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1. PREPARE BUDGET INFORMATION FOR THE HOTEL RESORT AND RESTAURANT INTERPRISES

2. Introduction It is essential to acquire the skills and knowledge in preparing budget information for hospitality businesses thus, this learning unit enabling you to understand and participate in the budgeting process across the hospitality and tourism industries. However to begin with, it is important to understand why business must budget and identify the types of budgets that can be created and the accounting terms that are often used in developing budget. The goal of a business is to manage its activities of buying, selling and paying expenses to make a profit. Budgets are the roadmaps of how you intend to start the year and how you arrive with a profit at the end. Small and medium business owners should create two types of plans such as operational and capital. Although the two plans are not alike and they serve different purposes hence they do connect with each other. Changes in one budget can lead to modifications in the other.

3. The Operational Budget An operational budget is a detailed projection of the company’s revenues and expenses for the upcoming fiscal year. These budgets record the expected cash flows from the firm’s buying and selling activities and their effects on the income statement. Operational budgets generally covers one fiscal year.

4. The Capital Budget Suppose that some of your equipment is getting old and maintenance costs are becoming more frequent. The solution is to spend $100,000 on a new machine but where will that money come from? Do you borrow from the bank or finance it with internal cash flow? Constructing a capital budget will provide the answer to this question. Future needs for purchases of fixed assets are incorporated into a capital budget. These budgets identify the assets needed, the sources of funding and expected returns. Capital budgets affect changes on the long-term assets portion of the balance sheet.

5. Differences between Operational and Capital Budgets Capital budgets are paid out of future cash flows from the projects and they represent the sources of funding and the purchases of the fixed assets. Planning for capital acquisitions is generally done for one to three years. An operational budget projects the activities for the firm in buying, selling and paying bills and usually done on an annual basis.

6. Interactions between Operational and Capital Budgets The purchases of fixed assets as project by the capital budget will have an impact on the operational budget. The new equipment may reduce maintenance costs and increase revenues because the production processes are more efficient. These changes must be coordinated with the capital budget and reflected on the operation budget. If the company wants to purchase fixed assets then some of the cash needed may have to come from the firm’s normal operations and cash flow. If so, an operational budget has to incorporate this requirement foe cash in addition to paying normal expenses. Budgets are essential management tools for all small business owners. Although most people think only about operational budgets but capital budgets are also important. Indeed, as your company grows then you will need additional fixed assets and you must make preparations to fund these acquisitions. Operational and capital budgets are related hence, business owner must balance the effects they have on other.

7. The hotel, restaurant and resort enterprises prepare annual budgets to help the management team to operate the hotel more efficiently. The success in the hospitality business requires careful management of expenses more particularly labor cost. Hotels and resorts have relatively large staffing requirements. It is important to sufficient human resources on property to deliver excellent customer service but not be overstaffed, which can reduce the hotel’s profitability.

8. The Budget Planning Process The budget in businesses are prepared using spreadsheet software. Financial models forecasting revenues are created along with the expenses that will be incurred to generate these revenues and provide high-quality customer service for hotel guests. Budgeting is part of the overall planning process the hotel undertakes, which includes strategic marketing planning and planning for capital expenditures.

9. Who Should Be Involved in the Budget Preparation? A hotel is organized into a series of departments. The managers of each of these departments create their own budgets The head of the housekeeping department has different expenses to manage than the bar manager in his area. The hotel’s financial staffs are responsible for consolidating the department budgets into an overall hotel budget. The general manager reviews the consolidated budget with the other managers and makes adjustments based on these discussions.

10. Key Variables in Forecasting Room Revenue The revenue forecast for a hotel is driven by two key variables: occupancy rate and or average daily rate (ADR) which means the average cost of staying in a hotel room for one night. Occupancy rate varies by day of the week, by month and by season. Resort hotels usually have a high season, when occupancy is high due to an influx of tourists to the area. Hotels that cater to business travelers often have higher occupancy during the work week with a drop-off on weekends. Average daily rate similarly varies. Hotels offer discounted room rates during off-peak times to encourage higher occupancy. Increasing the occupancy assumption in the budget requires increasing expenses, because the additional occupied rooms have to be cleaned . Increasing ADR does not increase expenses.

11. Research Required in the Preparation of Operational Budget A hotel budget’s accuracy is affected by the effort made to gather market data. Budgeting requires predicting how the core markets the hotel serves will change over the upcoming year and the direction of the overall economy. Even though the budget process is a once-a-year task, gathering information about the hotel industry and the local economy is an on-going process. This gives managers a clear idea of what the future may look like when they make assumptions for the key variables in the budget.

12. Common Mistakes in Budget Planning Process Rushing the planning process can result in a budget that is a less useful management tool than it should be. Managers have a tendency to build their expense budgets by simply taking last year’s numbers and adjusting them upward by an assumed percentage, such as 5 per cent. A better approach is to build a completely new budget each year, with justification for each spending. This approach focuses management’s attention on constantly looking for ways to improve the hotel’s operation rather than being satisfied with how things have been done in the past. Marketing expenditures from the prior year should be scrutinized to make sure they contributed o generating revenues before they are included in this year’s budget.

13. Forecasting Budget When individuals decide to operate a business it is usually because they have special interest or specific expertise in the product or service the business is selling. They are expecting that the income and profits can be made. For example, you may have trained as a tour guide and you decide to start a business where you will operate tours instead of working for someone else on the tours they are operating. Setting up and running a business involves large amounts of money, possibly several hundreds of thousands each year. To produce an income and profit for the owners this money must be managed very carefully. Business failure statistics show that 60% of new businesses do not survive more than five years and 90% do not survive more than ten years. The accountants who clean up the mess after a business has failed often found out that the main reason for failure is that the business managers do not plan for the future or keep a close eye on how their businesses are performing.

14. In the hospitality and tourism industry some unique characteristics make this monitoring and planning process even more important. Sales can change a great deal from one season or even one month to another. Busy times are very busy and quiet times are very quiet. This creates a problem for managers because they need to plan when to employ more people, change orders for stock or plan for having money flowing in and out to cover other expenses. Managers therefore need to spend time thinking about these seasonal fluctuations as well as considering what it is that the business is expected to achieve in the budgeted period. Talking to other people within the business also helps managers to better understand if goals are reasonable and can be achieved. Whilst budgeting is a necessary part of the business process, there are certainly some factors that make it difficult.

15. Factors that you should be aware in forecasting budget include the following: Budget take time and not all small business owners have the time. It is believed that the time is better spent out with clients conducting tours or selling products! Getting good quality information is costly and takes time. Budgets are only as good as the information gathered to compile them. Budgets are your best forecasts with information you have at the time. It is difficult to know if the real world will follow your forecast. It is therefore easy to be convinced that it is all too hard and not worth the effort.

16. Estimating Ancillary Revenue for a Hotel The ancillary revenue is essential in a number of different industries within the hospitality and tourism field. Hotels, resorts and especially airlines rely on revenue generated by sales of secondary products and services to customers who already utilize their primary services. Estimating the ancillary revenue for a hotel is no simple task but it can be done if you have good financial records. The following points will help you through in the formulation process: Scrutinize your overall revenue for the previous fiscal year. Define how much of your revenue was earned from room fees or charges paid to your hotel enterprise by patrons who stayed the night. Observe your remaining financial statements to determine how much money was made from additional service and products. Decide the percentage of your revenue earned from ancillary services and products. Estimate the percentage of ancillary income as far back as you can. 6. Compute your next year’s project revenue based on your past year’s revenue. 7. Calculate your ancillary income by multiplying your previous year’s percentages times your expected total revenue.

17. Revenue Generating Philosophies for Lodging Enterprise The lodging enterprises have perishable inventory. If a room stands empty for the night then the opportunity to earn revenue from renting it out is gone and cannot be recouped. It’s similar to he airline industry. Tickets can’t be sold for a flight that has already taken off. The revenue in lodging properties more particularly in hotels is generated from room rentals, food and beverage sales and meeting room rentals.

18. Occupancy and Room Rate The two features that determine how much revenue a hotel earns from its room occupancy and average daily rate. Occupancy is the percentage of rooms sold each night. If a hotel has 125 rooms and sell 9933 rooms then the occupancy rate is 74.4 per cent. The other factor is average daily rate. A room that sells for $350 during high season could go for as little as $150 in the off-season. Hence the difference I huge. Accordingly at a 74.4 per cent occupancy rate at $150 per room sold then the revenues generated would be a sum of $13,950. Consequently at $350 average room rate then the hotel will be generating a sum of $ 32,550. The concept of the management’s strategy is to increase either the occupancy or the average daily rate in order to attain targeted surge of total revenue.

19. Social Media, Discounting and Packages Approaches Actually, the management of lodging properties is being challenged to increase forecasted budget for upcoming target hence the enterprise is making use of Twitter, Facebook , Google+ and LinkedIn social networking sites and media to get the their hotel various buzz. The management is spreading the word by offering tips about the restaurant scene, local events, travel tips and special discounts and offers. The business hotels sell rooms during the week. Resort hotels generate the most revenue during high season whether that is during summer for beach locations or during the winter for ski resorts. Selling rooms at discounted rates in the off times generate additional revenue by increasing the occupancy rate. The property further promote the service and can generate more revenue if the hotel is in he city and has mostly business guests and offer a discounted rate for those who stay over on a Friday night. On the contrary, ski resorts take advantage of various – colour packages or perhaps summer wildflower tours. Similarly, the beach resort can tout the privacy and seclusion of an off-season stay.

20. Generating Further Food and Beverage Revenue The more guests in the hotel it would seem the higher the food and beverage revenue but it doesn’t always turn out that way. Guests may not want to wait in line for busy meal times or perhaps they just want to explore the restaurants rather than eat in the hotel. Consider offering guests a happy hour where the drinks are slightly discounted and the appetizers are complimentary. A twist on this idea is to sell the appetizers on piecemeal basis, such as shrimp for $1.50 each, mini tacos for $1.00 or sliders for $1.25. If your hotel is upscale then consider a wine tasting or cheese tasting at a reasonable fee. Likewise, offer a discount for dinners who eat dinner early or late.

21. Ways to Increase Revenue in Hotel Enterprises Travellers will always need some place to stay when out of town on business or on vacation. Make your hotel their preferred option by offering the right balance of customer service and price. Offer a unique environment or specialty services to differentiate yourself from the competition and limit the number of rooms you offer at discounted rates Managers must study the competition in the local area and familiarize himself with the level of service they offer and their price structure. The manager must learn and practice basic hotel revenue management as occupancy increases so should your room rates. The manager must train the front office staffs in upselling . The manager must consider occasional promotions or one-time –only offers to attract new customers or filling rooms during the off-season.

22. The Cost of Starting a Restaurant Business The restaurant start-up costs can vary tremendously from business to business. The costs are affected by the size style, number of staff, location and whether the restaurant is a franchise or a one-off. Although there are a lot of variables to consider so it is still possible to get a good estimate for the start-up costs of your desired restaurant as long as you have a strong business plan. When determining the start-up costs for your restaurant ten it is essential to have a good business plan in place. Your plan should detail the exact style of food, décor and service that you will have, as well as the location and number of dinners you expect to serve each day. You should build your sales forecast based on expected unit sales such as food and beverage. Also, you must also include estimates for permits, food costs, beverage costs, office supplies, cleaning supplies, staff training and contingencies. Many restaurants fail because they lack enough capital to keep running until they turn a profit hence, you also need to estimate when you expect to turn a profit and make sure you can meet the running costs until then.

23. The Cost of Restaurant Facilities The facilities cost vary widely and depending on weather you are buying or leasing and is buying, means buying an existing restaurant or building from the ground up. For an existing restaurant then you will need to spend money or renovation but how much will depend on the condition of the premises. If you are renting or leasing your premises then you will also you will also need to ensure that your least is for a long enough period to ensure that you have time to build up your business and become repeatable. If leasing then some building of owners will pay for part of the renovation cost in exchange for a longer-term least.

24. The Cost of Restaurant Equipment Accordingly, taking over an existing restaurant then your equipment costs will be primarily on upgrading and adding anything you need. However, if you are starting from scratch then your must expensive items will be ventilation equipment, cooking equipment and refrigeration. In the kitchen you will also need counters with under counter refrigeration and heating units, shelving and all of your cooking and storage tools and equipment. This can costs anywhere from 1,000,000 to 5,000,000 or more depending on the type of restaurant you have. Likewise, you will also need to budget for all the plates, cutlery, glasses and other items for the service as well as for breakages and equipment repairs and maintenance .

25. The Cost of Restaurant Extras Indeed, many restaurant owners do not plan adequately for all the extra expenses that can occur. In an instance, like you will probably need to purchases a point of sale system intended for managing orders. You also need to budget for credit card processing fees usually 1.8 per cent to 2.5 per cent of sales. Similarly, you must also budget for permits, signage and marketing costs. Likewise, there are many small details that can add up such as hiring a cleaning company to clean the restaurant everyday, printing menus, purchasing uniforms for staff and the costs of laundry for napkins and tablecloths, and waste disposal and other forms of costs that may incurred in the operation.

26. Food and Beverage Costs Definitely, once you are up and running then your biggest costs will be for food and beverages. However, depending on the restaurant concept so your food and beverage costs should be running no more than 25 per cent to 40 per cent of revenues for casual restaurant at the lower end category of the business scale. The payroll will take an additional 20 per cent to 25 per cent of revenue. So, with new restaurants, food supplies often have to be paid for on delivery so you will need to budget enough money to buy supplies until you turn a profit. So you will also want to budget for promotions and special events such as free meals on your first day in business.

27. The Variable and Fixed Costs in a Restaurant Operation The failing restaurant business during the first year of operation still points to the importance of careful budgeting and financial planning for restaurant owners and operators. The fixed expenses in restaurant business are those that do not fluctuate with changes in production level or sales volume while variable costs are those that respond directly in proportionately to changes in business activity level or volume of production or sales. The food and beverages costs are major components of restaurant operating expenses often fall into the variable category which poses a major challenge to restaurant to restaurant owners and managers.

28. Restaurant Occupancy Costs Even whether buying or leasing restaurant space then the monthly payment is one of any restaurateur’s major fixed outlays. Related fixed costs include local and state taxes as well as insurance. Rental space may increase in price over time but restaurant owners typically can count on a certain period at a fixed price and will usually have some notice of a ret increase. Certain utilities, such as water, phone and computer lines should be relatively consistent over time. Others, such as electricity may vary considerably depending on seasonal demands for heating or air conditioning. In addition, gas or oil when needed then it may also fluctuate in price depending on world markets.

29. Restaurant Equipment as a Fixed Outlay The normal operations and maintenance costs for restaurant equipment such as stoves, grills, dishwashers and freezers should remain constant from month to month. Notable exceptions to this fixed cost are the unexpected requirements to repair or replace broken equipment. Items such as dishes, flat ware, pans and glass ware required a considerable expense at a start-up but restaurant owners generally can plan for purchases of replacement. This category also include decor-related items such as candles, flowers or plants, like bulbs and window fixtures, as will as consumables including napkins. This items are typically bought routinely and in bulk, allowing the restaurant owner to plan for such expenses.

30. Food and Beverage as Variables Outlays The food and beverage costs are among the greatest variable expenses in restaurant business in which owners and managers face the challenges of controlling costs. These costs fall under the category ‘’costs of goods sold’’, commonly referred to us usage costs. Successful restaurant skillfully manage the balance between buying in bulk to have enough food to meet the customer demand and not buying so much food that it goes to waste. Menu prices for most items cannot change every time the restaurant’s food cost change so a restaurant’s profit margin is affected if food costs fluctuate frequently or substantially. Restaurants are the mercy of local and national supplies and markets which means that when national milk or fruit prices go up because of shortages then they must absorbed.

31. The Costs of Restaurant Laborers as Fixed and Variables Outlays The labor and personnel expenses are variable costs although restaurant managers can control the overall personnel costs by managing the number of shifts assigned and how much over time is approved. Small, local restaurant’s with a relatively static customer base may experience only limited variation in the month-to-month costs of staff but larger restaurants or those with a fluid customer base such a restaurant at a major highway inter section likely will have a greater variability in staffing expenses also vary seasonally in certain restaurant such as those hosting holidays parties. The key personnel expenses like the managers or the management team and regular employees salaries often falls under the fixed costs category.

32. Budgeting System Sales budget Labor budget Over head budget Cash budget Budgeted profit and loss statement

33. Budgeting Process The budgeting process usually starts with the sales budget as everything else that happens in a business depends on how much is sold. The quantities and monetary values of sales set a limit on how much should be spent on buying goods, how much should be spent on employing people to make and sell those quantities and values and on most other operating costs such as rent and electricity and other cost incurred in the operation of the business.

34. Sources of Data From management- new or altered management policies and procedures From management- declared commitments to any given areas From the accountant- performance data from previous periods From the marketing department- will the marketing effort changes? From the restaurant manager/chef- will the product range or menu change? From the front office(derived demand)- will the hotel’s occupancy change the demand patterns of the hotel’s restaurant? From the restaurant managers- any planned special promotions .

35. Reviewing and Analyzing Data Will the product price increase or decrease? What, if any, will be the change to the volume of product sold ? Will the timing of sales change from previous periods

36. The Budget Committee The budget committee is at least made up of the owners of the business or their representative the managing director, chief executive, department or activity center managers accountant. However during the budget process, the committee meets often to discuss progress and at the end of the process is responsible for distributing the budget throughout the organization. Before the budget committee can begin the budget process, the owners of the business must communicate the objectives they hope the business to achieve in the following year. For example, a travel company may wish to expand its tour guide business

37. Communication and Cooperation Once the budget committee begins, the process of creating budgets it becomes necessary to discuss various aspects of the budget with other colleagues who are involved in making the budget work but not in preparing the budget. This may be to confirm the sales targets are possible. For example, there would be no point introducing a lunch sitting if there were no staff willing to work. Communication is best by direct conversation but may also take the form of e-mails, newsletters, and department meetings. Sometimes stakeholders attend budget committee meetings. It is important to note that this communication is the responsibility of the budget committee through department or activity centre managers. It is very important that the department and activity centre managers gain the co-operation of colleagues affected by the budget. The larger the organization, the more demand each department or activity centre has on the resources of the business. Co-operation is always best when stakeholders are consulted and included in the budget process.

38. Providing Relevant Colleagues to Collaborate Budget Planning Process Relevant colleagues have the opportunity to contribute to the budget planning process with adequate notice. Although a budget committee may be an effective forum for managing the budget process since it is not the only way businesses prepare a budget. The strategies used by owners and managers can be summarized into two different styles.

39. Top Down Approach This approach to the budget process features owners, managers or even the budget committee creating the budget and informing all stakeholders of the business objectives and the budget that is going to meet those objectives. There is minimal communication with stakeholder during the process. The budget is usually communicated once it has been finalised by the budget committee. The main advantage of this approach is the timely manner in which the budget can be produced. It is also argued that the owners, managers and accountants have the expertise to produce the budget efficiently. However, lack of communication and input from relevant colleagues compromises the co-operation of these colleagues with the budget.

40. Bottom Up Approach The bottom up approach is a much more favoured strategy for managing the budget process. At the budget committee level, owners seek the input into budget objectives for the budgeted period. Objections by budget committee members about the objectives or plan of action to achieve them can be raised. Owners or senior management should listen and either make changes where they can or inform the budget committee members as to what is reasonable and achievable. In the same way, communicating and consulting with departmental staff in the review and analysis of data will encourage commitment to the achievement of the budget. For this reason, the goals of the organization become goals of those responsible for the budgeted outcome.

41. Thank You!