out. Your cash budget

tells you if this is going to happen but . . . . . . . .

For employee entitlements to be cash negative you

generally need a shrinking health service and if that’s

what you’ve got then you have other problems

Cash Budget

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Employee entitlements is a whole lecture on its own.

• Generally not a sophisticated conversation

• Often the subject of Board pressure

• The nuance is in backfill v non backfill roles

• Interest rates v wage rates

Basically – don’t worry about it

– take the cash surplus and use it

But before you do – think about it, calculate it

1% is a rule of thumb – you may be different

You are not now or ever going to keep cash reserves in the

order of that required to pay out employee entitlements

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Public health has a unique budget perspective

Commercial organisations need a return on investment . . .

. 20% EBIT . . . 10% net

Public health just wants to break-even . . . .

. . . . doesn’t it? . . . but 1% would be great!

Actually you do want a surplus

of at least 0.5% but 1% would

be better

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You need a surplus

to generate the cash

to pay for capital items

not covered by DHHS grants

Even with a cash surplus from a breakeven operating result

Just how much cash do you need?

Surprise!! – Your cash budget will tell you

You do need a really good asset management system

In the end you won’t have enough cash and you’ll tailor

your asset replacement to suit

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Do not . . . . run out of money !!!

Operating Budgets

Let’s assume somewhere along

the line you managed to deliver a

breakeven budget

Lock it in !!

You can survive a deficit or two but

capital expenditure must be

slashed

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Health Service budgets are

dependant on growth WIES for

survival

EBAs (wages) 3.5%

Revenue price increase 1.5%

Indexation gap 2.0%

After years and years of this most

savings are purely speculative

Operating Budgets

2% growth WIES gives you a balanced

budget but no actual growth resources

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Operating Budgets

Massive pressure to add resources

Your job is to say yes but only if the new resources are

funded

Always, always,

always, you will be

told:

“if we don’t add these

three extra doctors

people will DIE!!”

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Your response is:

A “Of course you can have three extra doctors, just let

me know what you are cutting out or reducing that

will pay for them?

or

B “Of course you can have three extra doctors, just

show me the letter promising the additional funding.”

If you put on additional cost without funding there is only

one possible outcome – deficit.

Make sure the message is heard and understood

“no unfunded resources”

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Budget to an account level

Manage at an operating level

Divisions / Departments / Cost centres

Err on higher level management than low level

In setting budgets allow trading within the Division

and even between Divisions

Your focus is on the net result

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Example 1 $M

Account Actual Budget var’n

Medical supplies ($12,345) ($10,000) ($2,345)

Meals ($8,765) ($10,000) $1,235

Total ($21,110) ($20,000) ($1,110)

New Budget Budget

Medical supplies ($11,235)

Meals ($8,765)

Total ($20,000)

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Example 2 $M

Account Actual Budget var’n

Revenue $12,345 $10,000 $2,345

Expense ($10,000) ($10,000) $0

Total $2,345 $0 $2,345

New Budget Budget

Revenue $12,345)

Expense ($10,000)

Total $2,345

Organisational decision (priority) as to where the extra

revenue might be used

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How often do you hear as an explanation for Actual v Budget

variations – “Budget error”?

Re the Actual v Budget nexus

Hold your Finance staff accountable and make it known

that Budget error is not an acceptable explanation

For that matter neither is “prior year cost not accrued at

year end”

Make it clear you expect high standards of work.

When discussing operational performance you

absolutely do not want to be discussing accounting

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Actuals = accounting 101 isn’t it?

Actuals are never actual – they are only ever estimates

How soon do you declare a month end result?

Day 1? Day 5? Day 10?

What percentage of separations have been coded?

10%? 30%? 50%?

How many journals are being processed?

Journals are time consuming and often a waste of time

Declare war on journals!!

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Intra-company charging

i.e. ICT wish to charge $100 for every PC installed

Ban intra-company charging

It is a time wasting exercise that has no bottom line impact

and becomes an excuse, i.e. I’m not responsible”.

Buy don’t lease – protect the bottom line

Be conservative - over accrue

The golden rule – no surprises!

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No surprises leads me to Forecasts

To a degree I hate forecasts

Predicting the future is a fool’s game

But it must be done – the Board generally want to know

what is coming and will ask for forecasts

How do you avoid looking foolish when your crystal ball

clouds over?

There is only one way to get forecasts correct . . . .

. . . . change the actuals

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Okay – it’s not quite as simple as that

1st For the first quarter just forecast budget

You say it is too early in the year to be making big

calls on where the result will end

2nd Make small moves towards where you think things are

headed. If you think you will miss budget by $2M

start by predicting $1M

3rd Do not change the forecast every month.

Let it sit for at least 2 months before you make a

move. Jumping around says you don’t know what’s

happening.

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4th You really should know where you are headed and

the psychology is always do better than you predicted.

If you are headed for a $3M loss predict $3.5M.

If you are headed for a $1M gain predict $0.5M

You really should know where you are headed and decide

on the result you are going to aim for.

You can always speed up expenditure

Maintenance in advance

Equipment below the level of capitalisation

But be careful – it can become a runaway train

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What’s really tough is if you can see you are going to blow

the forecast

Then everything stops

No maintenance

No minor equipment

No discretionary expenditure

This is your call – you have to decide and stand by your

decisions

The bit I don’t like about Forecasts is telling the Board

You have to manage the Board’s emotions

Absolutely avoid the good to bad to good rollercoaster

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I do forecasts continually

I discuss them with the CEO and COO continually

We constantly predict where we are at and manage

accordingly

The secret to forecasts is making the actuals match

The Board needs to trust you – you need to build credibility

You must not mess around with the forecast too much

but you can speed up or slow down expenditure and

you can manage WIES it is not just a matter of taking

it as it comes

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So let’s talk about WIES

los trios ringbarkus (three ring circus) - hfma · the psychology is always do better than you...

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