Budgeting

The budgeting process in a

Hotel
• There is only one thing we can say with absolute
certainty about the budget we are about to
create. What is that?

IT IS WRONG!

• We don’t know yet by how much or in which

direction, but we DO know that reality will be
different!
 Why is it wrong?
• It is based on history, assumptions, estimates,
plans and guesses. We have no guarantees that
every one of our estimates is a good one and
that history will repeat itself.

So, why do we do it anyway?

• Because having an inaccurate roadmap gives us

a better chance to reach our destination than not
having a map at all.
 Why establish a budget?
• Aside from being the roadmap we can use
to measure our progress, a budget is also
an very strong tool for goal setting and
motivation.
• The very process of calculating budgets
reminds us of our principal duties and the
business needs we are being paid to look
after.
What do we do with the budget?
• The operator uses it to measure actual
performance against what we considered
an acceptable standard.

• We (and the owner) also use it to

anticipate cash availability and/or
requirements.
 Budgeting
• If we can’t make a totally accurate budget,
we should at least make an intelligent one.
• The better the intelligence (information)
the better our assumptions.
• The better our assumptions the more
intelligent our budget.
 Assumptions
• Information is the basis of of making
assumptions.
• How do we make these assumptions?
History
Trends
External changes
Internal changes
 Different types of budgets
• Pre-opening budget
• First year budget
• Pro-forma budget (maturity)
• Zero based budget
• Operating budget
Where to start?
• SALES

• or

• PROFITS
 Sales
• Advantages • Disadvantages
• We tend to not challenge
• It is « realistic » ourselves too much
• It is logical • We assume that past
• practices were good
It has a fairly high enough and should
probability of being therefore continue
achieved • We consider that the
directest line to profit is
Why? from revenues and tend
to minimize the
importance of expenses.
 Profits
• A required/needed profit is established
• We plug in the profit that is required
• We add all our fixed expenses
• Based on our business model and experience,
we calculate what revenue we need
• Based on required activity, we calculate
variable expenses
• We try to fit in the fixed expenses
• We hope for the best
 Bottom up budgeting
• Advantages • Disadvantages
• Presents a higher • Is often unrealistic
probability of • Is based more on
improvement over the hopes than real plans
past and projections
• Challenges the • If we fall behind early,
it tends to discourage
operator to look for
new and better ways
of doing things
 Expenses
• Fixed expenses
• Expenses that are independent of activity
levels. Even if no customers are served,
these expenses will remain.
• Most « fixed expenses » have a variable
element (utilities, management salaries,
decorations, etc.)
 Expenses
• Variable expenses
• Expenses that are directly linked to the
activity levels. Each additional cover
served increases these expenses.
• Many « variable expenses » have a fixed
element
• Variable expenses do not always follow a
straight line