Tip of the Week: Capital Budgeting Can Help Reconcile Conflicting Goals

Capital budgeting accompanies planning and is at the heart of very important decisions made from what can appear to be conflicting goals.

Budgeting is among the management topics you will not often find in the pharmacy, because many budgeting processes are proprietary in nature and assumed to be undertaken only by corporate executives. However, budgeting is critically important.

All of us perform some level of budgeting daily regarding our own cash flows and expected expenditures. After all, a budget is essentially a detailed plan expressed in quantitative terms (dollars) that specifies how resources will be acquired and used during a specified period. This is especially salient for pharmacy owners, but understanding the principles of planning and budgeting are useful for any pharmacist, particularly one who is in or aspires to be in a managerial role.

The process of budgeting involves facilitating communication and coordination, allocating resources, controlling profit and operations, evaluating performance, and providing incentives to perform. There are different types of budgets, including revolving budgets, sales revenue budgets, cash budgets, operational budgets, and capital budgets.

A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment. It would typically accompany a strategic plan in helping to differentiate between potential locations of a new pharmacy or the relocation of an existing one. It also corresponds with plans to expand a business and thus make decisions about major renovations and automated dispensing technologies.

Again, there are relatively few studies of budgeting in pharmacy, but there are a few worth noting in medicine and health care, more generally. Wenz and Zhang examined capital investment decision-making by US hospitals. Their case study examined 4 hospitals: a small, private for-profit community hospital; a large, private, nonprofit trauma center; a publicly owned, medium-sized, non-profit, university-affiliated hospital; and a very large, private, nonprofit acute care hospital. The researchers conducted interviews of key hospital administrators and found that capital budget decisions differed among the 4 but still focused on return-on-investment and ad hoc mechanisms not related to long-term visionary processes.

Criteria of need were based primarily on stated physician needs, more immediate needs, and those that might provide a competitive edge in local market share. The researchers also found that overall, hospital organizations should develop and implement systematic processes by building upon decision analysis principles and approaches, such as the Simple Multi-Attribute Rating Technique (SMART).

A complete SMART analysis includes 10 steps and calculates the overall value of a given alternative as the sum of the performance score (value) of each attribute (criterion) multiplied with the weight of the attribute. Its advantage is its explicit accounts of multiple, often conflicting, objectives. This is not unlike what is faced by an individual dealing with conflicting objectives to maximize leisure, spend more time with family, work overtime to get promoted, and save money to send a child to a top-tier university. Nor is it unlike the pharmacy owner or manager faced with conflicting objectives to earn a greater profit on each prescription dispensed, provide better customer service, initiate new direct patient care services, and remodel a stylistically and logistically problematic pharmacy structure.

Capital budgeting accompanies planning and is at the heart of very important decisions made from what can appear to be conflicting goals. Reconciling those goals and priorities might help a decision-maker realize that the goals might not be so disparate, after all. A greater understanding of capital budgeting will help pharmacy managers but can also help staff pharmacists understand why executives make the decisions that they do.

Additional information about Capital Budgeting and Strategic Planning can be found in Pharmacy Management: Essentials for All Practice Settings, 5e.

Shane P. Desselle, RPh, PhD, FAPhA, is a professor of social and behavioral pharmacy at the Touro University California College of Pharmacy.

REFERENCE

Wenz C, Zhang H. Medical technology investment decision-making at U.S. hospitals: A comparative case study of four organizations. Proceedings from the 51st Hawaii International Conference on System Sciences. Accessed on November 18, 2020.