Laboratory Budget Handout ASSET VS. EXPENSES difference is the intention or goal in paying for it. Asset - .

. If our intention is to pay for something that will be ours or will be our property. Example : microscope, machines, land, equipment, computers, and furniture. 2 kinds of assets: a. short-term assets (assets that you can use within one year such as supplies or cash) b. long-term assets (assets that will benefit more than one year of your operations such as buildings and equipment) Expense - There is no intention of having them as our properties BUT we simply pay for the right to use it. Or we pay for their services. Example : water, electricity and internet bills; salary of workers, advertising or insurance CAPITAL EXPENDITURES (CAPEX) VS REVENUE EXPENDITURES (OPEX) When we buy a long-term asset, we call it capital spending or expenditure. When we buy short-term assets or we pay for expenses, we call it revenue spending or expenditure. BUDGETING - The process of planning, forecasting, controlling, and monitoring the financial resources of the organization Importance of BUDGETING For OPEX - To anticipate the sources (income) and uses (expenses) of funds in short period of time or within one year For CAPEX - To determine what kind of assets are needed by the company and the capacity or ability of the company to purchase such assets TYPES of BUDGETING I. Operational Budget- The process of planning for the laboratory as an ongoing business concern; accounting for everyday needs and expenditures a. Flexible Budgeting: A budgeting process that attempts to set expenditures based on a variable workload volume b. Zero-Based Budgeting: A method that analyzes needs based on prioritizing of goals and objectives and not on past allocations Operational Budget Preparation 1. Time Frame the annual budget, which covers 1 year or budget cycle, is the main working guidelines for management. 2. Forecasting Stage factors: i. Shifts in patient mix or volume ii. Changes in medical staff composition iii. Changes in business parameters such as inflation and reimbursement rates iv. Expansion or cutbacks in services offered by the hospital or laboratory v. Population fluctuations brought about by changes in the local economy 3. Scheduling Stage when budget is prepared. 4. Synthesis of information how the financial information is organized is very important. The budget report is organized into three parts: i. Revenue and volume figures ii. Itemized cost categories iii. FTEs and labor hours II. CAPITAL BUDGETING Two types of analysis: 1. Narrative description: includes a written justification of the project and a prioritization of the competing proposals. i. Justification a detailed rationale for a request; why the project is needed, how it will benefit the laboratory, and why it should be considered over competing projects.

ii.

iii.

Prioritization an additional step in justification is to prioritize the project, both in the time frame and in relation to other requests; capital budget forms are scaled according to rank priority Opportunity Costs the value of what is given up to pursue another project, it must be part of the overall decision making process

2. Quantitative techniques: use to determine the financial feasibility of the project. Methods used are: i. Payback Period the length of time it will take to recover the cash outlays for a project. ii. Average Rate of Return the average yield over the life of an investment iii. Net present Value (NPV) the worth of future earnings at todays rates; Time Value of Money the future value of a dollar compared with today iv. Internal Rate of Return The ratio of cash flow and cost-of-capital factors to the amount of investment required v. Required Rate of Return A bottom-line level of income required by a company before any project is considered.

Formulas i. Payback period = purchase price of project annual income ii. Average rate of return = _____annual income___ x 100 purchase price of project

Example: A new microscope costs Php100,000 and will produce an annual income of Php10,000. Payback period = 100,000 = 10 years to recover 10,000 Average rate of return = _10,000_ x 100 = 10% is the return every year 100,000

Prepared by: ARCIAGA R, ESTEVES M, GOLOSINO A, WAGAYAN R