04/12/23 Meyer Armand Salamon 1

BudgetingBudgeting

Budgets: financial statements that are prepared and approved prior to a defined period in accordance with the objectives and policies to be pursued in that period

Important management technique

Tool to help both planning and control

Determine the aims and objectives and how those objectives will reached

04/12/23 Meyer Armand Salamon 2

PurposesPurposes

Planning for future activities

Combine ideas of different units

Coordinate the efforts of different units- coordinated management policy

Develop appropriate yardsticks to measure performance

Provide a method of control so that actual results can be evaluated against plans

04/12/23 Meyer Armand Salamon 3

Types of BudgetsTypes of Budgets

Long term vs. short term budgets

Capital budget

Operating budget

Department budget

Fixed vs.flexible budgets

04/12/23 Meyer Armand Salamon 4

Advantages and DisadvantagesAdvantages and Disadvantages

Give business a direction

Forces management to think ahead

Provide basis to measure performance

Encourage communication and coordination

Time consuming

Costly

Unpredictability of the future

Reveal confidential information

Tendency of “spending to the budget”

May create conflicts

04/12/23 Meyer Armand Salamon 5

Budgeting FrameworkBudgeting Framework

04/12/23 Meyer Armand Salamon6

Determine targets

System of budgetaryControl to achieve targets

Operating BudgetsCapital Budgets

Budget Commitee

Draft Budget for Approval

Room OperationsF&B Operations

Minor Dept.sUndist. Expenses

Cash BudgetFixed Assets Bud.Debtor-CreditorCapital Funds

Budgeted I+SBudgeted B+S

Budget PreparationBudget Preparation

Bottom-up approach

Involve department heads at least

Budget committee for coordination

Formal presentation by the accounting department

Approval by the general manager and then by board of directors

04/12/23 Meyer Armand Salamon 7

Budget CycleBudget Cycle

Establish goals and objectives

Planning to achieve these goals and objectives

Comparing actual results with the plans and analyzing differences (variances)

Take corrective action if required

Improve the effectiveness of budgeting

04/12/23 Meyer Armand Salamon 8

Departmental BudgetsDepartmental Budgets Starting point

Most important and most difficult to prepare

Form the budgeted income statement

Estimate revenue levels by depatment

Deduct estimated direct operating expenses

Combine estimated departmental incomes

Deduct estimated undistributed expenses

04/12/23 Meyer Armand Salamon 9

Rooms Revenue Rooms Revenue

June July AugustNumber of Rooms 30 30 30Average room rate 45 49,5 49,5Occupancy 75% 80% 90%Daily revenue $1.013 $1.188 $1.337Monthly Revenue $30.375 $36.828 $41.432

04/12/23 Meyer Armand Salamon 10

Budgeted Rooms Revenue – PR Budgeted Rooms Revenue – PR 9.19.1

June July AugustRooms 30 30 30ARR 90 99 99Occupancy 75% 80% 90%Budgeted Rooms Revenue 60.750 73.656 82.863

04/12/23 Meyer Armand Salamon 11

PR 9.2 – Annual BudgetPR 9.3 Budgeted F&B Revenue

PR 9.4 – Budgeted Sales RevenueFor Coffee Shop

PR 9.6 Budgeted Food Revenue

Flexible Budget – PR 9.5Flexible Budget – PR 9.5Revenue 800.000 900.000 1.000.000Food Cost 320.000 360.000 400.000Variable Labor Exp. 200.000 225.000 250.000Other Variable 96.000 108.000 120.000Total Variable 616.000 693.000 770.000Gross Margin 184.000 207.000 230.000Fixed Labor Cost 60.000 60.000 60.000Other Fixed Costs 120.000 120.000 120.000Total Fixed Costs 180.000 180.000 180.000Income Before Tax 4.000 27.000 50.000Tax 1.200 8.100 15.000Net Income 2.800 18.900 35.000

04/12/23 Meyer Armand Salamon 12

Budgeting in a New OperationBudgeting in a New Operation Feasibility study could serve as a base

Forecasts based on a combination variables

Meal period revenue

Number of seats

Seat turnover

Average check

Days open in the month

04/12/23 Meyer Armand Salamon 13

Variance AnalysisVariance Analysis

Comparison of budget and actual Dolar and percentage variances

over budgeted figure Dolar or percentage variance

investigated depending on the size and nature of establishment

Only variances exceeding the allowance will be investigated

04/12/23 Meyer Armand Salamon 14

Variance AnalysisVariance Analysis

Analyze differences for each revenue and expense item

Total variance consists of: Price variance:

(Difference in price) * Actual quantity

Quantity variance (Difference in quantity) * Budgeted

price

Classified as favorable and unfavorablevariances

04/12/23 Meyer Armand Salamon 15

ForecastingForecasting

Two common techniques

Moving averages

Regression

Regression depends on causal relationships

Y = a + bX

Number of restaurant meals = Meal to non-hotel customers + b (Number of guest nights)

04/12/23 Meyer Armand Salamon 16