Financial Control and Budgeting

This document provides an in-depth analysis of financial control and budgeting in the context of health and social care. It explores the legal, financial, and regulatory environment and evaluates alternative funding options. The document also discusses agency theory and its impact on stakeholders. It is a valuable resource for students studying finance and healthcare management.

Financial Control and Budgeting

Table of Contents
INTRODUCTION...........................................................................................................................3
Q 1) .................................................................................................................................................3
a.) Analysing legal, financial and regulatory environment of health and social care. ................3
b) Evaluate alternative funding options.......................................................................................4
c) Discuss agency theory. ...........................................................................................................6
Q 2) .................................................................................................................................................7
a) Impact of financial constraints on stakeholders.......................................................................7
b) Challenges of budgeting in public sector organizations..........................................................9
c) Discuss incremental and zero based budgeting.....................................................................10
Q 3) ...............................................................................................................................................12
a) Calculate break even point and margin of safety...................................................................12
b) Key assumptions related with break even model. ................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
The term financial control refers to the system that are implemented to determine the
directed resources of the business with timely measurement and monitoring. These controls
specifically trace the accuracy of reporting that removes fraud thereby it protects the intangible
and physical resources of the organization (Batkovskiy and et.al, 2017). Whereas, budget means
a formal statement of estimated expenses and income that are based on objectives and future
plans. The Report will outline analysis of regulatory, legal environment, use of various funding
options, agency theory etc. It will also explain the impact of financial constraints on
stakeholders, challenges of budgeting in public sector firms and critical analysis of zero based
and incremental budgeting. Further, it will explain key assumptions related with break even
model.
Q 1)
a.) Analysing legal, financial and regulatory environment of health and social care.
Regulation tends to play one of the crucial role in health and social care company. The
regulatory bodies tend to focus on protecting the public from numerous programs which in turn
leads to higher sustainable growth and profitability (Rogulenko and et.al., 2016). Regulatory
agencies helps in protecting and regulating public health at every stage or level. Local and
federal regulatory agencies tend to focus on establishing rules and regulations. Some regulators
which are necessary for effectively managing the financial resources within health and social
care are:
Care quality commission: It is a non- departmental public body which mainly focuses on
regulating various health and social care services in order to ensure safety and quality of care in
England.
HM revenue and customs (HMRC): This non- ministerial arm of UK government is
responsible for collection of payment of income forms, regulatory regimes, national minimum
wages and collection of taxes.
Financial reporting council (FRC): This regulatory body is considered to be an effective
regulatory body which helps in promoting transparency, trust and integrity within business. This
is done by regulating auditors, accountants and actuaries.
The key purpose associated with the healthcare policies and procedure is very useful in
providing standardization in order to carry out day to day operations of the business. This is very

useful in understanding the roles and responsibilities of the employees within particular
organization. Health and social care act, 2012 mainly emphasize on mental and social health of
an individual. It mainly focuses on providing an extensive organizational structure of NHS in
England. It focuses on providing legal duties associated with health inequalities (Osadchy and
Akhmetshin, 2015). The legal laws and legislations helps people in the society to protect
themselves health and safety of an individual. Legislation in society helps everyone in the
society to effectively understand and accept the behaviours. Laws helps in protecting and
covering all aspects of life associated with health and safety.
Creating an effective financially sound and stable environment within the health and
social care helps in effectively carrying out the operations which leads to higher sustainable
growth, performance, productivity and profitability. Effective financial environment by accurate
financial control, maintaining timely financial reports and proper auditing in turn helps in
precisely understanding and interpreting the financial data in order to make informed decision.
Creating a financially sound environment helps in controlling and analysing the cash flows of the
business. It is very useful in predicting the financial accounting information with the help of
income statement, cash flow statement, balance sheet and shareholder equity statement
(Atanelishvili, Chikviladze and Silagadze, 2017). It also helps in critically analysing the cost
and operation of the business with the of management accounting tools like budgeting, pricing
data, variance analysis, etc. it also helps the management and stakeholders of the health and
social care to analyse current trend of the business, corporate governance, change in policies and
various competitive factors for the business.
b) Evaluate alternative funding options.
Private Finance Initiatives -
It is defined as the method of creating public-private partnerships in which private
companies are contracted to manage and complete the projects of public sector companies. It was
initially developed by UK and Australia and its variants have been adopted in various countries
as an element of the programme of financialization and privatization (Clark, Reed and
Sunderland, 2018). As per the critics, private finance initiative has been used simply to place a
great value of debt off balance sheet. In health and social care, this alternative of funding is used
as a way of procurement that uses private sector investment in order to offer infrastructure and

other services to public sector firms like NHS etc. according to the specification defined by
public sector.
Agency partnerships -
The term partnership is defined as an arrangement in which individuals are known as
business partners who accept to cooperate each other to advance their mutual interest. The
partners in a partnership may be interest based organizations, businesses, governments, schools
or combinations. There are various advantages of partnerships in health and social care. It
involves benefit to firms from resources, pooled expertise and power-sharing. Health and social
care organizations like NHS work together to develop and promote the workforce. Under this all
the partners contribute funds to attain common objective. Health and social care organizations
have experienced various benefits they have attained through working in partnership in relation
to services to young people and children, intermediate care etc. Further, there are other benefits
also such as delivery of care to clients homes, promoting access to comprehensive range of
services, reduction in duplication of services, improvement in job satisfaction level of
professionals etc.
Competitive tendering and outsourcing -
It is defined as the general approach of procurement. It is also known as bidding within
private sector organizations and government agencies. The rationale behind competitive
tendering is that it forces suppliers to compete and consequently the taxpayer and purchaser will
gain better value for their money (Del Boca, Pronzato and Sorrenti, 2016). Competitive bidding
in health and social care is currently gaining attention as the strategy for setting rates and
containing cost increases in medical care programs of the government. In relation to this, health
care financing administration has funded specific contracts to design demonstrations for
competitive bidding for home health care, durable medical equipment and clinical laboratory
services.
Outsourcing -
The term outsourcing is a popular strategy that can be used by healthcare organizations to
control the increasing cost of offering healthcare services to the patients. With the help of
outsourcing, external contractor takes the responsibility for managing the clinical, business or
hospitality services of healthcare organization because the contractor is specialized in offering
particular service and has ability to attain economies of scale.

c) Discuss agency theory.
Agency theory -
The theory suggests that the role of monitoring of board, supported with the help of
processes like reporting requirements and external audit helps to minimize the problems of
management performing poorly and pursuing own interest. The focus is given on avoiding the
problems related with management stemming from inappropriate utilization of managerial
discretion or poor management. In the context of NHS, the agency relationship is defined as the
relationship in which healthcare professionals performs the role of agents for the patients and
generally decides on their behalf regarding the type of services they require. Further, the perfect
agent is assumed to make choices that a principal, the patient would take if they have similar
details and professional knowledge (Gao and Chen, 2016).
The Confederation of NHS asks nurses and doctors in respect of how far financial nature
incentives have an impact on the clinical behaviour of professionals. The responses of
professionals are mixed as only 36 % has suggested that there are some influence. Therefore,
NHS is having principal agency problem related with financial incentives and one question is
remaining that whether the professionals working in NHS can always perform the role of perfect
agents. According to various authors, in case when organization provides greater choice in the
treatment to the patients they will generally choose fewer interventions than commonly assumed.
The communication takes place during the process of budgeting among various
stakeholders. This is described below -
The process of budgeting is categorized into two parts that is stage of formulation and
implementation. The budget is seen as the tool of management for top level executives that
supports them to communicate with subordinate managers regarding their expectations so that
the managers help in coordinating various activities in accordance to meet out the expectations.
The process of budgeting requires communication for sharing information and it is considered as
a factor that influence internal communication.
Formulation stage – During the phase of formulation unit specific goals as well as overall
strategic goals are communicated by the management to unit specific managers and their
subordinates. They in turn required to communicate back whether the aim and objectives are
achievable, realistic and how they will be measured in the terms of finance.

Implementation stage – The individuals generally line or finance department managers are
required to communicate with their employee's and also with each other to implement the budget
since the implementation of developed budget normally is decentralized to different middle
managers. Finance manager monitors the results and budget to top management. Further, top
management communicates to finance managers again. After this, top management encourage to
respond to divergence that is communicated down in the direction from top management to
middle managers (Gcora and Chigona, 2019).
Ways to communicate :
Schedule a meeting - To effectively communicate the budget, one of the best way is to schedule
the stakeholder meeting. It will help to save time in communicating the message to large number
of people. It can be communicated with the help of powerpoint or any mind mapping software
solution which is available online.
Send a newsletter -
Organization may also use newsletter to communicate the budget to stakeholders. It is one of the
best way to get the message across different stakeholders. It will help management to address the
concerns of stakeholders in detail and with high level of control.
Q 2)
a) Impact of financial constraints on stakeholders.
There are various stakeholders that are influenced by financial constraints. They are also
responsible for the accountability in respect of coordinated integrated health services delivery.
Health and social care managers are accountable towards the users of service that is
patients to provide high quality services and also complying with organizational standards,
professional standards and guidelines. The public is getting more active role for taking
responsibility for health service delivery (Jones and et.al, 2018). Since the establishment of
intensive care services, there is a major growth in clinical practice and clinicians are undertaking
the medical interventions that is considered as major part of modern care. This has increased the
requirement of resources because of high operating cost of intensive care units. The professionals
working in health and social care faces various ethical challenges when they deal with patients.
Major problem arise related with provision or discontinuation of a particular therapy. For
Example – Skilled nurse staff, beds, staffing capacity etc. are some significant constraints that
influences the effectiveness of healthcare services provided by managers. There are various

circumstances where resource scarcity becomes the major issue. The problems related with
budgeting are unpredictable in nature and the increasing demand of healthcare services are stress
by the non-availability of robust system of measuring the severity of different case of the
patients.
The manner in which clinicians respond to the financial barriers has been to act in concert
in ways that promotes the aim and objectives in clinical practice.
Financial constraints in health and social care organizations affects the patient care in
different ways -
The situations in which funding is not able to cover demand the patient care will be
affected in different ways. These changes can be the outcome of deliberate decisions to restrict
the access to particular service or to minimize the quality but more general than not, they are a
unintentional by-product of the decision focused on other issues.
Rationing by deflection -
It means that one element of health system refuses to offer the patient with a service
which is adequate for that individual or to fund care and instead seeks responsibility to another
element of the system. It may include deflecting a patient to another funder. Example – It may
also mean diverting the patient to another service provider of NHS.
Efforts by CCG in one part of England to motivate referrals to the private sector for patients with
insurance of private healthcare is one of the recent example of this currently happening in
practice (Miller, 2018).
Rationing by delay -
Under this, patients of healthcare organization are required to wait for a long period for a
treatment or diagnosis. Maximum waiting time targets at National level are in place to limit the
extent to which NHS can also delay the access to specific services.
According to National data, the performance of healthcare organizations against national waiting
time targets is worsening.
Rationing by denial -
It means that, the patients of the organization are not given certain type of treatment due
to the reason that relevant commissioner has not funded it or due to the reason that the service
provider does not consider it appropriate. It also involves decisions to offer low-value treatments
or not to provide effective treatments but also means that denying the service users effective care

on cost-effectiveness basis. Denial is related with rationing of a specific treatment whereas,
selection refers to rationing for specific patients (Mohamed, Kerosi and Tirimba, 2016).
In reality there are various health and social care organisations that has denied few
treatments to all the service users in different situations. Most CCG's publish the list on their
website related with treatments that are not funded in routine manner. For Example – This may
happen due to no or low clinical value.
Rationing by selection -
The term selection means the denial of treatment to specific patients who do not satisfy
the set of eligibility criteria. The criteria are related with the evidence on the effectiveness of
various treatments for individuals with different characteristics. For Example - The recent
example of selection involves the introduction of body mass index that is BMI and some other
specific criteria to evaluate which patients are referred for the surgery.
b) Challenges of budgeting in public sector organizations.
The challenges of budgeting faced by public sector organization are as follows -
Use of IFMIS on implementing budget -
Integrated Financial Management Information System (IFMIS) is a type of automated
system that helps to improve budgeting, planning, expenditure management and reporting etc.
One of the major challenge faced by public sector organization is during the process of
implementing IFMIS. This system is still not been able to fully offer the expected advantages of
integrated implementation, financial planning, control of public expenditure due to resistance by
staff members, system complexity, management commitment, skills and capacity of the users.
The technical know-how and capacity has been found to be low because of lack of adequate
training and hurried implementation of the system (Mutong'wa, Rodrigues and Liyala, 2017).
Effective audit function on budget implementation -
Internal audit is an independent, consulting and objective assurance activity which is
designed to add value and also help to improve the operations of the business. The audit function
in case of organizations operating in public sector is very ineffective that could result in the non-
compliance with procedures and policies, emergence of fraud, ineffective financial decision-
making for successful operations that also involves implementation of the budget. Governing
bodies of public sector firms are required to ensure effective system of internal control because it
greatly affects the performance of business.

c) Discuss incremental and zero based budgeting.
Incremental budgeting -
The term incremental budgeting is defined as a form of budgeting process which is
dependent upon the idea that a new budget can be prepared by the organizations just by making
some marginal changes in the present budget. Under incremental budgeting, the present budget is
used as a base while incremental assumptions are subtracted or added from base amount to
evaluate the amounts of the new budget. Out of all the methods of budgeting, the incremental
budgeting is considered as one of the most conservative method. There is no particular formula
to evaluate the required marginal changes in the process of budgeting. Marginal changes are
determined with the help of assumptions regarding incremental changes (Nevo, Nevo and
Pinsonneault, 2016).
It is considered as a general method in businesses in which management does not intend
to spend much time for formulating budgets or where there is no much requirement of
conducting thorough revaluation of the business.
There are various advantages and disadvantages of incremental budgeting. These are as
follows -
Benefits :
Simplicity -
It is considered as one of the easiest method of budgeting because it uses the budget of
present period to forecast future budget and it does not involve complex calculations. Due to the
simplicity of the method, it allows management to save their time on the process of budgting.
Operational stability -
The dependence of the management on the figures taken from previous year's budget
helps to ensure that the budget remain stable and consistent across the period.
Minimizes internal rivalry -
This method of budgeting generally allocates incremental modifications to the budget.
Therefore, departments within the firm does not required to compete with each other to secure
larger portion of the budget.
Limitations :
Promotes unnecessary spending -

It may result into unnecessary spending of the funds for the organization. The cause
behind this is that, departments within the business normally tends to spend all funds that they
have allocated in a budget to get larger amount of funds in next year.
Discourages innovation -
Since, present year budget are based on the figures taken from previous year. Since, there
is a little chances for the financing of new activities and ideas. Therefore, incremental budgeting
promotes conservative business environment and discourages the implementation of better ideas.
Fails to account for external factors -
The stability of these budgets does not offer any incentives to the management of
organization to review the budget. The lack of a review process makes the budget undefended to
inadequate mistakes and assumptions (Owen-Smith, Donovan and Coast, 2015).
Zero based budgeting -
The term zero based budgeting involves development of the budget from scratch with a
zero base. It includes the process of re-evaluating each and every item of cash flow statement
and justifying that all the expenditure that is to be incurred by different department. Therefore,
under zero based budgeting all the expenses related with new period are calculated on the basis
of actual expenses that are yet to be incurred and not on the basis of differential that involves
only the change of expenses incurred by taking into consideration changes in operational
activities (Walsh, 2016).
In opposite to traditional budgeting in which past expenditure are expected to rise, zero
based budgeting assumes that there are no balances to be carried forward. It is the approach of
developing the budget with zero prior base. It focuses on determining the activity and then
funding these expenses regardless of the present structure of expenditure. The process of zero
based budgeting involves various stages -
 Identification of a task.
 Determining ways and methods of completing the task.
 Evaluating the solutions and alternate sources of funds. Establishing the priorities and budgeted numbers.
Advantages :
Efficiency -

This approach assist in efficient allocation of the resources as it does not consider
historical figures but focuses at the actual numbers.
Minimizes redundant activities -
It helps to identify various opportunities and the ways to save expenses by removing all
the redundant and unproductive activities.
Communication and coordination -
This method of budgeting helps management to improve communication and
coordination between within the division and also assist to motivate workers by involving them
in the process of decision-making.
Budget inflation –
Under this method, every line item is required to be justified. Therefore, zero based
budgeting helps to overcome the limitation of incremental budgeting of budget inflation.
Disadvantages :
Time consuming -
Zero based budgeting is very time-consuming activity for the business as against
incremental budgeting which is far easier method (Walther and Skousen, 2017).
Requirement of manpower -
Developing the budget from the scratch may require the use of large number of
employee's. There are various departments that may not have adequate human resource and time
for the same.
Lack of expertise -
It is difficult to explain each and every line of item and every type of cost and it also
requires providing training to the departmental managers of the organization.
Q 3)
a) Calculate break even point and margin of safety.
Amou
nt in £
Calculation of fixed
cost
2018 2019
Particulars
Fixed manufacturing 1100000 1100000

Fixed selling and
distribution 1450000 1450000
Fixed administrative 675000 675000
Increase in fixed
cost 1450000
3225000 4675000
Calculation of
contribution per unit
Particulars 2018 2019
Sales 225 281.25
variable cost -125 -125
-15 -15
-20 -20
-15 -15
-10 -10
Contribution per
unit 40 96.25
Calculation of break
even point
2018 2019
Fixed cost 3225000 4675000
Contribution per
unit 40 96.25
BEP in units 80625
48571.4285714
286
BEP in amount 80625×225 = 18140625
48571×281.25
= 13660593
Calculation of Margin
of safety
Actual sales 220000 220000
BEP sales -80625 -48571
MOS in units 139375 171429
MOS in amount 139375×225=31359375
171429
*281.25=48214
406
The break even point in units for the year 2018 is 80625 units. Whereas, it has increased
in year 2019 up to 48571 units. Break even point means the volume of sales where firm neither

has loss nor profit. Further, margin of safety in year 2018 is 139375 units whereas in year 2019 it
has been increased up-to 171429 units.
b) Key assumptions related with break even model.
Break even model -
It refers to financial tool that assist management to determine at what phase the product,
service or company will be profitable. In other words, it is a financial calculation that helps to
determine the number of goods or services an organization should offer to cover the expenses
mainly fixed cost. It is also described as the situation where business is neither losing the money
nor making the money but all the expenses have been covered. It is an important tool in
evaluating the relation between fixed cost, variable cost and revenue (Wildavsky, 2017).
Calculating break even point with the help of break even analysis is a powerful
quantitative tool for the management. It also provides an insight into whether sales amount from
a specific item or service has the ability to cover the major cost of production for that product or
service. Management can use the details in making variety of business decisions that involves
preparing competitive bids, setting prices, applying for taking loan etc.
Break even model is based on various assumptions such as-
 Total cost may be categorized into variable and fixed cost. It does not take into
consideration semi-variable cost.
 Revenue and cost functions remain linear.
 Price of the item is assumed to be constant.
 The volume of production and sales are equal.
 Fixed cost remain equal over the volume under consideration.
 It assumes constant rate of increase in cost of variable expenses (Miller, 2018).
 It assumes no improvement in labour efficiency.
CONCLUSION
The above Report has outlined that financial control is defined as the system
implemented by organizations to determine the directed resources of the business with timely
measurement and monitoring. There are various regulators that are necessary for effectively
managing the financial resources within health and social care such as Care quality commission,
Financial reporting council, HM revenue and customs etc. Further, the Report has described that
there are various benefits of partnerships in health and social care. It includes benefit to firms

from resources, pooled expertise and power-sharing etc. Moreover, it has been concluded that
perfect agent is assumed to make choices that the patient,a principal would take if they have
similar details and professional knowledge. There are two major stages of budgeting that are
formulation and implementation etc. The public is playing more active role for taking
responsibility for health service delivery.
REFERENCES
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Miller, G., 2018. Performance based budgeting. Routledge.
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Wildavsky, A., 2017. Budgeting and governing. Routledge.