Financial Control and Budgeting in Health and Social Care Sector

This study material explores the legal, financial and regulatory environment of health and social care, critical evaluation of alternative funding options, agency theory of NHS, impact on managers and clients of financial constraints, budgets & costs. It also discusses the importance of communication with stakeholders regarding budgeting in healthcare services.

FINANCIAL CONTROL
AND BUDGETING

TABLE OF CONTENTS
Task 1...............................................................................................................................................3
a. Legal, financial and regulatory environment of health and social care...................................3
b. Critical evaluation of alternative funding options available for health and social care sector4
c. Agency Theory of NHS ..........................................................................................................6
Task 2...............................................................................................................................................7
a. Impact on Managers and clients of Financial Constraints, Budgets & Costs.........................7
b. Challenges of Budgeting in Public Sector organization:........................................................9
c. Advantages and disadvantages of incremental And Zero- Based Budgeting.........................9
TASK 3..........................................................................................................................................12
a. Calculation of Break Even Point and Margin of Safety :-....................................................12
b. Assumptions of Break Even Analysis...................................................................................13
REFERENCES..............................................................................................................................15

Task 1
a. Legal, financial and regulatory environment of health and social care
Legal environment
The sector known as Health and social care involves those organizations that are meant
for providing healthcare support to societies and communities such as hospitals, physiotherapist
and other social care support organizations that is, foster caring, nursing homes and nurseries
(Lippi, 2018).
There is a significant role of legal environment in promoting and maintaining well-being
and health of the nation's citizens as it aids people to get recovered from ill health. Within UK, to
assign legal duties to those organizations and individuals who are operating in health and social
care, the health and social care Act of 2012 has been passed in order to avoid health inequalities.
Within this act there are specific duties that must be fulfilled by health bodies within UK with
the motive of reducing health inequalities among the people of UK.
Furthermore, the Social Value Act of 2012 has made it necessary for health sector bodies
to take into account social and economic well-being at the time of procuring contracts and
services. The creation of social value indicates efforts of legal bodies in reducing health
inequalities where they are focusing and taking actions for social factors that are determining
health of people such as housing & employment.
Financial environment
Healthcare in UK is funded by public and generally comes from taxation source, social
health insurance and private insurance (Foley, 2018). The process begins with the collection of
taxes by government from majorly two sources that is direct implication of tax on individuals
and company's income and indirect implication of tax on export – import, value addition and
buying and selling of goods and services. Accordingly, central government utilizes the collection
of these taxes towards financing social and healthcare within UK. The benefit that UK is getting
by financing health and social care through taxation is it does not discriminate among low and
high income earners and accordingly, there is no inequality in getting hospital treatment. When
there is higher demand for health and social care within UK, then government resorts to raising
rates of taxes to provide for higher funding.
Regulatory environment

Two elements associated with the regulation of health care in UK are regulation of safety and
quality of care that is being offered by providers of healthcare services and the same is the
responsibility of Care Quality Commission (Magid and et.al., 2018). Another regulatory element
is healthcare services market regulation and the same is the responsibility of department of health
and monitor. Providers of healthcare includes NHS, independent providers, local authorities and
voluntary organizations who operate in a registered setting where registration is done with CQC,
however, registration is not compulsory. Regulation within healthcare sector is necessary to
ensure that healthcare professionals are able to carry out their practice in a safe and secure
manner along with limited risks from which patients are prone to while receiving treatment.
b. Critical evaluation of alternative funding options available for health and social care sector
Alternative funding options provides for opportunities to secure funding for the health
and social care concern either for expansion or carrying out day to day activities (Coyle
Dreesbeimdiek and Manley, 2021). Here, four of such funding options would be critically
evaluated with reference to health and social care sector, such as the following:
Private finance initiatives: Within UK, government resorts to the creation of public-private
partnerships where private bodies are encouraged to accomplish or manage projects undertaken
by public sector. Therefore, it is way of getting private funding for accomplishing health and
social care projects on behalf of the government.
There are many benefits of getting finance through PFI such as acquisition of payment
for upfront cost from private firms to accomplish health and social care projects within the
desired time frames and thus government get relieved of financial burden related to the execution
& completion of projects related to public services. However, some negative attributes of PFI
include steady repayments that government needs to make for a long period of time which is
considered to be burdensome.
Agency Partnerships: It is another form of alternative funding option where a healthcare
organization can form partnership with another organization of their own sector for ancillary
services (Ng, 2022). This is considered to be a funding option because for example a hospital
who is providing number of treatment to their patients may not have diagnostic facilities installed
and by forming partnership with a diagnostic centre, they could be able to ensure provision of
additional value at a concessional rates. This is a form of diversification at no cost.

It is beneficial in adding value to the core services without any extra efforts and thus
better quality of care can be offered to people. However, there are some limitations of this as
well such as sharing of confidential information which is necessary for functioning with one
another. Also, poor quality of services from one care can affect the reputation of another caring
service.
Competitive tendering: It includes potential service provider to submit their tender which
includes price for service offering. The tender application is then examined and the healthcare
commissioner begins with short-listing of preferred candidates and chooses one of them for the
provision of services (Phillips and et.al., 2021). The contract continues for a defined period
consisting of terms and cost of agreement. This process of tendering is to independent
practitioner, voluntary sector providers and social enterprise companies. For instance,
physiotherapist working within NHS are on hired on competitive tendering.
It is beneficial for a healthcare concern where publicly held healthcare sector involves
private or independent practitioners in providing the best quality care services at cheaper rates.
There are certain limitations as well such as provision of poor care facilities and services by
those who are tendered at lower rates. Poor services in healthcare sector leads to risk of life for
people who are getting their treatment from less experienced practitioners as they get agreed to
offer their services at lower rates.
Outsourcing: It is another form of alternate funding option where organizations within the
health and social care resorts to buying additional capacity which allows their patients to seen or
treated by an alternative practitioner at their own facilities. There are certain services that health
and social care organization, then an organization in to health and social care can be able to
concentrate on their core service of treating patients and alleviate themselves from installing
costly equipment for different services.
The biggest benefits of outsourcing ancillary health and social care services is ability to
access trained and experienced professionals at a lower cost which leads to improvements in
caring services, patient's experiences and overall outcomes for the organization. However, there
are certain drawbacks of outsourcing as well which includes no control over outsourced services
even if there are compromising quality associated with these services during the time when the
contract is existing and cannot be cancelled in between. Further, if the company to whom

services has been outsourced is not having required level of technology which leads to non –
fulfilment of organization's quality standards.
Therefore, all these alternate funding options may either provide direct funding such as in
case of PFI while there may be indirect funding as well that is, outsourcing, competitive
tendering and agency partnerships where assistance in terms of service provision is being
provided to health and social care organization which leads to alleviate them from making
arrangements of finance for numerous ancillary healthcare services.
c. Agency Theory of NHS
Agency theory is a theory which helps in resolving issues among the principles and agents in a
company. To perform the day to day transactions, principle hires the agent on behalf of him. The
agents of the sector are responsible for making decisions on behalf of principle. The agents'
theory protects the sectors from the agents who use their position for their benefits.
In the health sectors, In the health-care sector, the patients are the principals and the physicians
or health provider are their agents. The patients appoint them to seek information and make
decisions regarding the treatment (Vitolla, Raimo and Rubino,, 2020).
In the healthcare sectors ,the problem arises among the principal and agent when the agents act
against the interest of agents /patients for their interest in the profits. Many times, the decisions
by agents have posses high degree of uncertainty. The providers are the perfect agents of the
principals because they know everything about the patients' health conditions and what are the
treatments required.
In the health sector, there is also a problem of principal-induced demand. This demand implies
the patients to change according to the interest of providers. As, the demand means to provide
fee for the services offered.
Importance of Communication with Stakeholders with regard to Budgeting
It is necessary to communicate while preparing budgets in healthcare services, because of
its changing nature. The health care sector needs strong budget, with the updated technologies
and techniques. The budgets help Health care as it is a rapidly changing industry that must
continuously adapt the patients needs.. A strong healthcare budgeting process allows leaders to
plan for the future and establish priorities around care and clinical departments. A healthcare
budget is an important tool to understand where funds are best spent and how to allocate capital
among various departments and projects. This enables healthcare organizations to be more

efficient in delivering effective and efficient patient care. It helps in estimating the funds and
determine the amount needed for development of different departments and projects. The
budgeting helps in reducing the errors of purchasing new technological equipments in the health
care sector.
It is important for the health care services to communicate with the stakeholders about the
budgets because of effective decision-making, cost savings, risk management.
The Government is the key stakeholder of the national health sector as it contributes a major
part in funding the NHS. The communication of budgeting is necessary with the government to
specify them funds required in the health care sector because of the increasing demand of the
health-care services in the world. The hospitals and clinical departments associated with it
requires updated technology and diverse equipments for treatments of the patients. The
communication will help the government to increase the tax rates in the country to raise their
investment levels in the NHS.
Communication among the stakeholders is necessary regarding budgeting because it provides a
clear transparency regarding all financial plans. It helps the stakeholders to take steps that will
impact the National health care services in long run. It is essential to communicate the budget to
the pharmaceutical companies, so that they can ensure the investment requirement in the R&D
process.
Task 2
a. Impact on Managers and clients of Financial Constraints, Budgets & Costs
There are numerous things which showed impact on the managers, patients and
stakeholder of the health care sector. Increasing costs, insurance reimbursements, inefficient
budgets, etc.
Pharmaceutical companies are key stakeholders of the health-care system. The companies
are facing a downfall because of continuous rise in the prices of the medicines and drugs. While,
there is no way to prevent the increasing costs. Pharmaceutical companies have a responsibility
to charge affordable prices s so that everyone can afford those products.
Financial constraints : The financial constraints affect the consumers or patients if they are not
financially stable, they will not be able to afford treatments offered by the hospitals. The

pharmacists or pharmaceutical companies which have low investments can face the difficulty in
conducting required research and development and production of the medicines. Many health
care professionals in the hospitals need updated technology and techniques to treat the patients,
sometimes inefficiency in funds of the hospitals lead to use of outdated technology. The financial
constraints might affect the health sector, but they may be directly in favour of the patients and
clients of the health care sector. For example, The NO Surprise Act,2022 (Hoadley, Keith and
Lucia, 2020), it helps in guarding the patients from the surprise bills of the hospital. It ensures
transparency regarding cost of treatments and services between the health-care sector and its
consumers. The socio-economic status of the patients has a negative impact on their health
conditions as due higher costs of insurances premiums & treatments deter them from taking
receiving hospital care.
Budgets: The budgets help in allocating the costs to the needs and requirements in the health
care. The managers of the health care sector on the basis of budgets identify and allocate costs to
the operations and activities of the sector (Meadows and Padamsee, 2021). The allocation
ensures the investment requirements from the stakeholders. Budgets will also help the managers
and stakeholder in minimizing and adjustments of costs by reviewing the budgets. Budgets in the
health care sector make it difficult for the professionals and managers to adopt new and updated
treatment equipments and technology because of its constant nature, it is difficult to change the
investment and capital. The budgets prepare prior to COVID -19 pandemic, resulted in downfall
in the initial stages of the pandemic due to reduction in treatments and medical care (Kaye and
et.al.,2021). Budgets help the Governmental organizations in ensuring the taxation rates in the
country to increase the investments.
Costs : Due to change, in the health plans of the insurance companies, people have to pay higher
insurance premiums, due to this it is difficult for people to obtain adequate healthcare. Insurance
companies need to change their objective of profitability to affordability making easier for the
clients and managers to afford the health plans. The effective costing system helps the managers
to provide good and well maintained care to their patients (Zand, 2018).During the COVID -19
pandemic, many clients avoided the treatment and care due to high costs of testing and
treatments. Poor costing system of the hospitals make it difficult for the providers and managers
to link costs to the outcomes and process improvements. The providers of the services are

rewarded not at their actual costs of services due to inaccurate assumptions and confusion in the
cost allocation n method.
b. Challenges of Budgeting in Public Sector organization:
 Budgeting in public sector organization is highly inaccurate because public employees
have to collect and identify the data manually.
 Public sector organization creates the budgets and plan for multiple years, thus it is
limitation in the financial targets as changing and updating the variations in the budgets is
a challenge.
 Changes in the external environment is a limitation to the strategies and resources as it
causes instability and the changes are unavoidable, negatively affecting the organization's
budgeting.
 The budgets prepared in public sector organizations require highly skilled manpower
with the expertise in accounting and economical aspects.
 Public sector organization have an impact on its budgets due to change in laws and
legislations. Changes in laws might affect the budget prepared (Tavallaee, Solgi and
Nazari, 2020).
 Traditional budgeting is a challenge for public sectors as it doesn't refer the investments
of organizations with h outcomes, thus it reduces the ability to analyse ROI .
 Ascertaining the cost of tasks and activities in the public sector organization is a very
difficult task, thus it leads to inaccurate data for budgeting.
 Budgeting in public sector organization takes time because of their wide infrastructure.
 The variances of large budget in the public sector organizations leads to poor estimates
and lack of corrective actions in the management of budgets.
 The budgets generally considers the quantitative part, thus making it difficult for the
organization to ensure the needs of customers and good services.
c. Advantages and disadvantages of incremental And Zero- Based Budgeting.
Incremental budgeting
Incremental budgeting is an approach of budgeting that use the past year's budget as the
base to create new budget. In this method, only marginal changes are made in the current budget.
In other words, it is a type of budgeting which involves only incremental changes in the budget
to prepare a new budget (Incremental Budgeting. 2022). In this budgeting, there is no specific

formula applicable to determine the incremental changes in the budget. It is the conservative
approach of budgeting. This type of budgeting is not preferred in large companies, only the
companies with small funding or small changes adopt such budgeting. This budgeting assumes
that the previous budget has considered all the necessary expenses and the requirements of the
organization. From the survey conducted by CIMA, it showed that approximately 50% of the
managers of the companies use this method of budgeting.
Advantages :
 It is the simplest and easiest form of budgeting. As, it does not need any complex
calculations only few assumptions are needed to prepare the future budget.
 Through this budget, the changes in the budget can be easily identified by comparing
with the past years budget (Ortynsky, Marshall and Mou, 2021).
 This budget is more suitable for the companies whose projects require similar funding
for many years.
 It is adopted by many companies while preparing the budget because it is very easy to
implement and does not need detailed analysis. This budgeting focuses on consistency among all the departments ensuring minimum
conflicts between them.
Disadvantages:
 Due to this type of budgeting, there Is lack of innovation in the companies because of
slight change in the budgets and that creates a little space for new funding ideas and
activities.
 The budgets are prepared on the basis of past budget, thus it ignores the external factors
and the unforeseen circumstances.
 Due to changes in the past budget, management doesn't review changes and this result in
wastage of resources, uncertain risks and inappropriate assumptions.
 To have favourable variances, managers ensures little revenue and excessive expenses in
the incremental budgets.
 This budgeting assumes there is no change in the objectives of the organization. Also,
there is no change in approaches of finance and policy of the organization and its
departments.
Zero Based Budgeting

.Zero base budgeting is the type of budgeting which ensue that budgets should be
prepared from scratch, that is there in no base, zero- base. This budgeting is different from
traditional technique of budgeting. Past year budgets are not referred while preparing the budgets
for the current year ( Beredugo, Azubike and Okon, 2019.)In this budgeting, historical data or
balances are not carried forward. It forecast the budget on the basis of current economic and
political conditions such as inflation, updated projections, etc. In zero base budgeting, managers
analyse and prioritize their activities and also identifies the functions which are obsolete or
inefficient. This helps in allocating resources from low to high priorities in various programmes.
Advantages of ZBB:
 In this type of budgeting, mangers have to identify and calculate all the necessary
operating expenses and identify the areas generating revenue in the company.
 This budgeting uses actual data rather than historical data, so it results in efficient and
optimum resources' allocation.
 It is the most complex and accurate method of budgeting, as it involves scanning of all
the operational activities and environment of business.
 With the change in the outdated and obsolete technology, ZBB helps in adopting the new
and updated technological changes in organization(Ibrahim, 2019).
 It improves coordination among different departments of the organization. It reduces the unnecessary expenditures by constantly examining the budgets with the
activities.
Disadvantages of ZBB:
 This budgeting is very time-consuming as collection, identification and interpretation of
data need time. Also, it requires manpower, to conduct surveys and analysis of the
operations of the organization.
 To prepare the budgets, it requires expertise in accounting, forecasting, mathematical and
logical areas.
 This budgeting is based on cost benefit analysis, thus it ignores long term goals of the
organization.
 Due to rigidity of the management regarding budgets, it is difficult to consider sudden
and unexpected expense or changes in the organization.

 Savvy managers can use zero base budgeting for their benefits, as they can increase
resources and funds in their departments or for themselves. This might lead to
discrepancies and conflict among the organization.
 The managers and the accountants will take time to revise the budget and response to the
market conditions. This might leave gaps in departments because of sudden changes and
needs in the budgets.
TASK 3
a. Calculation of Break Even Point and Margin of Safety :-
Particulars 2018 2019
Sales 220,000 220,000
Selling Price 49,500,000 61,875,000
Direct material 27500000 —
Direct labour 3300000 —
Manufacturing overhead 4400000 —
Selling expenses 3300000 —
Administrative expenses 2200000 —
VARIABLE COSTS 40700000 50875000
CONTRIBUTION 8800000 11000000
Manufacturing 1100000 —
Selling and distribution 1450000 —
Administrative 675000 —
FIXED COSTS 3225000 4675000

PROFIT /REVENUE 5575000 6325000
Particulars 2018 2019
Break Even Point
[Fixed cost/Contribution per unit]
80625 93500
Margin Of Safety
[Actual Sales — BEP sales]
49419375 61781500
MOS (%) 99.83 99.84
Break Even point : It is a point where there is no profit, no loss from the sales. The
company's revenue earned from the product is equals to its production costs at this point(Gurley-
Calvez and Williams, 2020).
Margin of Safety: It is the difference between actual sales and the break even sales of
the period. This shows the margin of sales, from where the company can start losing it sales
before incurring loss (Margin of Safety. 2022).
From the above calculations, it is clear that to cover all the fixed and variable expenses the
company have to sell 80,625 units in year 2018 and 93,500 units in 2019. Also, it is interpreted
that the company will not incur loss from the sales of washing machines because the higher the
margin of safety, there is less risk of incurring loss.
b. Assumptions of Break Even Analysis
The assumptions of the break even analysis are :
 The total cost of product is divided into fixed cost and variable costs.
 The variable costs don't consider semi variable costs.
 At all output levels, the selling price of product remains constant.
 The production volume and sales volumes are equal.
 It is assumed that variable costs increases at constant rate with the change in level of
output.
 Sales and cost revenue are affected by sales volume.

 It is suitable for those business who produce single product or similar product mix.
 All the other factors such as technology, efficiency and production methods remains
constant.
 Either the inventory levels remains unchanged or there is no inventory at the beginning &
end of period.
 Cost of input factors such as advertisement, wages, etc. Remains constant.
 Fixed costs is assumed to be constant at all levels of output.
In today's business environment, the businesses with multiple products or different
product mix can't deal with the break even analysis model. The assumption that fixed costs
remains constant at all levels of output doesn't stand true as fixed costs changes after a certain
increase in the level of output. There are various costs which are as fixed as well as variable in
other words, Semi-variable costs and the model doesn't include semi variable costs, making it
difficult to calculate the break even point. While calculations selling price of the product remains
unchanged at all the levels of output, as this will also lead to wrong calculation of BEP because it
changes with every change in selling price of product. Many business are affected from this
analysis as market demand is not considered.

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<https://corporatefinanceinstitute.com/resources/knowledge/finance/incremental-budgeting/>
Margin of Safety. 2022. [Online]. Available through <https://www.wallstreetprep.com/knowledge/margin-of-
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