A Measurement Tools and Budgeting

An important way to assess operational organizational performance is benchmarking. To benchmark, an organization conducts a self-assessment and then compares itself to other, similar organizations to gauge its relative performance. For public health agencies, the National Public Health Performance Standards Program has developed such standards, for both state and local health agencies.³ The Joint Commission provides similar guidance for health care providers (see later).

Instruments to report performance include dashboards and balanced scorecards. Dashboards are operational management tools that track many indicators together. For each indicator, there are benchmarks; indicators outside acceptable benchmarks may be shaded red or yellow, whereas acceptable ones may be green. This allows managers and personnel to see immediately which domains are working well and which are not. Balanced scorecards provide similar feedback but present a more holistic picture of an organization to link strategic and operational domains. In balanced scorecards an organization’s vision, mission, and strategy are followed down into performance measures and initiatives, so that a mission goal can be followed all the way to a specific output and outcome metric⁴ (Fig. 28-1).

Figure 28-1 Example of balanced scorecard for a local government.

(From Rohm H: Perform 2[2]. Available at www.balancedscorecard.org/LinkClick.aspx?fileticket=ph%2b8b3YMoBc%3d&tabid=56)

In addition to providing a visual summary of certain benchmark indicators, balanced scorecards sometimes “weigh” dimensions by how much they contribute to the mission, providing a snapshot of the performance of the entire organization.

The main tool for assessing financial performance is a budget, because it can be used to plan, evaluate, and control expenditures. Most public health managers will encounter budgets, both in the planning process and when they are comparing actual performance to budgets. Budget planning is extremely important, since it is pointless to analyze variance from an unrealistic budget. However, all budgeting is based on assumptions and therefore represents a “best guess.” Such planning can use incremental budgeting. For example, a department with five salaried employees the previous year would budget for the next year for the same five employees, possibly with their salaries adjusted for any cost-of-living increases. The alternative to this is zero-based budgeting, in which an organization pretends it starts from zero. All expenditures must be justified not based on precedent, but rather by current need. Incremental budgets are easy to generate, but they may not serve an organization well if its conditions and environment have changed significantly. Zero-based budgeting allows optimal matching of recourses to current needs, although it can be disruptive to employees, stakeholders, and clients.

B Variance Analysis

The act of comparing actual performance to budgets is called variance analysis. This is an extremely important step, because it allows managers to decide if they need to take action now to spend more or less in the future.⁵ Budget variances are traditionally called favorable and unfavorable.

Table 28-1 provides a simple example of budget variance analysis. Budget variance can be caused by unexpected changes in clients, client mix, reimbursement, or expenses. Variance analysis needs to account for fixed and variable costs. As the name implies, fixed costs do not change with volume. For example, if one receptionist handles all the calls to an agency, that person’s salary is a fixed cost; the pay will not change, whether the receptionist answers 1 or 100 calls per day. In contrast, variable costs change with volume (e.g., test strips needed for exam, mileage costs for car).

Table 28-1 Variance Analysis, Unadjusted

Other types of variance include the following:

Table 28-2 provides another way to look at variances. Although the example shows a simple part of a budget from a company, the variance in a public health agency’s budget could be analyzed similarly. When analyzing budget variances, it is important to identify expected fluctuations from unexpected fluctuations. Unexpected fluctuations can usually be found by comparing revenue or expense fluctuations to previous years. If the differences are real, a manager needs to look for reasons. However, it is important first to make sure that there are no faulty calculations in the original budget and no errors in the actual results. It is also important not to respond to budget variances that are caused by singular, unexpected events (e.g., natural or man-made disasters). The most common reason for budget variance is a difference between assumptions and reality. Since budgets are informed guesses, it is easy to guess wrong. However, such differences require managerial action before the organization is in trouble.⁷

Table 28-2 Variance Analysis, with Adjusted Variance

For a public health agency, the budget in Table 28-2 might represent the fees brought in for new home inspections. By custom, favorable variances are shown as positive numbers; negative variances are shown in brackets. Since the revenue was below what was budgeted, one would expect a variance. However, since sales were below expected, the costs have to be adjusted for actual sales volume before further analysis.

Table 28-2 shows the budget revised for the actual volume. Now it is apparent that the sales value was actually higher (a good thing), but that both variable costs and fixed costs were also higher than expected (a bad thing). Armed with these numbers, the manager can investigate further and put fixes in place. For example, the manager might investigate why there is a different demand for the service, commend the salesperson for getting higher prices, and investigate why the fixed and variable costs were higher.