BUDGET AND BUDGETRY CONTROL

 

BUDGET AND BUDGETRY CONTROL

 

A budget is a financial plan that outlines an individual's, organization's, or government's expected income and expenses over a specific period of time, typically a month, quarter, or year. Its primary purpose is to allocate resources efficiently and effectively to achieve specific financial goals and objectives.

Budgets are essential tools for managing finances, as they provide a clear picture of where money is coming from, where it's going, and how it is being used. They help individuals and entities make informed financial decisions, set financial goals, and ensure that resources are allocated wisely to meet those goals. Additionally, budgets can be used to evaluate financial performance, identify areas for improvement, and adapt to changing financial circumstances.

 

Key components of a budget typically include:

 

1. Income: This section includes all sources of expected revenue, such as salaries, rental income, investment returns, or grants.

2. Expenses: Expenses are the expected costs or expenditures during the budget period. They can be divided into various categories such as fixed expenses (e.g., rent, mortgage, insurance), variable expenses (e.g., groceries, utilities), discretionary expenses (e.g., dining out, entertainment), and savings.

3. Savings and Investments: Budgets often include provisions for saving money or investing for future financial goals, such as retirement or education funds.

4. Debt Repayment: If there is outstanding debt, like loans or credit card balances, a budget may allocate funds for debt repayment.

5. Contingency or Emergency Fund: Many budgets include a category for unforeseen expenses or emergencies to ensure financial stability in unexpected situations.

6. Budgeted vs. Actual: To effectively manage finances, individuals and organizations track t heir actual income and expenses against the budgeted amounts. This helps identify variances and make necessary adjustments.

 

TYPES OF BUDGE

1.     On the basis of types of expenditure-

 

A.    Capital budget- Make provision for all items of capital assets, these are assets that are not normally used up in day to day life. It is important to keep a record of purchase and repairs as a form of control. Equipments, machinery, furniture and fittings etc .are typical examples of capital expenditure.

 

B.     Operating budget- Makes provision for all those items which are required for day to day operations e.g.-cleaning agents, guest supplies, salaries and wages contract services etc.

 

 

C.     Pre opening budget- Makes provision for the smooth opening of new hotel .e.g. resources for opening parties, advertising, generation of initial goodwill, initial cost of employee salaries and wages etc.

 

2.     On the basis of department involved-

 

A.    Master budget-These represents the forecasted budget for the whole organization and incorporate all incomes and expenditures estimated for the organization.

 

B.     Departmental budget-Each department of the hotel forwards a budget for its estimated expenses and revenues to the financial controller. E.g.-housekeeping budget, F&B budget etc. Rooms division budget is the combined budget for both front office and housekeeping.

 

 

3.     On the basis of flexibility of Expenditure-

 

A.    Fixed budget-These budget remains unchanged over a period of time and are not related to the volume of sale e.g. rent, insurance, depreciation etc.

 

B.     Flexible budget-These are also pre determined budget based on the revenue expected but differ with different volume of sale.

 

 

ADVANTAGES OF BUDGET AND BUDGETARY CONTROL

·        Provides an overall picture of the result expected from the proposed plan of operations.

·        It serves as a guide to various executives who are responsible for the various departments of the hotel.

·        Maximizing efficiency which is achieved by avoiding wastage and loss of manpower and materials.

·        Budgetary control ensures co-ordination and central control.

·        Helps to monitor performance since failure to achieve the budgeted forecast will be a measure of the overall performance for the hotel and its employees.

PLANNING A CAPITAL BUDGET

Capital expenditure involves large sums on such investments that have a long term impact. It is

thus natural that decisions on these items are critical and should be made by a group involving

the general manager, financial controller and executive housekeeper.

Decisions to incur capital expenditure in housekeeping arise from:

·        Renovation of rooms or public areas.

·        Addition of rooms or public areas.

·        Replacement of equipment, furnishings, carpets, etc.

·        Introduction of automation in the department.

Having received a decision from management on capital expenditure the housekeeper should observe the following steps:

Supplier identification, receiving competitive quotations, selection of a supplier and finally purchase of the product taking into consideration freight, transport, handling and installation charges.

The types of items that are provided for in the capital budget are:

·        Large equipment and machines.

·        Furniture, fixtures and fittings in rooms and public areas.

·        Linen and soft furnishings.

·        Uniforms.

·        Special project (construction of new rooms etc.)

·        Miscellaneous- It is quite normal to have a certain amount of money allocated under such a heading in order to make provision for emergencies e.g. alterations required by law etc.

 

PLANNING AN OPERATIONAL BUDGET

The first step in planning the operating budget is always to forecast room sales, which generates the revenue for operating the various departments. Most of the expenses that each department can expect are directly related to room occupancy levels. This is especially true of the housekeeping department where salaries and wages, and the usage rates for both recycled and non-recycled inventories are a direct function of the number of occupied rooms. The concept of “cost per occupied room” is the major tool the executive housekeeper uses to determine the levels of expense in the different categories. Once the executive housekeeper knows predicted occupancy levels, expected expenses for salaries and wages, cleaning supplies, guest supplies, laundry and other areas can be determined on the basis of formulas that express costs in terms of ‘cost per occupied room.’ By specifying expense levels in relation to room sales, the budget actually expresses the level of service the hotel will be able to provide. In this regard, it is important for department heads to report how service levels will be affected by budget adjustments. This is important for the executive housekeeper. If the top management tones down the operating budget submitted by the executive housekeeper, the executive housekeeper should clearly indicate what services will be eliminated and downgraded in order to achieve the specified reductions.

 

The various heads of expenditure that are normally reflected in a housekeeping operating

budget are:

·        Cleaning agents and guest supplies

·        Office stationery

·        Tailoring/ alteration expenses

·        Small cleaning equipment like mop heads and brushes

·        Salaries and wages-includes retirement, benefits, bonus, allowances, incentives, etc.

·        Energy and water consumption expenses

·        Repairs and maintenance of machines and equipments

·        Pest control and other contract cleaning services

·        Laundry cleaning agents expense

·        Flower room expense (flowers, oasis and vases)

·        Landscaping expense (seeds, manure, saplings and flower pots)

 

 

Using the operating budget as a control tool

An operating budget is a valuable control tool to monitor the course of operations during a specified period. Controlling expenses in the housekeeping department means comparing actual costs with budgeted amounts and assessing the variances. When comparing actual and budgeted expenses, the executive housekeeper should first determine whether the forecasted occupancy levels were actually achieved. If the number of occupied rooms is lower than anticipated, a corresponding decrease in the department’s actual expenses should be expected. If occupancy levels are higher, then there will be a corresponding increase in expenses. In either case the expense variation will be proportionate to the variation in occupancy level. The executive housekeeper’s ability to control housekeeping expenses will be evaluated in terms of his/her ability to maintain the cost per occupied room expected for each category. Small deviations between actual and budgeted expenses can be expected and are not a cause for alarm but serious deviations require investigation and explanation. The executive housekeeper needs to formulate a plan to correct the deviation and get the department back ‘on budget.’

 

Example: A re-examination of staff scheduling procedures or closer supervision of standard practices and procedures may be necessary. Other steps might include evaluating the efficiency costs of products being used in the housekeeping department and exploring the alternatives. Even if the executive housekeeper finds that the department is far ahead of the budget it is not necessarily a cause for celebration. It may indicate a deterioration of service levels that were built into the original budget plan. Any serious deviation from the plan is a cause for concern andrequires explanation. Identifying and investigating such deviations on a timely basis is one of the most valuable functions an executive housekeeper must perform in terms of the operating budget.

Methods of Controlling expenses in Housekeeping

It means ensuring that actual expenses are consistent with the expected expenses forecasted by the operating budget. There are basically four methods the executive housekeeper can use to control housekeeping expenses.

Accurate record keeping: It enables the executive housekeeper to monitor usage rates, inventory costs and variances in relation to standard cleaning procedures.

 

Effective scheduling: It permits the executive housekeeper to control salaries and wages and the costs related to employee benefits. The housekeeping employees should be scheduled according

to the guidelines in the property’s staffing guide which is based on the level of room occupancy.

Thus it ensures that personnel costs stay in line with the occupancy rates.

 

Careful training and supervision: It should not be overlooked as a cost control measure. Effective training programmes that quickly bring new recruits up to the hotel’s standard. Lower productivity and performance standards may considerably increase the housekeeping expenses.

Close and diligent supervision, as well as refresher training can ensure that performance and productivity standards are met and may even bring about improvements.

 

Efficient purchasing: Efficient purchasing practices afford the executive housekeeper the greatest opportunity to control the department expenses and to ensure that the hotel’s money is

well spent and the maximum value is received from products purchased for use. The executive housekeeper must set a proper ‘par’ for the various inventories (recycled and non-recycled), and must have a proper purchasing system with the quantities and specifications submitted to the purchasing department. The executive housekeeper needs to periodically re-evaluate the

suitability of existing products for their intended purposes. Alternative products should be

explored and compared to existing products in terms of performance, durability, price and value.

By comparing the cost per occupied room achieved with alternative products, the executive

housekeeper can evaluate which products yield greater cost savings and base purchasing

decisions accordingly.

 

 

Operating budget and income statement: An operating budget is identical in form to an income statement. The differences are:

 

Checklist for preparing a budget

·        Know the present position of the hotel.

·        Review the previous year’s financial statements.

·        Look at the major sports events, festivals and holiday events for the year ahead.

·        Check for any expansion plans, redecorating, raising standards, increase/decrease of staff.

·        Check on the supplies needed-consider automation, new technology and better products.

·        Take each cost heading separately and compile to form the final budget.

·        Plan for practical goals and do not over budget.

·        Take into account the inflation percentage. 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 and salaries, operating costs and expenditure that is variable, semi-variable, and

fixed.

·        Plan with the following year’s tax policies in mind. Take into consideration any new laws or

regulations or policies that may come into effect.

·        Prepare throughout the year for the next year’s budget noting changes and scope for

improvement.

·        Make decisions of what is more cost-effective

·        Part time or full time staff.

·        Cost of staff and how often they may be required.

·        The cost of servicing a room i.e. overtime versus

·        extra staff. Contract cleaners versus own staff.

·        In-house laundry against contract.

·        Use of cleaning agents as per dilution rates.