Because the healthcare industry is a service industry and requires people to perform the major portion of its business, the cost of HR component usually accounts for its largest expense. Budgeting for human resources is an important consideration when addressing the human capital needs of any organization. HR needs differ from one organization to the next, depending on the vision, mission, goals, and objectives of the organization. The number and type of people needed in a given situation are dependent on many factors, including the skill level of the workers, the workers’ familiarity with the organization, the standards the organization sets for productivity, and regulatory and accreditation requirements.
The Labor Budget
The labor budget, also known as the salary budget, consists of the expenses allocated for salary, wages, benefits, and other employee’s costs. The revenue portion of the budget is influenced by the human component. Using a past history of productivity and activity measures, most organizations can predict both revenue and labor costs fairly and accurately.
The purpose of the labor budget is to predict the following:
Required staffing levels based on volume projections and productivity measures.
Projected expenses related to regular, overtime, and overall productive hours.
Nonproductive hour expenses
Expenses for benefits
Total salary, wage, and benefits costs.
Healthcare organizations should develop flexible budgets that include revenues that are dependent on volume and expenses that fluctuate with volume.
Using Labor Budget Metrics for Measurement
Using budget metrics is necessary to measure and compare (benchmark) an organization’s performance to that of itself and of peer institutions. Such measurement is a step toward promoting best practices within the organization. The metrics for the HR department includes accession rate, cost per employee hired, time to fill jobs, benefits claims response time, training hours produced, number of employees trained, HR expense per employee, and HR FTE ratio. The analysis of key budgetary metrics, along with reporting of the variances, is usually performed monthly in most healthcare institutions. This is done so that organizations
can make the necessary adjustment to be following or to adjust their budgets. Key labor budget metrics include: units of service, total productive hours, total productive FTEs, total nonproductive hours, total nonproductive FTEs, total hours, total FTEs, average productivity/unit of service, revenue/unit of service, revenue per FTE, average hourly rate, average hourly rate/unit of service, salaries/unit of service, salaries/FTE, total net revenue, total labor expenses and total labor expenses/total net revenues.