TREND #2: BUDGETS: DAILY, WEEKLY, MONTHLY, ANNUALLY OR CONTINUALLY?
Historically, budgets were compiled once per year (if that often) and variance analysis was a monthly activity. Hospitals started looking at multi-year, year-over-year analysis first, then eventually actual-to-budget, reinforcing the variance analysis process once data became more transparent. This led to “re-forecasting” the budget into a new version called “forecast.” Usually the forecast is updated at least quarterly and a long-term forecast may look out across 3-5 years using driver-based assumptions.
In today’s rapidly evolving healthcare environment, provider organizations must be able to identify financial performance gaps continuously and quickly change course when needed. Do rolling forecasts improve accuracy? The “improving accuracy” assumption really tests the validity of our data in healthcare. Do we know enough about the metrics that are driving a useful driver based forecast?
Typically, the forecast budget is not prepared at the department level but may instead focus on divisions or even at an entity level. Global budget drivers and assumptions will typically be the same as the annual budget, but those unique to a department or division may not be line-itemed.
The forecast is built using historical trends, current conditions, and future assumptions for budget drivers. Some forecasts may be primarily driven by revenue drivers with expenses flowing from ratios defined to the model. The forecast feedback process fosters the partnership between finance and operations to allow the organization to course correct sooner and reinforce the cause-effect relationships that effect reality. Some organizations use the rolling forecast process in conjunction with the annual budget and others have moved to using the forecast only. Most healthcare providers are now moving to a more frequent budget cycle and at a minimum, they should execute a quarterly re-forecast based on updated actuals.
There are specific needs for detailed annual budgets in a provider setting (e.g. regulatory). However, the use of the rolling forecast should be tailored to meet your organization’s needs and should be a continuous learning process and more flexible to make necessary changes when needed from both a process and a technology perspective.
Benefits of replacing the annual process with a rolling forecast may include:
- Spending fewer resources on budget preparation and variance analysis
- Reinforces a culture of continuous performance management
- Allows a longer ramp-up time for course correction
- Supports the organization’s economic model (3-5 year macro-level plan) used for capital allocation decisions, margin targets, M&A modeling and more
This is just one of the healthcare enterprise performance management trends. In our new guide, we take a look at six performance management trends healthcare executives need to be thinking about in 2016 and beyond. We’ll identify technology strategies and solutions that will help healthcare organizations succeed in a data-driven, cost-management culture.
