BUDGETING

HOTEL BUDGETING

Introduction

This study is prepared to be used as a guide to identify the context and content of budget in hotels. It is designed as a source to build relation between management’s targets and use of budget as a strong tool to achieve those targets.

Targets of hotel managers:

Increase hotel occupancy rate

Increasing hotel occupancy rate depends on the success of marketing plan, which involves product, sales channels, promotions and prices. Marketing plan will be successful only when management has a thorough understanding of the target market and needs of potential customers. Marketing environment conditions - economic, social-cultural, legal, competitive and technological-, are directly correlated with the success of marketing plan.

Increase profitability of sales

Increasing profitability can be rendered through reaching the most profitable customer groups. As we all know, customers, who stay at higher rates, may not be the most profitable customer group. Another customer group which stays at a lower rate may bring higher revenue by benefiting from other outlets of the hotel such as spa, F&B outlets, etc.
At this point, management should find the answers to the following:
a. Who is the most profitable customers?
b. What are the most profitable products?
c. What are the most profitable departments?
d. And why are these more profitable?
Answers to these questions are keys to increasing sales and profitability.

Cost control

a. Finding the owners of revenues and expenses
Purpose of all company expenditures is to realize company objectives. According to this point of view, each expense should have a purpose and an owner. Here, owner of an expense indicates a department rendering any one of management functions. Similarly, revenues should have generators and owners.
It is crucial to define the owners of revenues and expenses and determine their generator -in line with responsibility accounting structure. This method will enhance the performance of relevant revenue and expense owners. The golden rule in organizational behavior is "concerning the topics and problems that you own or you are liable for."

b. Relating expenses and revenues
Revenues brought by each market section and expenses made for these sales should be correlated. This way, it can clearly be seen that how efficient the management resources are being utilized. The operations which stay below organization’s expected and targeted "expenditure rate for unit revenue" are determined, problems can be observed, regenerations can be rendered or these operations can be cancelled out entirely. Laundry is a good example for this: Should we have laundry service in our hotel or should we outsource it? In order to make a decision, you should know the exact costs of laundry service and their effects on revenues. But first, these should be correlated to one another.

The benefits of successful budget application

Deployment and application of a proper budgeting system brings 5 main advantages:

1. Forces managers look at the future and develop plans for possible outcomes
2. Enhances communication in the organization
3. Provides information to share holders and between different functions and levels of the organization
4. Sets a benchmark for performance control including organization as a whole, departments and individual employees.
5. Sets a goal oriented organizational behavior

Industrial Comparisons

To determine and evaluate performance level, it is needed to know the hotel's service standards and the revenues and expenses compared to regional competitors. Thus, financial reports for the lodging industry should be put up in compliance with Uniform System of Accounts, which contains reporting standards for hospitality industry. This way, all financial and statistical comparisons can be made. Principles of Uniform System of Accounts were first published in 1926, and now currently its 9th revision is being used. It is accepted as the financial & operational reporting standards of the hospitality industry. Accounting structure and technological infrastructure should allow reporting to be done in compliance with Uniform System of Accounts standards.

Mostly accounting and finance departments prepare these reports in line with Uniform System of Accounts requirements with the information that they gather from different sources of information.

A successful hotel budget should be compliant with Uniform System of Accounts reporting system and the financial reporting should be converted to budget results and comparison between planned and actual values for decision making purposes.

Relation between management functions and budget:

Four Functions of Management

It is crucial that the four basic functions of management -planning, organizing, leading and controlling- function properly and are well balanced. Otherwise, organizations tend to lose their strength.

Basic problems that managers face are poor applications of planning and control functions or not applying these functions at all. When market volume is large and intensity of the competition is less -meaning, when the demand-supply balance does not prevent the endurance of weak organizations- organizations which has not implemented planning and control functions can proceed with their existence in the market. However, when demand shrinks, when the number of competitors rise or when both happen at the same time, organizations which does not implement planning and control functions well tend to respond lately to the changes in their environment and face situations that ruin their financial structure.

Relationship between the Functions of Planning, Controlling and Organizing

Planning: Planning function depends on forecasting based on the combination of evaluation of the current market information and the market environment with organization's internal and external information and experience and determining action plan based on these forecasts. Three types of planning exist: Short, mid and long term planning.
Organizing: It is the implementation of the plan and utilizing company resources effectively in order to succeed it.
Controlling: It is the process of performance evaluation. After this evaluation is done, results reflect back to the plan as feedback. Relation between the plan and the actual results and deviations from plans supply inputs for organizing and leading functions.

Budget is a tool that runs planning and controlling functions in a hotel and supplies management necessary feedback to make decisions. Thus budget is a critical tool for hotel managers to run management functions properly and achieve organization’s goals.

Although almost every manager says that planning and controlling functions are important and budget is necessary for every hotel, actual results do not match with those intentions because of a list of reasons.

Reasons of failure in budgeting

Reasons for Failure of Planning and Controlling functions are as follows:
-Lack of top management support
-Lack of organizational conformity
-Lack of responsibility accounting
-Gathering wrong internal or external information which is not based on actuality
-Not complying with schedules
-Lack of flexibility
-Deficiency in observation and evaluation of actual results
-Not reflecting the evaluation of results back to business

Blocking factors above should be considered and eliminated for a successful budget application in any size of hotel properties.

Before starting to set up the budget

Consider following information before starting to set up the budget:

1. Current year’s activity figures
2. General economic and industry conditions
3. Competitive environment
4. Prices(rates) being applied
5. Industry forecasts and trends

Structure of hotel budgets:

For a multi-property situation following structure will be appropriate

1. Summary profit & loss schedule: This page includes revenues and expenses in total and break down regarding major sources.

a. Revenues: This part will be consisted of operating departmental revenues such as rooms, F&B, outlet rents, communications, laundry, activity membership-sport and gym outlets- etc.

b. Expenses: Expenses will be organized under major sub-total headlines such as cost of sales, departmental expenses, payroll and related expenses, undistributed expenses.

c. Cumulative profit and loss figure of multi properties

d. Ratios:

Operational ratios: Occupancy rate, double occupancy rate, average stay, average room rate, RevPar (Revenue per available rooms), F&B spending per person, Cost of sales ratio for F&B outlets, payroll and related expenses ratio,  total cost per occupied room

Profitability ratios: Net profit margin, Operating profit over assets, Operating profit over equity, Operating profit over long term assets

2. Single Property profit & loss schedule: Profit & loss page with some additions for each property would be appropriate in the same format mentioned above for cumulative values of all properties.

In property summary profit & loss schedule undistributed expenses should be given as well below payroll and related expenses information.

Use of additional schedule for operated department analysis will be appropriate. This schedule should include departmental profit and loss information for operational departments.

3. Departmental budgets: It wouldn’t be wrong to say that the most critical parts of a hotel budget are departmental budgets since cumulative sheets of budget for a single property of multi-property budget are derived by summing departmental budgets.

Departmental budgets include a summary sheet as follows:

1. Revenues: Departmental revenues (Not including details and market segmentation)
2. Expenses: Cost of sales, departmental expenses, payroll and related expenses

Departments here mean profit and loss centers which accounting system assigns and records costs and revenues related with each of those centers separately. Revenue generating departments are called as operated departments. Departments generating only costs such as marketing, accounting and maintenance are called as support departments.

Department budgets also include budgeted amount and related cost driver information for each expense.

 

Schedule examples:

Multi-Property Executive Summary Schedule

	Multi-Property Executive Summary Sheet
	January
	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Revenues
Expenses
Cost of Sales
Departmental Expenses
Payroll and related expenses
Undistributed Expenses
Total Expenses
Income After Undistributed expenses
Key Figures
Rooms Available
Rooms Sold
Occupancy %
Double occupancy rate
Average stay length
Average room rate
RevPar
F&B spending per person
COS ratio F&B Outlets
Total cost/occupied room
Net Profit Margin
Operating profit/Assets
Operating profit/Equity
Operating profit/LTAssets

Property Profit & Loss schedule (for each property)

	Property Executive Summary Sheet
	January
	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Revenues
Expenses
Cost of Sales
Departmental Expenses
Payroll and related expenses
Undistributed Expenses
Total Expenses
Income After Undistributed expenses
Key Figures
Rooms Available
Rooms Sold
Occupancy %
Double occupancy rate
Average stay length
Average room rate
RevPar
F&B spending per person
COS ratio F&B Outlets
Total cost/occupied room
Net Profit Margin
Operating profit/Assets
Operating profit/Equity
Operating profit/LTAssets

	Operating Department Analysis
	January
	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Revenues
Cost of sales
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Cost of Sales
Departmental Expenses
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Departmental Expenses
Payroll and related expenses
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total payroll & related expenses
Profit / Loss
Rooms
F&B
Communications
Laundry
Golf Course
Parking Lot
Rental and Other Income
Total Profit / Loss

Department Budgets

	Department Profit/Loss Schedule
	January
Rooms department	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Market segment 1
Market segment 2
Market segment 3
Market segment 4
Market segment 5
Market segment 6
Total Revenues
Cost of sales
Rooms
Total Cost of Sales
Departmental Expenses
Computers & computer supplies
China/glass
Cleaning Material
Ammenities
Flowers & decoration
Customer supplies
Room supplies
Laundry
Linen
Printed materials and office supplies
Total Departmental Expenses
Payroll and related expenses
Salaries
Employee Insurance
Employee Transportation
Employee Meals
Total payroll & related expenses
Total department expenses
Department Profit / Loss

F&B department revenue analysis schedule

			F&B Department Revenue Schedule
			January
Restaurant 1	#of covers	Per cover	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Breakfast Food
Inhouse
Walk In
Breakfast Beverage
In-house
Walk In
Total Breakfast
Lunch Food
In-house
Walk In
Lunch Beverage
In-house
Walk In
Total Lunch
Dinner Food
In-house
Walk In
Dinner Beverage
In-house
Walk In
Total Diner
Total Revenues

F&B Departmental Budget Schedule

	F&B Profit/Loss Schedule
	January
Restaurant 1	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Revenues
Breakfast
Lunch
Dinner
Total Revenues
Cost of sales
Breakfast
Lunch
Dinner
Total Cost of Sales
Departmental Expenses
Computers & computer supplies
China/glass
Cleaning Material
Amenities
Flowers & decoration
Customer supplies
Room supplies
Laundry
Linen
Printed materials and office supplies
Total Departmental Expenses
Payroll and related expenses
Salaries
Employee Insurance
Employee Transportation
Employee Meals
Total payroll & related expenses
Total department expenses
Department Profit / Loss

Support department budget schedule:

	Support Department Budget Schedule
	January
Maintenance department	Previous Year	Budget	Actual	% A/B	YTD Budget	YTD Actual	YTD % A/B	% of Total Income
Departmental Expenses
Computers & computer supplies
China/glass
Cleaning Material
Amenities
Flowers & decoration
Customer supplies
Room supplies
Laundry
Linen
Printed materials and office supplies
Total Departmental Expenses
Payroll and related expenses
Salaries
Employee Insurance
Employee Transportation
Employee Meals
Total payroll & related expenses
Total department expenses
Department Loss