Prepare and Monitor Budgets: Learner Guide

Learner guide
Prepare and monitor

budgets
SITXFIN004
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Contents
Overview ........................................................................................................ 3
Section 1: Prepare budget information........................................................... 3
Section 2: Prepare budget ........................................................................... 31
Section 3: Finalise budget ............................................................................ 59
Section 4: Monitor and review budget .......................................................... 65
Glossary ....................................................................................................... 78
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SITXFIN004 Prepare and monitor budgets
Overview
Have you ever prepared a budget? Have you ever planned to achieve a goal, worked out
how much you can afford each week and what expenses you might have to pay to reach
the goal?
Planning a holiday is a lot like planning a budget. You decide on your destination (the
goal), calculate your expenses (airfares, accommodation, new clothes, spending money)
and establish a plan for how to earn the income required to achieve your holiday.
Using budgets in the business world is essentially the same. They are a common and
important management tool, helping you achieve your organisational goals by setting
targets to be achieved within specific timeframes. They also allow you to evaluate your
performance against those targets and make adjustments for the future.
However, a budget that’s not carefully planned researched and developed, is useless.
You need to know that the figures are reliable and accurate before making any important
business decisions. Are you ready to learn how?
Let’s look at what you will learn on completion of this unit.
Section 1: Prepare budget information

Section 2: Prepare budget
Section 3: Finalise budget
Section 4: Monitor and review budget
Section 1:
1 Prepare budget information
In this section you will learn the following.
• How to determine and confirm scope and nature of required budgets.

• How to access and interpret data required for budget preparation.
• How to analyse internal and external factors for potential impact on budget.
• How to provide opportunities for others to contribute to the budget planning process.
What is a budget?
In simple terms, a budget is a detailed financial plan that shows estimated revenue and
expenses (glossary) for a given time period. This information is then used to determine a
business’s potential profitability.
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Click on the icon to find out more.
A budget provides a plan for activities to be undertaken in the business and a means of
comparing actual figures to budget forecasts to determine if the business, department or
outlet has achieved a targeted profit or loss.
They can be very simple: for the production or sales of a specific product or service, or for
a small business such as a sole proprietor. They can also be very complex: for example,
for larger businesses with multiple outlets, or organisations with a number of sites, such
as a hotel chain.
What is the purpose of a budget?

A budget is both a planning and performance evaluation tool. It is prepared prior to a
specific financial period to assist in the business’s planning processes and allocation of
funds within a business. At the end of a period, the budget is then used to assess
performance by comparing actual figures to those originally budgeted.
Click on the icon to learn more.
Budgets can be a very useful and powerful management tool. However, they’re only
effective if they have been carefully researched and prepared prior to implementation. A
budget allocates where the business’s funds will be spent and forecasts where and what
revenue will be generated. If funds have not been allocated appropriately, expenses
controlled or sufficient revenue generated, the business’s operation and profits will suffer.
How can budgets assist your business?

Budgets are very versatile tools. You can tailor them to suit a wide variety of situations
and levels within an organisation. For example, a budget could show expected revenue
for all food and beverage outlets in a hotel, for one specific outlet, or for a trading period
within any given day.
Click on the tabs to see how a budget can assist your business.
Planning
Information from past and current budgets is used as a basis for many aspects of
operational planning, including forecasting revenue, expenditure, capital expenditure
requirements and staffing levels. It can help determine if a business can afford to
undertake a renovation program or introduce new products or services.
Allocating resources
Budgets can show what resources are required where and when to meet forecasted
demand. They indicate when extra financial assistance is required to cope with off-peak
season expenses or how many extra staff are required for the busy summer period.
Controlling operations
Budgets set very clear and specific targets so areas of concern are usually indicated
quickly, allowing management to respond and resolve problems before they escalate.
Budgets help you monitor and control cash flow and expenditure, reduce wastage and
maximise profitability.
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Improved communication
Budgets clearly communicate the goals and targets to be achieved to management and
staff at all levels of the business.
Performance evaluation
Past and current budgets give immediate, fast and ongoing evaluation of the performance
of a department, an outlet, a team or a specific product or service. You can use this
information in a wide variety of situations, including when conducting personnel
performance appraisals, developing marketing campaigns, or analysing cash flow.
How do you prepare budgets?

Hello. I’m your wizard Buddy. I’ll be providing some magic so you can learn more about
preparing and monitoring budgets. Click on the scroll and learn how to prepare budgets.
Preparation and implementation of budgets follows a well-established pattern called the

budget cycle. How thoroughly or extensively these steps are undertaken, often depends
on the size of the business the budgets are being prepared for and the dollar value of the
funds being distributed. However, these should not be a determining factor; it’s important
for all businesses to carefully plan their budgets no matter how large or small their
operation.
What is the budget cycle?

The budget cycle is the process undertaken from starting to develop a budget to the final
transaction in the budget period. Since resources are allocated to budgets on an annual
basis, the cycle covers costs or expenditures for a single year.
A ‘year’ can mean three different things in accounting terms. Click on the calendar
dates to see what they are.
A financial year (1st July to 30th June)
A calendar year (1st January to 31st December)
A corporate financial year (1st October to 30th September)
Budgets for shorter periods (such as a quarter, month or week) are developed from the
information contained in the annual budget.
Steps involved in the budget cycle

Click on each step to see what’s involved in the budget cycle.
Step 1: Establish attainable goals.
Step 2: Plan to achieve those goals.
Step 3: Analyse the difference between planned and actual results.
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Step 4: Take corrective action.
Step 5: Improve the effectiveness of budgeting.
Let’s look at steps 1 and 2 in more detail over the next few screens. You’ll learn how to
undertake the final three steps later in this resource.
STEP 1: ESTABLISH ATTAINABLE GOALS

Budgeting decisions should support a business’s stated goals and objectives. Essentially,
the business’s various budgets establish a framework of targets which, if achieved, help
the business reach its overall goals.
These goals are usually expressed in very broad terms at the organisational level and are
then formulated into more specific targets at operational levels.
An organisation which has researched and defined its goals is more likely to achieve long-
term success, as it understands what it wants to do and can focus on what is required to
get there.
How do organisational goals affect the budget?

The strategic plan sets the long-term policies and objectives, outlining broad methods of
achieving those objectives. The business plan indicates how the business can financially
fund those objectives, where the funds will come from within the business, or if external
sources such as business loans are required.
Budgets detail how, where and when those financial resources are allocated within the
business, based on the priorities and objectives provided in the strategic and business
plans.
Click on the tabs to see examples of how these work together.
Organisational goals
An organisation’s goals might be:
1. To obtain a specified profit (for example 20% net profit).

2. To increase market share (e.g. from 3% to 5%).
3. To provide high quality service in all areas of the establishment.
Strategic plan
The strategic plan would break down those goals into more specific objectives.
1. Increase profits through tight controls on expenses, cutting cost of goods, and
providing staff training on marketing techniques, including up-selling and add-ons.
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2. Research and introduce new advertising strategies to promote the establishment to

current and new markets. Increase exposure through national coverage on lifestyle
television programs.
3. Provide high quality of service through better communication skills, attention to
detail, increased menu and resort facilities, product knowledge and staff skills
training programs.
Budget goals
As a result of the objectives in the strategic plan, a series of budgets would be developed
for all areas of the operation. One of the budgets produced would be a sales budget.
The sales budget sets specific targets for the entire establishment, for example, forecasts
of the activity required to achieve the overall goals. The establishment’s goals are broken
down into smaller targets for each of its sales producing areas, such as the marketing
department, reservations department and the operational outlets.
Targets in a sales budget could include the following.
• Number of meals or rooms sold

• Average spend per customer
• Number of customers per room, per outlet, per service period
• Anticipated revenue
STEP 2: PLAN TO ACHIEVE

THOSE GOALS
It’s easy to prepare a budget; it’s harder to prepare a good budget. Research and
planning makes the final budget forecasts more accurate, setting goals which are both
realistic and achievable.
To create an effective management tool, budget planners should prepare their goals using
simple criteria.
Click on the pictures to learn more.
Accurate
You can base new budgets partially on the results of previous budgets. However, those
results must be accurately recorded and the reasons for any budget deviations noted.
Planners can then determine their validity and impact on new forecasts.
Achievable
Are the budget targets realistic or unrealistic? Are you and your team capable of attaining
the goals? Goals can be designed to stretch your capabilities but not set so high that they
are impossible to achieve.
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Measurable
Any targets set must be measurable. Budgets are usually statistical or financial
documents so targets are often expressed as dollar values or percentages, providing
specific figures to achieve. It’s easier to measure your performance throughout the period
and react quickly to unfavourable results.
Realistic timeframe
How long will it take to achieve the targets? Some goals are spread over a period of time
(and therefore a number of budgets) whereas others can be achieved within a budgeted
period.
Understandable
Do the people who have to achieve the targets understand why those targets have been
set and what they can do to achieve them? Frontline staff may not understand why certain
goals must be achieved; they may not be aware of other factors which have contributed to
the budget forecasts. Sometimes good communication skills and a little information can go
a long way towards building understanding and cooperation from your staff.
Supported
Will the team affected by the goals accept the responsibility and be willing and able to
work towards successfully achieving them? There’s no point setting goals if those involved
in their implementation don’t know what they are, believe they are unachievable or don’t
have the skills or knowledge to reach them.
Monetary vs non-monetary goals

Many budget goals are expressed in monetary terms: revenue targets to aim for, expense
figures to stay within.
Sometimes you also need to specify non-monetary goals to attain the monetary goals.
Often these are expressed as percentages and can be based on less quantitative
(glossary) sources of data.
Here are some examples of what non-monetary goals could relate to.
• Number of items offered for sale

• Return on sales
• Output per employee
• Rate of staff turnover
• Return on investment
• Percentage occupancy
• Customer satisfaction
• Market share
Putting it all together

Click on the tabs to see an example of planning achievable goals and how they
relate to the budget.
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The goal
A bistro manager wants to increase food sales by 25%. To succeed, there must be a
reasonable plan behind this hefty increase in turnover.
The manager might believe this target is attainable for any of the following reasons.
• The establishment is increasing the seating capacity in the bistro.

• A local competitor has closed down their business.
• The establishment is about to start a major marketing campaign.
• Menu prices are about to increase.
The planning process

The establishment isn’t increasing its seating capacity so, to increase sales, it must either
increase prices or increase the number of customers served, or do both of these things.
Click on the steps to see the process the manager followed.
Step 1
Before increasing prices, the manager consulted customer satisfaction surveys to assess
the feedback received on current menu prices. This was to see if customers thought the
establishment is value for money, cheap or already too expensive.
Step 2
The manager assessed the strength of local competitors and tried to understand why
customers were drawn to their venues, and what they needed to do to attract them to
theirs.
Step 3
For a two-week period, staff kept a record of how long customers stayed in the bistro.
They also recorded how long it took staff to clear, clean and reset tables in preparation for
a new sitting. The manager assessed whether it was possible to increase the number of
customers served per session by increasing seat turnover.
Step 4
The manager re-evaluated the success of previous marketing campaigns to determine
their actual impact on sales figures.
The results
The manager found out some important information during his investigation.
• Customers thought the establishment’s prices were reasonable. From the comments
made the manager believed they could safely increase prices by 15 to 18% without
producing an adverse reaction.
• Local competitors had also increased their prices. Their menus have a wider
international mix of dishes and service is fast.
• Customers stayed, on average, 1½ to 2 hours in the establishment. This time must be
reduced if they want to increase customer numbers.
• In the past, marketing campaigns have increased sales by 15%.
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The action
The manager reassessed his original goal and modified the increase to 20%. They believe
the establishment can achieve this with a combination of increased prices, a good
marketing campaign and providing skills training to staff to increase service speed and
customer turnover.
Who is responsible for planning and preparing budgets?

Budgets are operational documents and are usually prepared by departmental or
divisional managers.
Click on the pictures to find out more.
In a large establishment, such as a hotel or resort, outlet managers prepare the budgets
for their own area or department. Specialist advice is often provided by financial experts,
such as the finance manager.
In a smaller organisation, such as a motel, tour company or café, one or two people might
be responsible for all budget preparation, or it could be the sole responsibility of the owner
or manager.
Alternatively, in large, multiple-site operations, chains or franchise organisations, an

external head office may set corporate budgets. These objectives are broken down into
operational budgets within the business.
In most medium to larger organisations, budgets are prepared in consultation with others.
What information do you need to prepare budgets?

Before you prepare a budget, you must identify what data you need and where you can
find it.
Each budget can require different types of data depending on its focus.
How many sources of data can you think of?
List as many as you can in 30 seconds.
Click start to begin.
List as many sources of data you can think of in the space below.
How did you go?
Compare your list to the examples provided on the next screen.
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Sources of data used to prepare budgets

Click on the checkboxes to learn the main sources of data.
 Performance data from previous budget periods: actual budget results from
previous, similar periods of operation
 Income and expenditure for previous time periods
 Previous departmental, event or project budgets
 Customer or supplier research: price trends, customer spending patterns
 Competitor research: what the opposition is doing
 Management policies and procedures: stock control procedures, staffing levels,
service and operational procedures
 Financial information from suppliers: changes to contractual obligations, bill
payment requirements, product-pricing trends
 Organisational guidelines on budget preparation: legal, corporate or franchisee
accounting requirements
 Declared commitments in areas of operation: upcoming events, projects or minimum
standards of service within the business, financial commitment
 Grant funding guidelines or limitations: environmental, tourism, infrastructure,
training or other specialist funding
 Financial proposals from key stakeholders: injections of funds, share releases
What performance data can you use?

A common starting point for the preparation of new budgets is analysing the business’s
performance in previous budget periods.
In Manage finances within a budget you learned how to analyse budget performance,
conduct a trend analysis, determine where and why budget targets were not met and how
performance could be improved. Use this information when preparing the next period’s
budget.
Click the tabs for examples of the types of performance data you might refer to
depending on the type of establishment and nature of operations.
Income/sales
• Total sales
• Total sales for each department, outlet or revenue producing area
• Sales breakdown by categories: food, beverage, tours booked, accommodation, health
spa, gift shop, etc.
• Sales breakdown by items sold: numbers of each food, beverage, tour, ticket or other
item sold
• Average room rate, customer spend, revenue per cover, visit or booking
• Number of customers per room, service period, time period, function or venue
• Occupancy figures: rooms occupied, vacant, unavailable for sale
• Accounts receivable
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Marketing
• Customer demographics: type, age groups, where from, length of stay
• Booking source: travel agent, conference, tour group, direct, online
• Function/conference breakdown: revenue, facilities used, number of delegates, length
of stay, average spend
Expenditure
• Purchase orders, requisitions, delivery dockets, receipts
• Invoices
• Stocktake sheets
• Bank statements
• Accounts payable
• Payroll documentation: timesheets, leave applications
• Contracts and business agreements
• Capital expenditure
Where do you find the data?

Click on the icon to find out the answer.
Most of the data listed is easily retrieved from computerised systems. Accounting, POS,
purchasing and front of house systems are programmed to produce specific reports on a
daily, weekly or monthly basis.
This allows the business to know exactly how many of every item they have sold for a
given period: every dish or beverage listed on the menus in every outlet, every tour, gift
shop item, massage or limousine transfer.
Statistics and other information are automatically produced in reports as part of the end-
of-day night audit (glossary) process and accumulated to give month-to-date and year-to-
date statistics.
Businesses without a POS (glossary) system often use electronic cash registers that have
several categories for most items on the menu; they may use pre-set keypads or PLU
(glossary) systems. Sales reports are generated from the cash registers at the end of a
service period or day. These figures are then accumulated using a spreadsheet or other
software packages to provide monthly and annual statistics.
Manual systems can also use spreadsheet software to record and accumulate data and
statistics from paper-based sources.
How do you know which budget the data applies to?

Income or revenue data are relatively easy to allocate to budgets. However, where
expenses are allocated depends on the type of expense.
There are four basic categories.
Click on the tabs to learn about each one.
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Fixed costs
Fixed costs include rent or lease payments, salaries, loan repayments and some aspects
of the marketing budget. These don’t vary no matter how busy or quiet you are, how many
people you serve or bottles of wine you sell.
Variable costs
The most obvious examples are inventory (food, beverages, dry goods) and wages.
These costs fluctuate with the level of activity within the business. If sales increase, so do
the variable costs.
Direct costs
Direct costs are those directly linked to the provision of products and services, for
example, wages, the cost of food and beverage items produced and sold, equipment
purchased. These costs are usually included in departmental or outlet budgets, as they
are directly associated with revenue earned in that area.
Indirect costs
These are costs which cannot be directly attributed to a sales item or operational outlet.
Administration, human resource, finance and marketing staff who are not directly
associated with a specific outlet, are indirect costs that you still need to include in the
establishment’s financial commitments.
Indirect costs are included in master and profit and loss budgets, with a percentage of the
total allocated to individual budgets. For example, 20% of a hotel’s accounts department’s
wages might be included in the restaurant budget, and 10% in the hotel’s café.
Note
The four types of costs are not mutually exclusive. An expense can be a variable and
direct cost; purchases of wine, fruit and vegetables for a restaurant are clear examples.
Alternatively, an expense could be variable and indirect (a tour company’s electricity bills)
or fixed and indirect (loan repayments).
Determining if an expense is direct or indirect controls where it’s recorded. Fixed and
variable figures determine what amount is recorded.
Putting a budget together

Do you know how to construct a budget? Click on the wizard hat to find out.
The method used to construct a budget has a profound effect on the preparation process
and the final budget targets. Which style a business chooses to use can depend on
organisational policies (possibly dictated by external corporate management), the abilities
of the management team, and the business’s desire to understand and control its sources
of revenue and expenses.
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What are the different styles of budgets?

There are three common budget styles.
Click on the pictures to find out what they are.
Style 1: Incremental budgets
Style 2: Zero-based budgets
Style 3: Rolling or continuous budgets
Style 1: Incremental budgets

This style of budget uses the previous period’s actual or budgeted figures as a basis for
the next budget. These figures are adjusted by an incremental amount to become the
targets for the next budget. The amount added may relate to inflation, CPI (glossary) or
other economic factors, or a pre-determined amount. For example, if inflation has been
running at 3.5% for the past year, a minimum of 3.5% is added to last year’s actual figures
for the new budget. Alternatively, the business may decide to increase all figures by 5%
across all areas.
One of the biggest concerns with this style of budget is it encourages spending up to the
budget limit so that the budget is maintained next year (a ‘use it or lose it’ attitude).
There’s little incentive to assess what your actual expenses could or should be, or to
control them once the targets have been set.
What are the advantages and disadvantages of using an incremental

budget?
Advantages Disadvantages
• It works well for expenses such as • This technique assumes that the
utilities, rent and purchases, where previous period’s figures were
changes or amounts can be predicted. acceptable. If there were problems or
• Departments appear to be treated the errors in the previous budgets they may
same, reducing feelings of favouritism or not be corrected.
neglect. • It doesn’t allow for changes in the
• Budget targets are relatively stable and business’s environment, priorities or
predictable. Change is gradual and this operation.
can be comforting to some staff and • Past figures are not reviewed to ensure
business operators. they still apply in the current operation.
• The system is relatively simple to Additional funds may have been
operate and easy to understand. Very allocated in the past, have never been
little training is required to successfully reviewed and are no longer required.
develop incremental budgets. • It can stifle new ideas, innovations or
growth, as nothing changes.
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Style 2: Zero-based budgets

All budget items are set at a zero dollar value. You have to justify targets, especially
expenditure. As a result, more thought is given to each item before resources are
allocated, and you must consider your department’s needs carefully. This usually leads to
a thorough understanding of expenditure and revenue patterns in each area.
Click on the icon to learn about the advantages and disadvantages of using a zero-
based budget
• Can control wasteful expenditure of • Very time-consuming to develop and
managers who spend money simply administer.
because it’s in the budget. • Zero-based budgeting must be clearly
• Funds are allocated to departments understood by managers at all levels to
which provide the greatest return on be successfully implemented so ongoing
investment. training is essential.
• Increases staff motivation by providing • Resources could be incorrectly allocated
greater initiative and responsibility in the due to persuasive managers obtaining
decision-making process. more resources than needed for their
• Gives managers incentive to find cost- area.
effective ways of improving operations. • It can be difficult to administer and to
communicate with those involved due to
the level of paperwork and number of
managers involved in the process.
Style 3: Rolling or continuous budgets

This style of budget always includes budgets up to 12 months in advance. As one
budgeted period is completed, the same period for the following year is added to the
budget. For example, as the month of January’s budget for this year is completed,
January’s budget for next year is prepared and added to the annual budget.
Click on the icon to learn about the advantages and disadvantages of using a rolling
budget
• Makes managers think about and plan • Constantly evaluating and setting future
for the future. budgets is time-consuming.
• Can be established using either • Can be established using either
incremental or zero balance styles. The incremental or zero balance styles. The
advantages for each of those styles disadvantages for each of those styles
listed previously still apply. listed previously still apply.
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Types of budget forecasters

There are different types of forecasters.
Click on the images to see what they are.
Realists look objectively at the business internally and externally and set goals based on
the information provided.
Pessimists underestimate what can be achieved as they don’t want to set the targets too
high or guarantee they will be achieved, thus making them appear to be good managers.
Optimists overestimate what can be achieved as they always think they can do better, no
matter what past history or current trends indicate. They often believe that, by setting high
targets, people will strive harder to achieve them.
Click on the icon to see the consequences of under- or overestimating the budget.
Underestimating income and expenditure can cause serious cash flow problems and
adversely affect long-term planning. New projects and improvements may not go ahead
as the budget forecasts don’t indicate sufficient profit will be generated to fund them, and
financial institutions won’t provide credit as the business may be seen as a bad risk.
The opposite can occur if income and expenditure are overestimated. Funds may be
invested in long-term projects based on forecasted profits which don’t eventuate, placing
the business in financial stress. Also, resources may be unevenly allocated to various
departments throughout the business. As a result, some areas may not be able to reach
their goals due to insufficient resources, while others are over-funded and waste
resources.
Budget formats
In Manage finances within a budget you learned the two basic formats for a budget: fixed
and flexible. All budgets are prepared in either one of these formats.
Click on the tabs to refresh your memory and see the difference between the two.
Fixed (static) budgets

These budgets are usually prepared at the start of a budget period for an area or outlet,
for specific goals, or for areas which do not have a direct relation to production or sales.
This means the figures remain static no matter what the organisation’s actual revenue or
expenses are throughout the budget period.
For example, the sales budget for a bar may have set targets for daily and monthly sales
for the entire outlet, or for sales of specific products (such as cocktails or Boag’s beer),
based on anticipated numbers of customers. Alternatively, the budget could be for fixed
items such as capital expenditure (glossary), specific marketing campaigns or repair
projects.
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Flexible (variable) budgets

A flexible budget allows for adjustments based on changing conditions and can show
figures based on various scenarios. For example, a budget can be prepared showing
sales or revenue figures for a bistro at 50% occupancy and 75% occupancy. This allows
staffing requirements or stock expenses to be planned at these different levels.
Alternatively, a flexible budget can be used as an evaluation tool, where the initial fixed
budget is adjusted to reflect events which occurred during the budget period that had a
direct effect on its outcomes. This is called flexing the budget and is discussed in more
detail in Manage finances within a budget.
Note
As with direct, indirect, fixed and variable costs discussed earlier, you can have a number
of different combinations of styles and formats of budgets.
For example, you can have a fixed incremental budget, a flexible zero-based budget or a
fixed, zero-based rolling budget.
Does size matter?

No matter what size, all businesses need and use budgets. However, the number and
type of budgets used may vary.
Click on the tabs to find out more.
Micro and small businesses

A small family-run catering business may have only one master budget, which
incorporates all the financial forecasts and objectives of the business.
Medium to large business

Medium to large organisations, especially if part of a national or international entity, use all
the different budgets we have discussed, many at every level of the business. Every
division (food and beverage, accommodation, marketing, finance, tours, events, etc.),
department (front office, housekeeping, tourism), outlet (restaurant, bar, gym, gift shop) or
cost centre (maintenance, security) will have its own separate operational budgets and
sales budgets if appropriate. Many will have cash flow budgets as well.
Types of budgets
As mentioned earlier, the budgets a business chooses to use is dependent on their
internal structure, external reporting requirements, type of operation and business
philosophy.
Every operation uses a variety of budgets to suit its specific needs, but there are a
number of commonly used budgets.
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Look out for the blue calculators!
Click on the tabs to learn more about each one.
Sales budget
This is one of the most important budgets, as it can determine whether the business
makes a profit or loss and is often the starting point for all other budgets. Sales budgets
are forecasts of income/revenue targets to be achieved from the sale of the business’s
goods or services.
They are usually developed as monthly, quarterly, fiscal (glossary) or calendar year
budgets.
Click on me!
What did the zero say to the 8? Nice belt!
Click on the icon to see a sales budget example.
Sales budget example
Sales budget Outlet: ______________ Period: ________

Breakfast Lunch Dinner TOTAL
No. covers 1,410 2,090 1,375 4,875
Average spend per cover: food $18.85 $23.94 $35.41 $25.70
Average spend per cover: beverages $3.50 $6.10 $8.90 $6.17
Average seat turnover 1.25 1.5 1.0 1.25
Food sales
Breakfast $26,579.00
Lunch $50,035.00
Dinner $48,689.00
Total food sales $125,303.00
Beverage sales
Alcoholic beverages $16,805.00
Non-alcoholic beverages $13,116.00
Total beverage sales $29,921.00
TOTAL SALES $155,224.00
Click on the icon to learn how other reports support the sales budget.
How other reports support the sales budget

The example provided is a departmental budget; it outlines the targets for the whole
department for the entire period. This budget would be supported by other more detailed
budgets, which could give breakdowns of how those sales figures are to be achieved.
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These budgets could give specific targets such as:
• Sales to be achieved for specific meal periods: breakfast, lunch, dinner.

• Breakdowns of sales into categories of menu items: cooked or continental breakfast,
entree, main course, dessert, coffee, wine, beer, mixed or pre-mixed drinks, non-
alcoholic juices, soft drinks, etc.
Purchases budget
This budget comprises a series of smaller budgets which are then accumulated into an
overall budget. The smaller budgets would focus on individual categories or purchases for
a specific area or outlet. For example, budget categories could include food, beverages,
equipment, cleaning products or linen. Alternatively, each outlet could have its own
purchasing budget based on its particular requirements.
Larger organisations often have both types of budgets. Departmental purchasing budgets
are developed based on anticipated purchases needed to achieve the targets specified in
the sales budget.
Category budgets are then developed from the figures in all departmental budgets, giving
organisation-wide goals.
Allocating purchasing figures to categories also helps outlets and the business track their
cost of goods (glossary), providing important information on a major expense area.
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Click on the icon to see a purchase budget example.
Purchase budget example
Purchases budget: food Period: ________ Amount $

Fruit & vegetables 2,294.00
Dairy products 3,670.00
Meat & poultry 6,423.00
Fish & seafood 2,890.00
Dry goods: food 2,560.00
Dry goods: other 1,345.00
TOTAL PURCHASES 19,182.00
Click on the icon to see a departmental budget example.
19 2016 Edition
Departmental purchases budget
Purchases budget Outlet: ______________ Period: ________

Food purchases Amount $
Fruit & vegetables 10,695.00
Dairy products 13,690.00
Meat & poultry 19,460.00
Fish & seafood 9,890.00
Dry goods: food 5,600.00
Dry goods: other 3,045.00
Total food purchases 62,380.00
Beverages: alcoholic Amount $

Wine: white 4,550.00
Wine: red 5,680.00
Beer 11,050.00
Spirits 2,780.00
Liqueurs 1,255.00
Fortified 920.00
Pre-mixed 7,265.00
Total alcoholic 33,500.00
Beverages: non-alcoholic Amount $

Juice 2,630.00
Post-mix 1,560.00
Bottled soft drink 7,850.00
Water 1,465.00
Total non-alcoholic 13,505.00
Total beverage purchases 47,005.00
Equipment Amount $
Cutlery, crockery replacement 150.00
Glassware replacement 200.00
Gas cylinders 400.00
Small bar equipment 50.00
Total equipment 800.00
Cleaning products Amount $
Chemicals 150.00
Small equipment 30.00
Total cleaning products $ 180.00
Total departmental purchases $ 110,365.00
2016 Edition 20
Labour/wage budget
Labour costs are a major expense for any hospitality, tourism or events business, and, as
a result, it’s important that the labour budget is based on accurate, up-to-date data such
as current pay rates, salaries and anticipated staffing levels.
However, wages are not the only expense which needs to be considered. Other costs
(often called on-costs) that must be included in a labour budget are superannuation,
WorkCover contributions, payroll tax and leave entitlements. These additional expenses
can add up to thousands of dollars a month and must be paid, so ensure you include
them in your planning.
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Why didn't the two 4's feel like dinner? Because they already 8!
Click on the icon to see a labour budget example.
Labour budget example
Labour budget Outlet: ______________ Period: ________

No. Gross wages Super Leave TOTAL
staff $ $ entitlements $ COSTS $
Full-time staff 3 7,150.00 643.00 595.00 8,388.00
Part-time staff 2 2,600.00 234.00 216.00 3,050.00
Casual staff 2 1,730.00 156.00 1,886.00
Total costs 11,480.00 1,033.00 811.00 13,324.00
Overhead expenses budget

Overheads are business expenses which cannot be directly linked to the production of a
product or service (indirect costs). They are part of the total cost of running, staffing and
maintaining a business. Examples include rent, electricity, gas, repairs and maintenance,
telephone and public area cleaning.
Sometimes expenses which may have been included in other budgets will also be
included in the overheads budget, for example, advertising and employment expenses.
This allows the business to gain an overall picture of all indirect or fixed costs while giving
the marketing and human resource departments an understanding of all expenses
associated with their area.
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6 out of 5 people have difficulty with fractions!
Click on the icon to see an overhead expenses budget example.
21 2016 Edition
Overhead expenses budget example
Overhead budget for the month of June

Expenses Amount $
Operating expenses 20,501
Motor vehicle expenses
Motor vehicle: fuel 5,869
Motor vehicle: insurance & registration 1,930
Motor vehicle: repairs & maintenance 3,353
Total motor vehicle expenses 11,152
Services & utilities
Electricity 12,841
Gas 8,636
Telephone & Internet 7,520
Rates 1,468
Total services and utilities 30,465
Employment expenses
Staff amenities 814
Superannuation 3,244
Training & seminars 2,470
Uniforms 542
Workers’ compensation 574
Wages 61,483
Employee benefits 654
Total employment expenses 69,781
TOTAL OVERHEAD EXPENSES $ 131,899
Master budget (whole of organisation budget)

The master budget is a comprehensive amalgamation of all operational and financial
budgets. Projected revenue and expenses figures from all the other budgets are
accumulated to give a global picture of the business’s target for that period.
It’s an essential document when planning the future operation of the business,
determining if resources have been allocated appropriately, assessing the financial
viability of the business, and gauging if the objectives outlined in the strategic and
business plans are being met.
Normally, master budgets are prepared for a specific period (usually the financial year)
and would include other budgets such as income statement and cash flow budgets. These
would be reported officially in the company’s financial documents.
More information and an example of a master budget are provided in Section 3 of this
unit.
2016 Edition 22
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63.7% of statistics are wrong!
Click on the icon to see how the master budget is interconnected to other areas,
departments and their budgets.
How the master budget is interconnected to other areas, departments

and their budgets
Departmental
budgets
Food Food Labour Marketing

sales purchases
Beverage Beverage
sales purchases
Equipment,
Other etc.
sales
Human
Purchases resources
Sales budget MASTER
budget BUDGET Overheads
Revenue (profit
& loss) budget
Balance sheet Cash flow

budget budget
Capital expenditure
budget
Income statement budget

The income statement budget can also be known as the ‘profit and loss budget’ or
‘revenue statement budget’; the terms are interchangeable. Some businesses call the
budget document a Revenue Budget, while the final, actual results reported at the end of
the period is called the Profit and Loss Statement. We will use the terms income
statement budget and revenue budget interchangeably in this resource.
23 2016 Edition
The income statement budget is a financial statement that summarises the anticipated
revenue and expenses for a budget period, usually a fiscal quarter or year. This is a very
useful accounting tool, as it shows what volume of sales or revenue you need to achieve
to make a certain profit.
You can then break the annual budget down into monthly and weekly targets for
departments to achieve. The smaller targets give staff an idea of what they are expected
to achieve over shorter timeframes, making the targets seem more realistic and providing
regular feedback on performance.
Income budgets are often used to support applications for business loans, and grant
funding as it shows the business’s ability to generate a profit.
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Click on the icon to see an income statement budget example.
Income statement budget example
Budgeted income statement for the month of June

Sales Amount $
Sales: food 45,878.50
Sales: beverages 23,212.50
Discount received 500.00
Total income 69,591.00
Less cost of sales
Purchases: food 13,763.55
Purchases: beverages 5,338.87
Total cost of sales 19,102.42
GROSS PROFIT 50,488.58
Less expenses
Cleaning 1,227.27
Insurance 2,090.91
Laundry 477.27
Other overhead expenses 19,678.31
Rent 5,454.55
Uniforms 575.00
Utilities 2,861.80
Wages & on costs 14,760.15
Total expenses 47,125.26
PROFIT/LOSS $ 3,363.32
2016 Edition 24
Cash flow budget

A cash flow budget is based on information from the sales and operational budgets and
predicts the cash flow into and out of the business. This allows you to determine how
much cash or funds are available or must be outlaid during any given period.
You can plan for periods of increased cash outflow, assess your ability to finance
additional projects such as renovations or capital purchases, or determine if you need to
apply for a bank loan or overdraft (glossary) to meet your commitments. A cash flow
budget can be prepared for all levels of a business and is one of the most important
budgets used by managers.
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There are three types of people in the world, those who can count and those who can't!
Click on the icon to see a cash flow budget example.
Cash flow budget example
Cash flow budget F&B outlets Period: January to March quarter 20XX
Cash inflow Amount $
Cash sales 1,109,130.00
Accounts receivable: payments received 137,084.00
Government incentives: conservation grant
TOTAL INFLOW 1,246,214.00
Cash outflow
Food and beverage purchases 317,846.20
Accounting fees 6,000.00
Wages & salaries 382,375.00
Advertising 60,000.00
Insurance 3,411.25
Telephone 4,666.67
Postage 3,600.00
Stationery 6,900.00
Rent 119,000.00
Utilities 39,000.00
Repairs & maintenance 12,937.50
Bank loan repayments 8,500.00
TOTAL OUTFLOW 964,236.62
Balance inflow (outflow) 281,997.38
BANK BALANCE
Opening bank balance 64,554.17
Receipts less payments 281,997.38
Closing bank balance $ 346,551.55
25 2016 Edition
Are there any other budgets?

There are two other budgets which are commonly used.
Click on the pictures to learn about each one.
Capital budget
Use this budget to plan for long-term financial outlays, which are not covered by
operational budgets. Examples can include the purchase of fixed assets, such as
equipment and machinery, fittings and fixtures. As this budget is used for larger resource
acquisitions, often the purchase price must be over a pre-determined value (such as
$2,000) for it to be included in a capital budget. You’ll often use this budget in conjunction
with a project budget.
Project or event budget

A project or event budget is developed for a specific task, goal or event such as
renovations, an annual function, extensions, etc.
What factors can impact on your budget?

You learned about internal and external environments and how these can impact on your
budgets in the unit Manage finances within a budget. Do you remember what you
learned?
You have 30 seconds to recall five factors.
Use your critical thinking skills to list five environmental factors that have the potential to
impact on your budgets.
How did you go? There are many possible answers. Let’s explore a few on the next
screen.
External environmental factors that can impact your budget

External factors are essentially anything outside the business which affects your internal
operation.
To improve your business, ask a range of questions to help you understand the
significance of these factors, determine what you can change, and how this will improve
the business.
Click on the tabs to learn about the external environmental factors that can impact
your budgets.
Shift in market trends

What is your current market share? Can you increase this? Do you want to? How
important is the timing of any growth? How quickly do you want to grow? Is the market
changing? Do you have the ability to grow now or in the future? What percentage of the
business is new and repeat business? Which do you want to grow?
2016 Edition 26
Competitors
Who are your immediate competitors? Are there plans for new developments in the area?
How will they affect the business? What plans do your competitors have for the future?
Complementary industries
Are there other businesses opening (such as a new tourist attraction or tour company)
which will provide new sources of income or customers for the business?
Technology
What technology do you currently use? How up-to-date is it? What technological changes
will affect the business in the next five years? Are there new production processes,
automations or computer systems which can be used by the business to improve service
or reduce costs? Are there new, innovative products or services the business can
provide?
New legislation or regulation

Which policies and regulations are currently being updated or developed by your local,
state and federal governments? When is the next election, and will a change of
government lead to changes in policy direction affecting the industry or local area? Have
there been recent court decisions relating to the application of laws in the industry?
Economy
What is the current economic situation? Is there a predicted growth or decline in economic
conditions? What predictions are financial advisors making for the future? Is there a
significant price movement for certain commodities or items that will impact your budgets?
Is it possible to predict the economic patterns for the next two, three or five years? What
will happen to interest rates, funds for capital investment, employment, property prices,
wages and salaries? How dependent is the business on the local, regional, national or
international economies? What trends are emerging in these economies?
Supplier availability and cost

What products and services do customers currently like and use regularly? Are these
readily available? Can suppliers meet customer demand and do their costs align to your
budget allocation? Do suppliers guarantee a set price or do prices fluctuate? Are you
expecting a price increase or decrease from suppliers?
Would investigating new suppliers cut expenses, increase quality, open up new
opportunities?
Note
Not every topic and every question is of equal importance. Use your critical thinking skills
and focus efforts on what you believe is important to your business.
27 2016 Edition
Internal environmental factors that can impact your budget

Internal factors are those which are controlled or managed within your organisation.
Click on the pictures to see examples.
Human resource requirements

Do staff have the skills, experience and qualifications to achieve new targets?
Do you have adequate staff numbers, supervisors and managers to oversee the
implementation of budgets?
What is the cost of training new employees? Does the existing budget allow for
recruitment of new employees?
Organisational and management restructures

Are there plans to change the internal structure of the organisation?
Do different managers have different priorities or expectations? How does this impact on
budgets and how they’re implemented?
Organisational objectives
Are there organisational objectives that take priority over financial objectives? What are
they and how do they impact on your budgets?
What are the long-term capital expenditure plans? When will they be completed, and what
is their effect on the budgets?
Scope of the project or event

How big or small is the project or event? Have associated costs been allowed for or will
they greatly affect the establishment’s bottom line? Are the costs offset by expected
revenue from the project or event?
What might the impact be if the project or event is unsuccessful? What are you hoping to
achieve by running the project or event?
Customer service standards

Are you offering services that customers want? Are you wasting money on unused
products or services? Should minimum service standards be raised or changed in some
outlets? What are the costs involved? How will cutting or adding services affect revenue
and expenses?
Departmental plans
The budget targets of one department can affect every other department in an
establishment. For example, the marketing department might plan advertising campaigns,
compile promotions such as competitions, giveaways, prizes and television coverage on
lifestyle programs. They also negotiate holiday packages with airlines, travel agents and
tour groups, and conference packages with professional event organisers. The deals they
make, when campaigns are run, what is promoted and prices offered during campaign
periods, affect the budgets in every other department of the organisation.
2016 Edition 28
What is a trend analysis?

A trend analysis is the process of collecting information and identifying changes in
business patterns.
They can be positive or negative trends; either way, the trend will affect the business’s
future trading and development.
When managing budgets, trend analysis is used in conjunction with variance analysis to
assist in better planning and control.
Specific information or statistics are used to determine trends. When statistics are
compared over a period of time, a trend or pattern may merge. The types of information
used are called indicators and can be both financial and non-financial subjects. Trend
analysis can be used in a wide variety of situations, using multiple sources of information
to gain specific feedback on the business. You just need to choose what you want to
investigate.
Involving colleagues in the planning process

The most effective budgets are usually ones which have been prepared in consultation
with the people most directly affected by its goals. Discuss any changes to income and
expenditure priorities (budget cuts, sales targets, etc.) with colleagues and key
stakeholders prior to implementation. This allows them the opportunity to identify any
areas of concern or potential problems they foresee with the proposed changes. Keeping
them informed also helps to gain their commitment to the achievement of budget goals.
Knowledge of what the targets are and what staff need to do to achieve them helps staff
feel like they’re part of a team and encourages them to contribute towards the
achievement of budgets. Involving them in the planning process ensures they understand
exactly how their daily duties impact on the budget.
Click on the icon to learn the importance of effective communication.
Effective communication skills are important to liaise and negotiate with colleagues on
potentially complex and conflicting budget requirements.
• Remain open to receiving feedback and comments from others.

• Use a communication and delivery style suited to your audience.
• Avoid technical jargon.
• Follow an organised format to ensure you don’t leave out valuable information.
Note
Many businesses have a budget calendar detailing planning and budget finalisation dates
for the financial year. This allows interested parties who might wish to contribute to the
planning process the opportunity to be involved.
29 2016 Edition
Who should you consult externally?

To establish market trends and external environmental factors, consult with people and
bodies outside of your operation. Advice from industry experts and suppliers can be
beneficial when determining future budgets.
Click on the icon to see examples of external consultations.
 Financial experts and advisors: financial advisors, financial institution

representatives, accountant
 Government bodies: liquor licensing, food safety, WHS, planning permits, building
regulations, etc.
 Industry bodies: Australian Hotels Association, Restaurant and Caterers
Association, unions
 Legal experts
 Industry specific experts: IT, equipment, architects, builders
End of section
You have reached the end of Section 1.
Click to the next section to continue.
2016 Edition 30
Section 2:
2 Prepare budget
• How to draft a budget.

• How to estimate income and expenditure.
• How to reflect organisational objectives within the draft budget.
• How to assess and present options and recommendations.
• How to circulate the draft budget for input.
Drafting a budget
Meet Jim.
Like you, Jim is in a management role.
Jim, did you make that nametag yourself?
That’s better, you’ve got to earn it!
And like you, Jim has just finished Section 1 of this unit.
You’ve both gathered the data and information needed to prepare a budget, you have a
general outline of what your budget will look like.
It’s time to make a few decisions that will start colouring in the details.
1. What style of budget are you going to use? Are you going to prepare an incremental
or a zero-based budget?
2. What types of budgets do you need?
3. Which budgets do you allocate costs to?
The answers to these questions depend on the type and size of establishment you work
in, the information being reported and your organisation’s financial reporting procedures.
Thanks for the help Jim.
Yeah you earned it.
When do you record the figures?

That depends on the type of budget, who is doing the recording and the policies and
procedures of the individual workplace.
31 2016 Edition
Another major factor is the use of computerised systems such as POS, purchasing and
accounting systems. Many establishments today have computers with spreadsheet
software or computerised front and back of house systems, so updating budgets can be a
relatively easy task.
Computerised systems provide quicker turnaround times compared to manual systems,

due to faster processing and faster updating and distribution of information, especially
when the various systems are linked together and can share information.
Ensure you’re familiar with the functions and reports produced from your establishment’s
accounting software. Arrange for updated training if you’re unsure how to operate the
system or don’t know how to maximise the benefits of the software.
Is a computerised system error free?

Remember, just because a system is computerised it doesn’t automatically mean all
figures are correct. Human error when entering data into the system can lead to incorrect
prices, quantities, stock items or levels, or wages. The computer will then base its
calculations on this data and you end up with misleading information.
Click on the tabs to see two examples of how to record figures using two types of
budgets.
Sales budget
Record actual sales figures for all outlets on the sales budgets daily. The end-of-day
accounting, which is completed as part of the business’s computerised night audit
(glossary) process, compiles the sales figures from all outlets into individual reports for
each outlet and a master report with accumulated figures to the manager in charge of
preparing the budgets.
Note
In a smaller establishment the sales budget may only be updated weekly when the
accountant is on site or the manager is doing the accounts.
Operational budgets
Some budgets cannot be updated daily as the information is not available that quickly. For
example, wages and payroll budgets can only be updated fortnightly after the end of your
pay period. The purchasing budget can be updated weekly once the purchasing and
accounts departments have processed all the invoices. The establishment can get an
understanding of how they’re performing compared to the budgets throughout the month,
but may not have a complete picture until the end of the budget period.
2016 Edition 32
Note
Other organisations may be able to produce the required information faster if they have a
weekly pay period for wages, more administration or accounting staff, or fully integrated
computer systems.
How do you allocate costs?

This is relatively easy for direct costs as they can be allocated to the department or outlet
that requisitions and uses those goods or services. You must be more careful about
where and how you allocate indirect costs.
Click on the icon to see an example from a holiday resort.
The wages of the food and beverage administration assistant, members of the purchasing
department, maintenance, cleaners and garden staff all need to be accounted for
somewhere. As the food and beverage administration assistant helps all food and
beverage outlets, their costs must be evenly distributed between all outlets.
Purchasing, maintenance, the cleaners and gardeners work with both food and beverage
and front office, so their costs must be split between the two areas based on a pre-
determined ratio. For example, food and beverage place a greater workload on
purchasing, so 70% of their wages are allocated across the food and beverage budgets.
However, front office use maintenance slightly more than food and beverage, so 60% of
their wages are allocated to that department.
Let’s look at the best way to calculate these ratios on the next screen.
How do you calculate ratios?

The best source of information is past history.
Click on the pictures to find out why.
If purchasing placed 2,500 orders last year, and 1,750 of those were for food and
beverage goods and services, then 70% (1,750/2,500) of their deliveries and internal
stock distribution workload is generated by that department. Similar records can be kept
for other indirect costs to help determine an appropriate ratio.
Some indirect costs can be harder to calculate; an obvious one is utilities. How do you
work out who uses the most electricity without installing individual meters? If the resort’s
café is open sixteen hours per day, whereas the restaurant is only open for dinner for six
hours per day, which do you think uses the most electricity? And gas?
This may be a little simplistic, and any ratios calculated may not be 100% accurate but,
when combined with other information about the resort’s operation, you can eventually
calculate a reasonably good estimate. (Beware: any allocation ratios will be arbitrary!)
33 2016 Edition
What if you’ve started a brand new business?

Preparing budgets can be more difficult in the first few years of a new operation, as there
is no past history to base forecasts on.
Click on the pictures to find out how to prepare a budget for a new business.
New businesses usually prepare a business plan as part of their establishment process;
this is especially true if the new business is applying for any form of assistance from
financial institutions.
A budget would have to be prepared as part of that business plan. Therefore the new
owners must conduct some research to get accurate figures on which to base their
budget. Suppliers and industry experience can be significant sources of information when
trying to determine what their expenses could be.
Sometimes forecasting potential revenue is the hardest. No one can really predict how
successful you’ll be. Results of research conducted by external authorities could assist
(industry surveys, government bodies, employer associations) as well as statistical
information on similar types of businesses or businesses located in the same area.
What can affect the accuracy of the previous year’s figures?

Previous budget periods’ figures are a starting point only. As discussed in Section 1, there
are a number of other factors which must be considered as well.
Even simple factors can have a significant effect on any budgets you’re preparing.
Click on the managers for some examples from various tourism, hospitality and
events establishments.
Motel
The dates for school holidays in each of the states and territories are not the same every
year. Sometimes the holiday periods in different states overlap, sometimes they don’t.
This is important for us to know as it affects our occupancy rates and revenue. For
example, if they overlap, our occupancy is higher but for a shorter period of time. Or the
holiday period might be spread over two monthly budget periods, not one.
Events coordinator
Does Easter fall during the school holidays or outside that period? Is Australia Day on a
Friday or Monday, creating a long weekend? When is Christmas and New Year’s Day this
year? The answers to these questions significantly affect attendance at our events, our
wage costs and revenue earning capacity for those budget periods.
Restaurant
One year we forgot that a local event, which had been running for a number of years and
attracted many visitors, had been cancelled. We didn’t come close to reaching our budget
forecasts that month!
2016 Edition 34
What other information do you need to analyse?

Click on the tabs to find out what other information you need to analyse before
drafting your budget.
Previous figures and variances

If you’re preparing an incremental budget, then the previous period’s figures are a
cornerstone of your future budget. It’s essential you know as much as possible about
those budgets and their results.
Here’s what you need to find out.
• Previous forecasted figures: what were the forecasts and what information were those
calculations based on?
• Actual figures: what did the establishment actually achieve? Why did you get those
figures?
• Budget variances: where did the variances occur? Is there a pattern or a trend to the
variances?
• Reasons why the variances occurred: understanding why you were under or over
budget previously helps your future calculations.
• Known future changes: are there upcoming changes that you already know about and
can factor in? Have you been notified of price rises, changes in suppliers or expenses
such as equipment purchases?
The economy
It’s rare these days for prices to go down; price rises are the norm. What you need to find
out is how much they will rise. This directly affects your expenses calculations, and
therefore revenue and profits. Often trends emerge in the economy which can indicate
pricing changes at the most basic levels. The two most common indicators of economic
trends are the consumer price index (CPI) and inflation.
Let’s look at these in more detail on the next screen.
CPI and inflation

The two most common indicators of economic trends are the consumer price index (CPI)
and inflation.
Click on the buttons to learn more about these terms.
Consumer Price Index (CPI)

This figure is released quarterly by the Commonwealth Government. It indicates changes
in prices for commonly used goods and services. If the CPI (glossary) is rising, it means
prices are rising. How quickly it rises, or by how much, impacts on your expenses and you
may have to recalculate your forecasts. If CPI is rising faster than wages, it means people
will have less disposable income (glossary). One of the first luxuries to go when on a tight
budget is a holiday.
35 2016 Edition
Inflation
The inflation rate is partially based on changes in the CPI over a period of time. It
indicates if prices are rising, but is also an indicator of the stability or health of the
country’s economy. Very high, rapidly increasing, or negative rates of inflation can have a
destabilising effect, making people nervous and wary about spending their money on non-
essentials.
Note
Before you move on to learn how to prepare a budget, there are some commonly used
terms you need to know and understand. These are standard industry terms you’ll hear
extensively when preparing budgets in your workplace. Let’s look at what they are on the
next screen.
Common terminology
Common terminology is used when preparing budgets, forecasting sales and expenses
and determining profits. It’s important to understand what each of these mean as you’re
likely to encounter them on a regular basis.
Click on the different terms to learn what they mean.
Average spend The average amount in dollars spent by each customer.

This is the total cost of food purchases expressed as a
Food cost
percentage of total food sales. For example, if food purchases
percentage
are $21,300 and food sales are $55,600 the food cost % = 38%.
Beverage cost Like food cost percentage, this is the total cost of beverage
percentage purchases expressed as a percentage of total beverage sales.
Labour cost This is the total cost of labour (including on-costs) expressed as
percentage a percentage of total sales.
Some hospitality businesses have more than one seating per
Seat turnover rate session. For example, if a restaurant seats 50 people and
serves 75 people in a session, the seat turnover rate is 1.5.
A cover equals one dining setting. The number of covers sold,
Covers
refers to the number of customers.
The number of rooms sold expressed as a percentage of total
Occupancy rate rooms available. If you have 75 rooms and 58 were occupied,
your occupancy rate is 77%.
How much revenue, on average, each room earned. If 58 rooms
Average room rate sold in one night earned $13,250, the average room rate is
$228.45.
Preparing the sales budget

Essentially you’re trying to predict how many of your goods and services sell, how much
for, and the revenue earned from those sales.
2016 Edition 36
There are five basic steps to prepare a sales budget.
Click on the steps to see what they are.
Step 1 Everyone wants to increase their sales, but when preparing your
budget you need to investigate if sales have the potential to increase
Estimating or decrease, and by what amount.
potential
Each item should be considered individually and a percentage
increase or decrease amount determined.
What sales trends have emerged over previous budget periods? Have
sales of that item been increasing or decreasing? If so, by how much?
Are sales seasonal, for example, do tours or other products sell more
in summer than winter?
Will future in-house or external marketing affect sales?
Is the cost of purchase or production going up? Will this increase the
selling price and potentially the number of sales?
Step 2 Once you’ve estimated how much you think sales will increase or
decrease, it’s a relatively easy task to calculate the quantity which
Estimating could be sold.
quantity
Let’s look at an example.
A business sells 3,685 dolphin tour passes per year. It’s one of their
best-selling tours and management expect sales to remain strong.
They believe sales will increase 10% next year.
3,685 (current volume sold) x 10% (anticipated increase in sales) =
368.5 more tour passes per year.
Therefore 3,685 + 368.5 = 4,054 potential dolphin tour passes sold
next year.
Step 3 There are a number of methods you can use to determine what price
an item will sell for in the next period. Key factors in determining if
Determining there will be a price rise and by how much include anticipated price
selling price rises of goods and services required to produce the item, wage costs
and other production costs.
Set percentage price rise. For example, all room rates are increased
by 15%.
Calculate cost of goods sold for each item then add a pre-determined
profit margin. You’ll learn how this is calculated a little later in this
section.
Step 4 Let’s look at another example.
Calculate A restaurant manager anticipates they will sell 4,054 serves of beer-
revenue per item battered fish and chips next year. With an 18% price rise, the new
selling price will be $11.90.
4,054 x $11.90 = $48,243 in sales for this item.
Step 5 Once you’ve followed this process for all of your establishment’s
products and services, you can calculate a total sales figure.
Calculate total
sales If you work in an establishment that has multiple departments, repeat
this process for all sales generating outlets. You can then accumulate
the figures to calculate a total sales figure for each of the departments
and the entire establishment.
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Do these steps apply to all areas of the business?

Yes, you can use these basic steps to help you calculate your sales budgets. However,
the formulas used will vary depending on the area you’re preparing the budget for.
Let’s look at an example of how to calculate sales for three revenue generating areas in a
hotel.
Area 1: Food
Area 2: Beverage
Area 3: Accommodation
Area 1: Calculating food revenue

First, let’s look at a simple formula for calculating food revenue.
Number of Seat turnover Average Days in Total food

x x x =
seats rate spend (food) budget period sales
75 x 0.75 x $13.90 x 31 = $24,238
Click on the icon to see an example.
To achieve a more accurate sales total, most managers calculate their sales for each
meal period, then add the individual totals together to obtain an overall figure. Turnover
rates and average spends will be different for each meal period; for example, lunch is
usually quieter than breakfast; customers spend the most at dinner time. This information
also helps when calculating labour budgets later.
You’ll see the process from start to finish shortly.
Calculating estimated sales

Let’s look at four menu items from a café menu. It’s anticipated the café can increase
sales to varying degrees for each item. Based on their goals and prior research, they plan
to increase prices by 15%.
Click on the icon to see how this is calculated.
Café menu Current Demand New Current Price New

Revenue $
item volume increase volume price $ increase price $
Salt &
pepper 2,130 15% 2,450 10.60 15% 12.20 29,890
calamari
Pescatori
2,655 5% 2,788 13.60 15% 15.50 43,214
pizza
Tapas
985 7% 1,054 12.90 15% 12.50 13,175
platter
Cappucci
17,450 12% 19,544 3.10 15% 3.50 68,404
no/ Latte
Total 25,836 154,683
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Area 2: Calculating beverage revenue

There are three methods you can use to calculate beverage revenue. The method used
can depend on if the beverage sales are in a combined food and beverage service outlet
or a purely beverage service area.
Click on the pictures to learn more about each method.
The basic beverage formula

The formula used to calculate food revenue can also be used to determine beverage
revenue. The average spend figure is based on how much per head each customer
spends on beverages rather than food.
Here is the formula modified for beverage sales.
Average Total
Number of Seat turnover Days in
x x spend x = beverage
seats rate budget period
(beverages) sales
Beverage only outlet

Calculating beverage sales for a purely beverage service outlet can be a little different, as
the number of seats and a seat turnover rate do not have the same significance. Often
sales are not broken down into service periods such as lunch and dinner, and the average
spend can be higher.
Here is the formula for calculating sales in a purely beverage service outlet.
Average spend Average number of Days in budget Total beverage

x x =
(beverages) customers per day period sales
Food and beverage outlet

Forecasting beverage sales in an outlet which sells both food and beverage can
sometimes be calculated as a percentage of food revenue. The percentage figure used
would vary according to each outlet’s sales history.
If forecasted food sales for the next budget period is $340,000, and you know from
previous budgets that beverage sales is 15% of food sales, this is how you’d calculate
beverage sales.
$340,000 x 15 % = $51,000 in beverage sales for the budget period
Area 3: Calculating accommodation revenue

Calculating room revenue is very similar to forecasting food and beverage revenue.
Again, you would follow the five basic steps discussed earlier and determine the potential
to increase or decrease sales, determine the quantity you can sell (number of rooms
occupied), selling price (room rate), and then calculate the sales and revenue figures.
39 2016 Edition
The calculations can be broken down into room types to create more accurate figures or a
less accurate figure can be calculated using room occupancy percentages.
Click on the tab to learn more about how to calculate revenue by room type.
The formula
Number of Days in budget Total room
x Average room rate x =
rooms occupied period revenue
Example
Room Current Demand New Current Price New

Revenue $
type volume increase volume price $ increase price $
Luxury
6 15% 7 375.00 10% 410.00 88,970
suite
Executive
11 18% 13 295.00 10% 325.00 130,975
suite
Standard
28 18% 33 195.00 10% 215.00 219,945
room
Apartment 7 0 7 410.00 10% 450.00 97,650
Total 52 60 537,540
Why would you use a less accurate formula?

Revenue figures are often forecasted years in advance to help a business plan its growth
and future developments, or apply for business finance. A completely accurate figure may
not be required; an indication of the revenue earning potential of the business may be
enough.
This method doesn’t allow for seasonal fluctuations, price changes throughout a period
(such as high and low season) or other factors. However, it does provide a starting point
for the business and an initial benchmark to compare the final budget figures against.
Click on the steps to follow for this style of forecasting.
Step 1
Total number of rooms Average rooms sold
x Average occupancy % =
available per day
Step 2
Average rooms Days in budget Total room
x Average room rate x =
sold per day period revenue
Example
Average Average Average Days

Rooms Total room revenue
occupancy % rooms sold room rate in
available for year $
p.a. per day p.a. $ period
62% 85 53 285 365 5,513,325.00
2016 Edition 40
Is forecasting revenue for conferences, tours and events the

same?
Each conference, tour or event is budgeted on an individual basis. Reasonably accurate
figures can be forecasted as prices to run the conference, tour or event are known prior to
the conference, tour or event date. The main variable is the actual final number of guests
attending.
Most conferences, tours and events are booked based on a minimum or maximum
number of attendees with numbers finalised closer to the event. As a result, a cancellation
factor is taken into account when calculating revenue in this situation.
Once you’ve estimated your sales figures (and therefore anticipated revenue), the next
step is to estimate costs. These figures are used to prepare your purchasing budgets and
revenue budget.
Let’s begin by looking at how to estimate food costs.
How can you forecast food costs?

Most establishments use a food cost percentage to forecast future costs. For revenue
budgeting purposes this percentage is calculated based on overall costs for a period of
time rather than a daily food cost percentage.
Averaging the percentage figure over a week, month or quarter reduces the effect of the
factors mentioned previously (price fluctuations, etc).
The food cost percentage should be reviewed and recalculated regularly to ensure it is
accurate and to identify unexpected changes. This could indicate problems within your
stock control systems such as over-ordering, leading to increased spoilage or wastage, or
possible pilferage and theft.
Click on the tablets to learn how to forecast food costs.
Step 1: Calculate food cost percentages

Total food cost/Total revenue x 100 = Food cost percentage
Now let’s see an example.
Last month a business spent $23,379 on food purchases. The revenue was $73,059.
$23,379/$73,059 x 100 = 32% food cost percentage
Step 2: Use food cost percentages to forecast food costs

In the sales budget $95,760 in sales is forecasted for January.
$95,760 x 32% = $30,643 forecasted food costs for January
This figure can be used in the purchasing and revenue budgets.
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Is this the only way to determine food costs?

This is not the only way to determine food costs. You can obtain more accurate food costs
by calculating the cost of every dish on the menu. This is a very time-consuming process
and would not be done every week or month. However, it would be undertaken every time
there is a change in the menu or on a regular basis, as the food cost of an individual dish
influences its final selling price.
If the prices of ingredients in a dish have risen, it’s important to recognise that costs have
gone up, by how much, how this affects budget targets, the selling price of the dish and its
profit margin.
By individually costing each dish, you can see which dishes are the cheapest or most
expensive to produce, which have the best profit margins, and therefore which are the
best to promote.
Estimating food costs

Determining food costs in advance can sometimes be a difficult science as there are a
number of factors which can change costs quickly.
Click on the question marks to see what some of those factors are.
? Price fluctuations due to under- or oversupply of ingredients in the marketplace,

especially meat and fruit and vegetables.
? Menu changes due to seasonal modifications or lack of demand for certain menu
items.
? Changes in demand for individual dishes.
? Unexpected demand for an item leads to ingredients being purchased from more
expensive sources (for example, the local supermarket).
So, with all these varying factors, how can you forecast food costs? Click to the next
screen to find out.
How do you cost individual dishes?

To make calculating food cost and ordering procedures easier, many establishments
develop standard recipes. It’s a common industry practice to develop and use standard
recipes for all menu items. Each dish’s recipe specifies all ingredients and quantities
required to produce a set number of serves; usually one or ten serves.
This helps establish appropriate portion sizes, makes it easier to calculate what quantities
of each ingredient must be purchased to produce a set number of serves for a menu item,
and to determine its food cost.
Click on the tabs to see how to calculate food costs in standard recipes.
2016 Edition 42
The first step

Initially, you may need to determine the unit cost of the item. For example, flour is
purchased in 20 kg bags for $48.00, but the recipe only requires 1 kg.
$48.00/20 = $2.40 per kg
Alternatively, you need 200 grams of carrots which are $1.98 per kg.
$1.98/10 = $0.198 per 100 grams
The formula
The formula used to calculate the cost of the ingredient is now very simple.
Quantity required in recipe x unit cost of the ingredient.
1kg flour x $2.40 per kg = $2.40
200 grams of carrots is required 2 x $0.198 per 100 grams = $0.396 (or $0.40)
By breaking the cost down into unit costs, you can easily calculate other weights such as
4.6 kg of flour or 450 grams of carrots.
Click on the icon to look at the costing for Italian bruschetta.
Costing for Italian bruschetta
Italian bruschetta Qty: 10
Ingredients Quantity Purchase price $ / qty Food cost $

required
Sliced Italian bread 20 slices 4.50 per loaf, 15 slices per loaf 6.00
Garlic clove 3 cloves 9.98 per kg 0.20
Extra virgin olive oil 20 ml 15.20 litre 0.30
Tomatoes 400 grams 4.70 per kg 1.88
Fresh basil leaves 50 grams 1.98 per bunch 0.40
Balsamic vinegar 10 ml 12.10 litre 0.12
Red onion 1 3.95 per kg 0.70
Salt, pepper shake 0.05
Food cost x 10 serves 9.65
Food cost x 1 serve 0.97
Note: There are 150 cloves in a 1 kg bag, 248 g of basil leaves per bunch, 5.6 onions per
1 kg, and 5 cents of salt and pepper required for 10 serves.
43 2016 Edition
What if the prices of the ingredients change?

There are software programs available which are designed to calculate the food cost for
recipes. The ingredients and quantities for your standard recipes are initially entered and
purchase prices can be updated as they change. The software automatically recalculates
the recipe for you.
Recipes can also be formulated using standard spreadsheet software. Once the recipe
data is entered, updating prices and obtaining new food costs is relatively easy.
If you’re calculating your food costs manually, then adjusting the cost of the main
ingredients will usually give you a reasonably clear picture of how much your overall costs
have risen.
How does this help my budget forecasts?

Costing a recipe using today’s prices gives today’s food costs. However, prices don’t stay
the same. When trying to forecast future food costs, there are two basic methods you can
use to try to predict changes.
Click on the tabs to see what they are.
Economic statistics
Remember we discussed inflation and CPI earlier? These statistics indicate changes in
prices of goods and services. If the CPI has risen by 5%, then you could assume your
prices have also risen by 5% and increase your food costs by this amount.
Past history
What trends do your previous budgets and statistics indicate? If your food costs have
risen by 2% every quarter for the last four quarters then you may use this as a basis to
estimate that your next quarter’s costs will continue on this trend and adjust the figures
accordingly.
What do you do if the food cost has risen?

Click on the dollar signs to find out your options.
? Re-evaluate your ingredients list and quantities

? Adjust the portion sizes
? Change the selling price
? Try to find cheaper alternative ingredients or suppliers
Now that you know the food cost, you can determine the selling price.
2016 Edition 44
Determining the selling price

Food cost is not the only factor determining the final selling price of a dish. There are
other costs which must be accounted for.
Click on the icon to see what they are.
 Direct costs such as wages

 Indirect costs such as utilities, administration wages and equipment maintenance
 Wastage. Allowances must be made for wastage when pricing a dish; this includes
incorrect orders, returned meals, leftovers and spoilage.
Earlier you learned how to calculate the food cost percentage. To calculate the selling
price, use a variation of the same formula.
You decide the food cost percentage for every menu item is to be a maximum of 28% of
the selling price. Now you can use the individual dish’s actual food cost and the food cost
percentage to determine the selling price.
Using the previous costing for the Italian bruschetta, the calculation is as follows.
$ 0.93 per serve/28% food cost percentage = $3.32 selling price
Is that the final selling price?

No, not necessarily. The final selling price can depend on your business’s policies. Using
this formula shows you what the selling price should be to keep your food cost percentage
at the predetermined rate. The final price for each dish can then be adjusted to suit other
factors.
Click on the images to see what these factors are.
Rounding
You’re not going to list a menu item for $3.32. This price would be adjusted to suit the
pricing structure in your establishment; for example, rounding up or down to the nearest
5c ($3.30 or $3.35), or even to the nearest 10c ($3.30 or $3.40) or dollar ($3.00 or $4.00).
Prices of other dishes on the menu

The price of some items may need to be adjusted to suit the price of other items on the
menu. For example, if all other specialty breads offered on the menu are priced around
$4.00 to $5.00, then the bruschetta’s price could be increased to match the other items.
Market acceptance
If customers won’t purchase the item at that price, you may consider lowering it slightly to
a more acceptable level.
45 2016 Edition
Profit margin
The food cost percentage is only a starting point. Some businesses have a pre-
determined minimum profit margin in addition to the food cost percentage. If a dish’s other
costs (wages, etc.) are relatively high, this will reduce the profit margin. The selling price
may be increased to maintain the desired margins.
Using the food cost figures

Do you know where you can use the food cost figures? Click on the cauldron to find out.
From the food cost figures, and using the establishment’s past budget history statistics,
you can estimate how many of each dish can be sold, calculate the total food cost and
total food revenue, and develop the purchasing budget.
Two other costs which must be forecasted are beverage and labour costs. Beverage costs
are also used when developing the purchasing budget and determining total cost of goods
(food and beverage) and total revenue. Labour costs are used as a basis for the labour
budget.
You’ll learn how to calculate both costs over the next few screens.
Estimating beverage costs

Estimating beverage costs is often easier than food costs due to the nature of how
beverages are packaged and sold. However, the formulas and processes used are
essentially the same.
Click on the pictures to learn more.
Using beverage cost percentages

As with food cost percentages, many businesses use a beverage cost percentage to help
forecast future beverage costs. A desired target can be established (for example, 28%)
and used as the basis for the calculation.
Total beverage cost / Total revenue x 100 = Beverage cost percentage
Click on the icon to see an example of how to forecast beverage costs.
Last month an establishment spent $12,152 on beverage purchases. The revenue was
$73,059.
$12,152/$73,059 x 100 = 16.6% beverage cost percentage
The establishment forecasted $95,760 in revenue in the sales budget for January.
$95,760 x 16.6% = $15,896 beverage costs
2016 Edition 46
Costing standard recipes

Standard recipes are also used in beverage costing for all drinks that are mixed in-house
and contain more than one ingredient. Examples include mixed drinks, alcoholic and non-
alcoholic cocktails and espresso coffees (if served from the bar).
If a beverage is purchased pre-packaged and served without any additional ingredients

added, then the beverage’s cost price and the beverage cost percentage can be used to
calculate a selling price without the need to develop a standard menu. These types of
beverages include canned or bottled beers, wine, pre-mixed spirits, cocktails and soft
drinks or juices.
Click on the icon to see a standard recipe example.
Tropical punch Qty: 1
Ingredients Quantity required Purchase price $/qty Food cost $

Orange and mango juice 100 ml 3.10 for 2 L 0.16
Pineapple juice 50 ml 6.10 for 2 L 0.15
Grenadine syrup 5 ml 7.50 for 1 L 0.04
Pineapple wedge 1 4.99 each 0.12
Passion fruit 1tsp 2.39 per can 0.09
Beverage cost x 1 serve 0.56
Note: On average there are 42 wedges in one pineapple and 26 teaspoons of passionfruit
per can.
Calculating unit costs

As with food costs, determining unit costs helps make costing recipes faster and easier,
especially when using the same ingredient in multiple recipes.
Unit costs are also necessary for many drinks which are sold unadulterated from larger
containers such as bottles or kegs. Examples are beer and wine sold by the glass and
neat spirits.
As there are standard measures for all alcoholic beverages, these can be used to
determine unit prices.
Click on the icon to see two examples of calculating unit costs.
Example 1: Calculating unit costs

One 750 ml bottle of wine holds 7.5 x 100 ml standard drinks.
Cost price for a bottle of wine $8.60/7.5 = $1.15 per 100ml serve.
Example 2: Calculating unit costs

One bottle of 700 ml Johnny Walker Red Label Scotch whisky holds 23.3 x 30 ml standard
serves.
Cost price $34.99/23.3 = $1.50 per 30 ml serve.
47 2016 Edition
Determining selling price

Using the beverage cost percentage calculated earlier of 16.6%, you can calculate the
selling price for the two examples used previously.
Here are the calculations.
Cost price 100 ml glass wine $1.15 / 16.6% = $6.99 selling price per glass
Cost price 30 ml serve whisky $1.50 / 16.6% = $9.04 selling price per serve
Depending on current market prices in similar styles of establishments, these prices may
be too high or too low. It is not uncommon for different beverages to have different cost
price percentages. For example the percentage for post-mix soft drinks may be 15%,
bottled wine 22%, wine by the glass 20% and spirits 30%. This allows for more flexible
and competitive pricing; you just have to remember which percentage to use with each
group of beverages!
Note
A key point to remember is to make allowances for wastage when calculating how many
serves can be obtained from a container. This is especially true of keg beer served from
the taps in a bar. While your calculations show you should obtain 175 (285 ml) serves from
a keg, you may only get 160 in reality due to over-pouring, spillages, mistaken orders,
quality issues, etc. This affects your cost per serve and your final selling price.
What else can affect the costings?

To keep beverage costs and prices accurate you need to undertake some simple internal
work practices.
Click on the pictures to see what they are.
 Keep records of stock transferred to other areas of the establishment; inter-bar or

kitchen transfers.
 Keep wastage records: drinks spilled, incorrect orders, drip-tray waste.
 Use standard glasses, measuring devices and recipes to ensure consistency and
accuracy of drinks.
2016 Edition 48
Estimating labour costs

The types of hospitality operations and services provided by staff are very diverse, so
trying to establish a labour cost percentage can be difficult.
Click on the percentage signs and look at the potential labour cost percentages for
different types of businesses.
% A self-serve or drive-through can be as low as 10%.

% An à la carte restaurant could be as high as 60% depending on the level of service
offered.
% In a hotel with both food and beverage facilities, labour costs can be between 20
and 35%.
% The accommodation section of a hotel could be around 25% with costs as low as
10% in a small, limited service motel.
What can affect labour costs?

Each business has factors that affect the amount and type of labour required, the job roles
undertaken, and therefore pay rates and employment status (casual, full-time, etc).
Click on the pictures for some examples common to many tourism, hospitality and
events businesses.
Seasonal demands
The hospitality industry sees peaks and troughs during different seasons of the year
depending on where the business is located and what attracts customers to that area.
This can affect labour requirements and the employment status of employees.
Location
A business located in a highly populated town or city can find it easy to employ new staff
when required. However, a business in an isolated area is likely to find it harder to entice
good staff, especially management level positions and those requiring specific
qualifications, such as a chef. The business may have to pay above standard rates to
attract and retain key personnel.
Hours of operation
Long hours or 24-hour operation affects rates of pay.
Use of equipment
Use of mechanical or electronic equipment can reduce the number of staff required.
Menus
The number and variety of items offered on a menu directly affect the labour costs for an
outlet, venue or event. In addition, dishes requiring many hours of preparation also
increase labour costs.
49 2016 Edition
Ingredients used
Use of partially or fully pre-prepared, processed or ready-to-eat items may reduce labour
costs but could increase food or beverage costs.
Core staff numbers

This includes staff who work irrespective of occupancy figures, reservations, booking or
tickets purchased. This can include administration, reservations, switchboard and cleaning
staff, managers and supervisors.
Contracted suppliers
Contracting out services such as laundry and dry cleaning, public area cleaning, pool and
garden maintenance, rubbish removal can help with forecasting the costs for budgets if a
set rate is charged for the service.
What costs do you need to include?

Labour costs not only include the total gross wages and salaries for staff. There are other
costs that you need to take into consideration when estimating overall labour costs.
Some are required under government legislation, others vary depending on the terms and
conditions of the award or agreement staff are employed under.
Click on the icon to see what they are.
 Casual, part-time and full-time rates of pay

 Holiday pay for all full-time and part-time employees
 Higher rates of pay or penalties for public holidays, weekends and shift allowances
 Workers’ compensation
 Payroll tax
 Superannuation
 Long service leave
 Sick leave
 Uniform entitlements
 Meal allowances
As you can imagine, labour costs are a major expense for any business. Developing
rosters and staffing plans for each event, tour, outlet, area or department helps you
calculate a reasonable estimate of labour costs. An indication of the staffing levels
required is provided by the level and type of sales activity forecasted in the sales budget.
Click to the next screen to learn how.
2016 Edition 50
Forecasting rosters
The sales budget shows you the forecast for how busy you anticipate the establishment
will be in a given period. Now you need to determine how many staff are required to meet
the forecasted demand.
Many workplaces have set shifts with standard start and finish times and pre-determined
staffing levels for levels of operation. For example, one waiter per 30 customers. If the
establishment anticipates 55 customers for breakfast, then two staff are required.
The roster used to help forecast labour costs does not have to be quite as detailed as the
operational weekly roster. You only need to estimate costs, not work out who needs to
work each day for the next six months!
Click on the icon to see an example of a roster used to forecast labour.
Roster using labour forecasts
Date Shift Hours No. staff Status

07/06/20XX 6 am to 2 pm 8 1 FT
7 am to 3 pm 8 1 FT
2 pm to 7.30 pm 5.5 1 PT
5 pm to 10 pm 5 2 C
Total hours 16 x FT
5.5 PT
10 x casual
You’re likely to use a simpler format when forecasting 12 to 24 months in advance. You
can then update and refine the roster closer to the actual budget period.
Click on the icon to see an example of how to roster using sales forecasts.
Roster using sales forecasts
Sales Comments
Date No. staff Hours
forecast
07/06/20XX 144 covers 2 x FT 16
1 x PT 5.5
2xC 10
08/06/20XX 97 covers 2 x FT 16 In-house conference dinner
2xC 10
51 2016 Edition
Forecasting the labour budget

Based on the information in the roster forecasts, you can now determine the labour
budget.
Click on the icon to see a labour budget example.
Labour budget example
Labour budget for the month of June

Normal Sun rate Shift Total
Sat rate $ Total $ Total $ Total $
Employee M-F Sat Sun hourly $ allowance gross
(1.5) Mon-Fri Sat Sun
rate $ (1.75) $ wages $
Supervisor 24 6 6 15.50 23.25 27.13 372.00 139.50 162.78 20.80 695.08
Full-time 1 34 4 13.75 20.63 24.06 467.50 82.52 - 20.80 570.82
Full-time 2 34 4 13.75 20.63 24.06 467.50 - 96.24 20.80 584.54
Part-time 1 14 6 13.75 20.63 24.06 192.50 - 144.36 336.86
Part-time 2 14 6 13.75 20.63 24.06 192.50 123.78 - 316.28
Casual 1 3 3 17.19 25.78 30.08 - 77.34 90.23 167.57
Casual 2 4 3 17.19 25.78 30.08 68.76 77.34 - 146.10
Total weekly wages 2,817.25
Note
Round your figures to two decimal points. If the figure, for example, is 20.625 round up to
20.63. If the figure is 20.623 round down to 20.62.
How do you work out monthly labour costs?

There are three ways you can calculate a monthly budget.
Click on the icons to see what they are.
The most accurate method is to calculate each week’s wages and add them up.
If sales forecasts are reasonably consistent for the period, the weekly figure can be used
to obtain a monthly figure.
For example: weekly wage of $2,817 x 52 weeks in the year = $146,484/12 months =
$12,207 monthly wage
2016 Edition 52
Alternatively you can use this formula.
Weekly wage of $2,817/7 days in a week = $402.43 wages per day x 30 days in June =
$12,073 monthly wage
Can you use these methods to calculate an annual budget?

Using the monthly figures obtained in examples two and three as a basis for forecasting
an annual budget will not achieve an accurate forecast.
Why?
Because sales forecasts and staffing levels can vary greatly from one month to the next
depending on seasonal demands and industry peaks and troughs. Any annual forecasts
based on one month alone is unrealistic and produces inaccurate results in a revenue and
cash flow budget and balance sheet.
Preparing the income statement budget

Now that you know how to forecast figures for the main budgets, you can develop the
revenue budget.
There are a number of other expenses to include in this budget and must be forecasted to
gain an accurate profit or loss figure.
Earlier in this section you learned about allocating costs, including direct and indirect
costs, and developing ratios to determine which areas or departments cost can be
allocated to.
Direct costs which can be allocated to an area are included in that area’s purchasing and
operational budgets.
Indirect costs can be allocated based on a ratio system as discussed earlier.
How do other budgets help you prepare the income statement

budget?
Let’s go back to the example of an income statement budget used in Section 1 and
discuss where the various figures came from.
Click on the highlighted sections.
53 2016 Edition
Budgeted income statement for the month of June

Sales You learned how to calculate $
this figure earlier and it’s
Sales: food recorded in the sales budget. 45,878.50
Sales: beverages This figure is also in the sales budget. 23,212.50
Discount received 500.00
TOTAL INCOME 69,591.00

Less cost of sales You learned how to calculate these
food costs earlier and they are
Purchases: food recorded in the purchasing budget. 13,763.55
Purchases: beverages Beverage costs can also be found 5,338.87

in the purchasing budget.
TOTAL COST OF SALES 19,102.42
Less expenses
Most of these expenses are found in either the
purchasing or overheads budgets, or are calculated
Cleaning specifically for this budget and the balance sheet. 1,227.27
Insurance 2,090.91
Laundry 477.27
Other overhead expenses 19,678.31
Rent 5,454.55
Uniforms 575.00
Utilities expenses are forecasted in
the overheads budget.
Utilities 2,861.80
Wages & on costs These are the labour costs

14,760.15
calculated for the labour budget.
TOTAL EXPENSES 47,125.26
PROFIT/LOSS 3,363.32
Preparing a cash budget

A key area of control in a business is its cash flow. The income statement shows the profit
you should make if everyone pays their bills.
Click on the icon to find out what happens when bills are not paid.
Not everyone pays when they purchase products and services; sometimes another party
such as an employer or travel agent is sent an account for later payment.
If a significant portion of your revenue is paid at a later date, especially after expenses
have to be paid, you could incur a cash flow problem.
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The cash flow budget helps you track your accounts receivable (money owed to the
establishment) and plan your accounts payable (money the establishment owes to
others).
What factors affect cash flow?

How to manage cash flow and what you need to do to control or improve it is discussed in
Manage finances within a budget. You may like to reread the relevant section of that unit
to refresh your memory on cash flow budgeting.
Click on the dot points to see a summary of factors that can impact your cash flow.
 Debtors’ receipts: what percentage of revenue is received through accounts

receivable and how long do debtors take to pay their accounts?
 Bank loan repayments: when are payments due and how much?
 Tax payments: does the establishment have outstanding payments? Are the
payments lump sum or periodical?
 Creditor payments: what are your major creditors’ payment terms: 7, 14 or 30 days?
Are these negotiable?
 Purchase of new plant or equipment: is the establishment still paying for purchases
made in previous budgets? When are payments due and how much? What capital
expenditure purchases are you planning that will affect this budget period?
Cash flow budget information

Where does the information for a cash flow budget come from? Click on the potions desk
to find out.
The initial source is the income statement budget. Other information is available from the
accounts department such as loan repayments, tax liabilities, creditor details and account
aging history.
Now that you’ve looked at how to prepare budgets, you need to ensure everyone agrees
with the set targets before finalising the budget. Part of this process involves preparing
and circulating a draft budget.
Preparing and circulating draft budgets

The information used in the draft budgets is based on the forecasts made when
calculating revenue and expenses. These calculations are based on what you think will
occur. While they’re based on past history, current bookings and workplace knowledge
and experience, they’re not entirely accurate and could change.
Some workplaces develop budgets based on a variety of scenarios or levels of business;

for example, 50%, 55% or 60% sales rate, 140, 150 or 160 customers served per day.
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You can then present these options to the management team with information relating to
why these levels of operation were chosen together with any recommendations. The
appropriate managers can assess the information and determine which of the budget
options they believe is achievable.
Click on the icon to learn the importance of organisational objectives
Organisational objectives are important considerations for every report and budget you
prepare. Don’t get so caught up in the figures that you forget about the values and core
objectives of the organisation.
Keep organisational objectives in mind when preparing your draft budget. This ensures
your recommendations are aligned with organisational goals and values, and helps
minimise undesirable impact on customer service levels, quality and safety.
Hot tip
Include all relevant data specific to the budget you’re reporting on. Lack of information or
irrelevant information does not allow the management team to make important informed
decisions.
Presenting alternatives
When a business wants to provide new or additional services, they’ll often prepare a draft
budget showing the consequences of the changes on the business’s finances.
Often two (or more) budgets are prepared, one showing forecasts with the new products
or services included, and one using existing levels of operation. These budgets are
prepared in consultation with colleagues and experts to try to ensure they are as accurate
as possible so that appropriate decisions can be made.
How do you present your recommendations?

This partly depends on how you present and circulate the budgets.
Click on the characters to learn your options.
Verbal presentation
A verbal presentation at a management meeting may be appropriate, especially if the new
budgets affect a number of the managers. This provides them with an opportunity to ask
questions and obtain further information.
Written presentation
The other alternative is to present written recommendations. This is especially helpful if
there is a significant amount of information to be communicated, or the information is
relatively complex.
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Graphical presentation
Often financial and statistical information is more clearly represented pictorially using
graphs, charts and other diagrams.
Many software packages include this facility as part of their standard features to assist
business operators in understanding the sometimes complex or diverse information they
are assimilating.
Whichever method you use, ensure you present options and recommendations in a clear
format suited to your audience. Some managers might understand the financial figures
and jargon; other colleagues might appreciate a summary or overview without being
overwhelmed with all the minor details.
Know your audience and ensure you communicate in a format suited to their needs and
which encourages their input.
Why circulate the draft budget?

• It allows colleagues and managers the opportunity to provide input.
• It allows time to assimilate and evaluate the information.
• You can hold individual and group discussions with appropriate personnel: the
purchasing manager, outlet supervisors, accounts department, events coordinator.
• Suggestions, comments and feedback can be made in writing. As this may involve
recalculating sections of the budget, written formats provide documents to work from.
• You can compare the goals outlined in the budgets to organisational goals to ensure
objectives are being supported or met.
Hot tip
Use your effective teamwork skills to invite and coordinate the input of others in the
organisation. They may have valuable ideas or suggestions you have not previously
considered which could benefit the organisation.
End of section
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Section 3:
3 Finalise budget
• How to negotiate a budget.

• How to agree on and incorporate modifications.
• How to complete the final budget.
• How to inform colleagues of content and application the final budget.
Budget negotiations
Many workplaces allow their team to negotiate budget targets before it’s finalised; some
don’t. This partly depends on the type of budget under discussion and the structure of the
organisation. Independent businesses may have more control over their organisational
targets than those who are part of a group or chain.
Click on the icon to see how the negotiation process works.
Once a budget is circulated, use your teamwork skills to invite colleagues to comment and
suggest modifications to the forecasted targets. This can help refine the figures to
potentially more accurate outcomes, provide information not previously considered and
allow management and staff to become more involved in the budgeting process.
What are some teamwork skills to control feedback and modifications?

• Set a specific timeframe for comments and negotiations to be completed by. Don’t let
negotiations drag on for too long.
• Set clear parameters on what areas of the budget are negotiable and which are not.
• Communicate organisational goals that directly affect budget targets so managers
understand why certain goals have been set.
• If feedback is requested within a department, specify one person to condense and
clarify all suggestions received so that management are not overwhelmed with multiple
or conflicting information.
Agree on and incorporate modifications

Evaluate options to confirm any suggested modifications are:
• viable
• achievable
• likely to enhance the performance of the budget.
Usually the person or department who developed the draft budget will revise the draft
document to incorporate the modifications and recirculate it for final approval.
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Not everyone has to agree with a budget’s outcomes for it to be finalised. Your
organisation will have set policies and procedures that outline who has the final say.
Completing the budget

Completing the budget essentially means making the necessary changes based on your
consultation and negotiation with others. What does this mean? Click on the wizard hat to
find out!
Choose a clear format that suits the end user and allows them to track progress within
their department or work team.
If the user can’t understand or interpret the information presented in the budget, they’re
not likely to implement any strategies to help achieve the budget. All of your research and
planning to date will be a total waste of time!
Importance of timeliness and self-management skills

Don’t waste any time completing and circulating the budget. There’s no point distributing a
monthly budget for July in September or an annual budget six months into the financial
year! Managers depend on current information that is reliable and relevant to the
operations.
Effective and efficient managers complete tasks to a high standard with the least amount
of time, effort and energy. Don’t waste time! Organise your tasks to minimise work and
maximise productivity.
Click on the clocks for some tips that can help you.
 Take responsibility for completion of set tasks.

 Make a list of tasks you need to complete.
 Be organised.
 Prioritise and schedule your tasks. Don’t wait until the last minute to get started.
 Avoid distraction. Concentrate on the job at hand.
 Use technology and software programs that can save you time.
 Ask for help if you’re struggling to meet deadlines.
 Ask for advice to identify more efficient ways of working.
What does the final budget look like?

Many budget examples you’ll already be familiar with from Section 1 of this unit.
Remember the figures reported come from the sales, purchases, wages and overhead
budgets.
Click on the icon for an example of a final master budget.
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The final master budget
Master budget for the month of July

Food sales $
Café 45,878.50
Bistro 61,935.98
Restaurant 80,287.38
Total food sales 188,101.86
Beverage sales $
Club bar 31,336.88
Café 23,212.50
Bistro 26,694.38
Restaurant 35,979.38
Total beverage sales 117,223.14
TOTAL SALES 305,325.00
Cost of sales $
Food purchases 52,668.52
Beverage purchases 26,961.32
TOTAL COST OF SALES 79,629.84
Expenses $
Accounting & bookkeeping 9,590.00
Advertising (other) 6,945.00
Bank charges 3,530.09
Credit card charges 1,095.00
Decorations 125.00
Dues & subscriptions 1,791.00
Entertainment expenses 579.79
Fines 212.00
Filing fees 200.00
Freight & cartage 365.00
General expenses 905.00
Hire of equipment 100.00
Insurance 3,831.69
Lease equipment 864.00
Maintenance & repairs 1,047.00
Motor vehicle expenses
Motor vehicle: fuel 5,869.48
Motor vehicle: insurance & registration 1,929.87
Motor vehicle: repairs & maintenance 3,352.50
Operational expenses
Printing & stationery 6,936.72
Postage 1,252.00
Rent 24,930.00
Security 1,318.95
Telephone 11,091.26
Travel 275.00
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Master budget for the month of July

Services
Utilities 12,841.00
Rates 1,468.00
Employment expenses
Wages/salaries 91,597.49
Staff amenities 813.50
Superannuation 8,244.00
Training & seminars 2,470.00
Uniforms 542.00
Workers’ compensation 574.00
Employee benefits 654.00
Total expenses 207,340.34
PROFIT FOR JULY 18,354.82
Inform colleagues of final budget decisions

Once the budget is finalised, provide colleagues with information about the final budget
decisions. Ensure they have access to all the information and skills required to achieve
specified targets.
Click on the checkboxes to find out what information they need.
 The budget targets that directly affect their area of control, for example, sales,
revenue, expenditure, purchasing targets.
 Other budgets affected by the targets to be achieved in their area, for example,
revenue and cash flow.
 How they can achieve their goals and if any assistance is provided, including
marketing or promotional campaigns.
 Budget breakdowns, such as monthly sales budget figures broken down into daily
and weekly targets.
 Factors that can affect their budget outcomes, such as in-house conferences,
occupancy rates or local events.
 Reporting requirements, including weekly status reports, monthly budget reports,
deviation reports and management meeting summaries.
 Their responsibilities: targets they’re responsible for achieving, which are influenced
by others, who they should report deviations and problems to, level of ability to
make changes in their area of control to achieve budget targets.
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Which budgets do you distribute?

Who gets what budget depends on their position, their reporting and financial
management role and responsibilities, and the relevance to their work area.
Click on the folders to see an example of how various budgets might be distributed
in a hotel.
 The hotel manager receives a copy of every department’s budgets as well as all
master budgets for the hotel.
 The accounts department manager and the head accountant receive a copy of all
budgets.
 The operational managers receive sales and labour budgets for their relevant work
area, as well as either a food and beverage or rooms division purchases budget.
 The head chef has a copy of the food purchases budget.
 The purchasing manager has all purchasing budgets for the resort and the capital
expenditure budget.
End of section
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4 Section 4:
Monitor and review budget
• How to regularly review budget to assess performance and prepare accurate financial
reports.
• How to incorporate all financial commitments into budget and budget reports.
• How to investigate and take action on deviations.
• How to analyse changes and make necessary adjustments.
• How to collect and record information for future budget preparation.
Monitoring and reviewing the budget

There are five main steps to monitoring and reviewing the budget.
Step 1: Assess actual performance
Step 2: Investigate budget deviations
Step 3: Record financial commitments
Step 4: Prepare financial reports
Step 5: Adjust budgets
You’ll learn more about each throughout the remainder of this unit. For a more detailed
overview of each step, refer to the unit Manage finances within a budget.
STEP 1: ASSESS ACTUAL

PERFORMANCE
There’s no point going to the trouble of developing a budget if you’re not going to regularly
update it and use the information produced. So your next step is to record the actual
figures against the various budgets. This is the first stage in monitoring and evaluating
what has transpired against the budget to determine if there are any variances (glossary).
Click on the icon to find out when budget performance is assessed.
Budget performance is assessed at the end of each budgeted period: monthly, quarterly,
annually.
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Once you’ve completed the comparison, ask the following questions.
• Were set targets achieved?

• Was the end result under or over budget?
• Why were set goals achieved/not achieved?
• What effect does this have on finances?
• What effect will this have on the future operation of the business?
• What changes need to be made as a result of investigations?
How do you assess actual performance?

To assess performance, compare actual performance figures with the budgeted figures. If
there’s a difference between the two figures, it’s called a variance. When a variance
occurs, you need to analyse the results to determine why it happened.
A comparative analysis report will help you get started.
Click to the next screen to learn how.
What is a comparative analysis report?

This report allows you to compare actual to budgeted figures for specific budgets in a
simple format, making it easy to distinguish results.
Initially, you can make a direct comparison of budgeted figures against actual
performance and determine if or where variances have occurred.
Before you can do this, you need to know how to calculate variances in dollar terms and
as a percentage. Click to the next screen to find out how.
How do you calculate variances?

Variance figures in budgets and other financial documents are expressed either as a
number or a percentage (or sometimes both).
Click on the tabs to learn how to calculate variances.
Calculating a dollar value variance

Actual $ – budget $ = variance $
Example
$10,150 (actual sales) – $11,000 (budget) = a variance of ($850).
As the actual figure is less than the budgeted figure, the variance is a negative value.
Some accounting systems express this as ($850) to clearly show it is a negative amount
as sometimes a minus symbol is hard to see in a row or column of figures in budgets, and
other reports. We will use that system in our sample budgets.
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Calculating a percentage variance: sales

(Actual $ – budget $) / budget $ x 100 = variance%
Example: sales
($10,150 – $11,000) / $11,000 x 100 = a variance percentage of (7.7%)
This method is used to calculate variance figures for money coming into the business.
You use this formula when calculating profit, revenue, income or sales variance figures.
Calculating a percentage variance: expenses

(Budget $ – actual $) / budget $ x 100 = variance%
Example: courier expenses
($4,000 – $3,775) ÷ $4,000 x 100 = a variance percentage of 5.6%
This method is used to calculate variance figures for money going out of the business.
You use this formula when calculating all types of expenditure, such as wages, parts,
materials, utilities and administration expenses.
Calculating variances with spreadsheets

Example
($10,150 – $11,000) / $11,000 * 100
If you are using a spreadsheet to calculate this formula, you must include brackets to
show which part of the formula has to be calculated first.
Basic comparative analysis report example
Comparative analysis report For period 01/10 to 31/10/20XX

Actual Budget Variance Variance %
No. of covers 5,000 5,500 (500) (9.1%)
Sales $235,200 $250,000 ($14,800) (5.9%)
Wages $100,800 $93,750 $7,050 (7.5%)
Inventory $38,600 $38,750 ($150) 0.4%
Electricity $11,400 $11,875 ($475) 4.0%
Gas $4,100 $4,375 ($275) 6.3%
Water $2,900 $3,125 ($225) 7.2%
Rent $8,000 $8,000 - 0%
Overall performance or profit/loss $69,400 $90,125 ($20,725) (23.0%)
How do you interpret positive and negative variances?

Now you need to determine whether these results are favourable or unfavourable for your
business operation. A negative variance does not automatically mean it is unfavourable.
The key is to consider what impact that it will have on the ‘bottom line’, net profit.
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There are some basic rules when trying to determine if a variance is favourable or
unfavourable.
Income variances
A positive figure for income-related variances (sales, revenue, profit) is a favourable
result; it’s indicating you are above budget. A negative variance figure is unfavourable;
it’s showing how much you are below budget. This applies to both the dollar and
percentage variance figures.
A positive variance here means you have received more income than you planned. This is
good! A negative variance means you have not achieved your targets: not so good.
Budget - Mar Actual - Mar Variance Budget - Apr Actual - Apr Variance
Sales $23,000 $21,500 ($1,500) $24,500 $26,700 $2,200
Expenditure variances
The results of expenditure-related variance calculations (purchasing, marketing, rent,
utilities) appear slightly differently to income variances in a budget variance report.
As with income variances, a positive dollar variance means you are above budget.
However, for expenditure, this is an unfavourable result as it means you have spent
more than budgeted for. A negative dollar variance is favourable as you are below the
budgeted figure: basically the reverse interpretation of income variances.
As with income-related percentage variances, the percentage variance figure indicates if it

is a favourable or unfavourable result. A negative figure indicates an unfavourable result
whereas a positive figure is a favourable one.
To summarise, a positive dollar variance and negative variance percentage means you
are over budget and have spent more than planned. Unless you have a good reason, you
could have some explaining to do.
A negative dollar variance and positive variance percentage means you are under budget;
you have not spent as much as planned and saved money. Most managers consider this
to be a good outcome.
Budget Actual Variance $ Variance %
Stock purchases $115,700 $135,450 $19,750 (17%)

Electricity $47,350 $44,980 ($2,370) 5%
Click on the icon to see how to interpret the variances.
Interpreting variances
Let’s look at an example of budget variances and how to interpret the results.
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Budget $ Actual $ Variance$ Variance% Result

Sales 129,100 111,750 (17,350) (13%) Unfavourable
Stock purchases 42,603 34,642 (7,961) 19% Favourable
Administration 12,500 13,600 1,100 (9%) Unfavourable
Gas & electricity 16,783 14,528 (2,256) 13% Favourable
Total expenses 71,886 62,770 (9,116) 13% Favourable
Hot tip
If you are unsure how to interpret the variance results, one method is to look at the
original budget and actual figures. If the actual figure is higher than budgeted for income
activities, this is a good result. When looking at expenses, this is not a good result.
Alternatively, look at the percentage variance. A positive variance is good, a negative
variance is bad, whether for sales, revenue or expenses.
STEP 2: INVESTIGATE BUDGET

DEVIATIONS
It’s rare to achieve exactly the same figures as those in your budget targets. Budget
variances are common. However, not all deviations have to be investigated. Small
variances in the budget comparisons usually do not require follow up. Ask yourself one
key question: is the variance a cause for concern?
For example, in the previous analysis, the variance in the electricity budget is relatively
small (0.9%) and not worth further scrutiny. The variance in the wages budget (18%) is far
more significant and must be investigated, especially as sales were under budget.
Why is it important to investigate budget deviations?

Budget deviations directly affect cash flow and profitability, either positively or negatively.
This in turn affects the long-term viability of a business. Every business aims to stay in
business for a long time, and the only way to survive in a very competitive marketplace is
to keep an eye on what you earn, and control what you spend.
How do you know if a variance is significant and worth further

investigation?
When monitoring budgets, determine what constitutes a problem and the indicators or
trigger points which lead to further investigation.
To do this, you need to use your effective problem-solving skills.
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Click on the tabs for some tips to help you with the process.
Regularity of variance
If a variance occurs only once, it may not be a problem. Regular variances can indicate a
problem with budget targets, the method of gathering information or the type of
information gathered, the accuracy of the information used, or that the outlet, event or
area is simply not performing as expected.
Size of the variance

If a variance is substantially different from previous reporting periods, then investigation is
often warranted. This is especially true if there is no obvious cause for the variation; for
example, storms and floods cutting off access to tour destinations for a week.
Cost of investigation
Is it worth looking into the variance further? Or are the costs in time, effort and manpower
worth the potential benefits of finding out the cause? This partially depends on the size
and regularity of the variance.
Consequences of investigation
Are you prepared to take action once the cause of the variance is located? Do you have
the authority, or can action be taken by others? If variances are occurring due to
personnel or contractor issues, do you have the human resources skills or legal ability to
take action?
What causes budget deviations?

There are many reasons why variations occur. They generally fall into four basic
categories.
Click on the pictures to learn about each category.
Too high/too low

One obvious reason for variations is the budgeted targets were set too high or too low.
This may mean the information used to develop the initial forecasts was not accurately
evaluated, appropriate information was not available when setting the targets, or they
were set some time ago using information which is no longer applicable.
Unforeseen circumstances
You can’t predict every factor which may affect a budget. An unforeseen circumstance
could be as simple as a week of bad weather affecting customer numbers or fruit and
vegetable supplies, an industrial dispute at a company manufacturing one of your
products, equipment breakdown, or influenza sweeping through your staff.
Changed conditions
Another reason a variation may occur is that the information or conditions the budgets
were originally based on have changed. For example, a new, unplanned advertising
campaign run during the budget period could have affected sales figures.
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Operational factors
This is the most common reason why variances occur and the one you have the most
control over and ability to influence. Let’s look at these in more detail on the next screen.
Operational causes of budget deviations

Possible causes of budget deviations are discussed in detail in Manage finances within a
budget.
Click on the tabs for a brief overview of what is discussed in that unit.
Reasons why expenses could be over budget

• Increased wastage due to lack of stock rotation, over-ordering (especially of
perishables), using poor quality products, inefficient usage, and over-production can all
increase inventory costs.
• Price rises, which have not been calculated into the budget predictions.
• Inefficient purchasing systems, such as over-ordering, stock purchased from more
expensive suppliers (for example, from a supermarket), or more expensive substitutes
used to cover stock shortages.
• Poor rostering procedures resulting in overstaffing or poor management of staff during
operation.
• Increased payroll costs due to changes in pay rates, use of more expensive agency
staff, leave expenses, increased overtime payments.
• Poor staff performance requiring more staff than anticipated to produce and provide
your products and services.
• Inappropriate allocation of costs to a budget. For example, the wages of an employee
who has transferred to another outlet still being charged to the wrong department, or
the entire cost of an item being charged to one department when it should be split over
a number of departments.
• Equipment breakdowns which lead to higher payroll costs and maintenance expenses.
Reasons why expenses could be under budget

• Price reductions on products and services used. For example, the price of chicken or
lamb has gone down.
• Optimising of ordering procedures to obtain bulk price discounts thereby reducing
costs.
• Efficient use of utilities, inventory and staff leading to cost savings.
Reasons why sales figures could be over budget

• The staff used great selling techniques to increase sales.
• Prices were increased.
• An in-house promotion helped increase customer awareness leading to increased
customer numbers.
• Customers spent more per person.
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Reasons why sales figures could be under budget

• The staff did not use their selling techniques and missed many opportunities to sell
more.
• Customers spent less per head, as they purchased cheaper items or bought fewer
items.
• Menu items were not available, reducing sales.
• Service was slow and customers did not stay to order dessert or other menu options.
Note
The next step is to determine if the news is as good or as bad as it first appears. Are the
results a true indication of how your team or department performed?
To find out, you need to ‘flex’ the budget. Flexing is when a budget changes in response to
changes in sales and expenses. You alter the format of the budget from a fixed budget to
a flexible budget by modifying it to reflect the changed conditions.
You’ll learn how to flex a budget in the unit Manage finances within a budget.
Who do you report budget deviations to?

This depends on the size and internal structure of your workplace. Most organisations
have a clear hierarchy outlining who staff, supervisors and managers report to, and who
they are responsible for. This same chain of command usually also applies to reporting
budget deviations. However, sometimes other personnel such as the finance manager
may also be included.
Departmental budget variations are rarely reported externally. Deviations in a master or

project budget for a business may be, especially if they are part of a larger organisation
such as a hotel group or chain.
How often do you report deviations?

The degree of emphasis placed on the importance of budget control is a factor when
considering how often budgets are discussed and formally reported on. Businesses with
structured financial plans usually have equally structured reporting processes.
Click on the checkboxes to see examples of what to report on.
 The previous month’s results and where deviations occurred.

 What processes are being used to identify deviation patterns.
 What techniques are going to be implemented to reduce and rectify the deviations in
future budgets.
 Follow-up required during the current budget period to identify if deviation trends are
reoccurring.
 The long-term effect of identified deviations.
 Targets to be achieved in the next budget period.
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Hot tip
Consider the significance of the deviation when deciding when and how to report it.
Deviations may be discussed informally throughout the budget period and reported
formally through weekly or monthly meetings.
STEP 3: RECORD FINANCIAL

COMMITMENTS
Financial commitments are funds the business has to spend to operate, for example, food
and beverage purchases, wages, utilities, costs, debts, rent, council rates, insurance,
taxation payments, and loan repayments.
Click on the icon to learn about operational budgets.
Most operational budgets include not only income earned but also expenses incurred
while earning that income. Income statement budgets and balance sheets record other
forms of financial commitments such as loan repayments, interest or lease payments.
It’s just as important to include financial commitments in budgets as income. Funds need
to be allocated to meet these commitments. Accurate information on the business’s
performance cannot be calculated without them.
How are financial commitments recorded in a budget?

Financial commitments are usually shown as expenses in operational budgets as they are
costs incurred by the business. How and where they are recorded depends on the type of
expense.
You learned about the four basic cost categories in Section 1 of this unit. Do you
remember what they are?
You have 30 seconds to record your answer.
What are the four basic cost categories used for recording financial commitments?
Record your answer in the space below.

How did you go? Did you remember all four categories?
• Fixed costs
• Variable costs
• Direct costs
• Indirect costs
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STEP 4: PREPARE FINANCIAL REPORTS

Part of the budget process is reporting on performance, the results from the various
budgets used, and analysing the information you’ve gained from them.
There are a number of reports you can prepare.
Click on the tabs to see some examples.
Annual general meeting reports

This is a comprehensive report on the organisation’s activities for the year: what they have
achieved, profit or loss, etc. The report is usually distributed to shareholders and other key
stakeholders (directors and managers) who have a vested interest in the financial
performance of the business.
Most annual general reports include the following type of information.
• General information
• Balance sheet
• Cash flow statement
• Profit and loss statement
• Any notes on financial statements
• Chairperson’s statement
• Director’s report
• Operating and financial review
• Audit results
Board reports
A board report contains similar information to a general report but is typically not to be
distributed to shareholders.
Funding acquittals in relation to grants received

Organisations that receive funding grants have specific reporting requirements to show
how the funds were utilised and outcomes achieved. Grants are often used to fund special
community events, fundraising events or projects.
Detailed information on expenditure, strengths and weaknesses is valuable to assess the

success of the event or project and for the funding body to review how funds are allocated
in the future.
Taxation commitments
All businesses have tax reporting requirements. Some are prepared annually, others
quarterly.
Some of the tax reports you might report on include the following.
• Goods and services tax (GST)

• Pay as you go withholding (PAYG)
• Fringe benefits tax (FBT)
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• Company income tax

• Capital gains tax (CGT)
• Payroll tax
Periodic budget performance reports

Budget analysis reports are prepared at the end of each budget period: monthly, quarterly,
annual reports. These reports compare actual performance against budget, indicate
variances, and outline possible causes for the deviations. They may also discuss actions
to be taken to reduce the impact of deviations, or changes which should be made to
ensure the variances don’t reoccur.
The completion and presentation of periodic reports was shown in Sections 2 and 3 of this
unit.
Planning reports
These reports outline plans for the future based on trends identified in budget outcomes or
external to the business. This could include changes to systems and procedures, long-
term capital expenditure planning such as renovations or extensions, or new marketing
strategies.
Statistical reports
You can produce a variety of statistical reports from analysing budget results, sales
patterns, customer purchasing trends and your spending on expenses. Examples include
trend analysis reports on sales of individual menu items, customer spending analysis,
breakeven analysis on your menu items or accommodation rooms, marketing
demographics, changes in cost of goods and budget variances.
Profit and loss statement

The final profit and loss statement for the budget period indicates if you’ve made a profit
or a loss. It summarises revenue and expenses and, if compared to previous budget
periods, can also be used to show trends in the business’s operation.
Balance sheet
The balance sheet provides an indication of the business’s financial viability. This looks at
the business’s financial status in more depth than the profit and loss statement. The
balance sheet is an important financial document for use both internally and externally for
reporting to a corporate head office, boards of directors, shareholders, financial
institutions and government bodies.
Are these the only reports used?

There are other reports which may be prepared and used. Every establishment has its
own reporting systems and requirements. Some are legal requirements for business
accounting and reporting, or taxation purposes; others are developed internally.
Many establishments, especially within larger organisations or with multiple outlets,

produce an internal daily report called a flash report.
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This report shows budget performance at that point in time within the budget period, for
example, a daily revenue summary report. It indicates sales and/or revenue achieved the
previous day, an accumulated period-to-date figure and the budget period’s final target. It
helps managers and staff track their performance and provides an opportunity to take
corrective actions as soon a trend or deviation begins to appear.
What does a flash report look like?
Daily revenue summary Month: July

Date: 06/07/20XX Day 6 Day: Tuesday Weather: Cloudy, rain
Occupancy: 78% No. guests: 108
Variance
Today PTD BPTD Variance Budget YTD
%
No. covers
Breakfast 26 185 192 (7) 960 7960
Lunch 18 132 158 (26) 750 6830
Dinner 54 396 425 (29) 2,125 15,875
Total covers 98 713 775 (62) (8%) 3835 30,665
Food revenue $1,821.35 $14,856.30 $16,892.70 ($2,036.40) (12%) $83,592 $665,430
Bev. revenue $602.50 $4,698.60 $4,865.80 ($167.20) (3%) $24,078 $168,546
Total revenue $2,423.85 $19,554.90 $21,758.50 ($2,203.60) (10%) $107,670 $833,976
Average per head
Food $18.59 $20.84 $21.80 ($0.96) (4%)
Bev. $6.15 $6.59 $6.28 $0.31 5%
Total $24.73 $27.43 $28.08 ($0.65) (2%)
Comments: Day 1 in-house conference, lunch inclusive.
STEP 5: ADJUST BUDGETS

What adjustments might you need to make?
Click on the pictures to see possible changes that could result in adjustments being
made to your budget.
 Changes to internal policies and procedures. For example, changes to the stock
control system could lead to reduced expenses and altered purchasing patterns.
 Changes to menu items due to customer demand (or lack thereof), thus changing
purchasing, sales and expenses figures.
 Purchasing of new equipment could change labour and other expenses.
 A restructure of the management and staff could affect labour budgets.
 New advertising campaigns are developed, increasing potential sales and therefore
expenses.
 External factors such as changes in the economic situation, customer holiday
preferences, weather conditions or local events.
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What information should you record for the future?

A budget performance report records not only actual performance but also reasons for
any deviations, and possibly any corrective action taken.
This information helps you understand current budget performance as well as keeping a
record for the future. You can then refer to the information when preparing budgets in the
future to help achieve more accurate, achievable and realistic budget targets.
End of section
Click to the next screen to read the unit summary.
Summary
Careful planning and budget control is essential for a business to survive in today’s
competitive market.
Planning is a key component when preparing a budget. You need to understand your
organisational goals and how they affect your daily operation, accumulate information and
base your forecasts on up-to-date knowledge of your business’s operation and its external
environment.
However, setting a budget is not enough. Regularly update actual figures and compare
performance to that forecasted. This shows you the positive trends to be encouraged and
warns you in advance about potential problems. You then have the power to take
corrective action before any adverse trends affect your business’s operation and
profitability.
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GLOSSARY
Glossary
Word Meaning
Capital Funds used by a company to acquire or upgrade physical assets such
expenditure as property or equipment.
Cost of goods The direct costs attributable to the production of the goods sold by a
business; for example, materials used and direct labour costs
associated with producing the goods.
CPI The consumer price index (CPI) measures price changes in consumer
goods. It is also known as the ‘cost of living index’.
Disposable Income (after taxes) available to you for saving or spending.
income
Expenses Costs incurred by a business in earning income, for example, rent,
advertising, wages, etc.
Fiscal year An accounting period of one year, not necessarily coinciding with the
calendar year.
Night audit An internal audit process, usually conducted at night time, where all
transactions for a hotel’s guest ledger are checked, verified, posted to
accounts if necessary, the accounts balanced and management
financial reports produced.
Overdraft An extension of credit from a lending institution.
PLU Price Look Up: a code assigned to each sale item.
POS Point of Sale: a computerised ordering system.
Quantitative Quantitative research generates numerical data or data that can be
converted into numbers, for example, the number of hotels in New
South Wales.
Revenue Income, such as cash or other items, received in exchange for
merchandise or services.
Variance In financial terms, a variance is the difference between a budgeted,
planned or standard amount and the actual amount incurred/sold.
Variances can be calculated for both costs and revenues.
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Prepare and monitor

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Section 1: Prepare budget information........................................................... 3

Section 2: Prepare budget ........................................................................... 31

Section 3: Finalise budget ............................................................................ 59

Section 4: Monitor and review budget .......................................................... 65

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© 2016 Didasko Digital. All Rights Reserved.

Let’s look at what you will learn on completion of this unit.

Section 1: Prepare budget information

• How to determine and confirm scope and nature of required budgets.

Click on the icon to find out more.

What is the purpose of a budget?

Click on the icon to learn more.

How can budgets assist your business?

How do you prepare budgets?

Preparation and implementation of budgets follows a well-established pattern called the

What is the budget cycle?

A financial year (1st July to 30th June)

A calendar year (1st January to 31st December)

A corporate financial year (1st October to 30th September)

Steps involved in the budget cycle

Step 1: Establish attainable goals.

Step 2: Plan to achieve those goals.

Step 3: Analyse the difference between planned and actual results.

Step 4: Take corrective action.

Step 5: Improve the effectiveness of budgeting.

STEP 1: ESTABLISH ATTAINABLE GOALS

Click on the icon to learn more.

How do organisational goals affect the budget?

Click on the tabs to see examples of how these work together.

1. To obtain a specified profit (for example 20% net profit).

2. Research and introduce new advertising strategies to promote the establishment to

Targets in a sales budget could include the following.

• Number of meals or rooms sold

STEP 2: PLAN TO ACHIEVE

Click on the pictures to learn more.

Monetary vs non-monetary goals

• Number of items offered for sale

Putting it all together

• The establishment is increasing the seating capacity in the bistro.

The planning process

Click on the steps to see the process the manager followed.

Who is responsible for planning and preparing budgets?

Click on the pictures to find out more.

Alternatively, in large, multiple-site operations, chains or franchise organisations, an

What information do you need to prepare budgets?

How many sources of data can you think of?

List as many as you can in 30 seconds.

Click start to begin.

How did you go?

Compare your list to the examples provided on the next screen.

Sources of data used to prepare budgets

What performance data can you use?

Where do you find the data?

How do you know which budget the data applies to?

There are four basic categories.

Click on the tabs to learn about each one.

Putting a budget together

What are the different styles of budgets?

Click on the pictures to find out what they are.

Style 1: Incremental budgets

Sales budget Outlet: ______ Period:

Purchases budget Outlet: ______ Period:

Labour budget Outlet: ______ Period: