It is crucial for you to know how much money is coming in and out of

your organisation. All hospitality professionals should understand the

skills involved in budgeting. All your team members should understand
the importance of their role in generating sales. They should be aware
of how their behaviour and service delivery will impact this.

Budgets are forecasts or projections of future earnings and

expenditures over a specific period. They reflect the strategy for
managing assets, income and expenses, and cash flow. They can be
prepared for specific purposes like a wages budget or to track the
performance of a department or the entire organisation.

Budget information is the information required to prepare budgets. It

comprises information relating to organisational goals and performance. It

also includes external information like market trends, legislation, and

competitor information that impacts the budget preparation.

Your budget is your planned revenue and spending. It allows you to allocate

funds. Consider preparing a budget quarterly or yearly. Forecasts are usually

more frequent, often monthly. A forecast predicts past and current trends in

your financial statements. This gives you a more realistic idea of how your

business is going and helps you to avoid problems.

A strong understanding of an organisation’s goals will assist you in

creating an attainable budget, whether for a project, department or the
whole organisation. You need to align your budget objectives with the
organisational goals and specific business needs.

Preparing budget information is the first stage in preparing and monitoring

budgets.

In this chapter, you will learn about the scope and nature of budgets. You will

get familiar with the various type of budgets an organisation can produce
and their functions. You will also understand the importance of budgeting in

a business. You will learn about data and data sources. You will also be able

to understand the process of preparing a budget. After this, you will learn

about the internal and external factors that impact budgeting. You will also

understand the importance of providing opportunities to colleagues to

contribute to the budget planning proBudgets quantify the goals the

budgeting unit wishes to achieve for a future period. The first step of

preparing any budget is determining its scope and nature. Budgets may

differ in scope and nature depending on their purpose.

The scope of a budget is the range of the subject matter it deals with or the

area to which it is relevant. Different budgets will have different scopes

based on the organisational requirements. For instance, the scope may

include increasing revenue through sales and revenue generation. It could

also be a budget to decrease expenses and outgoings, or it may be to

expand the products or services offered.

The nature of a budget includes its features, characteristics, and qualities.

Budgets need to have accurate and balanced data. They are time-sensitive

documents that require regular updates based on organisational demands

and practice. For instance, you may need to prepare weekly sales budgets to

track the performance of the hotel front desk operations. In contrast, you

may prepare the marketing department’s budget every quarter. The

organisational budget is usually prepared on an annual basis. Another

characteristic of budgets that defines their nature will be the circulation of

the budget. For instance, you must share the sales budget with the frontline

staff. In contrast, the organisational budget may be discreet and shared only

with your organisation’s senior management, as only those who need to

know should be kept informed.

To determine the scope and nature of the budget to be developed, you must

first understand the role of budgets and different types of budgets. You also

need to be familiar with common terminology of budgets. This subchapter

will cover the same. It will also help you understand how to determine and

confirm the scope and the nature of the budget you need to prepare.

cess.

A budget’s objective is to help the organisation plan, arrange, track, and improve its financial condition.
In other words, a budget aids an organisation in maintaining focus on its long-term financial objectives
by helping to restrict expenditure and continuously save and invest a percentage of its revenue. It is a
crucial management tool for every firm and a part of a long-term strategy and projection.

You may prepare different types of budgets depending on the scope and nature of the budgets required.

Cash budgets

- They are primarily designed to predict whether your business will have surplus cash during the
budget cycle.

Cash flow budgets

 - These are prepared to help estimate cash inflows and cash usage during a specific period. They
track the organisation’s cash flow on account of operating, investing and financing activities.

Departmental budgets

– They are used to analyse the performance of the department in a detailed manner, which in
turn grants them greater control over their spending. The organisation’s overall budget is
broken down into more manageable chunks for each department to manage. These help to
show which departments are performing well and which are not. Departmental targets can be
created using these budgets along with controlling costs.

Project budgets

– These are designed for specific projects, for instance, a holiday season marketing campaign.
They include the total sum of money allocated to that project in a particular period. They are
used to ensure funding is ready when needed at each project milestone to avoid delay or failure.
They also help track the profitability of the project.

Purchasing budgets

– These are prepared to keep track of the business’s inventory value and maintain control of the
purchasing expenses. They cover the inventory or supplies an organisation requires to purchase
during a budgetary period. This may be the stock to meet customer orders or equipment for the
operation of the business. They are usually developed once the sales budget has been finalised.

Sales budgets

– These budgets help plan for maximum utilisation of resources based on the forecasted sales.
The sales budget estimates future sales so an organisation can make informed decisions and
avoid failure. It should be developed before other budgets. It is prepared along with the master
or organisational budget. This way, an organisation can see the funds it has to allocate to
expenses. Past records and sales activities can assist when developing sales budgets. You should
also research competitors and understand the economy and market trends when developing
this budget. Economic downturns can severely impact travel, tourism, hospitality, and events,
often seen as discretionary spending. Hence, these budgets should take into account these
external environmental factors.

Wage budgets

– These are prepared to estimate and control the organisation’s spending on wages. They include
estimating all expenses incurred on labour, wage rate, number of staff and operating
efficiencies. They help clarify the balance available for other costs from the overall budget. Each
department usually manages its own wages and reports daily, weekly, or monthly to senior
management. They help roster staff, which is very relevant in the hospitality and event
industries as the busy periods generally come in peaks and troughs, such as service times. You
 must consider specifics like weekend rates and working past midnight when developing these
budgets. The pay cycles, i.e. weekly, fortnightly, or monthly, should also be considered when
developing a wage budget. There are many awards applicable to hospitality and events. An
organisation is obliged to meet these requirements as a minimum if it offers positions that do
not refer to the award.

Whole of organisation budgets

– The management team uses the organisational budget to direct and prioritise various activities.
It is also known as the master budget as it establishes the goals, targets, and expenditures for
the whole organisation.

Budgeting cycle

– It refers to the period for which a budget is developed.

– It can be monthly, quarterly, or annually

Income

– This refers to the sum total of revenue generated from various sales of goods and services, room
rentals, food billings, interest income, dividends, etc.

Expenses

- These include the total costs incurred during the budgeting cycle.

Projected profits

- These refer to the difference between the total expected income and the total estimated
expenses.

Assets

- These refer to an organisational resource that adds some value to the organisation and can be
used to produce something for income generation.

Budget variance

- This is the difference between the budgeted and actual performance.

- Reasons for these variances need to be analysed.

Budget reviews

- These are regular reviews conducted to compare the organisation's actual performance against
the budgeted performance.
To help you determine the scope and the nature of the budget that you will develop, you should keep in
mind the following:

Objectives and goals

- You need to understand what the purpose of the budget is. For instance, developing a
departmental budget for all departments may not be necessary if the business wants to track a
particular project. You will still need to ensure that the project budget aligns with the
departmental and organisational budgets.

Resources available

- You need to consider the resources the management is ready to allocate to the budget when
determining the scope and nature of the budget. Preparing a budget without having adequate
resources is a waste of energy and effort. You also need to understand the capability of the
systems that will be used to prepare and monitor the budgets. They should be capable of
providing the information in the required detail.

Schedule

- The available schedule will define the scope of the budget. The periodicity of budget reporting
and tracking is dependent on the schedule. For instance, sales budgets may require frequent
reporting, i.e. weekly, fortnightly or monthly. In contrast, marketing and advertising budgets
may require monthly or quarterly reporting

To understand the organisation’s business needs, you need to consult with various stakeholders as
described below:

- Consultation with senior management will help you understand the scope and nature of the
budget you will develop.
- Discussions with operating unit heads will give you an understanding of the challenges on the
ground. It will help you gain a better perspective of their requirements.
- Meetings with operating staff will help you understand the finer details of the processes
involved.

These consultations will also help you estimate the components of a budget more accurately.

Components of the budget are the main cost and revenue items that go into making the budget.
Depending on the type of budget, you will need to finalise the main components.

The main components include the following:

- Estimated revenue or sales

 - Fixed costs
- Variable costs
- One-time expenses
- Cash flow

Below are the suggested steps you may take to help you determine the scope and nature of the
budgets:

Understand objectives, resources and schedule

Consult with stakeholders including senior managment and line staff

Document your understanding of the scope and nature of the budget

When you consult with senior management, you should be mindful of their time. You should seek an
appointment so that you have their undivided attention. It would help if you were well-prepared with
your discussion points and questions. You should seek their input and viewpoints. Similarly, you should
be open to their contribution when you consult with line staff. They should feel that you value their
contribution and will consider their input.

The steps that you may take to confirm the scope and nature of budgets may include the following:

- Consult with senior management to confirm your understanding

- Incorporate the feedback and suggestions received during the consultation
- Finalise the document and circulate to senior management and budget team for the record

When you consult with senior management to confirm your understanding of the scope and nature, you
should make your points brief but clear.You should incorporate their feedback and suggestions. Finally,
you should document the final scope and nature as agreed in the consultation. Then you should
circulate the finalised document to the senior management and your budget team for their record. This
way, you can ensure no ambiguity during budget preparation.

Having determined the scope and nature of the budget, you now need to identify, access and interpret
the data required for the budget preparation process. Budget preparation is the process of allocating
resources to meet organisational, departmental or specific goals. It involves an estimation of income and
expenditure based on available resources. It helps set the objectives.

You need to identify and access relevant sources for the required data. During the budget preparation
process, you need to consult different types of data and data sources. You can prepare the required
budget by interpreting research, examining previous organisational results, or understanding new
legislation introduced.

Data may be understood as a collection of facts and statistics that is analysed or interpreted to reach
conclusions. Analysis of data helps make informed decisions.

- Competitor research will include information on competitors’ features, market share, pricing
strategy, marketing strategy, differentiators, SWOT analysis and customer reviews.
- Customer or supplier research will include information on the needs and preferences of the
target market, satisfaction levels of the customers, mode of purchasing a product, quality of
goods and services provided, fairness of the rates provided and alternative market vendors.
- Declared commitments in areas of operation will include information from the different
departments on whether they have signed agreements with individuals like suppliers. For
example, an organisation can be preparing for renovations. Planned renovations will influence
the budget because you can expect the income to fall during this time. When it is finished,
though, the income budget ought to go up since you anticipate that the renovations will draw
consumers.
- Financial information from suppliers will include information on the frequency of hike prices by
the suppliers, frequency of the payment received by the supplier and receipt of any other
payments.
- Financial proposals from key stakeholders will include information on consultation with the
owners to know the long-term and short-term goals and if objectives align with goals. They will
also state the factors that need to be modified and improved to keep the organisation on track.
- Income and expenditure for previous periods will include information on the creation of the new
budget. This information is helpful if little has changed in the situation and on the forecasting
accuracy when you use these numbers with other budgeting factors.
- Departmental, event or project budgets will include information on how to know about a special
event that does not happen every year. They will also include information on various initiatives
not part of regular business.
- Grant funding guidelines or limitations will include information on the organisation’s eligibility to
avail of funding or grants. They also provide knowledge of the things to be purchased with the
money received and the allocation of resources.
- Management policies and procedures will include information on the number of staff needed to
execute a task and how completion time is affected due to procedures. They will also include
how profitability can be affected by a change in the quality of the product.
- Organisational budget preparation guidelines will include information on whether the budget
has been created based on the organisational guidelines. They will include information on the
usage of applications or templates for the same and knowing which guidelines to include and
which to not.
- Performance information from previous periods will include the notable deviations from specific
periods that the new budget must account for to be accurate. It will consist of information on
 profit margins, whether the organisation undergoes loss, and how to account for it when
creating the new budget.

A data source can be a database or a collection of related items that may be accessed individually, in
combination, or as a whole entity. Data may be primary or secondary. Primary data is what you collect,
and secondary data involves using already existing data.

Given below are some examples of primary and secondary data sources:

Primary data sources may include:

Interviews

Observations

Action research

Case studies

Focus groups

Questionnaires

Secondary data sources may include:

Previous research

Statistics

Censuses

Governmental reports

Historical data and information

To help you prepare budget information, you need to identify the required data based on the scope and
nature of the budget you will be developing.

You may consult with your colleagues or co-workers experienced in planning the organisation’s budgets
to help you with this identification. You need to access workplace documentation containing
information on sources relevant to preparing budgets. These may include operational and financial data
reports.

Once you have identified the required data and the relevant data sources, you need to access and
review the data. Data access is the ability to obtain data from a database or repository. For primary data
to understand operating efficiency or customer preferences, you may need to conduct interviews or
observe activities. To access secondary data, you may need the assistance of your technology
department, which has database access. You may also obtain information like income and expenditure
for previous years from the operating departments. You may access published data from industry bodies
and economy monitoring services like the Australian Bureau of Statistics (ABS) for information on
industry or economic trends.

Having accessed the data required from relevant data sources, you need to interpret them to assist you
in making accurate assumptions for the budgets. To understand the data effectively, you may do your
preliminary analysis to arrive at findings and conclusions. Depending on the budget’s scope and nature,
you may discuss the data, findings, and assumptions with your colleagues, departmental heads,
technical committee or advisory board.

For instance, if you are preparing a project budget for a new hotel for your organisation, you may need
to consult with experts to access and interpret data on construction costs. You may review the existing
data on expenses incurred for a previous hotel opened for your organisation. You may consult with
market experts to understand trends in occupancy rates.

However, suppose you are preparing information for developing the wage budget for your department.
You may only need to obtain information on the prior period’s efficiency levels and current wage
structure. You may get this by consulting with the departmental head.

Budget development includes all the processes by which an organisation obtains and analyses all
required information and then prepares and finalises the budget. The next step in preparing budget
information after determining the scope and nature of the budget and interpreting identified data from
various sources is to understand the factors that can impact budget development. These factors may be
internal or external to your organisation. Internal factors are those which are determined by and are
within the control of the organisation. They are the strengths and weaknesses of the organisation.
External factors are those influences that are outside of an organisation. Organisations usually have very
little control over these factors.

These factors are based on the organisational culture, style of management and the employees. Some
internal factors that may have a potential impact on the budget and its development may include:

- Human resource requirements

These requirements are the employees who need to be hired and trained by the organisation to
achieve its strategic goals. The need for human resources can have a significant impact on
budget development. Rising staff costs would demand adjustments to the budget. A well-
planned budget must fund all employee initiatives and programs to attract and keep skilled
employees
- Organisational and management restructures
These may be due to redundancies, mergers, or implementing a more streamlined reporting structure.
Organisations undertake them to improve their profitability. But these changes might have a double-
edged impact on the budgets. You may need to adjust for changes in departmental structures and cost
centres. It may also need the appointment of advisers to manage these restructures.

- Organisational objectives

The aims of an organisation and the operating budget are connected. This is because the organisation’s
objectives guide the budget. But available funds in the budget will influence the objectives too. Available
funds depend on the resources authorised.

- Scope of the project

Project scope helps provide a list of specific objectives and deliverables. It defines the tasks, costs, and
deadlines. Changes in scope can impact the cost, schedule, risk and even the quality of the developed
budget at the organisation. Each project should have its own budget to help with cost control

The following are some recommended steps that you may take to analyse internal factors that may have
a potential impact on the budget that you are developing:

STEP 1 Identify internal factors

You may hold a brainstorming session with colleagues. You can use techniques like SWOT analysis to
identify internal strengths and weaknesses. SWOT Analysis is a technique for identifying internal and
external factors of an organisation that may impact the business.

Step 2

Analyse their impact

Check if these strengths and weaknesses have an impact on budget items. You may seek input from
senior management of your organisation. You may also consult with specialists and experts. You can
understand their impact by looking at the internal factors that caused variances in the budget in the
previous periods.

Step 3

Finalise action items for handling the potential impact

Having identified and analysed these internal factors, you must finalise the steps you will need to take to
ensure that you have catered for the potential impact. You should ensure that your budget allows you to
invest in your strengths and address internal weaknesses.
For instance, you may find that customers like visiting your hotel as it has access to great views. You may
allocate resources to further improve the facilities around the view. It will help you set your value
proposition apart and increase revenues because of higher occupancy rates.

On the other hand, you may identify that outdated systems and inadequate customer information
hamper the effectiveness of your front office team. You may budget for a technology upgrade for the
department.

These factors represent opportunities and threats to the organisation. For instance, a change in
legislation increasing minimum wages or overtime may impact a hotel chain adversely as they are
people-intensive organisations. A global amusement park opening near one of your hotel properties will
represent an opportunity for increased revenue, as it will attract more tourists.

Growth or decline in economic conditions

Economic factors like inflation, financial crises, and changes in interest rates may influence the budget.
For example, if the interest rates increase, the expense side of the budget would be affected, reducing
the organisation’s profits. The economic slowdown may adversely impact the travel, hospitality and
retail industries. Their products and services are considered discretionary items. Customers may reduce
their consumption of these products and services as they treat them as non-essential.

New legislation or regulation

Government policies and regulations may affect a business’s marketing, production, and financial plans.
You should consider how proposed or new legislation and governmental regulations may affect current
or future operations.

Shift in market trends

The state of the economy and the market can have a wide range of effects on the financial forecast. The
poor stock market performance will directly impact budget projections if the organisation substantially
relies on investments as a source of funding. The budget will have a surplus if the rate of return on
investments beats expectations.

Significant price movement for certain commodities or items

The forces of supply and demand in the market influence the price of commodities. For instance, the
price of a barrel of oil declines as the supply increases. On the other hand, if demand for oil rises, the
price also does. This can impact your budget development. For instance, the recent Ukraine–Russia
conflict resulted in worldwide inflation because of a sharp increase in the prices of natural gas, oil and
many staples. Transportation infrastructure disruptions coupled with higher fuel prices have impacted
shipping costs. It has led to increasing prices and resulted in shortages. This has impacted profit margins
for many organisations disrupting their budgets.

Supplier availability and cost

When supply is insufficient compared to demand, prices rise. This was seen when Cyclone Yasi caused
banana prices to skyrocket. On the other hand, suppliers often sell items at a lower price when there is a
market glut to shift surplus inventory. Hence, supplier availability and cost have a direct impact on the
budget.

Below are some recommended steps that you may take to analyse external factors that may have a
potential impact on the budget that you are developing:

Identify external factors

– You may hold a brainstorming session with colleagues. You can use techniques like SWOT
analysis to identify external opportunities and threats.

Analyse their impact

– Check if these opportunities and threats have an impact on budget items. You may seek input
from senior management of your organisation. You may also consult with specialists and
experts. You can understand their impact by studying the external factors that caused variances
in the budget in the previous periods. You may also use techniques like PESTLE and Porter’s Five
Forces Model to assist you in analysing external factors and competitive forces.

PESTLE analysis is an effective tool for analysing the impact of external factors on an organisation. This
tool looks at six external factors that influence an organisation’s performance. By analysing these, you
can get an insight into the external factors affecting a business’s activity and decision-making.

Political – Degree of political stability and government intervention regarding taxation, regulations,
trade restrictions, and tariffs

Economic – Economic growth or decline, interest rates, exchange, inflation, wages, working hours,
unemployment (local and national), credit availability, cost of living, and consumer spending
Social – Cultural norms and expectations, health consciousness, population growth rates, age
distribution, career attitudes, health and safety

Technology – New technologies continually emerging: Robotics and AI; rate of change increasing; impact
of this on organisation’s products and services

Legal – Changes to legislation impacting employment, access to materials, quotas, resources, imports
and exports, and taxation

Environmental – Global warming and increased need to switch to sustainable resources, ethical sourcing
(both locally and nationally)

Porter’s Five Forces is a tool that helps analyse the competition level within an industry. It talks about
five forces present in the industry while conducting any business activity. This enables an organisation to
shape strategy and develop budgets to achieve business objectives and maximise profitability. However,
you must constantly monitor these forces because of a dynamic business environment.

The five competitive forces are:

Competition and rivalry

Threat of new entrants

Supplier's bargaining power

Client's bargaining power

Threat of new substitutes

Finalise action items for handling the potential impact

– Having identified and analysed these external factors, you must finalise the steps you will need
to take to ensure that you have catered for the potential impact. You should ensure that your
budget allows you to invest in capitalising on the opportunities. Identifying and understanding
the impact of potential threats can allow you time to reduce non-critical expenses. You can
allocate more budget resources to mitigate the impact of these threats in the future.
For instance, substitute goods or services that customers may use in place of the product or service
offered by the organisation pose a threat. Organisations that produce goods or services without close
substitutes will have more power in pricing its offering and negotiating better terms. Opening a rival
hotel chain in the same locality as your hotel may reduce your sales and adversely impact your budget.
Similarly, suppose more vegetable vendors open their stores near your restaurant. In that case, you can
negotiate better prices for the produce you purchase, improving your profit margins.

Budget planning encompasses all processes that help organisations prepare information required to
develop budgets.

As previously covered in this chapter, these processes include:

Finalising the budget scope and nature

Finalising the data and information requirements

Analysing internal and external factors that may impact the budget

The success of your budget development and implementation is closely tied to how well the people
associated with it adapt and gear themselves to perform their expected roles. You should not develop
the budget in isolation and attempt to push its implementation in the organisation. It is critical to secure
the commitment of relevant colleagues to the budget at the planning stage itself. These colleagues may
have access to internal information and past experiences. They may also have a direct influence over
decisions and may actively participate in organisational management. You need to consult with your
colleagues about the various components of the budget at multiple stages during budget preparation.
This consultation will ensure that you prepare the budget according to the organisation’s business
needs. Business needs are the gaps between the current state and the goals of an organisation.

Seeking their participation in the budget planning process will engage your colleagues by demonstrating
that you value their opinion. Timely feedback and inputs can help you identify and correct issues early
on, thus saving valuable resources, including time and effort. This will also improve the quality of your
budget recommendations.