FRONT OFFICE BUDGETING

Introduction

A budget is a management tool and not financial tool. It uses the accounting process established for a business To understand the account system and report, it is essential to prepare a budget The person preparing budget should have a sound knowledge of profit and loss statement. The FO must prepare a budget which is controllable. Most hotels prepare an annual budget as a reasonable period for control

Intro..
A budget is a formal financial statement of a future period Process of setting goals that are attainable and compared to the previous financial performance during the same period The key to successful budgeting is the planning process where long term and short term objectives are in place supported by sound policies and procedures.

Purpose of Budget

It locks in the desired rate of return required by the investor. Establishes the cash flows required to achieve the targeted figures. It gets people thinking about the future It sets goals against which performance can be measured. It is a measure of success It sets parameters of expenditure that is acceptable to the business It enhances management control.

Why do we budget?????

It is a management control function and improves the process of control Business plans to go according to schedule(?) Plans are influenced by unanticipated factors internally or externally (strike/ new sales tax etc.) Budgets have to be altered accordingly

Preparing Budget Rules

Goals - attainable. Unrealistic goals vs performing teams!!!!! Wide participation in budget process. FOM & FO team!! Information of approved budget Budget completion before performing period Role of employees in the attainment of budget goal Employees targets must have authority ans control over the work process Flexible budget to permit revision for unanticipated changes.

Revenue Forecast

The first step in budgeting process is determining the desired sales required Two possible ways , arriving at desired sales figures 1) ROI 2) Historical

ROI Method

An investor sets a target of net profit on desired ROI on an investment. Exa. if investor has invested $20millionin the hotel project, he may say that he wants 15%ROI each year i.e. $3million a year This contribution comes from all revenue departments The ROI increases year by year. Sometimes investor is reasonable and takes PLC into account. He may lower the interest in Introductory stage but get more aggressive in the growth stage and easing out at the mature and decline stage. Working backwards accountant add the prevalent income tax % Then adding up fix charges like depreciation, insurance, interest of loans taken.

ROI Method..

We arrive at GOP GOP reflects the efficiency of the operations in controlling expenditure. It represents the operating costs to run the business. We then arrive at Gross Profit Hotels consider 30% GP as healthy If we add cost of goods derived from the historical % of direct cost we arrive at the desired sales figure. The rooms division sees its contribution to sales as a ratio to F&B sales i. e. 50:50 and then the room contribution is 50%of total sales desired.

Putting the formula in simple manner the budget would look like this

Desired net Profit (ROI)

+ income tax @30% of income before tax

(Income before tax) + fixed Charges (depreciation, interest,

+operating expenses @30%(GP) + cost of Goods @10% of sales (Sales) + room contribution 50%
insurance, rent) (GOP)

Historical Method

Forecasted room revenues= Rooms available X occupancy percentage X average room rate

Sources of Revenues

Rooms Business centre Health clubs Miscellaneous

Expense Forecast
Broad expense categories

Fixed expense Variable expense Discretionary expense Semi-variable expense

Fixed Expense : do not change with changes in volume i.e. depreciation, interest , payments, and insurance. Variable expenses : 1)salaries and wages 2) advertising and promotion expense 3) stationery and supplies 4) Transportation 5) energy costs 6) Repair and maintenance costs 7) Laundry expenses 8) duty meal expense 9) VIP amenities Discretionary expenses : 1) Major repairs 2) Complimentary meals for promotion 3) special unplanned promotion expense 4) special VIP amenities. Semi variable expenses :are those that are partly fixed and partly variable, exa. Incentive commission

The budget can be graphically represented as follows:

60 Revenue 50 Breakeven 40 Expenses 30 Sales 20 Fixed 10 Expenses 0 0 10 20 30 40 Sales Volume 50 60 70 Expenses Variable
Net incom e

Front Office Budget Format Budget Head Occupancy% Sales Rooms Business centre Health Club Miscellaneous Less Direct Costs Cleaning supplies Guest amenities Gross Profit Operating expenses Salaries and Wages Advertising and Promos Statinary and Supplies Transportation Energy Repair and Maintenance Laundry Duty Meals VIP amenities Gross Operating Profit Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual Budget