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At a time when nursing homes are dealing with the aftermath of the pandemic and a staffing crisis, nursing home accounting has become more important than ever before. Nursing home accounting and budgeting are financial processes that nursing homes use to track their income and expenses through the use of a long term care software system to ensure that they are operating within their means.

Nursing home accounting is indispensable because of the need for nursing homes to track their financial health to make informed decisions about how to allocate their resources. It also provides a way for nursing homes to measure their performance by identifying areas for improvement.

Although nursing home accounting systems can vary significantly from one nursing home to another, there are some key factors that tend to be shared, such as:

Staff conducting nursing home accounting.
Long term care providers that accept Medicare payments from residents must have accurate nursing home accounting practices to file Medicare cost reports.
  • Healthcare-specific functionality of the accounting software
  • Compatibility with banks
  • Cloud hosting capabilities
  • Scalability of the accounting software, in case it is used in more than one facility
  • Security measures within the accounting software
  • User-friendliness
  • Customer support of the software provider
  • Price

Other than using accounting to assess the financial health of a facility, long term care administrators also use it to stay on top of their regulatory reporting responsibilities. It is worth noting that states have their own requirements that are to be observed in addition to the national Medicaid requirements for nursing homes.

Long term care providers that accept Medicare payments from residents need accurate nursing home accounting practices when they file Medicare cost reports, which are used to report expenses for different types of Medicare reimbursable facilities in accordance with regulations. 

Best Practices for Nursing Home Financial Statements

Nursing home financial statements and financial reports are used by the financial department of nursing homes to provide an analysis of data obtained during nursing home accounting. The nursing home financial statement is used to communicate the nursing home’s overall financial position, while the nursing home financial report provides more detailed information about specific aspects of nursing home accounting, such as income and expenses.

Some of the best practices for nursing home reports and nursing home financial statements include:

Empty wheelchair in a nursing home with bad nursing home accounting practices
Collecting feedback from staff and residents to gauge the quality of care is an essential practice when creating nursing home reports.
  • Calculating your nursing home’s operating margins, expendable cash, and debt-to-capitalization ratios from your audited financial statements  
  • Analyzing your long-term and short-term debt-to-equity (D/E) ratio
  • Identifying all sources of funds for the facility
  • Collecting feedback from staff and residents to gauge the quality of care by using a care plan software system
  • Analyzing quality of care reports with the expenditure of the SNF
  • Considering how much money can be reinvested into the facility (from profits or from the facility savings) to further improve the quality of care
  • Considering preventive measures (such as auto-locking doors and gates in a memory care facility to prevent residents from wandering) that may need investment to help the facility save litigation costs in the long run.
  • Employing the use of a balanced scorecard method—a performance metric that can be used to improve business functions—to set quality of care targets
  • Reviewing financial controls by employing the use of cost and profit control, forecasting, and ratio analysis.

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Nursing Home Budget and Accounting Techniques

Creating a nursing home budget can be daunting, but it is an essential part of nursing home accounting. Today, a nursing home budget is typically created through accessing the information in nursing home software, which allows nursing homes to track their income and expenses and make informed decisions about how to allocate their resources.

Having previously discussed the importance of financial statements in healthcare, we will now discuss some budgeting techniques that long term care administrators can implement. Below are the four main types of budgeting methods that companies across all industries use.

1. Incremental budgeting

This is where nursing homes make small changes to their yearly budget. This is helpful for nursing homes that do not want to make radical changes to their operations. Of course, with incremental budgeting come potential issues. For instance, the inefficiencies of the previous budget can be easily passed onto the new budget. Also, the budget may ignore external changes (e.g., inflation).

2. Activity-based budgeting

This is a top-down approach to budgeting where nursing homes first identify the activities or goals that they need to attain and then allocate resources to those activities. Because activities are first considered before creating a budget, activity-based budgeting has a number of advantages over incremental budgeting, namely:

  • It forces nursing home leadership to think about the cost of each activity they perform
  • It takes into account external changes (e.g. inflation and nursing home census)
  • It is easier to make changes to the budget if a nursing home needs to cut costs

3. Value proposition budgeting

This is a bottom-up approach to budgeting where nursing homes first identify the needs of their residents and then allocate resources to meet those needs while considering previous nursing home financial statements. When creating a budget using value proposition budgeting, the budgeter should consider the amount included in the budget, whether or not value is being created for residents, and if the value of the service outweighs its cost.  

Value proposition budgeting has a number of advantages over other budgeting methods, namely:

  • It takes into account the unique needs of each nursing home’s residents
  • It is easier to make changes to the budget if a nursing home needs to cut costs
  • It is more responsive to changes in the nursing home industry

4. Zero-based budgeting

Zero-based budgeting is a bottom-up approach to budgeting where nursing homes first identify the needs of their residents and then allocate resources to meet those needs, without considering previous nursing home financial statements. This type of budgeting is helpful for nursing homes that are looking to make radical changes to their operations.

When creating a zero-based budget, nursing homes should always consider the nursing home’s mission and goals, the residents and their needs, the staff and their needs, and the nursing home’s resources.

Nursing home staff discussing the nursing home budget.
Zero-based budgeting is a bottom-up approach to budgeting where nursing homes first identify the needs of their residents and then allocate resources to meet those needs.

Zero-based budgeting has a number of advantages over other budgeting methods, such as:

  • It takes into account the unique needs of each resident
  • It is easier to make changes to the budget if a nursing home needs to cut costs
  • It forces nursing home leadership to think about the cost of each activity they perform
  • It is more responsive to changes in the nursing home industry

As long term care facilities implement the above budgeting techniques, leaders and financial departments should not forget the importance of financial statement analysis in healthcare. Additionally, nursing home administrators can implement management techniques in the process of conducting nursing home accounting and budgeting, including:

  • Thinking about department goals and strategies when budgeting
  • Getting involved in the budgeting process
  • Communicating budgeting plans to teams in the nursing home
  • Collecting feedback from teams and making amendments to the budget.
  • Monitoring the adherence to an approved nursing home accounting budget
  • Learning, planning, and evaluating outcomes of a budget 
  • Considering possible “what if” scenarios

The Importance of Nursing Home Accounting and Budgeting

There are four main types of budgeting that nursing homes can use as part of nursing home accounting: incremental budgeting, activity-based budgeting, value proposition budgeting, and zero-based budgeting. Each type of budgeting has its own advantages, so nursing homes must choose an appropriate budgeting method that best meets the facility’s needs. 

Additionally, nursing home administrators can adopt various management techniques to make sure that nursing home accounting and budgeting are carried out effectively. These techniques include getting involved in the budgeting process, communicating budgeting plans to teams, collecting feedback, and monitoring adherence to a budget. 

Nursing home accounting and budgeting are important tools that nursing homes can use to ensure the success of the facility. For maximum success when it comes to nursing home accounting, an effective long term care software that comes with financial modules should be implemented in the nursing home.

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Elijah Oling Wanga