Budgeting is one of the key processes involved in laboratory management (Tolzmann & Vincent, 2013). There are a variety of financial issues and responsibilities that laboratory managers have to address, and a thorough budgeting plan might help them in their work. Moreover, a budgeting plan is needed to transform the organization’s strategic objectives into daily operations: “A budget those serves as a tool and a benchmark for monitoring the performance of the organization throughout its fiscal year [and] a mechanism for imposing discipline on the organization” (Tolzmann & Vincent, 2013). In order to compose an effective budgeting plan, it is essential to understand the different terms used in budgeting, the different problems in budgeting, as well as the various components of operating budgets and the resources that require allocation.
There are several main definitions, the understanding of which is crucial in composing a budgeting plan:
- Budget is a representation of the company’s planned expenses for a given period of time, e.g. a year, a month, or a quarter (Raye, 2012);
- Operating margin defines the impact of the organization’s costs, including daily operational, administrative, and equipment costs, on its profit (Bragg, 2015). It is measured by subtracting the company’s operating expenses from its gross margin (Bragg, 2015);
- Internal controls are mechanisms involves in the organization’s governance system, which are designed to raise the organization’ s effectiveness, ensure legal compliance, protect against asset and revenue loss, and maintain the correct use of the company’s information (IFAC, 2012);
- Financial ratio analysis is the process of drawing mathematical comparisons between the different items on the organization’s financial statement (Tolzmann & Vincent, 2013). It can provide useful information on the company’s asset and debt management, as well as on its effectiveness and profitability (Tolzmann & Vincent, 2013);
- Fixed costs represent the company’s expenditures that do not vary depending on the amount of goods or services produced (Tolzmann & Vincent, 2013). For instance, rent is a good example of a fixed cost (Tolzmann & Vincent, 2013);
- Semi-variable or semi-fixed costs are the expenses that remain fixed until a certain level of production is reached and exceeding, requiring an increase in these expenses (e.g. telephone service) (Tolzmann & Vincent, 2013);
- Cost per test is the amount of expenditures associated with carrying out one test (Tolzmann & Vincent, 2013);
- A rolling budget represents a budgeting plan that is continually adjusted to suit the changes in the external and internal environments of the business (Raye, 2012);
- Zero-based budget is a budgeting plan where all expenditures “must be justified as if the service were starting from scratch, and it must be established that other ways to provide a service are not more cost-effective” (Tolzmann & Vincent, 2013, p. 609);
- Income forecasting is the process of estimating the organization’s income based on the past and current data, as well as on the projections of financial and business environment (GFOA, 2014).
Developing a Budgeting Plan for a Laboratory
Types of Operating Budgets
There are three different types of operating budgets that apply to the laboratory setting. The statistical budget includes a forecasting of the activity of the unit, including operations volume, during the proposed time period (Tolzmann & Vincent, 2013). A revenue budget, on the other hand, is used to estimate the revenues obtained from the projected unit’s activity (Tolzmann & Vincent, 2013). Finally, an expense budget is needed to determine the amount of resources that will be required to produce the anticipated volume of services and operations (Tolzmann & Vincent, 2013).
A Successful Budgeting Plan
The creation of an efficient budgeting plan occurs in a number of stages. A good budgeting plan has to comply with the organizational goals and objectives and to take into account any external factors that might affect the operations, revenues, and expenses, such as legal issues, demographics of the area, and estimated inflation (Tolzmann & Vincent, 2013). The next three components of the budget plan are statistical, revenue, and expense budgets (Tolzmann & Vincent, 2013). In order to ensure that the plan is effective for the chosen organization, it has to be reviewed by all the department heads, as well as the senior management, and corrected in accordance with their comments (Tolzmann & Vincent, 2013).
Common Issues in Budgeting
One of the main issues in budgeting is determining the nature of expenses.If there was no solid budgeting procedure before, it might be hard to identify where the money is spent. To allocate the expenses, a thorough review of operations and their costs is required. Another common problem is the forecasting of revenues. In certain circumstances, the external factors may have unexpected effects on the unit’s profits. In order to avoid the failures in forecasting, it is crucial to outline the specific environmental factors and processes that could influence the organization, and to estimate their impact in a given year. Finally, the misuse of resources is another problem that can occur in a laboratory (Huck and Lewandrowski, 2014). To solve this issue, it is required to impose a thorough utilization management strategy that would decrease the undesired effects of resource misuse (Huck and Lewandrowski, 2014).
One of the important parts of utilization management is resources allocation, which determines the share of expense budget going to different categories of expenses. Resource allocation can also include human resources needed to complete the desired volume of operations. The allocation of resources largely depends on the current goals of the organization and the state of its operations. For example, if there is a need to upgrade or change the equipment used in the laboratory, equipment maintenance and purchase will be one of the key items in the expenses budget. However, if the equipment used is up-to-date, but the laboratory performs complex and specialized tests, then a large share of the expenditures will be directed to operational expenses. Finally, salaries and fringe benefits are the main aspects of the laboratory’s financial expenses in any given settings (Tolzmann & Vincent, 2013). Similarly, the utilization of human resources also depends on the planned projects and processes. In general, the estimation of expenses and resources needed for various processes depends on a variety of internal factors; the allocation of resources, therefore, is made by examining these factors and setting the current priorities.
Overall, a careful consideration of the recommendations mentioned and a thoughtful approach to budgeting can help the laboratory to achieve its financial and operational goals, thus allowing it to become more successful and to decrease the influence of outside factors on the performance (Tolzmann & Vincent, 2013). The proposed budget planning process is applicable to the vast majority of settings, and can, therefore, be used in future financial decision-making.
Bragg, S. (2015). The difference between gross margin and operating margin. Accounting Tools. Web.
Government Finance Officers Association of the United States and Canada (GFOA). (2014). Financial forecasting in the budget preparation process. GFOA Best Practices/Advisories. Web.
Huck, A., & Lewandrowski, K. (2014). Utilization management in the clinical laboratory: An introduction and overview of the literature. Clinica Chimica Acta, 427(1), 111–117.
International Federation of Accountants (IFAC). (2012). Evaluating and improving internal control in organizations. International Good Practice Guidance. Web.
Raye, K. (2012). What is the difference between a budget & a rolling budget? Chron Small Business. Web.
Tolzmann, G. C., & Vincent, R. J. (2013). Costs, budgeting, and financial decision-making. In L. S. Garcia (Ed.), Clinical Laboratory Management (2nd ed., pp. 597-618). Washington, DC: ASM Press.