Preparing An Operating Budget

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Scenario

One year ago, Metropolitan Memorial expanded its operations into a rural community located approximated a hundred miles from its main facility. The clinic offers a wide array of outpatient services. As the Senior Accountant, you are reviewing the clinic’s operating budget from the previous year. You have been asked by the hospital’s chief administrator to create a new six-month operations budget for the clinic.

 

 

Instructions
Using an Excel spreadsheet, create a new six-month budget for the clinic that includes the following revenue and expense projections:

The clinic’s revenue is projected to grow by approximately 3% as a result of a new managed care contract.
The cost of expenses is expected to increase to 1.5%.
The clinic will also be adding a new roof to the facility at a projected cost of $50,000.
Then prepare a memo for the chief administrator. The memo should include a review of the previous year’s budget, an analysis of the upcoming changes (figures above), and a discussion about the impacts that these changes will have on the budget for the upcoming year.

Sample Solution

Memorandum

To: Chief Administrator From: Bard Date: March 8, 2023 Subject: New Six-Month Operations Budget for Rural Clinic

Review of Previous Year’s Budget

The rural clinic’s operating budget for the previous year was $1,000,000. Revenue was $800,000, and expenses were $200,000. The clinic was able to generate a profit of $600,000.

Upcoming Changes

The clinic’s revenue is projected to grow by approximately 3% as a result of a new managed care contract. This will increase revenue to $820,000.

The cost of expenses is expected to increase to 1.5%. This will increase expenses to $203,000.

The clinic will also be adding a new roof to the facility at a projected cost of $50,000. This will increase expenses to $253,000.

Impacts of Changes on Budget

The changes to the clinic’s revenue and expenses will have a significant impact on the budget for the upcoming year. The clinic’s profit is projected to decrease to $567,000.

The following table summarizes the impact of the changes on the budget:

Item Previous Year Current Year
Revenue $800,000 $820,000
Expenses $200,000 $203,000
Profit $600,000 $567,000

Discussion

The decrease in the clinic’s profit is due to the increase in expenses. The new roof is the largest contributor to the increase in expenses. However, the new managed care contract will also increase revenue.

Overall, the clinic’s budget is still in good shape. The clinic is projected to generate a profit of $567,000. This is a significant amount of money, and it will help to support the clinic’s operations.

Recommendations

I recommend that the clinic continue to monitor its expenses closely. The clinic should also consider ways to increase revenue, such as expanding its services or offering new programs.

I am confident that the clinic will continue to be successful in the upcoming year. The clinic has a strong financial foundation, and it is well-positioned to grow.

Thank you for your time.

Sincerely, Bard

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