BUDGET Unit VI 1 Characteristics of a budget

BUDGET Unit VI 1

Characteristics of a budget A good budget is characterized by the following: Ø · Participation: involve as many people as possible in drawing up a budget. · Comprehensiveness: embrace the whole organization. · Standards: base it on established standards of performance. · Flexibility: allow for changing circumstances. · Feedback: constantly monitor performance. · Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres. Ø 2

WHAT IS A BUDGET? A budget is a financial plan for a business, prepared in advance. Ø A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess about what you will need in monetary terms to do. 3

Why budget? Ø Ø Ø The budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments. The budget tells you how much money you need to carry out your activities. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities. The budget enables you to monitor your income and expenditure and identify any problems. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies. 4

Who should be involved in budgeting? Budgeting is a difficult and responsible job. Your organization’s ability to do what it has planned to do and to survive financially depends on the budgeting process. Whoever does the budgeting must: Ø Understand the values, strategy and plans of the organization or project; Ø Understand what it means to be cost effective and cost efficient Ø Understand what is involved in generating and raising funds. Ø 5

BUDGETARY CONTROL Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as: Ø "The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision". 6

Budgetary control and responsibility centres These enable managers to monitor organizational functions. Ø A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit. There are four types of responsibility centres: a) Revenue centres b) Expense centres c) Profit centres d) Investment centres Ø 7

OBJECTIVES OF BUDGETARY CONTROL Ø Ø Ø Planning Communication Coordination Motivation Control Approved Plan 8

BENEFITS OF BUDGETS AND BUDGETARY CONTROL Ø Ø Ø the budget assists planning the budget communicates and co-ordinates the budget helps with decision-making the budget can be used to monitor and control the budget can be used to motivate 9

LIMITATIONS OF BUDGETS AND BUDGETARY CONTROL Ø Ø Ø The benefit of the budget must exceed the cost Budget information may not be accurate The budget may de-motivate Budgets may lead to dis-functional management Budgets may be set at too low a level 10

ESTIMATING EXPENSES Ø Room’s division expenses are basically payroll and related expenses, laundry of room linen and bathroom provisions, guest supplies, commissions and reservation expenses, and other expenses. Heritage Institute of Hotel And Tourism 11

ESTIMATING EXPENSES Pay roll and related expenses = Forecasted Rooms Revenue X Average expense percentage Ø Room linen laundry, guest supplies Etc. expenses = Forecasted Rooms Revenue X Average expense percentage Ø Commissions and Payroll expenses = Forecasted Rooms Revenue X Average expense percentage Ø Other Expenses = Forecasted Rooms Revenue X Average expense percentage Ø 12

Revenue Management Methods Ø Capacity management: Balances risks of overbooking against potential loss of revenue from reservation cancellations, early departures, and no-shows. Ø Discount allocation: Restricts time period and product mix (rooms) available at reduced or discounted rates Ø Duration control: Places time constraints on accepting reservations in order to protect rooms for multi-day reservations (which represent higher levels of revenue) 13

Revenue Management Formulas Ø Ø Ø Ø Formula 1: Potential average single rate Formula 2: Potential average double rate Formula 3: Multiple occupancy percentage Formula 4: Rate spread Formula 5: Potential average rate Formula 6: Room rate achievement factor Formula 7: Yield statistic 14

Revenue Management Formulas Ø Ø Ø Formula 8: Rev PAR Formula 9: Identical yields Formula 10: Equivalent occupancy Formula 11: Required non-room revenue per guest Rev PAG GOPPAR Heritage Institute of Hotel And Tourism 15

Yield Statistic Formulas Formula #1 Actual Rooms Revenue Potential Rooms Revenue Formula #2 Room Nights Sold __________ X Room Nights Available Actual Average Room Rate ____________ Potential Average Rate Formula #3 Occupancy Percentage � Room Rate Achievement Factor 16

Rev PAR Formulas Formula #1 Actual Room Revenue Available Rooms Formula #2 Occupancy Percentage � Average Daily Rate 17

Elements of Revenue Management Strategies Ø Ø Ø Group room sales Transient room sales Other revenue opportunities Local and area-wide activities Special events Fair market share forecasting 18

Revenue Management Meeting Participants Ø Ø Ø General manager Sales managers Catering managers Reservations manager Front office manager Food and beverage manager 19

High-Demand Tactics Ø Ø Ø Close or restrict discounts Apply minimum length of stay restrictions carefully Reduce group room allocations Reduce or eliminate 6 p. m. holds Tighten guarantee and cancellation policies Raise rates to be consistent with competitors Consider a rate raise for packages Apply full price to suites and executive rooms Select dates that are to be closed-to-arrivals Evaluate the benefits of sell-throughs Apply deposits and guarantees to last night of stay 20

Low-Demand Tactics Ø Ø Ø Ø Ø Sell value and benefits Offer packages Keep discount categories open Encourage upgrades Offer stay-sensitive price incentives Remove stay restrictions Involve your staff Establish relationships with competitors Lower rates 21

Four Revenue Management Tactics Ø Hurdle rate Ø Minimum length of stay Ø Close to arrival Ø Sell-through 22

Revenue Management Software Revenue management software provides: Ø Ø Ø Continuous monitoring Consistency Information availability Performance tracking Special reports 23