- Describe the difference in Capital and Operational budgeting. How does the manager go about “justifying” them? Is there a difference in how to justify?
APA format, more than 400 words, 3 Recent scholars as reference, intro body and conclusion
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Budgeting is a fundamental process in any institution that involves allocating resources to different activities or projects. In the healthcare sector, budgeting is crucial in the delivery of quality care, managing costs, and ensuring the sustainability of healthcare services. Medical managers need to understand the two primary budgeting frameworks, capital and operational budgeting, and the ways of justifying them to make informed decisions. This paper discusses the differences between capital and operational budgeting, how managers justify them, and the differences in justifications.
Capital and Operational Budgeting:
Capital budgeting is the process of allocating funds to long-term projects or investments that provide future benefits such as property, equipment, facilities, and technology. It involves evaluating the expected returns in terms of revenue generation, increased efficiency, or reduced costs over an extended period. Operational budgeting, on the other hand, is the allocation of resources to short-term activities or daily operations such as salaries, supplies, maintenance, and healthcare services.
Justification of Budgets:
Medical managers justify capital and operational budgets differently. Capital budgeting requires managers to present a business case with detailed analysis of the project’s financial feasibility, expected return on investment, and risk assessment. Managers might employ various methods to justify capital budgeting projects, such as payback period, net present value, internal rate of return, and profitability index. These techniques help to evaluate the viability and financial justification of the project.
Operational budgeting justification entails presenting a budget proposal that lists the operational expenses, projected income, and measures to manage the cost. Managers might apply different approaches to justify operational budgets. For example, they can compare past performance to set the budget baseline, identify areas of cost-saving, use benchmarks to assess the competition, or employ activity-based costing to track expenses for specific services.
Differences in Justification:
The justification of capital and operational budgets differs in various ways. Capital budgeting justification emphasizes future benefits, while operational budgeting justification focuses on costs and savings. Capital budget justification requires long-term financial analysis and modeling, while operational budgeting justification needs data on day-to-day operations. Capital budgeting requires justifying the investment to executives and stakeholders, while operational budget justification requires the approval of departmental managers.
In conclusion, medical managers need to understand the difference between capital and operational budgeting and how to justify them. Capital budgeting requires a detailed analysis of the project’s financial feasibility, expected returns, and risk assessment. Operational budgeting entails presenting a budget proposal that lists the operational expenses, projected income, and measures to manage costs. While the justification approaches differ, both frameworks are crucial in ensuring effective resource allocation and sustainability of healthcare services.