2. Introduction
• It is essential to acquire the skills and knowledge in preparing budget
information for hospitality businesses thus, this learning unit enabling you
to understand and participate in the budgeting process across the hospitality
and tourism industries. However to begin with, it is important to understand
why business must budget and identify the types of budgets that can be
created and the accounting terms that are often used in developing budget.
• The goal of a business is to manage its activities of buying, selling and
paying expenses to make a profit. Budgets are the roadmaps of how you
intend to start the year and how you arrive with a profit at the end. Small
and medium business owners should create two types of plans such as
operational and capital. Although the two plans are not alike and they serve
different purposes hence they do connect with each other. Changes in one
budget can lead to modifications in the other.
3. The Operational Budget
• An operational budget is a detailed projection of the
company’s revenues and expenses for the upcoming
fiscal year. These budgets record the expected cash
flows from the firm’s buying and selling activities
and their effects on the income statement.
Operational budgets generally covers one fiscal year.
4. The Capital Budget
• Suppose that some of your equipment is getting old and
maintenance costs are becoming more frequent. The
solution is to spend $100,000 on a new machine but where
will that money come from? Do you borrow from the bank
or finance it with internal cash flow? Constructing a capital
budget will provide the answer to this question. Future
needs for purchases of fixed assets are incorporated into a
capital budget. These budgets identify the assets needed, the
sources of funding and expected returns. Capital budgets
affect changes on the long-term assets portion of the balance
sheet.
5. Differences between Operational and Capital
Budgets
• Capital budgets are paid out of future cash flows from the
projects and they represent the sources of funding and the
purchases of the fixed assets. Planning for capital acquisitions
is generally done for one to three years. An operational budget
projects the activities for the firm in buying, selling and paying
bills and usually done on an annual basis.
6. Interactions between Operational and Capital
Budgets
• The purchases of fixed assets as project by the capital budget will have an impact
on the operational budget. The new equipment may reduce maintenance costs and
increase revenues because the production processes are more efficient. These
changes must be coordinated with the capital budget and reflected on the operation
budget. If the company wants to purchase fixed assets then some of the cash
needed may have to come from the firm’s normal operations and cash flow. If so,
an operational budget has to incorporate this requirement foe cash in addition to
paying normal expenses.
• Budgets are essential management tools for all small business owners. Although
most people think only about operational budgets but capital budgets are also
important. Indeed, as your company grows then you will need additional fixed
assets and you must make preparations to fund these acquisitions. Operational and
capital budgets are related hence, business owner must balance the effects they have
on other.
7. • The hotel, restaurant and resort enterprises prepare annual budgets to help the
management team to operate the hotel more efficiently. The success in the
hospitality business requires careful management of expenses more particularly
labor cost. Hotels and resorts have relatively large staffing requirements. It is
important to sufficient human resources on property to deliver excellent customer
service but not be overstaffed, which can reduce the hotel’s profitability.
8. The Budget Planning Process
• The budget in businesses are prepared using
spreadsheet software. Financial models forecasting
revenues are created along with the expenses that
will be incurred to generate these revenues and
provide high-quality customer service for hotel
guests. Budgeting is part of the overall planning
process the hotel undertakes, which includes
strategic marketing planning and planning for capital
expenditures.
9. Who Should Be Involved in the Budget
Preparation?
• A hotel is organized into a series of departments. The
managers of each of these departments create their own
budgets The head of the housekeeping department has
different expenses to manage than the bar manager in his
area. The hotel’s financial staffs are responsible for
consolidating the department budgets into an overall hotel
budget. The general manager reviews the consolidated budget
with the other managers and makes adjustments based on
these discussions.
10. Key Variables in Forecasting Room Revenue
• The revenue forecast for a hotel is driven by two key variables: occupancy rate and
or average daily rate (ADR) which means the average cost of staying in a hotel
room for one night. Occupancy rate varies by day of the week, by month and by
season. Resort hotels usually have a high season, when occupancy is high due to an
influx of tourists to the area. Hotels that cater to business travelers often have
higher occupancy during the work week with a drop-off on weekends. Average
daily rate similarly varies. Hotels offer discounted room rates during off-peak times
to encourage higher occupancy. Increasing the occupancy assumption in the budget
requires increasing expenses, because the additional occupied rooms have to be
cleaned . Increasing ADR does not increase expenses.
11. Research Required in the Preparation of
Operational Budget
• A hotel budget’s accuracy is affected by the effort made to gather market data.
Budgeting requires predicting how the core markets the hotel serves will change
over the upcoming year and the direction of the overall economy. Even though the
budget process is a once-a-year task, gathering information about the hotel industry
and the local economy is an on-going process. This gives managers a clear idea of
what the future may look like when they make assumptions for the key variables in
the budget.
12. Common Mistakes in Budget Planning
Process
• Rushing the planning process can result in a budget that is a less useful
management tool than it should be. Managers have a tendency to build their
expense budgets by simply taking last year’s numbers and adjusting them upward
by an assumed percentage, such as 5 per cent. A better approach is to build a
completely new budget each year, with justification for each spending. This
approach focuses management’s attention on constantly looking for ways to
improve the hotel’s operation rather than being satisfied with how things have
been done in the past. Marketing expenditures from the prior year should be
scrutinized to make sure they contributed o generating revenues before they are
included in this year’s budget.
13. Forecasting Budget
• When individuals decide to operate a business it is usually because they have
special interest or specific expertise in the product or service the business is selling.
They are expecting that the income and profits can be made. For example, you may
have trained as a tour guide and you decide to start a business where you will
operate tours instead of working for someone else on the tours they are operating.
• Setting up and running a business involves large amounts of money, possibly
several hundreds of thousands each year. To produce an income and profit for the
owners this money must be managed very carefully. Business failure statistics show
that 60% of new businesses do not survive more than five years and 90% do not
survive more than ten years. The accountants who clean up the mess after a
business has failed often found out that the main reason for failure is that the
business managers do not plan for the future or keep a close eye on how their
businesses are performing.
14. • In the hospitality and tourism industry some unique characteristics make
this monitoring and planning process even more important. Sales can change
a great deal from one season or even one month to another. Busy times are
very busy and quiet times are very quiet. This creates a problem for
managers because they need to plan when to employ more people, change
orders for stock or plan for having money flowing in and out to cover other
expenses.
• Managers therefore need to spend time thinking about these seasonal
fluctuations as well as considering what it is that the business is expected to
achieve in the budgeted period. Talking to other people within the business
also helps managers to better understand if goals are reasonable and can be
achieved. Whilst budgeting is a necessary part of the business process, there
are certainly some factors that make it difficult.
15. Factors that you should be aware in forecasting budget include the following:
• Budget take time and not all small business owners have the time. It is believed that
the time is better spent out with clients conducting tours or selling products!
• Getting good quality information is costly and takes time. Budgets are only as good
as the information gathered to compile them.
• Budgets are your best forecasts with information you have at the time. It is difficult
to know if the real world will follow your forecast. It is therefore easy to be
convinced that it is all too hard and not worth the effort.
16. Estimating Ancillary Revenue for a Hotel
• The ancillary revenue is essential in a number of different industries within the
hospitality and tourism field. Hotels, resorts and especially airlines rely on revenue
generated by sales of secondary products and services to customers who already
utilize their primary services. Estimating the ancillary revenue for a hotel is no
simple task but it can be done if you have good financial records. The following
points will help you through in the formulation process:
1. Scrutinize your overall revenue for the previous fiscal year.
2. Define how much of your revenue was earned from room fees or charges paid to
your hotel enterprise by patrons who stayed the night.
3. Observe your remaining financial statements to determine how much money was
made from additional service and products.
4. Decide the percentage of your revenue earned from ancillary services and products.
5. Estimate the percentage of ancillary income as far back as you can.
6. Compute your next year’s project revenue based on your past year’s revenue.
7. Calculate your ancillary income by multiplying your previous year’s percentages
times your expected total revenue.
17. Revenue Generating Philosophies for Lodging
Enterprise
• The lodging enterprises have perishable inventory. If a room
stands empty for the night then the opportunity to earn
revenue from renting it out is gone and cannot be recouped.
It’s similar to he airline industry. Tickets can’t be sold for a
flight that has already taken off. The revenue in lodging
properties more particularly in hotels is generated from
room rentals, food and beverage sales and meeting room
rentals.
18. Occupancy and Room Rate
• The two features that determine how much revenue a hotel earns from its room
occupancy and average daily rate. Occupancy is the percentage of rooms sold each
night. If a hotel has 125 rooms and sell 9933 rooms then the occupancy rate is 74.4
per cent. The other factor is average daily rate. A room that sells for $350 during
high season could go for as little as $150 in the off-season. Hence the difference I
huge. Accordingly at a 74.4 per cent occupancy rate at $150 per room sold then the
revenues generated would be a sum of $13,950. Consequently at $350 average
room rate then the hotel will be generating a sum of $ 32,550. The concept of the
management’s strategy is to increase either the occupancy or the average daily rate
in order to attain targeted surge of total revenue.
19. Social Media, Discounting and Packages Approaches
• Actually, the management of lodging properties is being challenged to increase
forecasted budget for upcoming target hence the enterprise is making use of
Twitter, Facebook, Google+ and LinkedIn social networking sites and media to get
the their hotel various buzz. The management is spreading the word by offering
tips about the restaurant scene, local events, travel tips and special discounts and
offers. The business hotels sell rooms during the week. Resort hotels generate the
most revenue during high season whether that is during summer for beach
locations or during the winter for ski resorts. Selling rooms at discounted rates in
the off times generate additional revenue by increasing the occupancy rate. The
property further promote the service and can generate more revenue if the hotel is
in he city and has mostly business guests and offer a discounted rate for those who
stay over on a Friday night. On the contrary, ski resorts take advantage of various –
colour packages or perhaps summer wildflower tours. Similarly, the beach resort
can tout the privacy and seclusion of an off-season stay.
20. Generating Further Food and Beverage Revenue
• The more guests in the hotel it would seem the higher the food and beverage
revenue but it doesn’t always turn out that way. Guests may not want to wait in line
for busy meal times or perhaps they just want to explore the restaurants rather than
eat in the hotel. Consider offering guests a happy hour where the drinks are slightly
discounted and the appetizers are complimentary. A twist on this idea is to sell the
appetizers on piecemeal basis, such as shrimp for $1.50 each, mini tacos for $1.00
or sliders for $1.25. If your hotel is upscale then consider a wine tasting or cheese
tasting at a reasonable fee. Likewise, offer a discount for dinners who eat dinner
early or late.
21. Ways to Increase Revenue in Hotel Enterprises
• Travellers will always need some place to stay when out of town on business or on
vacation. Make your hotel their preferred option by offering the right balance of
customer service and price. Offer a unique environment or specialty services to
differentiate yourself from the competition and limit the number of rooms you offer
at discounted rates
• Managers must study the competition in the local area and familiarize himself with
the level of service they offer and their price structure.
• The manager must learn and practice basic hotel revenue management as
occupancy increases so should your room rates.
• The manager must train the front office staffs in upselling.
• The manager must consider occasional promotions or one-time –only offers to
attract new customers or filling rooms during the off-season.
22. The Cost of Starting a Restaurant Business
• The restaurant start-up costs can vary tremendously from business to business. The
costs are affected by the size style, number of staff, location and whether the
restaurant is a franchise or a one-off. Although there are a lot of variables to
consider so it is still possible to get a good estimate for the start-up costs of your
desired restaurant as long as you have a strong business plan.
• When determining the start-up costs for your restaurant ten it is essential to have a
good business plan in place. Your plan should detail the exact style of food, décor
and service that you will have, as well as the location and number of dinners you
expect to serve each day. You should build your sales forecast based on expected
unit sales such as food and beverage. Also, you must also include estimates for
permits, food costs, beverage costs, office supplies, cleaning supplies, staff training
and contingencies. Many restaurants fail because they lack enough capital to keep
running until they turn a profit hence, you also need to estimate when you expect to
turn a profit and make sure you can meet the running costs until then.
23. The Cost of Restaurant Facilities
• The facilities cost vary widely and depending on weather you
are buying or leasing and is buying, means buying an existing
restaurant or building from the ground up. For an existing
restaurant then you will need to spend money or renovation
but how much will depend on the condition of the premises. If
you are renting or leasing your premises then you will also you
will also need to ensure that your least is for a long enough
period to ensure that you have time to build up your business
and become repeatable. If leasing then some building of
owners will pay for part of the renovation cost in exchange for
a longer-term least.
24. The Cost of Restaurant Equipment
• Accordingly, taking over an existing restaurant then your
equipment costs will be primarily on upgrading and adding
anything you need. However, if you are starting from scratch
then your must expensive items will be ventilation equipment,
cooking equipment and refrigeration. In the kitchen you will
also need counters with under counter refrigeration and
heating units, shelving and all of your cooking and storage
tools and equipment. This can costs anywhere from 1,000,000
to 5,000,000 or more depending on the type of restaurant you
have. Likewise, you will also need to budget for all the plates,
cutlery, glasses and other items for the service as well as for
breakages and equipment repairs and maintenance.
25. The Cost of Restaurant Extras
• Indeed, many restaurant owners do not plan adequately for all the
extra expenses that can occur. In an instance, like you will
probably need to purchases a point of sale system intended for
managing orders. You also need to budget for credit card
processing fees usually 1.8 per cent to 2.5 per cent of sales.
Similarly, you must also budget for permits, signage and
marketing costs. Likewise, there are many small details that can
add up such as hiring a cleaning company to clean the restaurant
everyday, printing menus, purchasing uniforms for staff and the
costs of laundry for napkins and tablecloths, and waste disposal
and other forms of costs that may incurred in the operation.
26. Food and Beverage Costs
• Definitely, once you are up and running then your biggest
costs will be for food and beverages. However, depending on
the restaurant concept so your food and beverage costs should
be running no more than 25 per cent to 40 per cent of revenues
for casual restaurant at the lower end category of the business
scale. The payroll will take an additional 20 per cent to 25 per
cent of revenue. So, with new restaurants, food supplies often
have to be paid for on delivery so you will need to budget
enough money to buy supplies until you turn a profit. So you
will also want to budget for promotions and special events
such as free meals on your first day in business.
27. The Variable and Fixed Costs in a Restaurant
Operation
• The failing restaurant business during the first year of
operation still points to the importance of careful
budgeting and financial planning for restaurant owners
and operators. The fixed expenses in restaurant
business are those that do not fluctuate with changes in
production level or sales volume while variable costs
are those that respond directly in proportionately to
changes in business activity level or volume of
production or sales. The food and beverages costs are
major components of restaurant operating expenses
often fall into the variable category which poses a
major challenge to restaurant to restaurant owners and
managers.
28. Restaurant Occupancy Costs
• Even whether buying or leasing restaurant space then the monthly payment is one
of any restaurateur’s major fixed outlays. Related fixed costs include local and
state taxes as well as insurance. Rental space may increase in price over time but
restaurant owners typically can count on a certain period at a fixed price and will
usually have some notice of a ret increase. Certain utilities, such as water, phone
and computer lines should be relatively consistent over time. Others, such as
electricity may vary considerably depending on seasonal demands for heating or air
conditioning. In addition, gas or oil when needed then it may also fluctuate in price
depending on world markets.
29. Restaurant Equipment as a Fixed Outlay
• The normal operations and maintenance costs for restaurant
equipment such as stoves, grills, dishwashers and freezers
should remain constant from month to month. Notable
exceptions to this fixed cost are the unexpected
requirements to repair or replace broken equipment. Items
such as dishes, flat ware, pans and glass ware required a
considerable expense at a start-up but restaurant owners
generally can plan for purchases of replacement. This
category also include decor-related items such as candles,
flowers or plants, like bulbs and window fixtures, as will as
consumables including napkins. This items are typically
bought routinely and in bulk, allowing the restaurant owner
to plan for such expenses.
30. Food and Beverage as Variables Outlays
• The food and beverage costs are among the greatest variable
expenses in restaurant business in which owners and
managers face the challenges of controlling costs. These
costs fall under the category ‘’costs of goods sold’’,
commonly referred to us usage costs. Successful restaurant
skillfully manage the balance between buying in bulk to
have enough food to meet the customer demand and not
buying so much food that it goes to waste. Menu prices for
most items cannot change every time the restaurant’s food
cost change so a restaurant’s profit margin is affected if
food costs fluctuate frequently or substantially. Restaurants
are the mercy of local and national supplies and markets
which means that when national milk or fruit prices go up
because of shortages then they must absorbed.
31. The Costs of Restaurant Laborers as Fixed and Variables
Outlays
• The labor and personnel expenses are variable costs although restaurant
managers can control the overall personnel costs by managing the number
of shifts assigned and how much over time is approved. Small, local
restaurant’s with a relatively static customer base may experience only
limited variation in the month-to-month costs of staff but larger restaurants
or those with a fluid customer base such a restaurant at a major highway
inter section likely will have a greater variability in staffing expenses also
vary seasonally in certain restaurant such as those hosting holidays parties.
The key personnel expenses like the managers or the management team and
regular employees salaries often falls under the fixed costs category.
32. Budgeting System
• Sales budget
• Labor budget
• Over head budget
• Cash budget
• Budgeted profit and loss statement
33. Budgeting Process
• The budgeting process usually starts with the sales
budget as everything else that happens in a business
depends on how much is sold. The quantities and
monetary values of sales set a limit on how much
should be spent on buying goods, how much should
be spent on employing people to make and sell those
quantities and values and on most other operating
costs such as rent and electricity and other cost
incurred in the operation of the business.
34. Sources of Data
• From management- new or altered management policies and
procedures
• From management- declared commitments to any given areas
• From the accountant- performance data from previous periods
• From the marketing department- will the marketing effort
changes?
• From the restaurant manager/chef- will the product range or
menu change?
• From the front office(derived demand)- will the hotel’s
occupancy change the demand patterns of the hotel’s
restaurant?
• From the restaurant managers- any planned special
promotions.
35. Reviewing and Analyzing Data
• Will the product price increase or
decrease?
• What, if any, will be the change to the
volume of product sold ?
• Will the timing of sales change from
previous periods
36. The Budget Committee
• The budget committee is at least made up of the owners of the business or their
representative the managing director, chief executive, department or activity center
managers accountant. However during the budget process, the committee meets
often to discuss progress and at the end of the process is responsible for distributing
the budget throughout the organization. Before the budget committee can begin the
budget process, the owners of the business must communicate the objectives they
hope the business to achieve in the following year. For example, a travel company
may wish to expand its tour guide business
37. Communication and Cooperation
• Once the budget committee begins, the process of creating budgets it becomes
necessary to discuss various aspects of the budget with other colleagues who are
involved in making the budget work but not in preparing the budget. This may be to
confirm the sales targets are possible. For example, there would be no point
introducing a lunch sitting if there were no staff willing to work. Communication is
best by direct conversation but may also take the form of e-mails, newsletters, and
department meetings. Sometimes stakeholders attend budget committee meetings. It
is important to note that this communication is the responsibility of the budget
committee through department or activity centre managers. It is very important that
the department and activity centre managers gain the co-operation of colleagues
affected by the budget. The larger the organization, the more demand each
department or activity centre has on the resources of the business. Co-operation is
always best when stakeholders are consulted and included in the budget process.
38. Providing Relevant Colleagues to Collaborate Budget
Planning Process
• Relevant colleagues have the opportunity to contribute to the budget planning
process with adequate notice. Although a budget committee may be an effective
forum for managing the budget process since it is not the only way businesses
prepare a budget. The strategies used by owners and managers can be summarized
into two different styles.
39. Top Down Approach
• This approach to the budget process features owners, managers or even the budget
committee creating the budget and informing all stakeholders of the business
objectives and the budget that is going to meet those objectives. There is minimal
communication with stakeholder during the process.
• The budget is usually communicated once it has been finalised by the budget
committee. The main advantage of this approach is the timely manner in which the
budget can be produced. It is also argued that the owners, managers and
accountants have the expertise to produce the budget efficiently. However, lack of
communication and input from relevant colleagues compromises the co-operation
of these colleagues with the budget.
40. Bottom Up Approach
• The bottom up approach is a much more favoured strategy for managing the budget
process. At the budget committee level, owners seek the input into budget
objectives for the budgeted period. Objections by budget committee members about
the objectives or plan of action to achieve them can be raised. Owners or senior
management should listen and either make changes where they can or inform the
budget committee members as to what is reasonable and achievable. In the same
way, communicating and consulting with departmental staff in the review and
analysis of data will encourage commitment to the achievement of the budget. For
this reason, the goals of the organization become goals of those responsible for the
budgeted outcome.
