Industry Insights

Most Common Mistakes Made in Financial Budgeting/Forecasting – Part III

February 2014
Authors:  Matt Klauser

Matt Klauser

Director

Transaction Services

Health Care
Manufacturing & Distribution

14241 Dallas Parkway, Suite 1100
Dallas, Texas 75254-2961

Dallas
972.702.8262

 & Andy Kaempfe

Andy Kaempfe

Senior Managing Consultant

Transaction Services

Health Care

910 E. St. Louis Street, Suite 200
P.O. Box 1190
Springfield, MO 65801-1190 (65806)

Springfield
417.865.8701

In the ever-changing health care environment, the accuracy and effectiveness of financial forecasts face increased scrutiny and questioning from health care entity boards and management teams. As a result, BKD has developed a three-part series to address the most common mistakes in financial forecasts prepared by health care entities.

In this third and final article, we address issues organizations have in aligning forecasts with their overall strategic mission and communicating the forecast to the necessary individuals. Part I addressed mistakes related to the effect of complacency on the forecasting process, while Part II examined mistakes related to maintaining consistency among forecast assumptions.

Some organizations think of annual budgets or forecasts as a routine, check-the-box procedure that must be performed each year but never fully utilized. In addition, some management teams get stuck in the details and overlook implementing the forecast as part of the organization’s overall plan. Making any of the mistakes outlined below decreases the accuracy of any forecast and may lead to difficult-to-explain budget-to-actual variances next year:

  • Disconnect from Strategic Plan:  Successful organizations often employ a long-term strategic plan, especially when planning for major additions or renovations, changes in services offered, etc. In preparing a forecast, consider all aspects of the strategic plan. Failing to incorporate the strategic plan creates confusion as to which plan has higher priority. For example, if one of your organization’s primary goals is to increase orthopedic services to serve the community’s aging population, management should estimate the potential impact of such changes to allow for future comparative analysis.
  • Not Involving the Right People:  While forecast preparation often falls to the finance department, financial results often are driven by individuals in other areas of the organization. Make sure those charged with the execution of the plan have input into the forecast and buy into the assumptions used. For instance, board members should be involved in significant decisions, e.g., issuance of new debt or major capital expenditures, while medical staff should be involved in patient volume forecasts. In addition, each department should provide input to a certain extent to allow for buy-in and increased motivation to achieve the forecasted results.
  • Not Holding Individuals Accountable:  Once the right individuals are involved in the forecast, they should be held accountable for future results. Depending on the organizational structure, make sure at least one person is responsible for each major assumption included in the forecast. For example, department heads often are responsible for monitoring department expenses, while members of the executive team may be held accountable for larger strategic changes. This gives members of the management team a specific focus rather than everyone trying to manage everything at once.
  • Not Communicating Results:  Although most organizations prepare some variety of budget or forecast, many do not fully use it throughout the year. If those expected to follow the budget aren’t aware of monthly or year-to-date results on a timely basis, they cannot alter future decisions to better align with the forecast. To avoid this, prepare regular reporting packages, typically on a monthly basis, showing budget variances. To make it even more useful, include additional narrative explaining the main reasons for any variances. For instance, an increase in salary expenses can be explained by increased overtime that month, which was caused by increased patient activity and higher revenues.

It is imperative to consider how the forecast fits into the organization’s overall strategy and management structure for it to be used successfully. Making sure the appropriate individuals are involved both on the front end, with the determination of the forecast assumptions, and on the back end, when the assumptions are actually implemented, improves the accuracy and achievability of the forecast. Lastly, making sure to communicate actual results compared to the forecast on a timely basis will enable management to course-correct throughout the year and make any necessary adjustments.

For more information on financial budgeting and forecasting, contact your BKD advisor.

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