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Budget vs. actual in hospitals: how to find and explain variances

A budget only works if the comparison with actuals happens every month, at the right level and with an owner for each variance.

Clic Health teamUpdated 3 min read

The budget vs. actual comparison is the moment when the budget stops being a document and becomes a management tool. Done every month, by income statement line and cost center, it shows where the hospital drifts from plan and who needs to explain and act. This article shows how to make that comparison useful.

What to compare

  • By income statement line: revenue, denials, variable costs, payroll, fixed costs, result.
  • By cost center: each center with its expense budget (and revenue budget, for productive ones).
  • For the month and year to date: one bad month can be offset; a bad year-to-date is a trend.

Always use the same criteria as the budget: accrual basis, same accounts, same cost center classification. If the budget was built on a different basis, the comparison produces variances that do not exist.

Amount or percentage?

Both, but prioritize by amount. A 30% variance in office supplies draws attention and does not change the result; a 3% variance in payroll may be the month's biggest problem. A good practice is to set a materiality threshold: variances above a minimum amount or percentage of the line make the agenda; the rest do not.

The Clic Health Budget Variance dashboard shows each cost center's and expense group's deviation from budget. Sample data

The four types of variance

  1. Volume: the hospital produced more or less than planned. Variable costs follow. A cost above budget with volume above budget may be correct.
  2. Price: the same consumption cost more or less (price increases, contracts, exchange rates on imported items).
  3. Efficiency: consumption per unit produced changed. This is the variance that most calls for action.
  4. Poor budget: the budget assumption was wrong. It happens, and it should be recorded for the next budget, not "corrected" in the actuals.

To separate volume from price and efficiency, compare cost per unit of output (per patient-day, per surgery, per test) in budget and actual.

From variance to action

A comparison that ends in a table changes nothing. The useful cycle is:

  1. Controllership identifies the month's relevant variances.
  2. Each variance goes to the cost center owner, with the account detail.
  3. The owner explains the cause and proposes an action.
  4. The board decides and follows up the next month.

The PDCA format (plan, do, check, act) works well for this follow-up.

Re-projecting the year: the forecast

Mid-year, the question changes from "are we on budget?" to "how will we close?". The forecast adds actuals to date and projects the remaining months from the trend, the budget and known events. It does not replace the budget: it shows the gap between the plan and the likely outcome, and how much effort is needed to close it.

How BI helps

The most time-consuming part of the comparison, putting budget and actual on the same basis by account and cost center, is ready in BI right after the close. In Clic Health, the budget vs. actual income statement, the budget variance and the management income statement with forecast simulation cover this cycle. See hospital controllership and the step-by-step income statement analysis. The department detail is in costs by department.

Related questions

How often should budget and actual be compared?

Monthly, after the close, for the month and year to date.

Should the budget be revised during the year?

Keep the original budget as the reference. To track updated expectations, use the forecast alongside the budget.

What variance is acceptable?

It depends on the line and the hospital's size. Set a materiality threshold (minimum amount and minimum percentage) to decide which variances go to the board.

Clic Health team

Written by the team behind Clic Health: accountants, controllers and developers with more than 20 years of work in hospital management.

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