Budget Performanceand Profitability: Do Budgets Matter?Abstract summary of the dissertationby Mark Slyter

Page 1 of 2

Budget Performance and Profitability: Do Budgets Matter?

By Mark F. Slyter, DSc, MHSA, FACHE | markslyter.com

There is a near-universal assumption in both practice and literature

that greater accuracy and management to the budget improves profitability

(Libby & Lindsay, 2010; Umapathy, 1987). Prior to the dissertation study

“How Well Do Hospital’s Budget Operating Results? The Relationship

Between Budget Variances and Operating Margin,” by Mark Slyter, this

assumption has gone untested and we know little about the wisdom of such

an assumption.

The study applied a regression model to a longitudinal dataset for the years 1987-2013 (27

years) from the State of Washington. The database was comprised of 115 acute care hospitals

represented in one or more years as well as hospital characteristics of ownership, system

membership, bed size, and urban or rural locations. Washington requires hospitals to submit both

budget and year end reporting. The study tested the relationship between budget variances and

operating margin.

The results of this study indicate greater accuracy in forecasting and/or tighter management

to the budget, or favorably exceeding it, leads to improved profitability. The study also provided an

expected and measurable impact of these budget variances to the operating margin. More

specifically, smaller unfavorable budget variances are associated with greater operating margins

while greater favorable budget variances are associated with greater operating margins. A single

standard deviation reduction in unfavorable revenue (4.9% budget variance) and expense (7.0%

budget variance) increases operating margin by 5.2% and 6.3%, respectively. An equivalent

favorable deviation in revenue (6.7% budget variance) and expense (6.8% budget variance)

increases operating margin by 3.2% and 2.7%, respectively (see Figure 1).

Do budgets matter? Yes. Managers can improve hospitals’ operating margins by first

prioritizing the reduction and/or eliminating unfavorable variances, and second increasing favorable

variances.

Page 2 of 2

Figure 1. Favorable and unfavorable budget variance impact on operating margin (B is the Unstandardized Coefficient in the studies regression model). Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of

North-American budgeting practice. Management accounting research, 21(1), 56-75. Umapathy, S. (1987). Current budgeting practices in U.S. industry: The state of the art. New York,

NY: Quorum Books.

Author: Mark Slyter, DSc, MHSA, FACHE is a senior healthcare executive who creates and executes breakthrough strategies that revitalize organizations at an accelerated pace. Delivered operating margin gains from 17% to 650% and generated $40M+ in net income turnarounds through process and performance enhancements during 20-year career at leading health systems and hospitals. Produced substantial improvements across a balanced scorecard in areas of quality, finance, value, growth and patient, employee and physician satisfaction. Rallies key stakeholders to embrace new approaches and achieve a culture of excellence in patient-centered care. Areas of expertise: Strategic Planning & Execution, Quality Enhancement, Process Improvement, Evidence-Based Management, Culture Transformation, Team Building, Partnership Development, Government Affairs, Governance & Board Relations, Physician Relations, Employee Engagement, Community Relations

Standard Deviation B

FavorableRevenue 0.067 × 47.453 = 3.2 %Expense 0.068 × 39.734 = 2.7 %Volume 0.073 × 5.811 = 0.4 %

UnfavorableRevenue 0.049 × -105.620 = -5.2 %Expense 0.070 × -89.532 = -6.3 %Volume 0.060 × -9.623 = -0.6 %

5% Deviation B

FavorableRevenue 0.050 × 47.453 = 2.4 %Expense 0.050 × 39.734 = 2.0 %Volume 0.050 × 5.811 = 0.3 %

UnfavorableRevenue 0.050 × -105.620 = -5.3 %Expense 0.050 × -89.532 = -4.5 %Volume 0.050 × -9.623 = -0.5 %

A 1 standard deviation unfavorable expense budget variance reduces the operating margin by 6.3%, lowering the 4% example to a -2.3% operating margin.

A 5% favorable expense budget variance improves the operating margin by 2.0%, raising the 4% example to a 6.0% operating margin.

A 5% unfavorable expense budget variance reduces the operating margin by 4.5%, lowering the 4% example to a -0.5% operating margin.

Operating Margin Impact

Budget Variances

Example using a 4% operating marginand all other factors constant:

A 1 standard deviation favorable expense budget variance improves the operating margin by 2.7%, raising the 4% example to a 6.7% operating margin.

Budget Variances

Operating Margin Impact

Example using a 4% operating marginand all other factors constant: