BUDGETING

Budget is an estimate of revenue & expenditure for a forthcoming fiscal year. It is a

statement of anticipated results expressed in numerical terms. It acts as a basis for
continuous comparison of actual with forecasted figures.

The essentials of a budget are:

 It is prepared in advance & is based on a future plan of action
 It is based on objectives to be attained in future
 It is a statement expressed in monetary or physical units

TYPES OF BUDGETS & BUDGET CYCLE

There are several types of budgets that are prepared by an organization:

1. Capital Expenditure Budget

The Capital Expenditure Budget provides guidance as to the amount of capital
needed for acquiring capital assets during the budgeted period. Furniture, fixture
& equipments are among the constituents of capital expenditure budget.

2. Operating Budget
Operating budget is the financial statement that is associated with the routine
operations of a hotel. Operating expenditure is the cost that a hotel incurs in the
process of generating revenue during its normal operation. It includes salaries,
wages & direct labor cost.

3. Fixed Budget
Fixed budget is a budget that is prepared on the basis of standard or fixed level of
activity. It does not change with the level of activity.

4. Flexible Budget
Flexible budget is prepared after considering the fixed & semi-variable cost & the
changes that may be expected for each item at various levels of operation.

5. Master Budget
Master budget, also known as final budget, is the summary of all the budgets that
are prepared in the organization.

6. Departmental Budget
Departmental budget is the budget that is prepared by individual departments of a
hotel, containing the proposed estimates of revenue and expenditure for a specific
duration of time.

7. Sales Budget
Sales budget is essentially the forecast of the sales to be achieved in a budgeted
period. It is generally prepared by the sales manager.
 8. Administrative Overhead Budget
Administrative overhead budget covers expenses of all the administrative offices
& of management salaries.

9. Cash Budget
Cash budget is the forecast of the cash position for a specific duration of time. It
tells about the availability & requirement of working capital at different periods &
forms an important part in the efficient working of the hotel. The cash budget is
prepared by the chief accountant.

MAKING FRONT OFFICE BUDGET

Front office is one of the major revenue producing departments of a hotel, & is
responsible for guest satisfaction. The department’s efficient & profitable operations
affect the overall profitability of the hotel. As approximately 70% or even more of the
revenue is generated from this department, it becomes all the more necessary that more
than any other department a more conscious budgetary control is exercised on this
department.

Budgeting of Front Office means the Departmental Master Budget of Front Office, which
will include budgets for the smaller sections such as reservation, Lobby & Bell desk
individually. The budget will include the expected business for the year, the operating
expenses on all fixed & variable costs including labor, equipment etc;

Once the budget has been approved & given for implementation, the operations should
ensure that the staff adheres to the budget. Any deviation must be observed, recorded &
notified. The reasons for the deviation should be found out & analyzed. The FO budget is
normally made on quarterly basis. From time to time, the budget must be refined and
approval should be taken from the higher authorities.

The hotel’s accounting division prepares monthly budget reports that compare actual
revenue and expense figures with budgeted amounts. These reports provide timely
information for evaluating front office operations. Front office performance is often
judged according to how favorably the rooms division’s monthly income & expense
figures compare with budgeted amounts.

A typical budget report format should include both monthly variances & year-to-date
variances for all budget items. The variances between the actual & budgeted amounts are
analyzed as favorable or unfavorable at the end of each month. Only significant variances
require management analysis & action.

ESSENTIALS OF A SOUND BUDGET

1. Define clearly the responsibilities & authorities for preparation & administration
of budget
 2. Sound organizational capabilities is essential for budgeting
3. An accurate & adequate system of measuring & recording performance
4. Timely & regular system of reporting current events should be developed to keep
responsible people informed of actual results for timely correction
5. Clearly defined policies should be established for all phases of the firm
6. Free & frank communication between different departments & members of the
organization through regular meetings of budget committee
7. Efficient forecasting & research is necessary for the formulation of realistic
budgets
8. Human factor is very important in budgeting. Budget should be designed as a tool
& not to replace management
9. The system should be designed to meet the needs & conditions of the particular
enterprise
10. Key to effective budgeting is developing & providing standards, by which a
manager’s work can be translated into needs for manpower, material, money &
other resources
11. Budgetary control should not be used in situations where other control systems
are more suitable
12. It should not be implied to all departments in first go & should be started on a
small scale & extended as experience is gained

REFINING BUDGETS
The term ‘refining budget’ can also be called as amending the budget or adjusting the
budget or modifying the budget. This means this means to change by decreasing or
increasing the figures of the already prepared forecasted figures. Since budget is a
forecast for future, and is based on certain assumptions, and as future is indefinite,
whatever base we might have taken for the future, may occur or may not occur at all or
may occur partially. If the actual figures have a lot of difference, which could be plus or
minus, it means that our initial budget planning was wrong. Such variances have to be
studied and analyzed immediately & corrective actions taken. Reforecasting is normally
suggested when actual operating results begin to change significantly from the original
budget. The Information System of the Management (MIS) must be strong, efficient &
reliable.

BUDGETARY CONTROL
Budgetary control has now become an essential tool of the management for controlling
costs & maximizing profits.

The budgetary control involves:

 Establishment of budgets
 Continuous comparison of actual results with budgeted ones to attain the
organization’s objectives
 Ascertaining the responsibility for failure in the achievement of budgeted targets
  Revision of budgets in the light of changed environment

Advantages of budgetary control

Budgetary control is a useful management tool for comparing actual results with the
budgeted result.
 It brings efficiency & economy in the business enterprise
 It establishes departmental responsibility
 It acts as a safety signal for the management

FORECASTING ROOMS REVENUE

Historical financial information often serves as the foundation on which front office
managers build rooms revenue forecasts. One method of rooms revenue forecasting
involves an analysis of rooms revenue from past periods. Variances are noted & the
amount of rooms revenue for the budget year is predicted.

Another approach to forecasting rooms revenue bases the revenue projection on past
room sales & average daily room rates. There could be changes in this, for example,
when new competitors might enter the market, taking away occupancy from the hotel.
Management needs to anticipate this shift and adjust its forecast to take into account the
increased competition. The management may decide to hold or reduce rates to maintain
or improve occupancy when new competitors enter market.

ESTIMATING EXPENSES
In the Front Office, most of the expenses are direct, which means that they are in direct
proportion to the total room revenue, which means that higher the revenue, higher will be
the expenses and lower the rooms revenue, lower will be the expenses.

We can also forecast the expenses for a future period under various heads , such as
reservations system, bedroom linen expenses, bathroom linen expenses etc; by estimating
the variable costs per room sold and then multiplying these costs by the expected number
of rooms that will be sold.

ADVANTAGES OF BUDGETING
1. Eliminates uncertainty

2. Result of various brains

3. Good incentive to workers at times

4. Optimum use of capital resources

5. Easy availability of working capital

 6. Effective coordination

7. Responsibility can be pinpointed

8. Spotlight on deviation

9. Optimum utilization of man, machine & material

10. Serves as a beacon light

DISADVANTAGES OF BUDGETING
1. Budgets are estimates & can never be hundred percent accurate.

2. The budget is simply a tool to efficient management & not a substitute for it.

3. Budgets cannot guide as to what action should be taken.

4. Sound system of effective supervision is necessary & the lack of it would make
the budget ineffective

5. Budgeting entails the danger of inflexibility as everybody becomes conscious that

they must adhere to the projected budget, otherwise they may be called inefficient

6. Budgets may be misused by the bosses to find faults in employees & restrict
performance rather than improve it.

7. The initiative & creativity in an employee might be hampered if the supervisor &
bosses stick to budgets strictly

8. Budgeting is a time-consuming process & involves expenses

9. Budgeting goals may lead people to supersede the enterprise goals

10. Success of budgeting depends on the motivation of people who are to install &
use budgets

11. Budget making is a taxing exercise as it is an exercise to grapple with situations

that are yet to arise.

12. Budgeting is not a means to an end, the end being the successful attaining of
budgetary targets in actual results

13. Although budgeting is a big help in arriving at decisions, yet very often it is seen
as a substitute rather than as a tool of management.
BUDGET CYCLE

A budget cycle is the process of making a budget from the beginning to the end. The
budget cycle refers to the life of a budget from creation to evaluation. This cycle
involves; the formulation of the budget, execution, auditing and legislative assessment
and finally access to Information.

The general stages of the budget cycle

Agencies and Executive drafts
depts report on budget
Minister of
expenditure to
Finance presents
Auditor
budget to
General
parliament,
budget debates and
approves
formulation budget

budget
auditing & Medium Term Expenditure
budget
assessment Framework (MTEF) enactment
– 3 year rolling budget

budget
execution
Govt agencies & depts
implement programmes
and spend the funds
6

ZERO BASED BUDGETING (ZBB)

Method for preparing cash flow budgets and operating plans which every year must start
from scratch with no pre-authorized figures. Unlike the traditional (incremental)
budgeting in which past sales and expenditure trends are assumed to continue, ZBB
requires each activity to be justified on the basis of cost-benefit analysis, assumes that no
present commitment exists, and that there is no balance to be carried forward.
By forcing the activities to be ranked according to priority,
ZBB provides a systematic basis for resource allocation.

Zero-based budgeting is an approach to planning and decision-making which reverses

the working process of traditional budgeting. In traditional incremental budgeting
(Historic Budgeting), departmental managers justify only variances versus past years,
based on the assumption that the "baseline" is automatically approved. By contrast, in
zero-based budgeting, every line item of the budget must be approved, rather than only
changes. During the review process, no reference is made to the previous level of
expenditure. Zero-based budgeting requires the budget request be re-evaluated
thoroughly, starting from the zero-base. This process is independent of whether the total
budget or specific line items are increasing or decreasing.

Advantages

1. Efficient allocation of resources, as it is based on needs and benefits rather than

history.

2. Drives managers to find cost effective ways to improve operations.

3. Detects inflated budgets.

4. Increases staff motivation by providing greater initiative and responsibility in

decision-making.

5. Increases communication and coordination within the organization.

6. Identifies and eliminates wasteful and obsolete operations.

7. Identifies opportunities for outsourcing.

8. Forces cost centers to identify their mission and their relationship to overall goals.

9. Helps in identifying areas of wasteful expenditure, and if desired, can also be used
for suggesting alternative courses of action

Disadvantages

1. Justifying every line item can be problematic for departments with intangible
outputs.

2. More time-consuming than incremental budgeting.

3. Requires specific training, due to increased complexity vs. incremental budgeting.

4. In a large organization, the amount of information backing up the budgeting

process may be overwhelming.