Financial Control and Budgeting in Health and Social Care

This document discusses the legal, financial, and regulatory environment of health and social care, evaluates funding options, explains agency theory, and emphasizes the importance of communication in budgeting. It also explores the impact of financial constraints, costs, and budgets on stakeholders, challenges of budgeting in the public sector, and advantages and disadvantages of incremental and zero-based budgeting.

FINANCIAL CONTROL AND
BUDGETING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
a) Analysing the legal, financial and regulatory environment of health and social care.............1
b) Evaluating funding options in health and social care industry ...............................................2
c) Explaining agency theory in context of NHS and importance of communicating regarding
budgeting with stakeholders........................................................................................................3
QUESTION- 2.................................................................................................................................3
(a) Impact of financial constraints, costs and budgets on health and social care service
managers, their clients and other stakeholders............................................................................3
(b) Challenges of budgeting in public sector organization..........................................................4
(c) Advantages and disadvantages of incremental and zero based budgeting.............................5
QUESTION- 3.................................................................................................................................7
(a) Calculation of the break-even point and the margin of safety................................................7
(b) Assumptions of break-even model.........................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial control and budgeting is important component for managing business. It helps
organization to evaluate income and expenditure so that required corrective actions can be taken.
The present report will include legal, regulatory & financial scenario of social and health care.
Case study will give emphasis on PFI, agency partnership, outsourcing and competitive
tendering in mentioned industry. Importance of communication to stakeholders in budgeting
along with agency theory implication. Present report will involve impact of financial constraints,
cost on stakeholders also challenges of budgeting public organization. Advantageous and
disadvantages of zero based & incremental budgeting. Calculation of BEP and MOS will be
shown along with its model's assumption.
QUESTION 1
a) Analysing the legal, financial and regulatory environment of health and social care
Legal scenario
Laws are made up by legislature, executed by government through making binding legal
proceedings. There are two types of legislations such as primary that is made by nation and
secondary that is implemented by local government. In health & social sector there are three
important factors that defines the whole structure (Meisner, 2017). It includes creating &
recognizing rights, developing obligations and penalty standards and set up of permanent
institutions that servers for safeguarding interest of people. These play role in protecting public
health from communicable diseases & risks and providing assistance and power to take action to
prevent.
Regulatory environment
The regulatory bodies of UK are GMC, NMC, GDC, GOC, GosC, GCC, Gphc, PSNI
and HCPC which monitors health care workers in UK. This is considered to be independent
bodies for managing doctors, nurses and other social care professionals in the industry
(Skipworth, Delbufalo and Mena, 2020). Every authority of these mentioned body is separate
piece of legislation. For this purpose 9 important authority has been established for standard
practices of professionals. These all is governed under section 60 of health care act 1999. It is
exerted for purposes so that social protection can be provided to public. This involves road map
for NHP and implementation of mechanism for achieving objectives into standardized manner.
Financial situation
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Currently UK Health and social care department is financed by levy regulatory
authorities that provides it independence for taking corrective course of action according to need.
Its focus is on cost-effectiveness in turn economic and business efficiency can be obtained. In
addition to this, it will drive consistency and improvements. While financing, it also assures
there will be no role of authority in operational decisions.
b) Evaluating funding options in health and social care industry
PFI
United Kingdom as stated utilizing Private Finance Initiative (PFI) as an important
component for adding value through crucial resources in health care. With respect to this for
managing risk it uses plethora technique. For PFI this technique is used in generic nature there is
no evidence that it is appropriate for all the time. Basically the funds of private sector is used for
delivering improvements in public firms infrastructure.
Agency Partnership
It is essential for obtaining solutions for enhancing health equity through collaborating
multi sectors to have pool of resources, expertise & power-sharing. The aim of this is to enhance
efficiency and quality of services. This involves firm with health mission such as hospitals,
federal qualified centres and public health agencies. The guiding principle that is followed is
paradigm shift, innovation and strategic concision making thinking.
Competitive Tendering
It is the process in which large organization purchases newly issued government debts.
The biggest advantage that specified industry receives is production efficiency. The aim for
promoting this by UK is to achieve cost saving and effectiveness. It leads in attaining procedure
which attempts to undercut each other & causes unease. It provides the cheapest social care
services that result in the best value for public. In price variations ensures that financial
considerations are uppermost which will give differentiating factors.
Outsourcing
This decision usually bring vast change in organizational procedure of health care firms.
The reasons for which these companies opt for outsourcing comprises profitability, efficiency
and qualitative performance. In order to cope with clinical performance and numerous medical
act it becomes essential for healthcare organizations to obtain speed. The outcome that is derived
through outsourcing practice is cost diminution, redefinition of value course, execution of quick
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changes and risk diversification.
c) Explaining agency theory in context of NHS and importance of communicating regarding
budgeting with stakeholders
The theory has principle that social and political objectives that can be achieved through
contracts between agents and principal. In addition to this, agent is refereed as person that
undertakes various tasks on behalf on principal. However, principal has limited authority for
monitoring actions of agents so that satisfactory result can be derived (Abugabah, A.,
Nizamuddin and Abuqabbeh, 2020). The deed on basis both are involved into relationship is
termed as compensation agreement. The critical issue in underpinning is to formulate
remuneration contract.
The theory in NHS shows typical relationship between government and health funds. It is
usually developed for improving insurance schemes of country. The parties involved in it are
government, health fund, general practices, private owners, hospital mangers and doctors. The
focal point of approach is to design remuneration structure so that generic practician are give
back by payers. Different parties in agency theory creates health care connections that is crucial
part for gaining networking. The change in one party may lead to modify other pair.
Importance of ways via communicating with stakeholders
There are several ways which helps the organization to get connected with stakeholders.
The interested people of organizations are customers, management, employees, creditors,
investors, etc. Budgeting describes efficiency of handling cash in and out flow which gives idea
about performance of firms (Marques, Martins and Araújo, 2020). The ways that can be utilized
by organization includes scheduling meeting, project summary report, conference call, electronic
media telephone, annual and general presentational, etc. with help of these meetings firm
stakeholders can derive information regarding ROI on investment, liquidity position, credit
paying capacity, etc. It plays important role in growing image as performance of stakeholders is
linked with business so providing accurate and fair data becomes crucial.
QUESTION- 2
(a) Impact of financial constraints, costs and budgets on health and social care service managers,
their clients and other stakeholders
In the health and the social care industry the financial constraints, costing and the budgets
play a crucial role in the business and its various operations. It also impact the client,
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stakeholders and the management of the health business. Costing is one of the important
approach that shall be used by the service managers in the accumulation of the various costs that
are incurred by the business in providing the services related to the health and social care. The
expenses are identified and allocated and the different levels in the business where further the
rightful measures are taken in respect of minimizing the expenditure of the institution (Garrison
Jr and et.al., 2018). In this the various stakeholders of the business shall be affected in the
different manner, which is some can be affected positively and the others shall be negatively
impacted. The employees, staff, shareholders and the management will get higher profitability by
reducing the expenses that are applicable to the business whereas on the contrary the clients,
customers or the patients shall get the deteriorated services which shall be causing negative
impacts in their health and safety.
Budgeting shall be related to the estimations in terms of the financial outcome and the
financial results for the future period of the company. It is associated with the planning and
measuring the performance accordingly which can be achieved in the near future by providing
the health care services. Various budgets shall be prepared by the managers, and they shall be
serving as the blueprint for the company which can be used in the process of decision-making.
The budgeting shall also be including the various financial constraints that are applicable for the
business in the arrangement and the utilization of the financial resources of the company (Xue
and et.al., 2018). Through the utilization of the various financial resources the health and social
care business can plan updating the existing technology, expansions leading to the ease in
accessing the quality of the health care services of the company.
The quality and efficiency level of the health and social care that is provided is highly
dependent on the cost, budget and the financial constraints that are applicable on the business.
And it can also be analysed that the preferences and the priorities of the various stakeholders are
also distinct which shall be governing their behaviour in the organization (La Rosa and et.al.,
2018). The clients or the patients will be highly impacted with the management's decision of
reducing the cost and increasing the profitability of the business.
(b) Challenges of budgeting in public sector organization
The task of budgeting pertaining to the public sector is more demanding in comparison to
the private sector. But there are various challenges or issue in respect to budgeting of the public
sector organization. The main challenge of budgeting in public institution is basically the
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hierarchical process being followed which initiates at the subunit level and ends at the apex of
the hierarchy. Often there are several ties among the 2 levels of the hierarchy. The main aim of
the organizations like the hospitals are extremely broad and can be competing as they deal with
patients, providing treatment to elders and carrying out operations (Saliterer, Sicilia and
Steccolini, 2018). Therefore, arriving at the resource allocation situation is seemed to be a
complex process. In addition to this, in public sector, it is difficult to determine relation between
inputs and outputs. In respect to the health care organization, the number of doctors might not be
able to effectively deal with the varying and unpredictable demands of the patients. Also, in
public sectors, there is a wide engagement of the stakeholders is needed and also other interested
parties are required to be consulted which involves the business community, trade unions and
voluntary organization. Thus, all these results into posing as challenge for the creation of budget
in respect to the public sector organization.
(c) Advantages and disadvantages of incremental and zero based budgeting
Incremental budgeting
The incremental budgeting refers to the process related to budgeting which is based upon
the concept that the new budget can be effectively created by making marginal changes to the
current budget. In other words, it refers to considering the current budget as the base for the
purpose of creating incremental assumptions which results into addition and subtraction from the
current amount. This budgeting style is considered to be the most conservative approach.
Advantages
 It is the easiest method of budgeting as it makes use of the budget of previous year for
projecting the next year's budget. It does not involve any complex calculations and
therefore, only few assumptions are required to be made (Incremental Budgeting. 2020).
Therefore, it allows the management to save time pertaining to the budgeting process.
 Under this, the dependency of the next year budget on the previous year budget results
into bringing consistency and making it stable over the period of time. Along with that, it also helps in ensuring that the funding remain stable and constant over
time due to the reason that the expenses are relatively easy to project. It is beneficial for
the firms having projects which needs funding for the multiple years.
Disadvantages
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 This budgeting approach might result into unnecessary spending for the entity. The core
reason behind this is that the departments in the company generally spends all the money
which has been allocated in a budget of a year with the only purpose of getting higher
amount in the next year's budget (Emerling and Wojcik-Jurkiewicz, 2018).
 It discourages the innovative ideas as the new budget is based on the current budget thus,
it results in very less space for financing the new idea.
 The stability in the budget does not provide any incentive to the organizational
management in respect to reviewing its budgets on account of realizing the savings which
can be made on expenditures. Therefore, this lack of review process which results into
making the budgets vulnerable and results into making mistakes.
Zero based budgeting
This is the another budgeting approach in which the budget is created from the scratch,
that is, from zero base. It involves the re-evaluation of all the expenses department wise along
with proper justification pertaining to all the expenditure which is to be incurred by the
department (Ibrahim, 2019). The expenditure are computed on the basis of actual expenses and
not on the differential basis. Thus, it requires explaining the justification in respect to revenue
every cost will generate.
Advantages
 In comparison to other methods, approach provides accuracy to the budgeting process as
the every department re-look every item and determine their costs.
 This approach results into efficient distribution of the resources as per the department as
it does not look out at the historical numbers as it only considers the actual numbers. It
also results into reduction in the unnecessary activities which only leads to creation of
expenditure for the organization. As, the zero based budgeting is justified with every item, it helps in overcoming the
weakness of the incremental budgeting in regard to budget inflation (Salem, Itani and El-
Hajj, 2020).
Disadvantages
 This approach is time-consuming process as creating the budget from the base is a tough
task along with proper justification of each item requires exercising lot of time and
efforts.
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 In order to carry out the zero based budgeting, it requires highly qualified and
experienced personnel having knowledge in the creation of budgets. This cannot be done
by anyone, thus, it can be a costly affair of the company and not everyone can afford the
same which is its major drawback.
 There is an increase in chance of personal bias as the department manager may
intensionally increase their required amount in order to look superior to the other
department. This intention might result into affecting the allocation of financial resources
decision packages.
QUESTION- 3
(a) Calculation of the break-even point and the margin of safety
Direct labour costs= £45 per hour
It takes 20 minutes per unit for the labour to produce it.
So, the direct labour cost per unit= 45/60 *20
=£15 per unit
Variable costs:-
Direct material= £125
Direct labour= £15
Variable manufacturing overhead= £20
Variable selling expenses= £15
Variable administrative expenses= £10
Total variable cost per unit= £185
Fixed costs:-
Fixed manufacturing= £1100
Fixed selling and distribution= £1450
Fixed administrative= £675
Total fixed expenses= £3225
For the sale of 220000 units in the year 2018:-
Sales £225*220000= £49500
Less: Variable costs £185*220000= £(40700)
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= Contribution £40*220000= £8800
Less: Fixed expenses =£(3225)
= Profit/ Loss =£5575
Break-even point= Fixed expenses/ Contribution per unit
=£3225000/£40
= 80625 units
In value= £80625*£225
= £18140625
Margin of safety= Current sales unit- Break-even point
= 220000- 80625
= 139375 units
In value= Current sales- Break-even sales
= £49500000-18140625
= £31359375
Contribution margin ratio= Contribution margin/ selling price per unit*100
= 40/ 225*100
= 17.77%
For the sale of 220000 units in the year 2018:-
Changes are that the selling price has increased by 25% and the fixed cost has increased by
£1450.
Sales £281.25*220000= £61875
Less: Variable costs £231.25*220000= £(50875)
= Contribution £50*220000= £11000
Less: Fixed expenses =£(4675)
= Profit/ Loss =£6325
In order to maintain the same contribution margin ratio of the company the variable cost per unit
is also increased by 25% to 231.25 (Batkovskiy and et.al., 2017).
Contribution margin ratio= Contribution margin/ selling price per unit*100
= 50/ 281.25*100
= 17.77%
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Break-even point= Fixed expenses/ Contribution per unit
=£4675000/£50
= 93500 units
In value= £93500*£281.25
= £26296875
Margin of safety= Current sales unit- Break-even point
= 220000- 93500
= 126500 units
In value= Current sales- Break-even sales
= £61875000-26296875
= £35578125
The break-even point in the year 2018 is 80625 units but with the increase in the fixed
costs and change in the contribution per unit the break-even point in the year 2019 has increased
up-to 93500 units.
(b) Assumptions of break-even model
There are several assumptions that are undertaken in the break-even analysis through
which the company can know the minimum point of sales that is to be incurred where the
revenues are sufficient to cover the costs of the company (Maruta, 2018). The profitability is
zero at this time and so this is the lowest level for the survival of the company.
The assumptions are:-
 One of the significant assumptions is that the total fixed expenses will remain constant
for the period and the variable cost will change directly proportional to the units produced
by the company (Assumptions of break even analysis, 2021).
 The selling price of the output shall also remain constant and will not change with the
increase or decrease in the supply of the products.
 All the costs that are incurred by the company can be classified in the fixed and variable
costs, the fixed cost which is on the overall production and the variable cost that can be
measured in terms of per unit.
 There are no changes in the technology, method of production, efficiency and the
equipments that are used (Kim and et.al., 2017).
 The cost of the various raw material shall also remain constant for the company.
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 The revenues generated and the costs that are incurred are measured on the common base
of activity which is the sales value of the company.
CONCLUSION
It can be inferred from the above that there are various factors which are crucial for the
purpose of evaluating the surrounding environment of health and social care. In addition, there
are alternative funding options like PFI, tendering and outsourcing etc. which can be used within
health and social care sector. The services of health and social care organization is highly
impacted by the financial constraints and budgets of the institutes. Along with that there are
certain challenges being faced by public sector organizations pertaining to budgeting like
following hierarchical process, discussing with stakeholders and the interested parties involved.
Among the budgeting approaches like incremental and zero based, each one is having its pros
and cons which is essential to be analysed before taking decisions.
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