Budgeting

According to the Institute of Cost and Management Accountants, Budgets may be

defined as “a financial and/or quantitative statement, prepared and approved prior to
a defined period of time, of the policy to be pursued during that period for the
purpose of attaining a given objective”.
Budgetary Control is defined as “the establishment of budgets relating to the
responsibility of executives to the requirements of a policy, and the continuous
comparison of actual with budgeted results, either to secure by individual action the
objective of that policy or to provide a basis for its revision”.
In practical terms, before budgets are prepared it is essential to decide on the aims
and objectives of the business and determine how such aims and objectives are to
be achieved. In terms of hotel operations, it is necessary to fix a profit target and
then prepare a number of budgets covering all income, expenditure, assets and
liabilities to ensure that the profit target is reached.

Before the preparation of any budget it is essential to examine all the key factors
(also known as limiting factors or Principal Budget Factors). These are factors,
which operate to limit the volume of output/sales. It will be found, of course, that in
market-oriented businesses the most important key factors operate on the revenue,
rather than cost side of the business. Thus, whilst in cost-oriented businesses, key
factors such as shortages of materials, non-availability of skilled labor and general
labor shortages are often the most critical key factors, in market-oriented
businesses such key factors are of secondary importance.

CLASSIFICATION OF BUDGETS
ACCORDING TO ACCORDING TO ACCORDING TO
TIME FUNCTION FLEXIBILITY

1. Long term budget 1. Sales budget 1. Fixed budget

2. Short term budget 2. Production budget 2. Flexible budget
3. Current budget 3.Purchase budget
4. Rolling budget 4. Personnel budget
5. R & D budget
6. Capital Expenditure budget
7. Cash budget
8. Master budget
Types of budget.
 1. ON THE BASIS OF PERIOD
a. Long term budget:
This budget is made keeping in mind long term capital expenditure.
b. Short term budget:
Short-term budget is prepared keeping in mind the short term operational
expenses.
c. Current Budget:
A budget for current expenditures, also known as the budget for revenue
accounts.
d. Rolling Budget:
Method in which a budget established at the beginning of an accounting period
is continuously amended to reflect variance that arises due to changing
circumstances.
2. FUNCTIONAL BASIS BUDGETS
a. Sales budget:
Sales budget is the primary budget. It is the most important budget to prepare and
the other budgets are prepared on the basis of the sales budget. It is an estimate of
future sales, often broken down into both units and amount. It is used to create
company sales goals. The Marketing budget is an estimate of the funds needed
for promotion, advertising and public relations in order to market the product or
service.
b. Production budget:
It estimates the number of units that must be manufactured to meet the sales
goals. The production budget also estimates the various costs involved with
manufacturing those units including labor and material. Production budget is a
detailed plan showing the number of units that must be produced during a period in
order to meet both sales and inventory needs.
c. Purchase Budget:
Purchase budget shows the amount of goods to be purchased from its suppliers
during the period with the amount expected to be involved in the cost along with the
procurement cost.
d. Personnel budget:
The budget meant for the development of the personnel in the organization keeping
in mind their training needs and also the salary structure.
 e. R & D budget:
Generally, budget used for development or enhancement of a product or service.
f. Capital Expenditure budget:
The budget for heavy expenditure, with recurring benefits to be received over a
period of years.
g. Cash budget:
The cash flow budget is a prediction of future cash receipts and expenditure for a
particular time period. It usually covers a period in the short term future. The cash
flow budget helps the business determine when income will be sufficient to cover
expenses and when the company will need to seek outside financing.
h. Master budget:
The Master budget is a summary of company’s plans that sets specific targets for
sales, production, distribution and financing activities. It generally culminates in a
cash budget, a budgeted income statement and a balance sheet. In short, this
budget represents a comprehensive expression of management’s plan for future and
how these are to be accomplished.
3. ON THE BASIS OF FLEXIBILITY
1. Fixed budget:This is the rigid budget and it is drawn on the assumption that
there will be no change in the budgeted time period. A fixed budget will be helpful
only when the actual level of activity is equal to budgeted level of activities.
According to the chartered institute of management accountants.” A fixed budget
is defined as a budget designed to remain unchanged irrespective of activity
actually attained.
2. Flexible budget:A flexible budget is a budget which is designed to change in
accordance with the level of activity attained. It is also called a variable budget as
the budget recognizes the difference in cost behavior namely fixed and variable
costs in relations to fluctuations in output or turnover. The budget is designed to
change appropriately with such fluctuation.The flexible budget allows more
meaningful comparison as it flexes to the actual volume. It computes what costs
should have been for the actual level of activity and the flexible budget has the
advantage of assisting the manager’s deal with uncertainty by allowing them to
see the expected outcomes for a range of activity.
TYPES OF BUDGET
1- MASTER BUDGET – A master budget is a comprehensive projection of how
management expects to conduct all aspects of business over the budget period,
usually a fiscal year. Most master budgets include interrelated budgets from the
various departments. Managers typically use these subset budgets to plan and set
performance objectives. Master budgets are generally used in larger businesses to
keep many managers on the same page.
2- OPERATIONAL BUDGET– The operational budget covers revenues and
expenses surrounding the day-to-day core business of a company. Operating budgets
are usually broken down into smaller reporting periods, such as weekly or monthly.
3- CASH FLOW BUDGET– A cash flow budget examines the inflows and
outflows of cash in a business on a day-to-day basis. It predicts a company’s ability
to take in more money than it pays out. Managers monitor cash flow budgets to
pinpoint shortfalls between expenses and sales.
4- SALES BUDGET- an estimate of future sales, often broken down into both units
and currency. It is used to create company sales goals.
5- REVENUE BUDGET– consists of revenue receipts of the government and the
expenditure met from these revenues. Tax revenues are made up of taxes and other
duties that the government levies.
6- FLEXIBLE BUDGET– Flexible budgets are, as their names suggest, variable
and flexible depending on the variability in the results expected in the future. Such
budgets are most useful for businesses that operate in an ever changing business
environment, and have the need to prepare budgets that are able to reflect the many
outcomes that are possible.
7– FIXED BUDGET– Fixed budgets are used in situations where the future income
and expenditure can be known, with a higher degree of certainty, and have been quite
predictable over time.
BUDGET CYCLE
The budget cycle refers to the life of a budget from creation to evaluation. It
consists of four phases.
1- Preparing the Budget
2- Approving the Budget
3- Executing the Budget
4- Evaluating the Budget
Budget Cycle
Steps in a Budgeting Cycle
1) Budget Preparation
2) Budget Execution
3) Budget Evaluation
Essential Activities of Budget Preparation Stage
1) Program And Budget Planning
2) Fund Procurement
3) This stage usually takes place between 6 and 12 months before the start of
the Fiscal Year
Program and Budget Planning Activities
1) Needs assessment and feasibility study
2) Setting goals and objectives
3) Program planning
4) Cost estimation
5) Budget development
Fund Procurement Activities
1) Submit budget proposal
2) Negotiate with funder
3) Budget adjustment and resubmission
4) Award and acceptance
Budget Execution Stage
1) Involves Room Division Manager
2) Occurs from first to last month of Fiscal year
Fiscal Management Activities
1) internal fund allocation
2) Manage Cash Flows
3) Financial Accounting and Recording, accounting
4) Program/service monitoring and reporting
5) Cost control and containment
6) Projecting Variances
Budget Assessment Stage
1) Involves performance assessments and audits’
2) Budget “recycling”
3) Usually takes place starting 2 month and after the end of the fiscal year
Performance assessment and Audit Activities
1) End of year financial statements
2) Financial Audit
3) Performance Audit
4) Cost/Financial Analysis
5) Reporting to external constituencies
Budget Recycling
1) Program re-planning
2) Continuing budgeting
3) Usually starts late in the fiscal year
Essential Information for Budget Development
1) Program Plan – must be fully developed and specific and be able to answer
a) What types of resources are needed for this program
b) What level of resources are needed for this program
2) External Demand and Constraints must be known in detail. Such as:
a) Policies and procedures of parent agency
b) Policies and procedures of funding agency
c) Government statutes and regulation
Budget Development Strategy
P Personnel S Supporting I Indirect
M Materials Services
E Employee P Payroll Taxes
Benefits S Space
Making of a Front Office Budget
The major elements in the budget preparation process are as follows:
a) Financial objectives
b) Revenue forecasts
c) Expense forecasts
d) Determination of forecasted net income
a) SETTING FINANCIAL AND OTHER OBJECTIVES
The operating budget process begins with the board of directors of the hospitality
organization establishing financial objectives. A major financial objective set by
many organizations, both hospitality and business firms in general, is wealth
maximization.
 Another objective may be to provide high quality service even if it means
incurring higher labor costs than allowable to maximize profits. Other objectives
set by hospitality organizations have been
(1) to be the top establishment in the hospitality industry,
(2) to be the fastest growing establishment, and/or
(3) to be recognized as the hospitality operation with the best reputation.
b) REVENUE FORECAST PROCESS
Forecasting revenue is the next step in preparing the operations budget. In order
for managers of profit centers to be able to forecast revenue for their
departments, they must be provided with information regarding the economic
environment and detailed historical financial results of their departments.
Information regarding the economic environment includes such items as:
1. Expected inflation for the next year
2. Ability of the operation to pass on cost increases to guests
3. Changes in competitive conditions-for example, the emergence of new
competitors, the closing of former competitors, and so on
4. Expected levels of guest spending for products/services offered by the
hospitality operation
5. Business travel trends
6. Tourist travel trends
For operations in foreign countries, in addition to the above considerations, other
factors such as wage/price controls expected for the next year and the political
environment may need to be considered.Historical financial information often
serves as the foundation from which managers build their revenue forecasts. This
type of budgeting has been referred to as “incremental budgeting.”From 2001 to
2004 (exhibit – 1) the amount of revenue increased from $l, 000,000 to $1,331,000;
however, the percentage increase was 10% for each year. Therefore, if future
conditions appear to be similar to what they were in prior years, the room’s revenue
for 2005 would be budgeted $1,464,100 which is a 10% increase over 2004.
Exhibit 1: Rooms Revenue Increases
Increase over prior year
Amount Amount %
2001 1,000,000 - -
2002 1,100,000 100,000 10
 2003 1,210,000 110,000 10
2004 1,331,000 121,000 10
An alternative approach to budgeting revenue based on increasing the current year's
revenue by a percentage is to base the revenue projection on unit sales and prices.
This approach considers the two variables of unit sales and prices separately. For
example, room revenue for. ---lodging property for years 2001 through 2004
appears in Exhibit 2.
Exhibit 2: Rooms Revenue 2001 through 2004
Year Room Sold Occ. % Average Room Room
2001 25,550 70 $40 $1,022,000
2002 26,280 72 42 1,103,760
2003 26,645 73 45 1,199,025
2004 27,375 75 49 1,341,375
An analysis of past financial information shows that occupancy percentage
increased 2% from 2001 to 2002, 1% from 2002 to 2003, and 2% from 2003 to
2004. The average room rates have increased by $2, $3, and $4 over the past three
years, respectively. Therefore, assuming the future prospects appear reasonable, the
considerations for forecasting room’s revenues for 2005 may use a 1% increase in
occupancy percentage and a $5 increase average room rate as the basis for
forecasting 2005 rooms revenues. The formula for forecasting room’s revenue is as
follows:
Rooms Available x Occupancy Percentage x Average Rate =
Forecasted Rooms Revenue
36,500 x 76 x $54 =
$ 1,497,960
c) ESTIMATING EXPENSES AND PROJECTING FIXED CHARGES:
The next step in the budget formulation process is estimating expenses. Since
expenses are categorized both in relation to operated departments (direct/indirect)
and how they react to changes in volume (fixed/variable), the forecasting of
expenses is similar to the approach used in forecasting revenue. However, before
department heads are able to estimate expenses, they must be provided information
regarding the following:
1. Expected cost increases for supplies, food, beverages, and other expenses
2. Labor increases including the cost of fringe benefits and payroll taxes
Department heads of profit centers estimate their variable expenses in relation to the
projected revenue of their departments. For example, historically, the food and
beverage department may have incurred food costs at 35% of food sales. For the
next year, the food department manager decides to budget at 35%; therefore, the
food sales multiplied by 35% results in the projected cost of food sales. Other
variable expenses are estimated similarly. Fixed expenses are projected on the basis
of past experience and expected changes. For example, assume supervisors in the
food department were paid salaries of $85,000 for the past year. The new salary
level of the supervisors is $90,000 plus another half-time equivalent to be added at a
cost of $8,000 for the next year. Thus, the fixed cost of supervisor salaries for the
next year is set at $98,000. Other fixed expenses are similarly projected.
While the profit center managers are projecting expenses for their departments the
service center department heads are estimating expenses for their departments. The
service departments in a hotel comprise the general expense categories of
administrative and general, marketing, property operation and maintenance, energy
costs, human relations, data processing, and transportation. Department heads of
service centers will estimate their expenses based on past experience and expected
future changes. Generally, the historical amounts are adjusted to reflect higher
costs. For example, the accounting department salaries of a hotel for 2001 were
$150,000. Salary increases for 2002 are limited to an average of 5%; therefore, the
2002 accounting department salaries budget is set at $150,000 + ($150,000 x 0.05)
= $157,500.
A relatively new budgeting approach, zero-base budgeting (ZBB), is applicable in
budgeting for service departments. ZBB, unlike the incremental approach, requires
all expenses to be justified. In other words, the assumption is that each department
starts with zero dollars (zero bases) and must justify all budgeted amounts. Let's
look at an example that illustrates the differences between the incremental and the
ZBB approaches to budgeting.
The marketing department of a hotel had a total departmental budget of $500,000 in
2001. In 2002, cost increases were expected to average 5%, and advertising in the
monthly city magazine is expected to cost $500 per month. Under the incremental
approach the marketing budget would be set at $531,000, determined as follows:
$500,000 + 500(12) + 500,000(.05) = $531,000
The next step in the budget formulation process is the projection of fixed charges.
Fixed charges include depreciation, insurance expense, property taxes, rent expense,
and similar expenses. These expenses are fixed and are projected based on past
experience and expected changes for the next year.
For example, assume interest expense for a hotel was $215,000 for 2001. Exhibit 3
illustrates how the interest expense budget for 2002 is determined by estimating
interest expense based on current and projected borrowings. Based on calculations
in Exhibit 3, the interest expense budgeted for 2002 is $160,000.
Exhibit 3: Interest Expense Budget 2002
Debt Principal Interest Time Amount
Mortgage $500,000 12% Year $60, 000
Loan from 500,000 18 Year 90,000
Working 200,000 20 6 months 10,000
Total $160,000
(d) DETERMINATION OF FORECASTED NET INCOME
The final step is for the controller to formulate the entire budget based on
submissions from operated departments and service departments. The forecasted net
income is a result of this process. If this bottom line is acceptable to the board of
directors, then the budget formulation is completed. If the bottom line is not
acceptable, then department heads are required to rework their budgets to provide a
budget acceptable to the board. Many changes may be proposed in this "rework"
process, such as price changes, marketing changes, and cost reductions, just to
mention a few)

Principal Key Factor (Factors affecting budget planning)

 Accommodation available
This is one of the most critical key factors operating in hotels. When all the rooms
are sold, it is impossible to increase the volume of room sales except through an
increase in room rates. When the sales budget is being prepared it is essential to
examine patterns of occupancy to establish what level of room sales may
realistically be expected during the forthcoming budget year. Where there is a high
degree of room sales instability, evidenced by pronounced swings in occupancy
rates, it is desirable to examine the possibility of shifting demand from peak to off-
peak periods.
 Seating capacity
This is probably the most powerful key factor operating in restaurants and hotel
restaurants. The effects of this key factor may, to some extent, be offset by
increasing the number of waiting staff and by appropriate in-company training
programmers. Another possibility and this has been tried successfully in many
establishments) is to offer the waiting staff a bonus based on the number of covers
served. The exact solution will, in the end, depend on the circumstances of each
establishment. In the majority of expensive restaurants most clients will arrive
between 7.30 and 8.30 p.m., and will not leave before 10.00 or 10.30 p.m., by
which time it is too late to expect many new customers. In such circumstances it
would not make much sense to even attempt to increase restaurant occupancy. It is,
of course, entirely different in low ASP establishments where the customer's main
objective is to secure a palatable meal-and no more. Speedier service will, in such
establishments, be reflected in improved restaurant occupancy and the volume of
sales. Various pricing devices have been extensively employed by high ASP
establishments to combat this key factor. Many restaurants, which offer a dinner
dance, charge about 20 per cent more towards the end of the week than at the
beginning of it to shift demand to the less busy periods of the working week. Others
impose a minimum charge during the busy part of the week in order to discourage
low spenders and, generally, shift demand to slacker periods.
 Shortage of labor
This particular key factor is potentially powerful, but there is no evidence that it
exerts much influence on the volume of hotel and restaurant sales. In some
locations labor shortages may, in fact, be a severe limiting factor. It seems that 'such
locations are rather exceptional.
 Quality of management
This is an important key factor. Its operation is not, however, evident over shorter
periods. Over longer periods, of course, the quality of management will have a
direct and powerful influence on the volume of sales.
 Consumer demand
Consumer demand is often found to be a potent key factor. Its operation may be due
to several reasons.
The price level of the establishment may be too high, and this may result in a low
ASP or NoC or both. Where the price level is thought to be the reason for
insufficient consumer demand, it is essential to subject all the tariffs and menus to
thorough scrutiny, and examine room sales, menu items offered to customers, as
well as all profit margins.Insufficient consumer demand may also be due to
competition. In order to remedy this it is imperative to examine the external
environment of the business and answer questions such as the following: Who are
our main competitors? What are their strengths? What is our customers' profile?
What is it that draws the customer to one establishment rather than another?Where
insufficient consumer demand obtains over long periods, it is essential to undertake
a thorough re-appraisal of the whole marketing policy in relation to the existing
location. Quite frequently new restaurants are opened in unsuitable locations simply
because the proprietors did not undertake a market feasibility study. It should be
pointed out that the greater the degree of market orientation of an establishment the
greater the need for a proper market feasibility study.
 Other key factors
In addition to the key factors dealt with above, several others may operate to restrict
the volume of sales. Insufficient capital may make it impossible for a company to
acquire further units and thus increase its turnover. For the same reason an
establishment may find it difficult to maintain its facilities at an appropriate level of
comfort, etc., through insufficient expenditure on repairs, replacements and other
items which add to the decor and atmosphere of the establishment. Management
may, as a result of its own policy, exclude certain types of customer, e.g. coach
tours. In self-service operations cash collection and the time taken by customers in
the selection of food items are both important limiting factors.
From what has been said it will be clear that there are a variety of key factors. It is
for each establishment to identify the key factors limiting its sales and take steps to
remove their negative effect on the volume of sales.
Capital and Operating Budgets
a) Operating Budget
The method used in the preparation of hotel and catering budgets is. I now fairly
well established. The first step is to predetermine the volume of sales. In order to do
this it is essential to examine the following: (a) past sales; (b) current trends; and (c)
relevant economic and political aspects. .
The analysis of past sales is always the starting point in the preparation of any sales
budget. I t is necessary to establish the overall trend in the volume of sales as well
as the trends in the principal elements of the sales mix. It is useful to calculate the
percentage change in room, food and beverage sales as well as changes in the
turnover of minor operated departments over the last two or three years. I t will not
be enough to consider only the absolute sales values. The volume of sales depends
on the number of units sold and the price per unit. It follows, therefore, that it is
equally important to establish trends in room occupancy, room rates, the number of
covers sold and the average spending power.
In addition to past sales, it is essential to look at the reality of the current situation,
and decide what trends exist which are likely to influence the volume of sales over
the next budget year. Points, which are relevant in this context, are: trends, in hotel
and restaurant occupancy; composition of guests by country of origin; trends in the
sales mix of the establishment, etc.
The state of the national economy and political developments are sometimes more
critical than the internal environment of the business. Government economic and
fiscal policies have a powerful effect on the level of disposable incomes of the
population. Similarly government decisions have an important effect on the state
and prosperity of particular industries and regions. Hotels and restaurants, which
cater for foreign tourists, have to look beyond their frontiers, and consider
developments overseas and their effect on the inflow of foreign tourists.
When the budgeted volume of sales has been predetermined, it is necessary to
decide what turnover will be achieved by every revenue producing department.
From the budgeted room, food and beverage sales as well as sales of minor revenue
producing departments will be deducted. (Controllable) departmental expenses.
Thus the budgeted departmental profit for each revenue producing department is
arrived at. Where there is an appreciable volume of banqueting sales, a separate
budget will be prepared for that department.
The second step is to deal with the multiplicity of (essentially fixed) expenses such
as administration and general expenses; advertising and sales promotion; heat, light
and power; repairs and maintenance; depreciation, rates and similar expenses. All
these are frequently referred to as ‘undistributed operating expenses’, because in
most situations no attempt is made to distribute or apportion them to the revenue
producing departments.
From the point of view of budgetary control two methods of approach are possible
here. In smaller units all such expenses may be predetermined for the next budget
year without attempting to allocate/apportion them to departments. In larger units it
is possible to analyze such expenses as between those which are controllable and
those which are not: and allocate the controllable items to the respective non-
revenue producing departments such as: accounts; control; personnel and training
and maintenance. The uncontrollable expenses would then appear separately and be
the responsibility of top, rather than departmental, management. Which of these two
solutions is chosen depends on the size and the special circumstances of each hotel.
As far as the basic method is concerned there is no difference between hotels and
restaurants.
The operating budgets dealt with above may be of two kinds: fixed budgets and
flexible budgets. A fixed budget is one, which is not influenced by the level of
activity. Thus most of the budgets for the undistributed operating expenses (e.g.
administrative and general expenses, advertising and sales promotion, repairs and
maintenance, etc.) will be fixed budgets because changes in hotel and restaurant
occupancy will not have a direct influence on them. With regard to flexible budgets
the position is quite different. Expenditure on food, beverages, the cost of sales in
the minor operated departments, part-time and casual labor, etc. will be directly
influenced by the volume of sales. Such budgets will, therefore, be dependent and
directly influenced by the level of activity. All establishments will, therefore, have
some fixed and some flexible budgets, depending on the response of their operating
cost to changes in the volume of sales.
b) Capital Budgets
Examples of capital budgets have already been given. The most important capital
budgets in the context of hotel and catering operations are cash budgets and capital
expenditure budgets.
c)Cash budget
The main objective of the cash budget is to predetermine the cash inflows, cash
outflows, and the resulting cash balance over a future period.In order to determine
future cash inflows it is necessary to identify the sources of cash inflows. These will
normally be: room, food and beverage sales and sales of the minor operated
departments. Each of these sources may generate cash and credit sales. Cash sales
constitute an immediate cash inflow. Credit sales, however, take time to result in a
cash inflow. Thus credit sales in the banqueting department may take an average of
almost two months before conversion into cash (i.e. payment by banqueting
customers). On the other hand, credit room sales may take an average of only a few
days. It is necessary, therefore, in the case of credit sales to take into account the
average time lag in relation to each element of the credit sales mix.
Cash outflows may be categorized variously depending on the actual system of
budgetary control in operation. We may divide the total cash outflows under
headings such as: food costs, beverage costs, cost of sales of minor operated
departments, wages and salaries and other expenditure. The alternative, which is
preferable and more generally used in larger units, is to divide the total cash outflow
under headings such as: departmental expenses (distinguishing between cost of
sales, departmental wages and salaries and other departmental expenses),
controllable departmental expenses of non-revenue producing departments and
other expenses.
In most situations it will be found that there are non-routine receipts and payments
e.g. dividends received on company investments, bank interest received payments
for fixed assets, etc. It is essential to make provision for such non-routine items in
each cash budget.
d)Capital expenditure budget
The capital expenditure budget will make provision for expenditure on kitchen plant
and equipment, furniture, extensions to premises and similar items. In most cases
the capital expenditure budget will extend over one year. Sometimes, however, it
may cover a period of time in excess of one year, particularly in the case of
extensions and more substantial projects which take a long time to complete.
This particular budget will, to some extent, be affected by the cash budget as,
inevitably; any proposed capital expenditure must depend on the availability of cash
over the budget period. The cash budget will, therefore, have to be consulted before
a decision is made on the timing of each item of capital expenditure. All new
acquisitions of plant, furniture, etc. listed in the capital expenditure budget will be
incorporated in the budgeted balance sheet.
e)Other capital budgets
Debtors and creditors budgets are important elements of the system of budgetary
control in many organizations. Hotels and restaurants, however, have a high
proportion of cash and short-term credit sales and keep relatively low stocks and,
for these reasons, budgets for debtors and creditors are not usually prepared. In any
case, figures of the outstanding debtors and creditors may be obtained from the cash
budget, as illustrated later in this chapter.
Similarly, one does not often prepare a budget for food and beverage stocks. Where
a system of budgetary control is in operation a standard stock level for food and
beverages is fixed, and this is quite adequate for most purposes, including the
construction of the budgeted balance sheet.
BUDGETRY CONTROL
Budgetary control as the term suggests, is the financial control through budgets,
which means fixing responsibility for budgeted results to the managers concerned.
Another very important aspect of budgetary control is perpetual comparison of
budgeted figures to actually achieved figures of that specific period for which the
budget was prepared.
Budgetary control has been defined as the establishment of budgets relating to the
responsibilities of the executives to the requirement of a policy and the continuous
comparison of actual with budgeted results either to secure by individual action
the objective of that policy or provide a basis for its revision’’. According to Glen
A.Welsch ‘’ Budgeting refers to the entire process of budget, planning,
preparation, control, reporting, utilization and related matters’’.
Budgetary control involves the use of budgets and budgetary reports throughout the
period to coordinate evaluate and control day to day operations in accordance with
the goals specified in the budget.”The most important aspect of budgetary control is
planning which goes into the making of budget and its effectiveness in the control
of Hotel operation.
Objectiveness of Budgetary Control
1. To give a practical expression to the aims and objectives of the business.
2. To provide a detailed plan of the Front Office operation with respect to a
particular trading period.
3. To ensure better cooperation of various department /sub –departments
(functions of the business)
4. To set ‘’benchmarks’’ ( standards) against which the managerial performance
is to be measured
5. To ensure an economical use of the resources of the business
6. Budgeting serves to clarify the programme, measure efficiency and provide
plans to all concerned.
Essentials of Sound Budget (Budgetary control)
1. Budgeting process must be backed by the Chief Executive of Organization
2. Organizational goals must be clearly stated and quantified and further
divided into functional goals
3. People responsible for execution of the budget must be involved in its
preparation.
4. Budgets must be realistic, continuous and must cover all relevant aspects
5. Budgeting system must be based on information, communication and
participation
6. Clear responsibilities for effective budget implementation must to be
established
Advantages of Budget Control
1. Eliminates uncertainty: It provides a planned approach to every activity of
Hotel within which expenses have to be incurred and results achieved .This
eliminates uncertainty and ensures that the hotel is not caught unaware in the
face of an actual situation.
2. Top Management Involved: Since top management are involved in making the
budget, this insures against budgets being framed according to subjective
standards and a single individual.
3. Good Incentives to workers: Budgetary control system also enables the
introduction of incentive schemes of remuneration. The comparison of
budgeted and actual performance will enable the use of such schemes.
 4. Optimum use of capital resources: It guides the hotel to use its capital
resources in the most profitable manner.
5. Easy availability of working capital: The cash receipts and expenses budget
ensures that sufficient working capital and other necessary resources for
efficient functioning of the business are available.
6. Effective coordination: The working of different departments and sectors is
properly coordinated. The budgets of different departments have a bearing on
one another. The co-ordination of various executives and subordinates is
necessary for achieving budgeted targets.
7. Responsibility can be pinpointed: This pinpoints the person on whom the
responsibility can be fixed.
8. Highlight deviation: The deviations in budgeted and actual performance will
enable the determination of weak spots. Efforts are concentrated on those
aspects where performance is less than the stipulated.
9. Optimum utilization of man, machine and material: Budgeting aims at
distributing production programs according to production capacity and makes
most effective utilization of men, material and machine possible.
10. Tool for measuring performance: By providing targets to various
departments, budgetary control provides a tool for measuring managerial
performance. The budgeted targets are compared to actual results and
deviations are determined. The performance of each department is reported to
the top management.
Limitations of Budgeting
1. Budgets are estimates and can never be hundred percent accurate. They are as
good as the data and forecasts on which they are based. Inflation and rapid
changes in the business environment tend to distort budget data before they
are put into operation.
2. The budget is simply a tool to efficient management and not a substitute for it.
An efficient system of budgeting can achieve nothing. Without effective
planning and control.
3. Budget cannot guide as to what action should be taken. Similarly , it is not an
outlived program that must be adhered to under all conditions
4. Sound system of effective supervision is necessary and the lack of it would
make the budget ineffective.
 5. Discourage Efficient Persons: Under budgetary control systems the targets are
given to every person in the organization. The common tendency of people is
to achieve the targets only. There may be some efficient persons who can
exceed the targets but they will also feel content by reaching the targets. So
budgets may serve as constraints on managerial initiatives.
6. Budgeting is a time consuming process and involves expenses.
7. Problem of coordination: The success of budgetary control depends upon the
coordination among different departments. The performance of one
department affects the results of other departments. To overcome the problem
of coordination a Budgetary Officer is needed. Every concern cannot afford to
appoint a Budgetary Officer. The lack of coordination among different
departments results in poor performance.
8. Depends on Support of top management: Budgetary control system depends
upon the support of top management. The management should be enthusiastic
for the success of this system and should give full support for it. If at any time
there is a lack of support from top management then this system will collapse.
9. Conflict among different departments: Budgetary control may lead to conflicts
among functional departments. Every departmental head worries about his
department goals without thinking of business goals. Every department tries to
get maximum allocation of funds and this raises a conflict among different
departments.
10. The initiative and creativity in an employee may be hampered if the
management follows the budget strictly.

BUDGETING FOR OPERATIONS

The most important long term planning function that the front office performs is
budgeting front office operations. The hotel's annual operations budget is a profit
plan that addresses all revenue sources and expenses items. Annual budgets are
commonly divided into monthly plans that are divided into weekly (sometimes
daily) plans. These budget plans become standards against when management can
evaluate the actual results of operations. In most hotels, room revenues are greater
than food, beverage, banquet or any other revenues. In addition, room’s division
profits are usually greater than those of any other division. Therefore, an accurate
room’s division budget is vital to creating the overall budget of the hotel.The
budget planning process requires the closely coordinated efforts of all management
personnel. While the front office manager is responsible for room revenue
forecasts. The accounting division staff will be counted on to supply department
managers with statistical information processes. The accounting division staff is
also responsible for co-coordinating the budget plans of individual department wide
operations budgets for top management’s review. The General Manager and
controller typically have a budget report for approval by the hotels owners. If the
budget is not satisfactory, elements requiring charges may be written to the
appropriate division managers for review and revision.The front office manager’s
primary responsibility in budget planning is forecasting room’s revenue and
estimating related expenses. Room’s revenue is forecasted with input from the
reservations manager’s, while expenses are estimated with input from all
department managers in the rooms divisions.

FORECASTING ROOM REVENUE

Historical financial information often serves as the foundation on which front
office managers build rooms revenue forecasts. One method of room revenue
forecasting involves an analysis of room’s revenue from past periods. Dollar and
percentage differences are noted and the amount of room’s revenue for the budget
years is predicted.
For example, the table shows yearly increases in net room’s revenue for the Emily
Hotel. For the years 2001 to 2004, the amount of room’s revenue increased from
$1,000,000 to $1,331,000, reflecting a 10 percent yearly increase. If future
conditions appear to be similar to those in the past, the rooms revenue for 2005
would be budgeted at $1,464,100, a 10 percent increase over the 2004 amount.
Rooms Revenue Summary for the Emily Hotel
YEAR ROOMS INCREASE OVER PRIOR YEAR %
2001 $1,000,000 - -
2002 $1,100,000 $1,00,000 10%
2003 $1,210,000 $1,10,000 10%
2004 $1,331,000 $1,21,000 10%
Another approach to forecasting rooms revenue bases the revenue projection on
past room sales and average daily room rates. The table presents room’s revenue
statistics for the 120 room Bradley hotel from 2001 to 2004. An analysis of these
statistics shows that occupancy percentage increased three percentage points from
2001 to 2002, one percentage point from 2002 to 2003, and one percentage point
from 2003 to 2004. Average daily room rates increased by $2, $2, and $3
respectively over the same periods. If future conditions are assumed to be similar to
those of the past, a room's revenue forecast for 2005 may be based on a one
percentage increase in occupancy percentage (to 76 percentage) and a $3 increase in
the average daily room rate (to $60). Given these projections, the following
formula can be used to forecast room’s revenue for the year 2005 for the Bradley
Hotel.
Rooms Revenue Statistics for the Bradley Hotel
YEAR ROOMS AVERAGE NET ROOMS OCCUPANCY
2001 30,660 $50 $1,533,000 70%
2002 31.974 $52 $1,662,648 73%
2003 32,412 $54 $1,750,248 74%
2004 32,850 $57 $1,872,450 75%
Forecast rooms revenue = rooms available X occupancy percentage X Average
daily rate
= 43,800 X .76% X $60
= $1,997,280
The number of rooms available is calculated by multiplying the 120 rooms of the
Bradley Hotel by the 365 days of the year. This calculation assumes that all rooms
will be available for sale each day of the year. This will probably not be the case,
but it is a reasonable starting point for projection. Note also that at some point
occupancy will not be able to grow any further, and may actually decline. For
example, new competitors may enter the market, taking occupancy away from the
hotel. Management needs to anticipate this shift and adjust its forecast to take into
account the increased competition. The same logic applies to projecting rate
growth. Hotel management may decide to hold or even reduce rates to maintain or
improve occupancy when new competitors enter the market.
This simplified approach to forecast to forecasting rooms revenue is intended to
illustrate the use of trend data in forecasting. A more detailed approach would
consider the variety of different rates corresponding to room types, guest profiles,
days of the week, and seasonality of business. These are just a few of the factors
that may affect room revenue forecasting.

ESTIMATING EXPENSES’
Most expenses for front office operations are direct expenses in that they vary in
direct proportion to room’s revenue. Historical data can be used to calculate an
approximate percentage of room’s revenue that each expense item may represent.
These percentage figures can then be applied to the total amount of forecasted
room’s revenue, resulting in dollar estimates for each expenses category for the
budget year.
Typical rooms division expenses are patrol and related expenses, guestroom laundry
(terry and linen), guest supplies (bath amenities, toilet tissue), hotel merchandising
(in-room guest directory and promotional brochures), travel agent commission and
direct reservation expenses, and other expenses. When these costs are totaled and
divided by the number of occupied rooms, the cost per occupied room is
determined. The cost per occupied room is often expressed in dollars and as a
percentage. The table presents expense category statistics of the Bradley Hotel
from 2001 to 2004, expressed as percentage of each year’s room’s revenue. Based
on this historical information and management’s current objectives for the budget
year 2005, the percentage of rooms revenue for each expense category may be
projected as follows, payroll and related expenses 17.6%, laundry, linen and terry,
and guest supplies, 3.2%, commissions and reservation expenses, 2.8%, and other
expenses, 4.7%.Expenses category as percentage of Rooms Revenue for the
Bradley Hotel
YEAR PAYROLL & LAUNDRY COMMISSIONS OTHER
2001 16.5% 2.6% 2.3% 4.2%
2002 16.9% 2.8% 2.6% 4.5%
2003 17.2% 3.0% 2.6% 4.5%
2004 17.4% 3.1% 2.7% 4.6%
Using these percentage figures and the expected room’s revenue calculated
previously, the Bradley Hotel’s room division expenses for the budgeted year are
estimated as follows.
Payroll and related expenses: $1,997,280 X .176 = $351,521.28
Laundry, linen, terry, and guest supplies: $1,997,280 X .028 = $63,912.96
Commissions and reservation expenses: $1,997,280 X .028 =$55,923.84
Other expenses: $1,997,280 X .047 = $93,872.16
In this example, management should question why costs continue to rise as a
percentage of revenue. If costs continue to rise (as a percentage, not in real dollars),
profitability likely will be affected. Therefore, one of the outcomes of the budget
process will be to identify where costs are increasing as a percentage of revenue.
Then, management can analyze why these costs are increasing disproportionately
with revenue and develop a plan to address the issue.
Since most front office expenses vary proportionately with room revenue ( and
therefore occupancy), another method of estimating these expenses is to estimate
variable costs per room sold and then multiply these costs by the number of rooms
expected to be sold.

REFINING BUDGET PLANS

Departmental budget plans are commonly supported by detailed information
gathered in the budget preparation process and recorded on worksheets and
summary files. These documents should be saved to provide an explanation of the
reasoning behind the decisions made while preparing departmental budget plans.
Such records may help resolve issues that arise during the budget review. These
support documents may also provide valuable assistance in the preparation of future
budget plans.
If no historical data are available for budget planning, other sources of information
can be used to develop a budget. For example, corporate headquarters can often
supply comparable budget information to its chain-affiliated properties. Also,
national accounting and consulting firms can usually provide supplemental data for
the budget development process.
Many hotels refine expected results of operations and revise operations budgets as
they progress through the budget year. Reforecast is normally suggested when
actual operating results start to vary significantly from the operations budget. Such
variance may indicate that conditions have changed since the budget was first
prepared. While operating budgets are seldom changed once they are approved by
a hotel’s management and owners, reforecast provides a more realistic picture of
current operating conditions.