Importance of Healthcare Accounting in The Hospital Budgeting Process

Importance of Healthcare Accounting in The Hospital Budgeting Process VIE Healthcare Woman Budgeting

As healthcare providers begin the long journey towards financial recovery following the COVID-19 pandemic, there is a greater insistence on ways in which hospitals can drive revenue and curb costs. Specifically, most providers are looking to leverage robust capital budgeting processes through more professional healthcare accounting.

What is the Financial Planning and Capital Budgeting Process in Healthcare?

Regardless of their size, whether large or small, healthcare providers consistently embark on decision-making, which affects the long-term success of the healthcare facility. Note that healthcare organizations that seek longevity need to take on financial planning. The latter is crucial as it ensures that the organization has funds set aside to brace itself in case of unprecedented events. It requires that management identify various possibilities of what the future might hold for the healthcare industry.

The capital budgeting process in healthcare aims at financial security in which the healthcare facility plans for the funds they intend to spend. This requires that management takes a critical look at where costs can be improved. This thought pattern is informed by evidence that a lot of financial resources are wasted when healthcare providers fail to continuously identify areas where there could be greater financial efficiency. Note that the capital budgeting process also accounts for the funds that have to be religiously spent on compulsory entities. Still, there needs to be a critical look at what other metrics can be substituted or leverage for more excellent financial stability.

Notably, the golden rule in healthcare accounting for efficient budgeting requires that healthcare managers eradicate any spending whose total costs exceed its total benefits and those whose total benefits exceed the total costs. Specifically, efficient healthcare accounting for better budgeting requires the consistent balancing of marginal costs and marginal benefits within the healthcare systems.

What is the Importance of Healthcare Accounting in the Hospital Budgeting Process?

Financial Control

During the COVID-19 pandemic, most healthcare providers have had to deal with dwindling financial resources. The latter have had to be spread thin to account for the influx of patients admitted into the healthcare facility.

Accounting for hospital budgeting helps with monthly budgetary variance analysis, which facilitates more efficient financial control. Operational managers get more significant insights which should help with corrective actions that improve financial control.

Note that, as with any of the organizations that operate worldwide, the budgeting processes are rife with politics. Practical accounting ensures that said processes are free from personal interferences by well-connected individuals or groups with specific interests. As such, accounting stands to provide your best bet at budgetary control.


No single entity within the healthcare facility can effectively handle accounting and the subsequent hospital budgeting process. As such, there is a need for delegation of managerial responsibilities. Expressly, healthcare providers will delegate expenditure consumption in a bid to improve the speed of decision-making as it pertains to quality resource allocation. Note that delegation helps with improving healthcare service delivery.

Resource Allocation

The reality is that healthcare providers have to constantly deal with the fact that funding is finite. Often, there will be fewer financial resources, which consequently do not meet the different needs. It has been found that most providers will embark on departmentalism for efficient resource allocation. Accounting helps provide the different cost pools that require financial resources allocation, thus facilitating more efficient decision-making.


Note that while budgets are in effect annual service plans in financial terms, they are critical to the planning process embarked on by the healthcare provider. When aligned to the predominant strategy, it is increasingly possible to come up with multiple planning frameworks for capital expenditure. Accounting means that managers are able to submit their supplementary budgets without unfounded or unrealistic assumptions.

Overall, accounting is essential to the hospital budgeting process as it provides an evidence-based assessment that informs budgetary allocation. In hindsight, it ensures that the hospital budgeting process has responsiveness regarding the total cost breakdown.


As a healthcare provider, your staff creates what your facility sells. As such, your human capital is crucial to the success of your facility. Proper accounting during the budgeting process requires that you devolve budgeting to the key employees within the different departments. Specifically, accounting requires “macho management,” in which you link employees and the different departments to a budgeting goal.

This top-down approach has been found to motivate healthcare service providers who are more in tune with their contributions. To further motivate your staff, you might require that they develop supplementary estimates for your total budget, which further solidifies their contribution to the facility.

What Solutions Are Present for Efficient Capital Accounting and Budgeting Process in Healthcare?

Traditional accounting and budgeting are susceptible to rigidity. Specifically, the last decade has unearthed inefficiency in the accounting and budgeting of the scarce economic resources available to healthcare providers. It has been argued that the traditional maintenance of financial reports, balance sheets, and cash flow analysis is no longer feasible in today’s world. As such, there has been an evolution of solutions that contribute to more efficient capital accounting and hospital budgeting processes.

Understandably, healthcare accounting is relatively complex. You have to account for challenges, including revenue recognition and accrual accounting. Besides, there is a systematic shift in healthcare systems from the traditional fee-for-service model to a largely value-based one.

Accrual and Cash Accounting

This form of accounting recognizes revenue and expenses when they occur or are earned. Specifically, when the patient receives a service at the healthcare facility, the latter then bills the patient. In accrual accounting, all associated expenses and revenues are recorded and billed as necessary.

The main advantage of this accrual and cash accounting is a greater level of accuracy. The downside would be that there is a need for software that can handle the complicated functions involved in balancing accounts payable and receivable.

Cash accounting, on the other hand, is relatively more straightforward. Revenues and expenses are only taken down when the patient makes the payment. Unfortunately, this setup is not fit for most healthcare providers as, in some instances, the payment can take months to reach the provider.

Reporting Accounting

As with most entities globally, healthcare providers have to produce financial reports that provide insights into their performance. These reports are meant for hospital trustees and senior management tasked with decision-making. Note that details within these reports include cash flows, statements of operations, balance sheets, and changes incurred within their net assets. Finally, in the event that your facility is tax-exempt, you are required to itemize any uncompensated care benefits, including charity care.


Technology advancements have meant that healthcare providers are major consumers for IT infrastructure and capital equipment, which will all depreciate with time. Under this accounting system, this asset deprecation will be recorded within the accounting records of the consequent period.

Payments and Receivables Related to Medical Services

There are several ways in which hospitals can be reimbursed. For instance, your facility can receive capitation in which you get a fixed amount per patient over a month or a year. This system would mean that you receive the fund even when the patient does not visit the facility. In effect, it is an excellent alternative for the traditional fee-for-service model in which your cash is tied to the number of patient visits. Unfortunately, this is increasingly complex as you have to keep close tabs on the vast web of different billings and receivables.

What Are Healthcare Accounting for Better Budgeting Best Practices?

There are fundamental steps that are required during healthcare accounting for a better budgeting process. Some of the best practices to maintain include:

Accounting Systems Indexing

Accounting systems in healthcare need to identify and group together the costs of the various resources utilized. Specifically, you want to break down each facet of the operations that take money out of the budget. You could have specific groups, including clinical staff, drugs, and premises, each having a comprehensive cost breakdown.

Group Resource Costs into Cost Pools

For efficient budgeting, you want to have an accounting system that groups the resource costs into cost pools. Within each of these cost pools, you want to identify cost drivers. Note that you want to create these cost pool groups based on the different departments or activities you carry out within the facility.

Link All Costs

There will be variabilities between the different cost pools that you come up with. Still, you want to create a link between these cost pools to help determine the interlinks during cost management. This best practice takes decision-making to the most basic level of granularity.

Concisely, accounting for healthcare budgeting facilitates tighter financial controls. Besides, it is vital to more responsive decision-making as the budgeting and accounting process unearths any service redundancies that contribute to inefficient use of financial resources.

VIE Healthcare understands that imperative financial accounting during the budgeting process is central to the overall success of healthcare providers. Our consultants take a closer look at existent faults within your financial planning and the decision-making stages during the budgeting process. We have created a robust system that should help improve budgeting efficiencies within any hospital or clinic. We are convinced that when there is greater financial efficiency, there is improved patient outcomes and more excellent economic value.

Schedule a call and let us help you increase your operating margins through proven financial strategies.