PREPARING OPERATING BUDGET

                                            PREPARING OPERATING BUDGET 

Definition: A budget is a plan. It projects both the revenues the hotel anticipates during the period covered by the budget and the expenses required to generate the anticipated revenues. It is a process, based on actual performance of establishments in the past, estimation of future expenditure, are made and adjusted for forecasting future outcomes. It is one of the main planning activities of an executive housekeeper. It is the process by which, based on the actual performance of establishments in the past, estimates of expenditure and receipts are made and adjusted for forecasting future outcomes.

 Characteristics of a budget- a good budget is characterized by the following:

·       Participation: involve as many people as possible in drawing up a budget.

·       Comprehensiveness: embrace the whole organization.

·       Standards: base it on established standards of performance.

·       Flexibility: allow for changing circumstances.

·       Feedback: constantly monitor performance.

·       Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centers.

Advantages of budgeting- There are a number of advantages to budgeting: 

·       Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system.

·       Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organization purpose and direction. 

·       Promotes coordination and communication.

·       Clearly defines areas of responsibility. Requires managers of budget centers to be made responsible for the achievement of budget targets for the operations under their personal control.

·       Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors. 

·       Enables remedial action to be taken as variances emerge

·       Motivates employees by participating in the setting of budgets.

·       Improves the allocation of scarce resources.

·       Economizes management time by using the management by exception principle.

Based on the type of expense and assets involved and the flexibility of expenses, budget may be categorized as:

1.      Capital Budget/ Capital Expenditure budget (CAPEX)- It is the allocation of funds for a specific project or items that will help and assist the operation of the hotel. Usually the CAPEX fund is allocated on a yearly basis project/s is/are accomplished and completed especially if the item/s have specific life span where replacement is made specifically each year. Therefore, in order to have a smooth operating and well-maintained hotel or facility, it is important that allocation of funds for the operational needs and maintenance of the hotel should be handled and monitored effectively based on occupancy percentage where key department heads are knowledgeable on how to adjust their budget accordingly.

2.       Operating Budget: is the allocation of expenses for each item/s required by the department in order to operate smoothly. In case of hotel operation, control of expenses is based on occupancy percentage. The operating budget outlines the financial goal of the hotel. The basic Housekeeping Operational Budget includes:

a)       Linen and Towels

b)      Guest Supplies and Amenities

c)       Cleaning Supplies

d)      Laundry Supplies

e)      Machine, Tools & Equipment

f)        Staffing

3.       Pre-Opening budget: It is an intended expenditure of allocation of the resources for opening parties, advertising initial generation of goodwill, liaisons and Public Relations. It also includes the initial cost of employee salaries and wages, as well as amenities, supplies, and other day to day useful items like cutlery, crockery, etc.

For calculating operating expenses- following expenses have to be calculated:

·       Variable operating expenses-those expenses which can vary as per occupancy level, e.g. guestroom supplies and laundry expenses

·       Semi- variable operating expenses- those expenses which can vary as per occupancy level and it will include manpower, cleaning supplies, flowers, linen and uniform purchase (if any)

·       Fixed operating expenses- these expenses include monthly or yearly charges of contract services

Operating budgets are typically prepared for each fiscal year. Monthly operating budgets are also prepared to enable managers to clearly outline seasonal variations in expected revenues and corresponding expenses. The budget planning process depends on:

1.    Forecasted room sales or occupancy levels- The room sales for the year are forecasted by the front office manager. The monthly breakups are also outlined in this forecast. This information is given to the heads of departments far in advance for the preparation of departmental budgets. Forecasted room sales (occupancy level) is very important because

·       Room sales generate the revenue for operating departments.

·       Most of the expenses are directly related to room occupancy levels especially true in housekeeping since salaries and wages, and the usage rates for recycled and non-recycled inventory items are directly related to the number of occupied rooms.

2.       Cost per occupied room- The executive housekeeper works out the cost per occupied room based on the historical data. It is calculated to

·       Determine the levels of expense in the different categories and

·       Measure the ability of the exec. Housekeeper maintains the expected costs.

Cost per occupied room = Operating expenses / Room sales.

Checklist for preparing a budget

·      Know the present position of the hotel.

·      Review the previous year’s financial statements.

·      Look at the major sports events, festivals and holiday events for the year ahead.

·      Check for any expansion plans, redecorating, raising standards, increase/decrease of staff.

·      Check on the supplies needed-consider automation, new technology and better products.

·      Take each cost heading separately and compile to form the final budget.

·      Plan for practical goals and do not over budget.

·   Take into account the inflation percentage. Prepare by looking at past experiences, present knowledge and judgement of what is likely to happen.

·      Identify areas which can or cannot be controlled.

·     Review wages and salaries, operating costs and expenditure that is variable, semi-variable, and fixed.

·  Plan with the following year’s tax policies in mind. Take into consideration any new laws or regulations or policies that may come into effect.

·      Prepare throughout the year for the next year’s budget noting changes and scope for improvement.

·      Make decisions of what is more cost-effective:

·      Part time or full time staff.

·      Cost of staff and how often they may be required.

·      The cost of servicing a room i.e. overtime versus extra staff.

·      Contract cleaners versus own staff.

·      In-house laundry against contract.

·      Use of cleaning agents as per dilution rates.

 

Preparing operating budget process involves:

1.    Gathering information (forecast rooms ales, room occupancy);

2.    Formulating initial plans (determine ‘cost per occupied room’, including expenses like salaries, wages, cleaning supplies, guestroom supplies, laundry expenses, etc.);

3.     Reconsidering goals and objectives; and

4.     Making final adjustments (upgrading, eliminating, downgrading any service as per the budget given).

Each month the hotel’s accounting department produces statements reporting actual costs in each of the expense categories. These actual costs are listed alongside budgeted costs, and variances are assessed. This enables the executive housekeeper to monitor how well the housekeeping department is doing in relation to budgeted goals and constraints. Small deviations can be expected, but serious deviations require investigation and explanation. When comparing actual and budgeted expenses, the executive housekeeper should first determine if the forecasted occupancies were actually achieved. A decrease or increase in expenses should be proportional to the variation in occupancy levels. If actual costs far exceed the budgeted amounts while the predicted occupancy levels remain the same, the executive housekeeper need to find sources of deviation and formulate a plan to correct it. If the department is far ahead of the budget, it may indicate deterioration of service levels that were built into the original budget plan. Identifying and investigating deviances on a timely basis is one of the most important functions of the EHK.

Points to remember

Operational budget is prepared annually and submitted to the Director of Finance for further study and to finalize the total amount in coordination with the department head. Operational budget is always based on the next year’s forecasted occupancy percentage.

Operational budget is for consumable items. Monitoring the operational budget is the most crucial part in the operation of business. With the modern technology and the computer software, daily updated total expenses against budgeted amount are made possible and easy to trace in order not to exceed the budgeted amount. Every end of the month, the accounting department distributes copies of last month’s budget outcome to the General Manager and the Department Heads in order for them to review and analyse where their budget is in line and where it’s not. General Manger will require the department head that have exceeded their budgets a reasonable report since he is accountable to the organization as well as the owner of the hotel. 

Video reference: from Yunik Hotel Management Education

https://www.youtube.com/watch?v=CLnpuklIPrk&t=7s