Key Financial Terms to Know - Emerging Nurse Leader

By Rose O. Sherman, EdD, RN, NEA-BC, FAAN

I teach leadership development programs for nurse managers. Even experienced nurse leaders will often admit that their weakest leadership area is in the financial management of their units and departments. It is a new and important competency when you assume a leadership role. Through our leadership sessions, I have learned that there is very little uniformity in the budgets of nursing departments in different organizations. That is why is so important that when leaders are new to an organization, they should spend time to gain an understanding of how budgeting is done and what is included in their financial reports. The budget is your organization’s plan to coordinate their financial goals. Some key areas to pay attention to include the following:

The Budget Cycle – is the timeframe that a yearly budget covers. This varies in organizations. Some use the calendar year from January to December. Others use what is described as the fiscal year beginning in July and ending in June. Budget development for the next year usually begins at least six months before the budget for the current year expires. Nurse leaders usually participate in budget planning and are asked to make forecasts about staffing, supplies and equipment.

The Different Types of Budgets – organizations have more than one type of budget. Your operating budget is your day to day expenditures. These include the revenue your area generates and the expenses including labor, supplies and pharmacy costs. Your capital budget is your equipment needs or replacement needs for longer term investments such as IV pumps, patient beds or point of care testing equipment. This is separate from your operating budget and items are usually over a certain dollar amount such as $500.00. If you lead a specialty program such as hemodialysis, you may also have a program budget to cover all the needs of patients across the organization. A program budget focuses careful attention on both the costs of the program and the value to the organization.

Cost Centers – your unit or department is usually broken down into one or more cost centers that accumulates costs and generates revenue. For nurse leaders that supervise multiple units, each area will probably have their own cost center report that outlines budget and variances. These cost center reports can be very confusing for new leaders. Leaders are often surprised at who (what personnel other than nursing are charged to their unit) and what (equipment, supplies) are being charged to their cost centers. Beginning leaders should take these cost center reports to a more senior leader in either nursing or finance and review the report line by line. Sometimes cost centers are charged for years for services that are no longer part of care provided to patients. Nurse leaders are held accountable for variances in their cost centers so developing expertise in this area will make you much more effective in your leadership.

Average Length of Stay – number of patient days in a given time period divided by number of discharges in that time period. The budget is generally formulated on the average length of stay of patients on the unit – not the outliers.

Fixed Costs – are costs in a department or on a unit that do not change in total as volume changes, i.e. you need a unit clerk, a housekeeper, a nurse manager.

Variable Costs – are costs that vary in direct proportion with your patient volume such as staffing, pharmacy and supply costs.

Payer Mix – is the source of financial payment received for care of the patient. Examples could include private insurance, self-pay, Medicare and Medicaid. If an organization has a 75% Medicare payer mix, any changes which reduce reimbursement could have significant impact.

Bad debt – are operating expenses related to care provided to patients who ultimately do not pay and have to be absorbed by the healthcare organization.

Like math phobia, fear about budgeting can be overcome if you are willing to invest the time to become more financially savvy. Nursing is the largest professional group within the hospital and usually the most expensive. We play an important role helping to reduce costs.