Expert Tips for Healthcare Finance Leaders Plus Guidance for Users of Syntellis’ Axiom Budgeting Software
The budgetary ramifications of COVID-19 will continue long past the first wave of cases, impacting budgets going forward for at least fiscal year 2021 and possibly 2022.
We’ve devised several recommendations on how to model the impact of COVID-19 into your fiscal year 2021 budget process, including suggestions to adjust your budget monthly as new information emerges or new challenges occur.
Here’s how to adapt your budget to account for COVID-19 uncertainty.
First, set up your baseline budget with your original assumptions at the department level, but realize that it’s not reflective of what’s going to happen over the next 12 months.
If you have added a COVID-19 department for your general ledger (GL), use that in your budget as a placeholder for the expected impact of COVID-19 for each of your facilities. For example, if you have four hospitals, you would have four COVID-19 departments. You’ll document the impact to hospital A in department one, and the impact to hospital B in department two, etc. Quantify at an income statement level the inpatient gross revenue, outpatient gross revenue, contractual allowances, salaries, supplies, benefits, and other parameters. Perhaps you’ll document a large credit because your baseline budget has too much revenue in it, or too much operating expense, or maybe not enough supply cost expense.
You also need to determine the impact of stopping elective surgeries. Consider the impact at the macro level rather than at the department level, because granular analysis will change wildly over the coming weeks and months.
Variations by end of fiscal year
The starting point for the 2021 budget will largely depend on an organization’s fiscal year-end. However, the challenges will be the same regardless of fiscal year end.
Many clients wonder how to adjust their budgets for next fiscal year. They’re asking questions such as:
- What will monthly variance reporting look like?
- How frequently will we update our forecast or adjust our budget?
And the real question is, “Does our management budget, meaning the adjusted budget that we’re using for budget variance reporting, need to tie to the annual budget?”
Clients use two tools in Syntellis’ Axiom® Budgeting to help with adjusting the budget for variance reporting and forecasting for the remainder of the fiscal year: Flexible Budgeting and Current Year Forecasting. Both help with moving from a dollar-amount focus to a rate-per-unit focus in the variance reporting process.
Flexible Budgeting is designed to restate the budget through the current month with the premise that “if we had budgeted volumes to match actual, here is what the budget would have been.”
Flexible Budgeting takes your budgeted rate per unit times your actual volume, so it will flex down or up, depending on what’s happening with your volumes at the department level. You can then add your fixed expenses using a variety of methodologies such as the current budget, applying inflation to last year’s amount, etc.
Due to the impact of COVID-19 on rate-per-unit relationships, be mindful of the rate per unit that was used to develop the baseline budget compared to the current rate per unit. By accounting for the volume variance with Flexible Budgeting, any remaining variance in the comparison of the flex budget to the actual budget will be due to a rate-per-unit difference.
Current Year Forecasting
Current Year Forecasting is a feature that will forecast the remaining months of the fiscal year using historical relationships multiplied by updated volumes. Updating the current year forecast is a five-step process:
- Update your driver assumptions: Using your budget as the starting point, you can apply assumptions based on your COVID-19 recovery plan. For example, if you expect your budgeted volume in October to be 15% less than what was budgeted, the driver will apply that assumption to your budget.
- Calculate your baseline forecast: Using the inputs from the driver assumptions as well as your forecast method assignments, a baseline forecast is calculated for each department for volumes, revenue, deductions, expenses, and hours. A broad variety of forecast methodologies are available:
- Variable – Select from using your budget, YTD Actual, three-month or one-month run rate multiplied by the adjusted volume
- Fixed – Select from using your budget, YTD Actual, three-month or one-month values multiplied by any adjustments from step 1
- Adjust your baseline forecast: Adjustments can be made at the department/account level to account for known differences from your baseline assumptions.
- Adjust your entity level forecast: Adjustments can be made at the income statement category level by entity.
- Adjust your budget: The difference between your original budget and the revised forecast will be posted as an adjustment to the budget database so you can now report on your “revised budget” or your original budget before the adjustments were made.
An advantage of Current Year Forecasting is that it uses your current per unit relationship, so it reflects current changes in your per unit relationships. Because the result is likely to be very different than your annual budget, you’ll need to reconcile the two. This approach effectively reflects the changes in volume using the updated historical relationships and allows you to potentially revise your monthly budget based on what you know today, as opposed to what you knew when you put your budget together.
The current year forecast can be updated once for the remainder of the year or on a monthly basis as more information is available upon which to base your recovery assumptions.
Rolling forecasting can be used to plan on a monthly or quarterly basis; however, the planning is done at a more summary level than traditional budgeting. It’s generally done at a financial statement or an income statement level of detail as opposed to the GL level of detail of a traditional budget. You can update the forecast monthly or quarterly based on your most recent actuals. Axiom Rolling Forecasting uses those actuals to reforecast your future periods. Most clients forecast out six to eight quarters, which is a longer time horizon than either Current Year Forecasting or traditional budgeting.
It focuses on rate per unit variances as opposed to traditional budgeting, which focuses on dollar amount variances. We recommend this approach as a potential replacement for a budget due to the volatility and nuances that COVID-19 has presented.
As you’re planning for fiscal year 2021, you need to determine how to handle your variance reporting. Start by answering these questions:
- How frequently will you make updates to your volume assumptions?
- Does the management budget need to tie to the annual budget, or how will you report that to the Board?
- Is the Board open to seeing your original plan, a revised plan, and additional revised plans throughout the fiscal year?
If you want more information or to share your suggestions for how you've addressed this issue within your budget process, please contact me at firstname.lastname@example.org.