The Love/Hate Relationship With Budgets

May 17, 2019

The traditional annual budget at a typical hospital or healthcare system serves two purposes: 1) it provides a plan for the next year’s financial performance 2) it gives each department a target to which they will be held accountable. Finance departments love the budget because of the initial clarity and consistency it provides. However, anyone that has ever been involved in a budgeting process can likely attest to the shortcomings.

First, the budgeting process is time consuming. For the typical medium-to-large health system, the budget is a multi-million-dollar process that spans months, requires many hours, and involves hundreds or even thousands of individuals.

This is made worse by the second problem with the traditional budget: once complete, it quickly becomes obsolete. According to a recent assessment of 200 healthcare delivery systems, more than 83% of respondents said their organization’s budget was out of date within the first six months of operations. More than 43% said it was out of date within the first quarter. These inefficiencies in the budget can stagnate efforts to drive topline revenue and prevent an organization from reacting to changes in the marketplace.

Third, although budgets are designed to hold staff accountable to financial targets, they rarely allow for this. Instead, department managers sometimes pad the budget, impeding an organization’s understanding of what they think will happen. This can result in a possible 25% overspend in overhead and support. In short, a continuous improvement mindset is rarely encouraged and instead, performance is tied to inaccurate and inefficient financial goals.

Although time-consuming, inaccurate, and inefficient, the traditional budgeting approach is loved because it is familiar – most executives have been using this system for their entire career. And although hospital leadership know the shortcomings of the budget, they feel tied to it simply because shifting the organization’s mindset can feel like too daunting a task.

At Strata Decision Technology, we see hundreds of budgets every year and intimately understand both the benefits and inadequacies of the process. Leveraging this subject matter expertise, we’re working on solving the problem in several ways, from Activity Based Budgeting to Dynamic Planning. These advanced planning methods allow organizations to retain the key functions of the budget, planning and accountability, while allowing them to be more agile, accurate, and efficient.