By the end of this presentation you will be able
to:
Define Fiscal Literacy & understand why it is
necessary to be a leader
Recognize the components of an operating
statement & utilize to manage your business
Create a departmental budget
 Interactive budget exercise
Complete a variance analysis
 Interactive variance exercise
Fiscal Literacy is defined as:
 Possessing the skills and knowledge on financial matters to
confidently take effective action that best fulfills an
individual’s goals
A good leader understands daily operations
and the impact of decisions on financial
performance
Leaders need to be able to effectively
communicate financial issues of an entity
A good leader should be
able to successfully tell
the story of their
department/entity by
weaving together the
clinical (provider, patient,
quality) AND financial
issues
Should I
go back to
college?
Is there an
APP on
my
IPhone?
Develop a good working knowledge of key
financial terms, reports & processes
Put together the right team
 You don’t need to be a subject matter expert
 You should, however, know what to look for
 It’s important to know what type of questions to ask
 Go to subject matter experts for help!
Collaborate & communicate within the
department
 Physician lead, Administrative & Finance Leads all working
together, leveraging the different skill sets
Core financial statement
Presents a company’s operating results over a
specific period of time
Starts with revenue and then subtracts
expenses to calculate net income
Sometimes referred to as an income
statement, a P&L (profit & loss), statement of
operations, earnings report
Required by Regulatory Agencies, Banks, etc.
Provides a uniform and understandable
mechanism for measuring financial
performance
To monitor financial results
 Over the passage of time; allows for comparison to previous
periods
 Vs a Budget
Actual
REVENUES
Revenues – inflows
resulting from the
provision of goods and
services
Actual
REVENUES
Gross Revenue
$1,000,000
In a hospital, Gross
Revenue is generally
services provide to the
patient (charges)
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
Uncompensated Care
Revenue that will not be
collected because the
patient qualified for
discount under the
charity care policy;
patient deemed unable to
pay
10,000
5,000
600,000
615,000
Bad Debt
Revenue that will not be
collected due to patients
unwillingness to pay
There are reductions
made that reduce the
amount of gross charges
Contractuals
Revenue that will not be
collected due to
contractual agreements
with payors
$1.0 M Gross
Charges
MEDICARE
$0.30M Gross
MEDICAID
30%
$0.20M Gross
20%
COMMERCIAL
$0.50M Gross
50%
The resulting
percentages
of the total
charges is
referred to
as the payor
mix
MEDICARE
Contractual
Adjustment %
Contractual
Adjustment $
$0.30M
75%
$0.23M
$0.07M
25%
$0.20M
80%
$0.16M
$0.04M
20%
$0.50M
45%
$0.23M
$0.27M
55%
Gross
Net
Realization
Revenue
Rate
MEDICAID
COMMERCIAL
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
Net Revenue is the Gross
Revenue less deductions. This
is the real amount expected to
be collected
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
150,000
75,000
50,000
275,000
Expenses are outflows
resulting from the acquisition
of goods and services
Variable- costs move up and down dependent
upon changes in volume
Fixed- costs consistent regardless of changes
in volume
Step Variable- costs remain consistent, but do
change at certain discrete changes in volume
Assumption - One tech with appropriate
equipment can do 250,000 tests annually
Assumption - Salary and associated costs for one
tech - $80,000
Perform 1 test
1 Tech required
$80,000 Expense
Perform 250,000 tests
1 Tech required
$80,000 Expense
At this point, the tech appears to
be a fixed expense
Perform 250,001 tests
2 Techs required
$160,000 Expense
The $80,000 cost
remained fixed, until
we reached a
discreet change in
volume. At that
point, our expenses
went up.
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
150,000
75,000
50,000
275,000
EBIDA
110,000
EBIDA is earnings before
interest, depreciation and
amortization. Subtotal that
measures cash earnings from
operations
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
150,000
75,000
50,000
275,000
EBIDA
110,000
Less: Depreciation
7,500
Depreciation is the allocation
of fixed assets over their
useful lives
Actual
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
150,000
75,000
50,000
275,000
EBIDA
110,000
Less: Depreciation
7,500
Operating Income
$102,500
Total Operating Revenues
less Total Operating Expenses
Actual
REVENUES
Gross Revenue
Budget
Variance
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
10,000
5,000
600,000
615,000
Net Revenue
385,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
150,000
75,000
50,000
275,000
EBIDA
110,000
Less: Depreciation
7,500
Operating Income
$102,500
An operating
statement typically
displays the actual
results for the
period, along with
the corresponding
budget and
variances
A revenue and expense forecast describing an
entity’s financial goals
The estimates for each line item reflect what
management wants and expects to achieve in
upcoming periods
BUT WHY???
Assists in making sure goals
are met
 Capital
 Debt
 Pension Funding
 Etc.
Accountability of
management
Can help control spending
Helps with allocation of
limited resources
 Can use to control direction of
company
Payor Mix Assumptions
Revenue Assumptions
•
•
•
•
Volume projections
Changes to chargemaster
Inpatient vs. Outpatient mix
Types of procedures, tests
Staffing/Salary Assumptions
•
•
•
•
# of FTE’s necessary to support
volumes
Appropriate skill mix
Fixed vs. variable
Merit Increases
•
•
•
Patient population/
demographics
Shifts in payor mix
Changes in reimbursement
rates
Full Time Equivalent
(FTE)- A standard
measure of full-time
work. Often
OtherasExpense
Assumptions
measured
40
hours
perof expenses needed to
• Level
week/2,o80
per year
support
volumes
• Fixed vs. variable
• Medical vs. non-medical
• Inflation
For Step #1, we’re going to build a budget…..
Refer to your handout for assumptions
Using the assumptions, calculate out the
values for each line item, and transfer them to
the budget column of the worksheet
We’ll take about 10 minutes to complete…..
Budget
REVENUES
Gross Revenue
Budget
REVENUES
Gross Revenue
$1,000,000
CPT #1
CPT #2
Quantity Charge Per Gross Revenue
10,000
$75
$750,000
5,000
$50
$250,000
15,000
$1,000,000
Budget
REVENUES
Gross Revenue
Less Deductions:
Uncompensated Care
Bad Debt
$1,000,000
Budget
REVENUES
Gross Revenue
Less Deductions:
Uncompensated Care
Bad Debt
$1,000,000
30,000
20,000
Uncompensated Care
Bad Debt
Percent Gross Revenue Deduction
3.0%
$1,000,000 $30,000
2.0%
$1,000,000 $20,000
Budget
REVENUES
Gross Revenue
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
$1,000,000
30,000
20,000
Budget
REVENUES
Gross Revenue
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
$1,000,000
30,000
20,000
573,000
Medicare
Medicaid
Commercial
Payor
Mix
30%
20%
50%
Gross
Contractual Contractual
Revenue
%
Adj.
$300,000
73% $219,000
$200,000
77% $154,000
$500,000
40% $200,000
$1,000,000
$573,000
Budget
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
30,000
20,000
573,000
623,000
Net Revenue
377,000
EXPENSES
Salary Expense
Budget
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
30,000
20,000
573,000
623,000
Net Revenue
377,000
EXPENSES
Salary Expense
FTEs
270,000
Staff
Non-Staff
Salary Per Salary Expense
1 $150,000
$150,000
3
$40,000
$120,000
4
$270,000
Budget
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
30,000
20,000
573,000
623,000
Net Revenue
377,000
EXPENSES
Salary Expense
Supply Expense
270,000
Budget
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
30,000
20,000
573,000
623,000
Net Revenue
377,000
EXPENSES
Salary Expense
Supply Expense
270,000
60,000
Procedures Cost Per
Supply Expense
15,000
$4
Supply Expense
$60,000
Budget
REVENUES
Gross Revenue
$1,000,000
Less Deductions:
Uncompensated Care
Bad Debt
Contractuals
Total Deductions
30,000
20,000
573,000
623,000
Net Revenue
377,000
EXPENSES
Salary Expense
Supply Expense
Other Expense
Total Expenses
EBIDA
270,000
60,000
10,000
340,000
37,000
Less: Depreciation
5,000
Operating Income
$32,000
Now that we’ve established a
budget, it’s time to move on
to variances and variance
explanations…………
The variance is the difference between the
budget and the actual
Revenue variances
Expense variances
Revenues
Actual
Budget
Actual greater than budget = favorable
Actual less than budget = unfavorable
Expenses
Actual
Budget
Actual greater than budget = unfavorable
Actual less than budget = favorable
Be cautious – favorable is not always good….
For example, a result like this might send a good message at first glance……
Salary Expense
Actual
$500,000
…..but it could be the result of an issue
where the area is understaffed
Budget
$750,000
Variance
$250,000
…and unfavorable is not always bad
For example, a result like this might send a bad message at first glance……
Supply Expense
Actual
$100,000
…..but it could be the result of better
than expected volumes, which creates a
higher supply spend than planned
Budget
$75,000
Variance
($25,000)
For Step #2, we saved you a little work by
giving you the actual results for the period
You will need to :
 calculate the variances against the budget you prepared
 do your best to come up with the variance explanations,
using the detail of the actual results provided
We’ll take about 15 minutes to complete….
Actual
Budget
$965,000 $1,000,000
Gross Revenue
Variance
Explanation
($35,000)Volume variance is favorable $25,000 (500 more CPT #2
than expected), offset by unfavorable rate variance of
$60,0000 for CPT #1, where charge has been lowered
Actual
CPT #1
CPT #2
Volumes
Charge Per
10,000
$69
5,500
$50
15,500
Total
Charges
$690,000
$275,000
$965,000
Budget
CPT #1
CPT #2
Total
Volumes
Charge Per
Charges
10,000
$75 $750,000
5,000
$50 $250,000
15,000
$1,000,000
CPT #1
• Rate Variance
• $6 per x 10,000
• ($60,000)
CPT #2
• Volume Variance
• 500 x $50 per
• $25,000
Uncompensated Care
Bad Debt
Actual
Budget
29,915
30,000
19,300
20,000
Variance
Explanation
85Although variance is positive, we’re writing off 3.1% of gross
as opposed to 3.0% in plan. More charity care than
anticipated
700Although variance is positive, we are consistent with budget
at a bad debt write-off of 2% of gross revenue. Positive
variance is result of a smaller revenue base.
Actual
Uncompensated Care
Bad Debt
Write-Offs
$29,915
$19,300
Result
3.1% of Gross
2.0% of Gross
Budget
Uncompensated Care
Bad Debt
Write-Offs
$30,000
$20,000
Assumption
3.0% of Gross
2.0% of Gross
Uncompensated
Bad Debt Care
TheWorking
favorable
asvariance
planned.is
misleading.variance
Write-offs
are aof
Favorable
is result
higher percentage
of gross
lower revenue
revenue than anticipated
Contractuals
Actual
Budget
586,720 573,000
Variance
Explanation
(13,720)Contractual write-offs are higher than expected despite
lower revenues. Shift in payor mix from commercial into
government payors
60%
50%
50%
40%
30%
40%
35%
30%
Actual
25%
Budget
20%
20%
10%
0%
Medicare
Medicaid
Commercial
Actual
Budget
300,000 270,000
Salary Expense
Variance
Explanation
(30,000)Staff position hired at 47% higher rate than anticipated
($70,000 unfavorable) offset by savings attributable to nonstaff resignation that was not filled ($40,000 favorable)
Actual
FTE
Staff
Non-Staff
1
2
3
Cost Per
Expense
$220,000 $220,000
$40,000
$80,000
$300,000
Budget
FTE
Staff
Non-Staff
1
3
4
Cost Per
Expense
$150,000 $150,000
$40,000 $120,000
$270,000
Staff
• Rate Variance
• $70,000 x 1
• ($70,000)
Non-staff
• Volume Variance
• 1 x $40,000
• $40,000
Supply Expense
Actual
Budget
62,000
60,000
Variance
Explanation
(2,000)Due to higher than expected volumes
Actual
Supplies
Procedures
15,500
Cost Per
Expense
$4
$62,000
• Volume Variance
• 500 x $4
• ($2,000)
Budget
Supplies
Procedures
15,000
Cost Per
Expense
$4
$60,000
REVENUES Gross Revenue
Actual
Budget
Variance
Explanation
$965,000 $1,000,000 ($35,000) Volume variance is favorable $25,000 (500 more CPT #2 than expected),
offset by unfavorable rate variance of $60,000 for CPT #1, where charge
has been lowered
Less Deductions:
Uncompensated Care
29,915
30,000
Bad Debt
19,300
20,000
Contractuals
586,720
573,000
Total Deductions
635,935
623,000
85 Although variance is positive, we’re writing off 3.1% of gross as opposed
to 3.0% in plan. More charity care than anticipated
700 Although variance is positive, we are consistent with budget at a bad debt
write-off of 2% of gross revenue. Positive variance is result of a smaller
revenue base.
(13,720) Contractual write-offs are higher than expected despite lower revenues.
Shift in payor mix from commercial into government payors
(12,935)
Net Revenue
329,065
377,000
(47,935)
EXPENSES Salary Expense
300,000
270,000
Supply Expense
62,000
60,000
(30,000) Staff position hired at 47% higher rate than anticipated ($70,000
unfavorable) offset by savings attributable to non-staff resignation that
was not filled ($40,000 favorable)
(2,000) Due to higher than expected volumes
Other Expense
10,000
10,000
0
Total Expenses
372,000
340,000
(32,000)
EBIDA
(42,935)
37,000
(79,935)
Less: Depreciation
5,000
5,000
0
Operating Income
($47,935)
$32,000
($79,935)
A good leader understands daily operations
and the impact of decisions on financial
performance – “Fiscal Literacy”
You don’t need to do it alone
 Create the right team
 Know what to ask
 Leverage the different skill sets