BUDGETING

Concept

The most important long-term planning function performed by front office managers is
budgeting front office operations.
The hotel’s annual operation budget is a profit plan which addresses all revenue
sources & expense items. Annual budgets are commonly divided into monthly plans,
which, in-turn, are divided into weekly or sometimes daily plans . These budget plans
become standard against which management can evaluate the actual results
of operations.
The budget planning process requires the closely coordinated efforts of all
management personnel. While the front office manager is responsible for
room revenue forecasts, the accounting division will be counted on to supply
department managers with statistical information essential to the budget preparation
process.
The accounting divisional responsible for coordinating the budget plans
of individual department managers in to a comprehensive hotel operations budget for
top management’s review. The hotel general manager & controller typically review
departmental budget plans & prepare budget report for approval by the property’s
owners. If the budget is not satisfactory, elements requiring change are returned to the
appropriate vision managers for review & revision.
The primary responsibility of the front office manager in budget planning are
forecasting room’s revenue & estimating related expenses. Room’s revenue is
forecasted with input from the reservations manager, while expenses are estimated
with input from all department managers in the rooms division.

OBJECTIVES OF BUDGETARY CONTROL

 To ensure planning a future by setting up various budgets.

 To increase revenue
 To reduce cost and expenditure
 To coordinate with different departments.
 To maximise profits
 To minimise capital investment
 To operate departments with efficiency & economy
 To anticipate capital expenditure for future.
 Elimination of waste & increase in profitability.
 Fixation of responsibility of various individuals in the organization
 To have separate Control Department under supervision of Sr. Manager

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

How Budgetary Control is applied?

Budgetary Control is enforced to accomplish

•Goals
•Objectives

 Course of Actions to be followed

 That would make the realization of budgeted targets possible
 When deviations are found between Actuals and Budgeted Targets
 Immediately the cause must be found
 Promptly decide the corrective actions

Essentials of the Budgetary Control

Quick Reporting
Juniors – Submit – Actual Performance report
Reports – analyzed quickly
On the basis of Past Data & other Information
Seriousness In Implementation
Top Management should take Budget seriously
Only then Juniors will have sense of Seriousness
Responsibility Matched by Authority
Responsible personnel should be given authority to make the budget.
Authority brings responsiveness and to enforce decisions and desires
Rewards and Punishments
Employee must be suitably awarded, appreciated or punished
Flexibility
No Hesitation – Change /revision/modification in Budget from time to time
As per the current needs of business conditions
Shouldn’t be altered too frequently
Patience
Don’t expect results overnight
Without real sensible reasons, don’t frequently modify budgets
High degree of knowledge and experience is needed

Essentials of Good Budget

To have a good budget, one requires experienced and qualified staff along with perfect
future estimates. There is a separate budget department who is responsible for
preparing budget along with departmental executives.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Organization of Good Budget

 An organization to prepare budget is headed by the chief executives & they are
responsible for preparation, maintenance and administration of budgets.
 The chief executives appoint committees for each & individual budget & each
committee are headed by a budget officer.
 The Executive Chef, The F & B Manager and The Sales Manager prepares the budget
of F & B department i.e. revenue & expenditure along with profit of margin.
 The budget officer scrutinizes, modifies & submits it for approval.
 The department or section for which the budget is prepared is termed as Budget
Centre.

Budget Manual

A BUDGET MANUAL IS A DOCUMENT WHICH SPELLS OUT THE DUTIES &

RESPONSIBILITIES OF VARIOUS EXECUTIVES CONCERNED WITH THE BUDGET.

A BUDGET MANUAL COVERS THE FOLLOWING MATTER:

 The objective of budgetary control along with the benefits of the same.
 The duties & responsibilities of various executives preparing the budget.
 It gives information about sanctioning authority of various budgets.
 A specimen format & the number of copies to be made for preparing budgets.
 The budget center's name & the budget officer’s name is along mentioned.
 The length of various budget periods is mentioned.
 In small hotels, the accounts department itself is responsible for making the budget

Types of Budget

THE BUDGETS CAN BE CLASSIFIED AS PER THE FOLLOWING:

ON THE BASIS OF:

1. Length of time
2. Functions
3. Financial
4. Flexibility
5. Other factors

ON THE BASIS OF LENGTH OF TIME:

1. Long term budgets
2. Mid- term budgets
3. Short term budgets
4. Current budgets

Long Term Budgets:

 These budgets depict long term planning.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

  The length may vary from 5 to 10 years.
 These are periodically remained & can be modified if the need arises.
 These budgets are mostly prepared by top level management & the lower level
executives are not even aware of the same.
 Long term is usually involving huge investment to increase the efficiency & quality.

Mid - Term budgets:

 These budgets are usually 2-5 years & can be for revenue as well as cost.

Short Term budgets:

 This are generally for 1-2 years and generally used in agriculture sector.

Current budgets:
 This are prepared for less than a year an a weekly or even on a daily basis.
 A current budget is defined as a budget which is established for use for a short
period of time & relaxed to current conditions

On the basis of Functions:

The function related to the department are revenue, cost, profits, etc. these are the basis
of clarifying the budgets
1. Operating budgets
2. Capital budgets

OPERATING BUDGETS:
 The operations budget can be made for sales, production, cost control, purchase,
labor cost & operational expenses, etc.
 These budgets are related to different activities of the department.
 The achievements of budgetary targets is the responsibility of all personnel working
in the department.
 An operational budget is the most common type of budget used.
 It forecasts and tries to pretty closely predict yearly revenue and expenses for a
business.
 This budget can be updated with actual figures on a monthly basis and then you can
revise your figures for the year, if needed.

Capital budgets:
 The capital budget helps you figure out how much money you need to put in place
new equipment or procedures to launch new products or increase production or
services.
 This budget estimates the value of capital purchases you need for your business to
grow and increase revenues

On the basis of Flexibility:

1. Fixed budgets
2. Flexible budgets

FIXED BUDGETS:

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

  Fixed budget are prepared for a specific activity.
 They are prepared before the beginning of the financial year.
 A budget is prepared at least few months prior to the commencing date of the
budgeted period.
 E.g. the financial budget is prepared on 28th February whereas the financial year
begins on 1st April.

Flexible Budgets:
 It is extremely difficult for the budget to tally 100%, with the actual figures.
 Hence, the budget are regularly reviewed & if needed they are modified.
 A flexible budget is defined as a budget which recognizes the difference between
fixed variable and semi variable cost.
 The budget is useful where the level of activity changes from time to time.

On the basis of Financial:

1. Capital budgets for Expenditures
2. Operational budgets for Expenditures
3. Cash Flow Budgets

CAPITAL BUDGETS FOR EXPENDITURES:

 Capital budget are long or medium termed budget and involves a large amount of
many generally for purchasing of machinery, other equipment.
 Before the capital budget is prepared, the following is considered.
 The utility of the item purchased or procured.
 The return of capital investment
 Comparison of one capital investment to another & the comparison of capital
investment for various departments.

Operational Budgets for Expenditures:

 This can be made both for revenue and expenditure.
 To run any business efficiently, money is required on a day to day basis.
 This is termed as operational cost. The profit earned from the operational is call as
operational profits.
 The operational budgets are usually short termed and do not require any capital
allocation.
 E.g. Telephones, Market expenditure, Labor cost, Rent , Depreciation etc.

Cash Flow Budget:

 A cash flow budget details the amount of cash you collect and pay out.
 This is generally tallied on a monthly basis, but some businesses tabulate this
weekly.
 In this budget, you track your sales and other receivables from income sources and
contrast those against how much you pay to suppliers and in expenses.
 A positive cash flow is essential to grow your business.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Other types of Budgets:
1. Zero Based Budget
2. Standard Budget

ZERO BASED BUDGET:

 The new company or hotels which have no budget to support, make a budget which
does not refer to previous year's budget.
 Sometimes even old company go in for a zero based budget, so as to get rid of any
prejudice.
 In zero based budgets, all future expenditure are estimated & totaled to know the
final figure.
 To make the final figure for making the sales budget, the anticipated that units of
products can be sold & what will be the selling price of each.
 After multiplying the rate with the units to be sold, the total sales can be calculated.

Standard Budget:
 A standard budget contains fixed revenue and expense budget information.
 It does not provide for any variability in the amount of units sold, price points,
activity levels, and so forth.
 As such, a standard budget represents a single best estimate of the future
performance of a business through the budgeting period.
 This approach works best when the business model is relatively simple, revenues
rarely deviate from expectations, and expenses are highly predictable.
 Conversely, it functions poorly in a more fluid business environment that is more
difficult to predict.
 A standard budget is usually accompanied by variance analysis, which measures the
differences in actual revenues and expenses from expectations.
 These variances may be used as the foundation for a system of performance
bonuses.
 If bonuses are based on variances, this tends to force employees to follow the
budget, even if subsequent changes in the market make it obvious that the company
really should be diverging from the plan to follow new opportunities as they arise.
 The linkage of bonuses to the budget also means that employees are more likely to
pad their budgets to make them easier to achieve.
 Padding means that revenue targets are set artificially low, while expense targets
are set too high.
 The standard budget is commonly used in a centralized command-and-control
environment, since it allows senior management to judge the performance of the
organization in comparison to a single forecast of future results.
 Though the standard budget concept is extremely wide-spread, it suffers from the
singular failing of only planning for a single outlook on the future, which any
business is extremely unlikely to precisely reach.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Budget Cycle

THE BUDGET CYCLE

1. Establishing attainable goals or objectives
2. Planning to achieve this goals and objectives
3. Evaluating results
4. Taking corrective actions if any
5. Improving effectiveness of budgeting

ESTABLISHING ATTAINABLE GOALS:

 The management must determine goals
 Communicate to every level by setting targets.
 Feedback from juniors on goals & time
 Budget designing from top to bottom & reverse.
 The employees should participate at every level.
 Selection of the right type of budget
 proper incentives to meet or exceed the budget goals be established.

Planning to achieve these goals & objectives

 Plans must be made to achieve goals.
 The rooms division is the profit center
 The rooms divisions manager is responsible for maximizing profits.
 Selection of skilled manpower, appropriate indenting, buying, forecasting etc. helps
to achieve goals.

Execution /Evaluating Results

 Most important step during the budget cycle
 Comparison is made between the budgeted & the actual figures
 The analysis is carried out.
 The difference or variance, do not offer solutions.
 Variance depicts some errors between planning and execution

Corrective Action
 After Analysis of variance, Corrective action is identified.
 If possible, suitable corrective action is taken to rectify the error.
 Also a provision is made for future budgets so that similar problem does not occur.

Improve effectiveness of Budgeting

 The need of improving the budgetary process.
 The information provided from the analysis of variance can be helpful in taking
corrective actions in future.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

Making Front Office Budget

 Front office is one of the major revenue producing department of hotel.

 It is also responsible for a guest satisfaction.
 As we all know that approximately 70% or even more of the revenue is generated
from this department so it becomes all the more necessary that more than any other
department a more conscious budgeting or a budgetary control is exercised on this
department.
 This department's efficient and profitable operations affect the overall profitability
of the hotel.
 Front Office department of a large hotel has various sections such as reservations,
lobby, bell desk, telephones, business centre, concierge etc.
 The Master Budget for front office which includes budget for each section such as
reservations, lobby, bell desk mainly & individually.
 Front office manager should get individual budget for each of these areas.
 Reservation section shall give its budget which will mean, the budgeted figures of
reservations for a specified period of time that means number bookings.
 This budget shall also include the cost of reservation system that is to say cost to be
incurred on a various equipment and stationary used in the system
 Similarly other equipment like more filing racks for the section, more telephone
lines and such other equipment which may be necessary for the efficient functioning
of the section and ultimately in achieving the budgeted targeted figures.
 The reservation budget should also include the budget figures of labour which
means two things.
 Firstly it means that for the specific period for which the budget is being made what
will be the requirement of staff number of people?
 Now this will depend on the budgeted figure of reservations and if there are more
than the past period, most staff will be required and vice versa
 Secondly it means the labour cost and a labour rated cost for that.
 The budget for reservation section will be prepared by the reservation manager and
he must take the help and suggestions from his junior while preparing a draft
budget.
 The budget can be classified under the various heads such as fixed budget and
operating budgets.
 On the similar lines the subsections budget shall also be prepared by the other
sections of Front Office such as lobby and a bell desk.
 Many hotels combine the Bell Desk Budget with lobby budget.
 The lobby budget is usually prepared by the lobby manager but if it includes the bell
desk budget also, which normally in this case then he is assisted by a bell captain in
compiling this budget.
 Finally on the basis of subsections budgets which are prepared by Reservation
Manager and lobby manager, the Front Office Manager prepares a Front Office
department budget for the hotel.
 The Front Office Manager takes the help and guidance from the lobby manager,
reservation manager in doing so.
 Normally the budget for Front Office department are prepared on quarterly basis.
 While preparing the budget, guidance is taken from the past figures and
information.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 The marketing and sales department of the hotel also helps in preparing final budget
as they can also focus the future or expected business.
 Further it is also important that the lobby manager and reservation manager be
given this budget for implementation once it is approved by the front office manager
and then by the general manager and controller and then by the board of directors.
 Once the budget has been approved and given for the implementation it is the duty
of the operating section to ensure that the workers adhere to the budget.
 Any deviation must be observed, recorded and notified.
 The reasons why the deviation was there must be found out and analysed.
 From time to time refining of budget should also be done as per the need by the
Front Office Manager and approval of higher authorities for the same must be taken
and further communicated to the concerned person.
 Preparing an accurate budget requires the ability to forecast sales with a reasonable
amount of certainty, several different methods are used to predict future sales, but
some techniques are more accurate than others. The easiest technique is averaging-
calculating the average monthly sales in the past.

How to calculate Sales Averages

Past financial information is called historical data. The more recent the historical date
used, the more accurate the average. In most cases, sales figures from more than three
years in the Past often are not reliable for predicting future sales. To calculate an
average, add the amounts and divide the sum by the number of amounts.

Projecting/ Estimating expenses

One key element in budget preparation is the estimating/projecting expenses. Since
expenses are categorized both in relation to operated departments (direct/indirect) and
how they react to changes in volume (fixed and variable), the forecasting of expenses is
similar to the approach used in forecasting revenue. However, before department heads
are able to estimate expenses, they must be provided within formation regarding the
following:
 Expected cost increases for supplies, food & beverages, and other expenses.
 Labor cost increases, including the cost of benefits and payroll taxes.
 Budget preparation is indeed a complicated work and the skill is acquired after long
experiences. It includes a lot of permutation & combination of various influencing
factors either of external and internal.
 Normally, departmental budgets are made by the respective departmental heads,
then it is sent to the financial controller of the hotel for evaluation. After
modification, it is approved.
 All departmental budgets together form a consolidated budget for the hotel.
 Present position of the hotel
 Previous years financial statements
 Any expansion plan, renovation, raising standards, increase/decrease in staff
strength.
 Take each cost heading separately and compile.
 Plan for practical goals, do not over-budget
 Supply needed- consider automation, new technology and compile to make final
budget

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Take into account, the percentage of inflation, current economic situation in the
market. Prepare by looking at past experiences, present knowledge and judgement
of what is likely to happen .
 Identify areas which can or cannot be controlled.
 Review wages & salaries, operating cost and expenditures that are of variable, semi
variable and fixed nature.
 Consider the following year’s tax policies, new laws & regulations that may come
into effect
 Prepare throughout the year for the next year’s budget noting changes and scope for
improvement

 Make decision of what is more effective:

– Part time or full time staff
– Cost of staff and how often they may be required

– Overtime versus extra staff

– Outsourced versus own

Expenses are of two types:

Fixed Expenses and Variable Expenses.
 A fixed expense remains constant and is not dependent on sales and these include
charges such as depreciation, insurance expense, property taxes, rent expense, and
similar expenses.
 A variable expense fluctuates as sales rise or decline.
 Expenses such as stationery charges, room amenities expense that varies
as per the occupancy of the establishment are termed as variable expenses.

Refining Budget

 The term Refining Budget can also be called as Amending the Budget or Adjusting
the Budget or Modifying the Budget.
 As the term says this means to change which may be increasing or decreasing the
figures of the already prepared forecasted figures.
 Budget as we know is a forecast that is to say a projection of figures for future and is
based on certain assumptions which may be past figures or expected activities or
future.
 Now since future is indefinite so whatever base we might have taken off the future
may occur or may not occur at all or may occur partly or more than the expectations
and hence when it will come to actuals for that period, the actual figures may match,
may be more, may be less than the projected figures.
 Suppose the budget is for a period of one year then it is always advisable to monitor
the output after a regular interval of time say every quarterly.
 Further suppose we have budgeted a sale of rupees 1 Crore over a period of three
months which means approximately our sale every month shall be 33,33,333. Now
at the end of every month we must check whether we are meeting this figure or not .

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 If in actuality we're meeting the figure at the end of say this four month that means
our forecasted targeted sale is alright but if there is a lot of difference which may be
both plus or minus then it means that our initial budget planning was wrong.
 Such variances have to be studied and analysed immediately and corrective action
taken, which means based on new circumstances new targeted figures are to be
calculated
 For example suppose we project 10,000 foreign tourists in the first quarter of the
financial year that is from April to June and by the middle of February we find that
there a lot of problems in the country such as unstable government, highly increased
terrorist activities in the region or outbreaks of an epidemic then we must
refine/modify our target figure for the period from April to June and may reduce the
expected figure of tourists from 10,000 to say only 7000.
 Reforecasting is normally suggested when actual operating results begin to change
significantly from original budget this is possible only when the operation results
are reviewed from time to time that is at a regular interval of time.
 Original budgets has been made on the basis of certain documents.
 It is important that these facts must be preserved to provide an explanation as to
why and on what basis the earlier decisions were taken
 Such records are also necessary for answering questions which arise during budget
review.
 Refining Budget is very important activity and it protects the establishment from
suffering a great loss.
 For example suppose we are expecting 10 Lakh tourist over a period of time than to
meet the challenge of giving them perfect service and product, we might have to
employ extra labour, spend more on bed linen, bath linen, maintenance, food and
beverage and housekeeping staff.
 All these may be waste of money if the expected number of tourists do not come
during that. And we are not careful in refining modifying our budget in our course of
action.
 The Refining Budget is done by the same person who initially prepared the budget
but he must be furnished with facts and figures and data and information by
operators in due course of time and regularly.
 The MIS must be strong, efficient and reliable.
 Computer aided MIS should be used for this purpose.
 Various sources other than the hotels at the statistics issued by the central
government, state government, tourism authorities or any other relevant agencies
may be contacted to collect information hence it is important to maintain a good
relation with such agencies

Factors affecting Budget Planning

FACTORS AFFECTING BUDGET PLANNING

The following are the elements, which have an affect on the front office budget
planning.
• Accommodation:
This is one of the most critical key factors operating in hotels. When all the rooms are
sold, it is impossible to increase the volume of room sales except through an increase in

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

room rates. When the sales budget is being prepared it is essential to examine patterns
of occupancy to establish what level of room sales may realistically be expected during
the forth coming budget year
• Manpower:
This particular key factor is potentially powerful, but there is no evidence that it exerts
much influence on the volume of hotel and restaurant sales. In some locations, labour
shortages may, in fact, be a severe limiting factor.
• Consumer demand:
Consumer demand is often found to be a potent key factor. Its operation may be due to
several reasons. The price level of the establishment may be too high, and this may
result in a low ARR or low occupancy or both.
• Quality of management:
The management and its operation however do not have a bearing over short period.
Over longer periods, the quality of management will have a direct and powerful
influence on the volume of sales generated.
• Other factors:
1. Political state of affairs
2. Natural calamities
3. Terrorist activities
4. Climate conditions
5. Events (sports, festival celebration, etc)
6. Importance of the city (climate, industries- IT, BPO, Biotechnology)

Capital & Operations Budget for Front Office

 The main objective of the cash budget is to determine the cash inflow, cash outflows
and the resulting cash balance over a future period.
 In order to determine future cash inflows it is necessary to identify the sources of
cash flows.
 Point of Sales like Rooms, F & B Outlets, Business Centers, Telephones, Bar, Mini Bar,
Laundry, Spa, Florist Shop, Other Recreational Outlets etc. generate Cash In flow.
 Each of these sources may generate cash or credit sales.
 Cash sales constitute an immediate cash inflow.
 Credit sales, however, take time to result in a cash inflow.
 Most expenses for front office operations are direct expenses in that they vary in
direct proportion to room’s revenue.
 Historical data can be used to calculate an approximate percentage of room’s
revenue that each expense item may represent.
 These percentage figures can then be applied to the total amount category for the
budget year.
 Historical data can be used to calculate an approximate percentage of room’s
revenue that each expense item may represent.
 Typical rooms division expenses are payroll and related expenses like guestroom
laundry (Bed & Bath Linen), guest supplies (bath amenities, toiletries), hotel
merchandising (in-room guest directory, hotel brochure), travel agent commission
and reservation expenses.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 When these costs are totalled and divided by the number of occupied rooms, the cost
per occupied room is determined.
 The cost per occupied room is often expressed in rupees and as a percentage.

Advantages of Front Office Budgeting

 Compels Management to think about future which is very important aspect of

Budgetary Planning and Control.
 Forces Management to look ahead, to set out detailed plan for achieving targets for
each department, each operations.
 Promotes coordination & communication
 Clearly defines area of responsibility
 Requires managers of budget centres to be made responsible for the achievement of
budget targets for the operations under their personal control.
 Provides a basis for performance appraisal (variance analysis).
o A budget is basically a yardstick against which actual performance is measured
and assessed. Control is provided by comparisons of actual results against
budget plan.
 Enables remedial action to be taken as variances emerge.
 Motivates employees by participating in the setting of budgets.
 Improves the allocation of scarce resources.
 It brings about efficiency and improvement in the working of the organization.
 It is a way of communicating the plans to various units of the organization.
o By establishing the divisional, departmental, sectional budgets, exact
responsibilities are assigned. It thus minimizes the possibilities of buck-passing
if the budget figures are not met.
 It is a way of motivating managers to achieve the goals set for the units.
 It serves as a benchmark for controlling on-going operations.
 It helps in developing a team spirit where participation in budgeting is encouraged.
 It helps in reducing wastage's and losses by revealing them in time for corrective
action.
 It serves as a basis for evaluating the performance of managers.
 It serves as a means of educating the managers.
 Eliminates uncertainty.
 It leads to better planning.
 Optimum use of capital resources.
 Easy availability of working capital.
 Used as a control tool by management

Disadvantages of Front Office Budgeting

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Budget are estimated and can never be hundred per cent accurate.
 Budget cannot guide as to what action should be taken.
 The major problem occurs when budgets are applied mechanically and rigidly.
 Budgets can demotivate employees because of lack of participation.
o If the budgets are arbitrarily imposed top down, employees will not understand
the reason for budgeted expenditures, and will not be committed to them.
 Budgets can cause perceptions of unfairness.
 Budgets can create competition for resources and politics.
 A rigid budget structure reduces initiative and innovation at lower levels, making it
impossible to obtain money for new ideas

Forecasting Room Revenue

 Historical financial information often serves as the foundation on which the front
office managers built room revenue forecast .
 One method of room revenue forecasting involves an analysis of room revenue from
past periods.
 Rupee and percentage difference are noted and amount of rooms revenue for the
budgeted year is predicted.
 The simplified approach to forecasting room's revenue is intended to illustrate the
use of trend data in forecasting.
 A more detailed approach would consider the variety of different rates
corresponding to room types guest profiles days of the week and seasonality of
business

Estimating Expenses

 Most expenses for front office operations are direct expenses in that they vary in
different proportion to room revenue.
 Historical data can be used to calculate an approximate percentage of room revenue
that each expense item may be present.
 This percentage figures can then be applied to the total amount of forecasted room
revenue resulting in rupee estimates for each expense category for the budgeted
year.
 Typical room division expenses are payroll and related expenses, guest room
laundry, guest’s supplies, hotel merchandising, travel agent commissions, direct
reservation expenses and other expenses.
 When these costs are totalled and divided by the number of occupied rooms the cost
per occupied room is determined.
 The cost of occupied room is often expressed in rupee and a percentage.

 Management should question why cost continues to rise as a percentage of

revenue?
 If cost continues to rise (as a percentage not in real rupee) profitability likely will be
affected.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

 Therefore one of the outcome of the budget process will be identified where costs
are increasing as a percentage of revenue then management can analyse why this
costs are increasing disproportionately with revenue and develop a plan to address
the issue.
 Since most front office expenses vary proportionately with room revenue (and
therefore occupancy), another method of estimating this expenses is to estimate
variable costs per room sold and then multiply these costs by the number of rooms
expected to be sold.

Budgeted Income Statement (BIS)

 The room division is a profit centre so the rooms division budget is concerned with
planning to maximize revenue and minimize expenditures.
 This statement specifies the desired sales goal that are the basis for planning
expenses and capital expenditures, refurbishing, increasing supplies inventory, etc.

Budgeted Cash Flow (BCF)

Budgeted cash flows are very helpful in planning day to day operations of a business.

Difference between the BIS & BCF

 Budgeted income statement is prepared on the basis of accrual accounting system

and is composed of revenue and expenses.
 Revenues are recorded when a service is rendered not when the hotel receives a
payment for it.
 Similarly expenses are recorded when an asset or service is consumed not when it is
paid for.
 The amount of cash that a hotel receives on a given day and the amount of revenue
earned will not be the same because some sale of service maybe credit sales for
which the hotel receives no cash in current accounting.
 Some expenses recorded on the current income statements are not paid for in the
current accounting and therefore do not represent an outflow of cash.
 In other words budgeted income statement shows the profit or a loss from the
business operation irrespective whether cash has been paid or received or not.
 Budgeted cash flows help managers to plan expected total cash receipts and
expenditures and indicates that net cash flow difference between receipts and
expenditures.
 For preparing and operating cash budget estimates of when actual payments on
sales will be received.
 In other words budgeted cash flow is a form of cash book which shows total receipts
and payments.

Variance Analysis

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A

Simple Rupee Variance Analysis:
 It is the difference between budgeted and actual revenue and expense amount.
 An evaluation of the rupee amount of these differences helps determine how far off
budget the actual results were.
Percentage Variance Analysis:
 It divides the rupee variance by the respective budgeted amounts this enables us to
determine by what percent the actual amount exceeded or was short of budgeted
amounts.
Compound Rupee Variance Analysis:
 To understand compound variance analysis it is necessary to review the makeup of
rupees sales and expense amount sales and expenses are the result of two
components unit price or unit cost and unit volume.

FRONT OFFICE MANAGEMENT – 1 5TH SEM B Sc H & H A