Operations budgeting

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Operations budgeting

  1. 1. Operations Budgeting and Cost-Volume-Profit Analysis BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 1 /25
  2. 2. Recap of Pricing Methods• Explain the Subjective Pricing methods.• Itemize the Objective Pricing methods.• Recall the formulas for All Simple Mark Up pricing methods.• Recall calculation formulas of Contribution Margin Pricing method, Ratio Pricing method, Simple Prime cost method and Specific Prime cost Method. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 2 /25
  3. 3. Scope of the Session1. The Budget Process Overview.2. Multi-Unit Budgeting.3. Calculate Projected Revenue Levels.4. Determine Profit requirements.5. Calculate Projected Expense Levels.6. Budget Development Process.7. Variance Analysis. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 3 /25
  4. 4. The Budget Process Overview• The Operating Budget.• Plan.• Estimates.• Meet the financial requirements and Goals.• Long term, Short Term, Capital and Cash.• Short Term is the most commonly used in Food and Beverage Business. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 4 /25
  5. 5. The Budget Process Overview• What happens if the expense category gets overshot.• What happens if the income levels fall below the forecasted levels.• How does one compare Income and Expense with the actual % age levels.• Why is it important to have a reasonable budget projection in the F & B business. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 5 /25
  6. 6. The Budget Process Overview• The Main Goals set are for:1. Revenue.2. Profit Requirements.3. Operating Expenses.• Goals must be attainable and must not compromise with establishments quality requirements. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 6 /25
  7. 7. The Budget Process Overview• The Budget evaluates the past to plan corrective actions for the future as well.• The current period budget is used often to develop budgets for the next fiscal period.• It helps in defining responsibilities, and empowers management personnel to meet the financial ends and be accountable for their actions. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 7 /25
  8. 8. Multi-Unit BudgetingBottom-up budgeting• Operating budgets assembled at unit level• Unit-level budgets “rolled” up the organization• Budgets geared specifically to individual operations• Creates “ownership” at unit manager level BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 8 /25
  9. 9. Bottom Up Budgeting• Bottom-up budgeting, also called participatory budgeting, is a somewhat modern approach to planning the use of a companys financial resources.• Reserved for somewhat larger organizations, it differs from top-down budgeting where the high level executives BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 9 /25
  10. 10. Top Down Budgeting• Operating Budgets developed at Corporate Levels.• Budgets are passed down to unit levels.• Corporate profit requirements made part of individual unit plans. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 10 /25
  11. 11. The Top Down Budget• A top-down budget process means that a binding decision on budget aggregates is taken before allocating expenditure within that aggregate.• In each step of the budget process, the allocation of expenditure is subject to the constraints that have been set at the previous stage. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 11 /25
  12. 12. Top Down and Bottom Up BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 12 /25
  13. 13. Budget Development Process• The Budget development process is based on three important steps to minimize reforecasting unless the revenue earned reduces.• Calculate Projected revenue levels.• Determine profit requirements.• Calculate project expense levels BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 13 /25
  14. 14. 1. Calculate Projected Revenue Levels1. The easiest way is to first take the average check and multiply by Projected customers. • Revenue histories • Current factors • Economic variables • Other factors • Special concerns in forecasting beverage revenue BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 14 /25
  15. 15. 1. Calculate Projected Revenue Levels• Revenue Histories: Past revenue level analysis and trends, commonly in times where there is a consistent rise every year.• Current factors: New competition, Government projects, liability laws.• Economic Variables: Inflation, Public Habits and life style change. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 15 /25
  16. 16. 1. Calculate Projected Revenue Levels• Other factors: Mix between connected revenue from Room and derived revenue of F & B. Any mix of revenue like F & B connected to banquet revenue if not documented separately may lead to a merger.• Special Concerns: Mix in the beverage product sales estimates because there is no segregation of Beverage sales. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 16 /25
  17. 17. 2. Determine Profit requirements• Two basic ways to treat profits when budgets are developed:1. Profit = Revenue – Expenses.2. Revenue - Required Profit = Allowable operating expenses.a. Treats Profit as a cost b. Generates revenue.c. Plan for desired profit. d. Have money to meet the expenses required to generate revenue. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 17 /25
  18. 18. 3. Calculate Projected Expense Levels• Fixed Costs: • Variable Costs:• Management • Food Costs. Salaries • Beverage Costs.• Rent Expense. • Labor Costs.• Insurance. • Supplies Costs.• Property Taxes• Depreciation.• Interest Expense BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 18 /25
  19. 19. 3. Calculate Projected Expense Levels• Profits• Profit Margin Ratio = Net Income Total Revenue• Return on Investment= Net Income Average Owners Equity• Return on Assets = Net Income Average Total Assets BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 19 /25
  20. 20. Budget Development Process Calculate projected expense levels. • Simple mark-up method • Percentage method • Zero-based budget calculations. • Special Concerns in estimating beverage expenses in beverage revenue. • Estimating other expenses. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 20 /25
  21. 21. Estimating Expenses—Mark-Up Method• Estimates future expenses on basis of current expense levels.• Amounts of current expense levels are increased/decreased for new operating budget.• Assumes all costs were reasonable during current year.• Inefficiency could be extended into the new budget. BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 21 /25
  22. 22. Estimating Expenses—Percentage Method• Based on current percentage of each expense relative to revenue• Applies same cost percentages of current year to upcoming year• Assumes all costs were reasonable during current year• Inefficiency could be extended into the new budget BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 22 /25
  23. 23. Estimating Expenses—Zero-Based Method• Builds new budgeted expenses from a zero base• Current and previous years’ amounts/percentages are ignored• Each expense item justified on its own merit• Avoids extending inefficiency into new budget but requires considerable time/effort BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 23 /25
  24. 24. Example• Exhibit-2,3, 4,5 & 6- Page 109 Operations Budgeting and Cost-Volume- Profit analysis.• Planning and Control for Food and Beverage Operations 7th Edition, 2009 American Hotel and Lodging Association 2113 N High street, Lansing Michigan 48906-4221. ISBN: 978-0-86612-339-6• Jack. D. Ninemeir BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 24 /25
  25. 25. Variance AnalysisIdentifies differences between budgetedplans and actual resultsEquations below: positive variances arefavorable; negative variances areunfavorable Revenue Variances = Actual Amount − Budgeted Amount Expense Variances = Budgeted Amount − Actual Amount BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting Monday, October 29, 2012 Slide 25 /25
  26. 26. Questions  Comments BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations BudgetingMonday, October 29, 2012 Slide 26 /25

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