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Please read the “The DMV” case study (attached). Answer the questions below using the information found in the case study and the required reading.
Answer the following questions:
1. Prepare a monthly operating budget for the DMV for the fiscal year ending August 31, 2014. Determine the operating surplus and deficit for each month and for the year as a whole. Use one page or worksheet in your spreadsheet to list all of the base information, and another for the operating budget. (Hint: It may be easier to prepare the budget if you add a third page or worksheet to calculate the number of transactions each month.)
NOTE: Students may access a 60-day trial version and/or purchase the required Microsoft software at http://technet.microsoft.com/en-us/evalcenter/jj192782.aspx. The Microsoft trial version can only be downloaded one time.
2. To what do you attribute the changing surplus/deficit pattern during the year?
3. What would happen to the overall deficit or surplus if the number of vehicles failing inspections increased from 15% to 30%? Keep in mind that vehicles must be re-inspected, so this would also increase the total number of inspections. Does this give the DMV a reason to make its standards tougher? Is this good policy?
4. Suppose the DMV can decide when to implement the new digitized licensing system.
a. What would happen to the finances of the DMV if the new licenses are implemented at the beginning of the year and issued throughout the year?
b. What would happen if the new licenses are not implemented at all during the coming year? In either case, assume the total number of licenses issued for any month does not change. Is that assumption realistic? How does it affect your results?
5. What other changes would you suggest that might help the DMV’s situation? What are the advantages and disadvantages of the various suggested changes? Select an approach that you believe is best, create a worksheet showing the resulting budget, and provide an explanation defending your choice of changes.
References:
Financial Management for Public Health and Not-for-Profit Organizations (4th edition)
Assignment reading attached!
1
1. Describe key methodologies for the practical application of financial management in healthcare
organizations.
1.1 Explain how the budget provides the detailed plan for accomplishing the objectives defined in
the long-range plan.
1.2 Discuss flexible, performance, and zero-based budgeting techniques.
1.3 Explain the budgeting process, including budget preparation, review and adoption,
implementation, and evaluation of results.
Reading Assignment
Chapter 2:
Planning for Success: Budgeting
Chapter 3:
Additional Budgeting Concepts
Unit Lesson
In Unit II, you will begin to explore how to get the most out of your healthcare organization, whether you are
the chief executive officer (CEO), the chief financial officer (CFO), or a department director. Obviously, you
want a positive bottom line on your income statement; you want the best financial performance, the strongest
balance sheet, and excellent stability for the future.
Chapter 2 provides essential background on this topic, managing your service or your entire organization from
a budgetary standpoint. As you might guess, a lot of planning is essential for making this happen. Planning is
accomplished by establishing the mission for the organization, defining a strategy to accomplish the mission,
developing a long-range plan which defines the organization’s objectives, and then preparing specific detailed
budgets which define the resources needed to accomplish these objectives.
A healthcare organization without solid planning is like a ship adrift at sea: headed nowhere in particular,
getting nowhere fast, but when the healthcare facility’s strategic plan ties to its budget and everyone in the
organization buys into the plan, then big things can happen. It is especially crucial that all parts of the
healthcare facility be involved in strategic planning and budgetary planning. For example, the medical staff of
the hospital (the physicians) will have very important input to the planning process. Failure to include the
doctors in planning can spell disaster for any healthcare facility. Also, nurses are absolutely crucial to the
facility’s success in so many ways. They must be consulted on the budget. They will have knowledge of
certain aspects which will lead to a positive patient experience, things that the CEO and CFO would likely
overlook. Nurses spend the entire day with our patients, and we must listen up when they speak about what is
important for quality care and patient satisfaction. Every department—plant operations, housekeeping,
business office, laboratory, radiology, respiratory care, and rehabilitation—must be involved because they
have important knowledge that might not otherwise come to light for inclusion in the budget.
Taking just one example: What if the medical staff has big plans for a new magnetic resonance imaging (MRI)
system and new computerized tomography (CT) scanner in the next year (perhaps five million dollars total),
but the plant operations director knows that the hospital’s roof is completely shot and must be replaced very
soon or lead to serious problems for the whole facility (perhaps two million dollars total)?. The CEO will need
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to listen to the director and take care of essentials before spending his entire capital budget on new
technology which could very well wind up in standing water from a leaky roof!
In this unit, you will learn that a budget is simply a plan, but one of the most important plans you will ever be
involved with. The plan shows how management expects to obtain and utilize resources to achieve the
organization’s objectives. It provides a detailed action plan. There is no magic in budgeting, but it requires
thought and careful consideration of factors which will impact the organization’s finances over the years
ahead. Budgeting requires estimating all the likely receipts and all the likely payments for the organization
over the years ahead. The process usually requires a number of preliminary drafts and revisions before a
feasible plan is developed and accepted by all parties. Input from every department of the hospital is essential
for a successful budget process.
Typically, healthcare organizations will budget for three years into the future. Beyond that timeframe, the
crystal ball gets pretty fuzzy, and it is just too difficult to predict further than three years downstream. Much
can change over longer periods of time. Once approved, efforts must be made to keep actual organizational
performance as close to the budgeted plan as possible.
Although some budgeting is done on an ad hoc basis, most budgeting is done at regular intervals. The master
budget incorporates and summarizes all of the budget elements for the coming year. The main elements of
the master budget, sometimes called the comprehensive budget, are the operating budget and the financial
budget. The operating budget presents a plan for revenues and expenses for the fiscal year. The financial
budget includes a cash budget and a capital budget. While the cash budget focuses on cash flows for the
fiscal year, the capital budget considers outlays for resources that will provide service for a number of years
into the future.
The process of developing a budget is highly politicized. If allowed to happen, the budget can become an
organization-wide competition for funding; however, effective healthcare leaders do not let that happen, and
they do not play favorites. They keep the budgetary process objective and fact-based. Department managers
should use an objective budget process which focuses on the accomplishment of the organization’s mission,
goals, and objectives. All organizations seek to accomplish some end. Hospitals exist to provide health care
services to their communities. The budget becomes a tool to facilitate the accomplishment of this mission.
Unit II then continues with Chapter 3, which builds on the basic budgeting concepts of Chapter 2. Budgets
may be organized to provide information in many different ways. They can be line-item budgets, focusing on
the amounts spent on various types of resources, such as labor or supplies. Or, they can be organized to
present the budget for responsibility centers, programs, or functions. Often there is a combination of
approaches used within the same budget. Most responsibility center, program, or functional budgets will
generally show line-item information.
The budgeting process at some organizations is highly centralized. Other organizations take less of a top-
down approach, giving managers throughout the organization more say in the development of budgets for
their responsibility centers. There are advantages and disadvantages to both top-down and bottom-up
budgeting. As a result, most organizations use an approach that incorporates both direction from above and
detailed input from below.
A number of specialized budgeting techniques can be very helpful for managers: flexible budgeting,
performance budgeting, zero-based budgeting, and forecasting are some of the more prominent techniques.
Flexible budgeting is an approach that provides budgets at different volume levels. This helps managers plan
actions that will be necessary if actual volume exceeds or falls short of expectations. Performance budgeting
is an approach that helps organize budget information so that managers can see the cost of achieving
different outcomes, instead of focusing primarily on inputs. Zero-based budgeting is a technique that requires
budget justification of all costs in a budget, rather than just justification of the increase in costs from one
budget year to the next. Forecasting focuses on how managers make predictions of expenses, revenues, and
other items in the budget.
Once the budget exists, a very important document is produced each month which compares actual revenues
and expenses with budgeted revenues and expenses. This document is called the variance report, and it is
an extremely important monitoring tool for departmental and overall organizational performance. Variances
from budget tell the department manager and the CFO about changes which may be taking place in the
department, some of those may be positive changes for the organization, and others may be negative. For
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example, a 20% upward variance from budget in payroll expense is a major problem which will need to be
explained and addressed immediately. Is there too much overtime being approved? Is there too much agency
staffing being utilized? Just what is happening to cause such an overage in payroll cost? Meanwhile, a 20%
upward variance from budget in service revenue is a very good thing; it means that business is up, more
patients are utilizing our facility, and we are actually collecting for services provided.
Conclusion
Effectively budgeting is honestly a lot of work, but it is so important for the success of the organization.
Taking time up front to prepare a valid and realistic budget will make everything else easier and better as
you move through the fiscal year. You are encouraged to learn as much as possible about the budget
process during this unit!
306 Part IV • Case Studies
CASE STUDY
The DMV
The Division of Motor Vehicles (DMV) is pa1t of the State Depattment of Transportation
(DOT). The purpose of that depa1tment is to ensure the safety and free flow of people and
goods throughout the State by ensuring that there is a reliable system of transportation and
motor vehicle services. This mission is accomplished by funding the maintenance of the
existing transpo1tation infrastructure, by adding to and improving the infrastructure, and
by othe1wise operating a transportation system that minimizes congestion and promotes
safety and the economic growth of the State.
Among the key functions served by the DOT are:
• driver licensing and insurance
• vehicle inspection
• bridge and highway construction and maintenance
• public transit
The current year budget for the DOT is $874 million. Of that amount, $96 million is
budgeted to be spent on the DMV, which has the following objectives:
• to provide customer-friendly, efficient motor vehicle services;
• to regulate drivers and motor vehicles to deter unlawful acts and protect the public
safety;
• to further protect public safety by identifying vehicle safety problems; and
• to further protect the public by ensuring that all drivers cany insurance.
The State is currently preparing its budget for the coming fiscal year, which runs
from September 1, 2013, through August 31, 2014. As the director of the DMV, you are
responsible for three major areas:
• licensing, registration, and inspection of motor vehicles;
• driver licensing; and
• compulsory insurance.
A major issue for the coming year will be the overhaul of the driver’s license program
to include the latest enhanced digitized security technology. To cover this increased cost,
the DMV is planning to charge $5 more for new drivers’ licenses and license renewals.
This charge is not enough to fully cover the cost of the new licenses, but raising fees
was a political hot potato during the last session of the state assembly, and the Governor
would be reluctant to propose any further increase to that fee.
Another major initiative being planned for the DMV for the coming year is a cen
tralized computer system to verify that all registered vehicles are insured. Once the
system is in place, the DMV will be able to check insurance coverage not only when a
vehicle is registered, but also when law enforcement officers stop a vehicle, when the
vehicle has its biannual safety inspection, and at other times. The system will require
an initial capital investment of $3 million and operating costs of $1.30 per inqui1y. It is
expected that there will be 1 million uses of the system spread evenly during the coming
year. None of the capital investment cost appears as part of the operating budget for the
coming year.
To comply with the State’s 2011 Clean Air Act, the auto inspection program must be
modified. The DMV has estimated that it will cost $7.2 million to equip the state vehicle
testing centers with the necessary equipment for the new, stricter test. None of this cost
will be part of the operating budget for the DMV.
Chapter 9 • Financial Management Case Studies 307
The DMV also expects to issue more licenses per month early in the year, as driv
ers try to avoid the extra cost and documentation requirements associated with the new
higher security licenses. It expects to issue 923,456 licenses using the old technology,
spread evenly throughout the first four months of the year, and 843,023 licenses using
the new digitized technology, spread evenly throughout the last eight months of the year.
There are expected to be 342,587 vision tests, 847,129 written driving tests, and
429,222 road tests in total for the year. These tests are expected to occur in the same
proportion as the number of licenses issued each month. It is expected that there will
be 962,135 vehicle registrations and 1,106,455 annual vehicle inspections, and these will
occur evenly throughout the year. Note that the vehicle inspection number includes
re-inspections for vehicles that fail their initial inspection.
The sources of revenue for the DMV are as follows:
• auto license fees: $25 for the old-style license and $30 for the new improved digi
tized license with all security features;
• vehicle registration fees: $53 per vehicle registered, on average;
• vehicle inspection fees: $35 for failing the inspection-otherwise no fee. It is
expected that 15 percent of the total number of vehicle registrations will result in
inspection failures and re-inspections;
• state appropriation-for any balance not funded by fees; and
• transportation trust fund-for capital acquisitions.
The costs of running your department consist of personnel expenses, materials and
supplies, and a variety of purchased services. Personnel costs have a fixed administra
tive component of $6.5 million per year that is not affected by the DMV’s service volume.
Administrators are paid evenly throughout the year. Other personnel costs average $2 per
transaction, regardless of transaction type, including issuance of an auto license, vehicle reg
istration, vehicle inspection, or administration of any type of test. Materials and supplies cost
$.30 per transaction. These costs are incurred each month in direct relation to the number of
transactions for the month. The $2 personnel and $.30 materials and supplies cost per trans
action’ are not required for insurance inquiries. Other departmental overhead costs include
heat, electricity, and rent. Those costs are fixed at $8 million, and are paid evenly throughout
the year. Additionally, the DMV pays outside contractors on the following fee schedule:
• $17 per vehicle inspected
• $2 per vision test
• $15 per road test
• $5 per written test
• $25 per license plate (30 percent of all vehicle registrations require new license plates)
• $10 per driver’s license (old style) and $37 per license (new digitized licenses)
The director of the DOT is hoping that DOT’s financial situation will allow for expanded
subsidies of public transportation. As such, she is hoping that each division of the DOT
-will at least break-even, if not show a profit. Although you realize that the DMV will
receive a state subsidy to operate if needed, you know that your boss would be unhappy
if such a subsidy is needed for your division.
Using a computer spreadsheet, prepare a budget for the DMV for the coming year,
based on the information you currently have. If the budget shows a deficit, you may need
to make some adjustments, so use formulas for your calculations. That way you will be
able to make changes in your worksheet and easily calculate updated results. Specifically,
