The Laboratory Budget

Definition of Terms
Budget
• the estimated income and expenditure for a set period of
time
Budgeting
• the process of preparing a budget
• Planning, forecasting, controlling, and monitoring financial
resources
Asset
• A property of the company that is regarded to have value
Expense
• The cost of acquiring something (property/service)
 Definition of Terms

• Short-term Assets – used up within one year

• Long-term Assets – usefulness lasts longer than one year

Capital Expenditure (CAPEX) – money spent on long-term

assets
Revenue Expenditure (REVEX)/Operating Expenditure
(OPEX) – money spent on short-term assets
 Definition of Terms
Liabilities
• obligations to creditors

Owners’ Equity
• total company assets minus total liabilities (a.k.a. Net
Assets, Net Worth)
 Definition of Terms
For-Profit Organizations / Profit Organizations
• an organization whose primary goal is making a profit;
taxable

Not-for-Profit Organizations / Non-Profit Organizations

• an organization dedicated to furthering a social cause;
tax-exempt
 Definition of Terms

• Revenues – income; amount of money received

• Accounts Receivable – money that is owed; that which a

company or organization has the right to receive

• Accounts Payable – money owed by a company; that

which the company is obligated to pay
 Definition of Terms

• Overhead Cost
• Expenses associated with operating a business that
cannot be directly linked to the production of a product
or service
• Indirect costs of operating a business
 Definition of Terms

• Uncontrollable Costs/Expenses
• Costs that are not under the control or influence of
daily operations
• Predetermined by top management or external entities

• Controllable Costs/Expenses
• Costs that can be adjusted or influenced by the
normal/daily operations of the organization
 Definition of Terms

• Fixed Cost
• Cost that remain constant regardless of volume

• Variable Cost
• Cost that vary proportionally with volume of testing

• Cost-per-test
• (fixed cost + variable cost)/number of tests
 Types of Budgeting

• Operational Budgeting – the process of planning the

budget for the normal/everyday operations of the
laboratory

• Capital Budgeting – the process of planning the budget

for the acquisition of long-term assets/capital
expenditures that require major financial commitments
 Operational Budgeting
• Fixed Budget
• Assumes a single level of activity
• The income and expenditures are predetermined
• Flexible Budget
• Sets expenditures based on variable work volume
• Some allocations are represented as percentages(%) of
revenue sources that are expected to be variable
• Generally more beneficial but also more complicated to
prepare.
 Operational Budgeting

• Zero-based Budgeting
• Annual budgets are always prepared from “zero” as the
base
• Not based on previous allocations or the previous
year’s budget
• Every projected expense is evaluated based on
priorities, benefits, and fund availability
• Seeks to eliminate wasteful expenses
 Operational Budgeting

• Traditional Budgeting
• Annual budgets are prepared based on the previous
year’s budget
• Incremental changes are made from the previous
budget to meet the needs of the current period
• Adjustments are usually based only on the increase in
costs
• Wasteful expenses are easily ignored
 Operational Budgeting

• Program Budget
• Created for a specific program which is not part of the
regular/basic operations

• Appropriation Budget
• Depends on an outside source of funds
• Usually found in government organizations
 Operational Budgeting

• Rolling Budget
• Continuous budget that is updated periodically (e.g.
monthly)
• Adds the budget for one more month at the end of a
multi-period budget as each month goes by
 Operational Budgeting
• Preparing an Operational Budget
• Time frame setting
• Most budgets are prepared annually
• Frequently, the annual budget is broken down into
smaller units such as monthly or quarterly budgets

• Forecasting
• Predicting future revenues and expenditures
• Takes into account historical data
 Operational Budgeting

• Preparing an Operational Budget

• Scheduling
• Planning when activities (purchases/payments/
expenditures) are done

• Synthesis
• Putting everything together in an organized manner
 The Budget Report

Parts of a Budget Report

• Revenue and Volume Figures
• Itemized Cost Categories
• Fixed expenses
• Variable expenses
• “Full-time-equivalent” / Labor hours
 Example of a Simple Operational Budget
January February March April Total / Annual
Income
CBC 105,000 105,000 105,000 105,000 1,260,000
Platelet 4,000 4,000 4,000 4,000 48,000
Glucose 58,000 58,000 58,000 58,000 696,000
Total Income 167,000 167,000 167,000 167,000 2,004,000
Expenses
Rent 30,000 30,000 30,000 30,000 360,000
Electricity 6,000 6,000 6,000 6,000 72,000
Water 4,000 4,000 4,000 4,000 48,000
Glu Reagent 17,500 17,500 17,500 17,500 210,000
Hemalyzer Rgt 2,300 2,300 2,300 2,300 27,600
Wages 30,000 30,000 30,000 30,000 390,000
Slides 450 450 450 450 5,400
Stains 6,000 6,000 36,000
Total Expenses 96,250 90,250 96,250 90,250 1,119,000
Income Less Expenses 70,750 76,750 70,750 76,750 885,000
 Capital Budgeting

• Plan for acquisition of long-term assets that require major

financial commitments.

• How are capital budgets analyzed/justified?

• Narrative
• Quantitative
 Capital Budgeting

• Narrative
• Justification – rationale for the request; benefit
• Prioritization – rationale for the timing
• Opportunity costs – what is given up if not pursued
 Capital Budgeting

• Quantitative
• Payback period – the length of time to recover the cost
payback period = purchase price/annual net income

• Average rate of return – average yield over the life of an

investment
rate of return = (annual net income/purchase price) x 100
 Capital Budgeting

• Quantitative
• Net Present Value
• Internal Rate of Return
• Required Rate of Return
Communications