UNIT :- 4 BUDGETING

CONTENT

❏ Types of budget and budget cycle

❏ Making Front Office budget

❏ Factors affecting budget planning

❏ Capital and operations budget for front office budget

❏ Refining budget

❏ Budgetary control

❏ Forecasting room revenue

❏ Advantages and disadvantages of budgeting

A budget is a financial plan for a defined period, often one year. It may also
include planned sales volumes and revenues, resource quantities, costs and
expenses, assets, liabilities and cash flows.

•A Budget (derived from Old French word –BOUGETTE, PURSE)

•It means – is a quantified financial plan for a forthcoming accounting period.
•Budget is essential for any organisation.
•A budget is the blueprint.
•The generated revenue will be utilized to achieve the objectives of the company.
The budgets are generally prepared for the next financial year.
TYPES OF BUDGET

1- MASTER BUDGET – A master budget is a comprehensive projection of how

management expects to conduct all aspects of business over the budget period,
usually a fiscal year. Most master budgets include interrelated budgets from the
various departments. Managers typically use these subset budgets to plan and set
performance objectives. Master budgets are generally used in larger businesses to
keep many managers on the same page.
Define : The summary budget, incorporating its component functional budgets,
which is finally approved, adopted, & employed.
by (CIMA) The chartered Institute of Management accounts – London.

2- OPERATIONAL BUDGET– The operational budget covers revenues and

expenses surrounding the day-to-day core business of a company. operating
budgets are usually broken down into smaller reporting periods, such as weekly or
monthly.
•It is the financial statement.
•It is associated with the routine operations of a hotel.
•It is the cost that a hotel incurs in the process of generating revenue.
Eg: i) Salaries,
ii) Wages,
iii) Direct labour cost.

3- CASH FLOW BUDGET– A cash flow budget examines the inflows and
outflows of cash in a business on a day-to-day basis. It predicts a company’s ability
to take in more money than it pays out. Managers monitor cash flow budgets to
pinpoint shortfalls between expenses and sales.
•To forecast of the cash position for a specific duration of time.
•It tells about the availability & requirement of working capital at different
periods.
•An important part in the efficient working of the hotel.
•It is prepared by the chief accountant.

4- SALES BUDGET- an estimate of future sales, often broken down into both
units and currency. It is used to create company sales goals.
•To forecast of the sales.
•To be achieved in a budgeted period.
•To be prepared by sales manager.
Eg: i) room sales budget ii) food & beverage sales budget.

5- REVENUE BUDGET– consists of revenue receipts of government and the

expenditure met from these revenues. Tax revenues are made up of taxes and
other duties that the government levies.

6- FLEXIBLE BUDGET– Flexible budgets are, as their names suggest variable

and flexible depending on the variability in the results expected in the future.
Such budgets are most useful for businesses that operate in an ever changing
business environment, and have the need to prepare budgets that are able to
reflect the many outcomes that are possible.
•To give the budgeted cost for any level of activity.
•It prepared after considering the fixed & semi-variable elements of cost.
7– FIXED BUDGET– Fixed budgets are used in situations where the future
income and expenditure can be known, with a higher degree of certainty, and
have been quite predictable over time.
•It is prepared on the basis of standard or fixed level of activity.
•It is does not change the level of activity.

8- CAPITAL BUDGET -
•It guidance as to the amount of capital.
•FFE- Furniture, fixture, & equipments are among the constituents of capital
budget.
•Eg: i) EPABX, ii)telephone, iii) Renovated Computers, iv) Updated
software's, v) Billing machine, vi) self service terminals, etc

9- DEPARTMENTAL BUDGET :-
•It is prepared by individual departments of a hotel.
•The proposed estimates of revenue & expenditure for a specific duration of time.
•Eg: i) Front office budget ii) Housekeeping budget

10 ADMINISTRATIVE OVERHEAD BUDGET :-

•It covers expenses of all the
i) Administrative offices
ii) Management salaries.
•The budget for the entire administrative departments.

GOALS FOR BUDGET PROCESS

•Maximise Revenue.
•Minimise Expenses
•Minimise Investments.

BUDGET CYCLE
The budget cycle refers to the life of a budget from creation to evaluation. it
consists of four phases.
1- Preparing the Budget

2- Approving the Budget

3- Executing the Budget

4- Evaluating the Budget

1.Establishing attainable goals or objectives.

2.Planning to achieve these goals or objectives.
3.Executing the budget plan
4.Evaluating the budget plan
5.Taking corrective action – if required
6.Improving the effectiveness of budgeting.

Establishing attainable goals or objectives:

•The top management must determine and
•Communicate the objectives of the organisation to the lowest levels.
•Specific objectives need to be set for the organisation & department.
•Realism must play a part in setting goals. Limitation (draw back) should be
considered.
•Customer demand & competition must always be kept in mind.
Note: Adding more room does not automatically increase the demand for rooms
in the area.
Planning to achieve these goals or objectives:
•Once the objectives have been determined , plans must be made to achieve them.
•Front office manager is responsible for maintaining sales & minimizing expenses.

Executing the budget plan:

•To work as per the budgeted plan.
•To get into work.
•To begin actions of operations in hotel.
Evaluating the budget plan:
•To know the performance of budgeted process.
•To know the difference between the plan budgeted & actual performance .
•It’s a yardstick .
Taking corrective action – if required:
•The cause of difference in performance by the fact. May be
 i) Selling prices were not sufficient, ii) Inflationary rate of cost increased.
iii) Budgeted forecast in room occupancy, iv) Construction of new hotel nearby
•To do correction,
i) To do brainstorming, ii) analysis with the facts iii) work out to overcome.
Improving the effectiveness of budgeting:
•The final step of budget cycle.
•Emphasis on improving the budget process in success.
•The past record will be more help to do the improving in budget.
Making Front Office budget :-
•FO department’s efficiency & profitability affects the overall revenue of the
hotel.
•About 70% of the hotel revenue is generated form this Room division-
(FO&HK).
•The budget will further be classified under i) Capital , ii) Operational Budget.
•Here we see what are all considered before making FO budget.
Budget:
•It is a quantified financial plan for a forthcoming accounting period.
•To be utilized to achieve the objectives of the company.
Major sections for making FO Budget:
•It includes i) Telephones, ii) Lobby, iii) Bell desk, & iv) reservation.
CHART CONSIDERED FOR MAKING BUDGET:(RENOVATE OR BUY
NEW)
MANUAL SEMI AUTOMATED AUTOMATED

FORMS KEY RACK SOFTWARE

REPORTS MESSAGE RACK COMPUTERS

FILES DESK TELEPHONE

CARDS TROLLEY WIFI

REGISTERS OTHER EQUIPMENTS SCANNER

STATIONARY MAINTENANCE PRINTER

FOM role:
•FOM prepares a FO department budget for the hotel.
•Normally the FO budget is prepared on a quarterly basis like Q1,Q2,Q3 & Q4.
•The FOM would coordinately take the help & guidance from the Lobby
manager & Reservation manager in finalizing the budget.
Conclusion:
•The finalized budget is presented to the GM & Financial controller & then
finally placed for approval by the BOD – Board of directors..
•Once the budget has been approved then implemented. It is the duty of the
operating section to ensure that the employee adhere (stick- follow) to their
budget.
FACTORS AFFECTING BUDGET PLANNING
History: Previous performance analysis that can project the estimated sales
revenue
The Economy: The inflation of materials
Market research: Improper data & facts
Government legislation: Political Rules & regulation of governments
Perception: The way see the data, not in detail care of data & information.
Motivation: lack of motivation to the employee to execute
Nature of product : Product depletions – need renovation
Improper planning: Unplanned meeting & poor plan of work
Competitors actions : They may take our business resources & guests
Change in trends: Technology changes, people taste changes
Change in management policy: Company rules & norms
Change in availability of resources: Scarcity of resources.
Changes in policies: Company Internal policy changes of the hotel
Changes or development of hotel plans: It may affect the hotel budget plans
Changes in reservation trends or patterns : Technology revolution

CAPITAL & OPERATIONS BUDGET FOR FRONT OFFICE

Capital Budget: (Investment)
•This relates to items that appear as fixed assets on the asset side of the balance
sheet.
•It deals with the assets.
•It is a planning process.
•It involves a large sum of money.
•It deal capital funds of business.
•An organisation on long term investment
•One of the primary goals of capital budgeting is investment is to increase the
value of the firm to the shareholders.
Eg: Capital investment in such as
i) New machinery ii) New hotels iii) New products
iv) R&D Research & Development Projects v)Land & Building vi)Adding rooms
Popular methods of capital budgeting : it includes
NPV - Net present value method
IRR - Internal rate of return
DCF - Discounted cash flow
PBP - Payback period.