Time to Rethink Annual Budgets

Starting a New Year with New Targets: A Fresh Approach to Healthcare Budgeting

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Starting a new year with new targets and projections can be both exciting and daunting. For healthcare organizations, having a clear direction for the upcoming year is crucial. However, it is equally important to minimize uncertainties and surprises as much as possible.

The Impact of the Pandemic on Projections

The recent pandemic has provided a much-needed reality check. Plotting numbers based solely on previous years' performance and handing them over to stakeholders is no longer sufficient. Few discussions focus on the shortcomings of this practice in the healthcare industry.

Over the years, I have often questioned the effectiveness of creating 'cast in stone' projections based solely on past performances. Experts who ignore the market and business environment risk leading their hospitals and organizations on a potentially bumpy ride.

The Challenge of Long-Term Projections

In today's dynamic and fast-changing world, is a 12-month projection too ambitious? In January 2023, who can accurately predict what will influence our business by December? The answer may lie in Rolling Budgets.

The Benefits of Rolling Budgets

Rolling budgets allow organizations to maintain constant projections for the next 4 or 5 quarters. At the end of each quarter, the projections for the 4th or 5th quarter can be added. This approach offers the flexibility to adjust numbers based on changing market conditions. It is a more adaptable strategy than adhering to fixed targets for 12 consecutive months.

Embracing Flexibility with Multiple Budgets

Flexibility is key. Companies should consider having Budget A, B, and even C if they choose to stick with the 12-month projection formula. As circumstances evolve, the revenue and cost composition should also change. By June, some organizations may realize that a 10% growth over the last year is unrealistic. It should be acceptable to switch to scenario B or C, keeping the team motivated toward more achievable goals. This requires revisiting key assumptions regularly—something we often overlook once the budget is finalized.

The Risks of a Fixed Budget Cycle

A significant pitfall of a fixed 12-month budget cycle is the conservative approach taken in the last couple of months each year. No new investments are made, and no risks are taken to protect EBITDA. Even if opportunities arise, teams may defer investments to the new budget cycle, stifling growth.

I have observed healthcare P&L owners who hesitate to exceed projected numbers. They fear that overperformance will set a higher baseline for future growth calculations. This mindset highlights the perils of relying on previous year's numbers for growth.

The Need for Long-Term Governance

Lastly, governance plays a crucial role. Boards and promoters should allow P&L owners in business units a longer runway. With constant pressure on CEOs each quarter, pursuing long-term sustainable growth becomes nearly impossible.

A Fresh Perspective on Budgeting

In conclusion, the entire concept of budgeting requires a fresh perspective from both Boards and CXOs. The current process is becoming redundant. As the world continues to face rapid changes and uncertainties, it is essential to adapt our budgeting strategies accordingly.

Conclusion

In summary, the healthcare industry must embrace a more flexible and realistic approach to budgeting. By adopting rolling budgets and allowing for multiple scenarios, organizations can navigate uncertainties more effectively. This shift will not only enhance growth prospects but also foster a culture of adaptability and resilience in the face of change.

For further insights on healthcare consultancy, visit SURGE Growth Partners | Healthcare Consultancy Dubai.