hotel budgeting project report 4635

8/6/2019 Hotel Budgeting Project Report 4635

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Hotel BudgetingA guide for planning and controlling processes in hotels

by

Cem Adiguzel

University of North Alabama

Instructor and Class Information

Dr. Jerry Ferry

Managerial Accounting AC-626

Spring 2003

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INTRODUCTION ........................................................................................................... 4

TARGETS OF HOTEL MANAGERS: ........................................................................... 4

Increase hotel occupancy rate ................................................................................................................. ........ .......4

Increase profitability of sales ..................................................................................................................................4

Cost control ...................................................................................................................................................... ........4

THE BENEFITS OF SUCCESSFUL BUDGET APPLICATION ................................... 5

INDUSTRIAL COMPARISONS ....................................................................................5

RELATION BETWEEN MANAGEMENT FUNCTIONS AND BUDGET: ..................... 5

Four Functions of Management .............................................................................................................................5

Relationship between the Functions of Planning, Controlling and Organizing ...............................................6

REASONS OF FAILURE IN BUDGETING ...................................................................6

BEFORE STARTING TO SET UP THE BUDGET ........................................................6

STRUCTURE OF HOTEL BUDGETS: ......................................................................... 7

SCHEDULE EXAMPLES: ............................................................................................. 8

Multi-Property Executive Summary Schedule .................................................................................................... .8

Property Profit & Loss schedule (for each property) ................................................................................. ........ .9

Department Budgets ..............................................................................................................................................11

F&B department revenue analysis schedule .......................................................................................................12

F&B Departmental Budget Schedule .......................................................................................................... ........13

Support department budget schedule: ........................................................................................................ ........14

RELATION BETWEEN DEPARTMENTAL BUDGET SCHEDULE AND COSTDRIVERS ..................................................................................................................... 15

BUDGETING MECHANICS: ....................................................................................... 15

TIPS FOR A SUCCESSFUL BUDGET: ..................................................................... 17

What else should be there? ..................................................................................................................................17

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CRITICAL FACTORS FOR A SUCCESSFUL HOTEL BUDGET: .............................17

Correlating information: .....................................................................................................................................17

Understandable and comparable expression (ratios): ............................................................................. ......... .18

FRAMEWORK TO SET UP SUCCESSFUL BUDGETING SYSTEM: .......................18

TOOLS BEING USED IN BUDGETING PROCESS AND NECESSARY ITINFRASTRUCTURE FOR LARGE SCALE PROPERTIES: ...................................... 18

RESOURCES: ............................................................................................................. 22

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IntroductionThis study is prepared to be used as a guide to identify the context and content of budget in

hotels. It is designed as a source to build relation between managements targets and use of

budget as a strong tool to achieve those targets.

Targets of hotel managers:

Increase hotel occupancy rate

Increasing hotel occupancy rate depends on the success of marketing plan, which involves

product, sales channels, promotions and prices. Marketing plan will be successful only when

management has a thorough understanding of the target market and needs of potential

customers. Marketing environment conditions - economic, social-cultural, legal, competitive

and technological-, are directly correlated with the success of marketing plan.

Increase profitability of sales

Increasing profitability can be rendered through reaching the most profitable customer groups.

As we all know, customers, who stay at higher rates, may not be the most profitable customer

group. Another customer group which stays at a lower rate may bring higher revenue by

benefiting from other outlets of the hotel such as spa, F&B outlets, etc.

At this point, management should find the answers to the following:

a. Who is the most profitable customers?

b. What are the most profitable products?

c. What are the most profitable departments?d. And why are these more profitable?

Answers to these questions are keys to increasing sales and profitability.

Cost control

a. Finding the owners of revenues and expenses

Purpose of all company expenditures is to realize company objectives. According to this point

of view, each expense should have a purpose and an owner. Here, owner of an expense

indicates a department rendering any one of management functions. Similarly, revenues

should have generators and owners.It is crucial to define the owners of revenues and expenses and determine their generator -in

line with responsibility accounting structure. This method will enhance the performance of

relevant revenue and expense owners. The golden rule in organizational behavior is

"concerning the topics and problems that you own or you are liable for."

b. Relating expenses and revenues

Revenues brought by each market section and expenses made for these sales should be

correlated. This way, it can clearly be seen that how efficient the management resources are

being utilized. The operations which stay below organizations expected and targeted

"expenditure rate for unit revenue" are determined, problems can be observed, regenerations

can be rendered or these operations can be cancelled out entirely. Laundry is a good examplefor this: Should we have laundry service in our hotel or should we outsource it? In order to

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make a decision, you should know the exact costs of laundry service and their effects on

revenues. But first, these should be correlated to one another.

The benefits of successful budget application

Deployment and application of a proper budgeting system brings 5 main advantages:1. Forces managers look at the future and develop plans for possible outcomes

2. Enhances communication in the organization

3. Provides information to share holders and between different functions and levels of the

organization

4. Sets a benchmark for performance control including organization as a whole,

departments and individual employees.

5. Sets a goal oriented organizational behavior

Industrial ComparisonsTo determine and evaluate performance level, it is needed to know the hotel's service

standards and the revenues and expenses compared to regional competitors. Thus, financial

reports for the lodging industry should be put up in compliance with Uniform System of

Accounts, which contains reporting standards for hospitality industry. This way, all financial

and statistical comparisons can be made. Principles of Uniform System of Accounts were first

published in 1926, and now currently its 9th revision is being used. It is accepted as the

financial & operational reporting standards of the hospitality industry. Accounting structure

and technological infrastructure should allow reporting to be done in compliance with

Uniform System of Accounts standards.

Mostly accounting and finance departments prepare these reports in line with Uniform System

of Accounts requirements with the information that they gather from different sources ofinformation.

A successful hotel budget should be compliant with Uniform System of Accounts reporting

system and the financial reporting should be converted to budget results and comparison

between planned and actual values for decision making purposes.

Relation between management functions and budget:

Four Functions of Management

It is crucial that the four basic functions of management -planning, organizing, leading and

controlling- function properly and are well balanced. Otherwise, organizations tend to lose

their strength.

Basic problems that managers face are poor applications of planning and control functions or

not applying these functions at all. When market volume is large and intensity of the

competition is less -meaning, when the demand-supply balance does not prevent theendurance of weak organizations- organizations which has not implemented planning and

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control functions can proceed with their existence in the market. However, when demand

shrinks, when the number of competitors rise or when both happen at the same time,

organizations which does not implement planning and control functions well tend to respond

lately to the changes in their environment and face situations that ruin their financial structure.

Relationship between the Functions of Planning, Controlling andOrganizing

Planning: Planning function depends on forecasting based on the combination of evaluation

of the current market information and the market environment with organization's internal and

external information and experience and determining action plan based on these forecasts.

Three types of planning exist: Short, mid and long term planning.

Organizing: It is the implementation of the plan and utilizing company resources effectively

in order to succeed it.

Controlling: It is the process of performance evaluation. After this evaluation is done, results

reflect back to the plan as feedback. Relation between the plan and the actual results and

deviations from plans supply inputs for organizing and leading functions.

Budget is a tool that runs planning and controlling functions in a hotel and supplies

management necessary feedback to make decisions. Thus budget is a critical tool for hotel

managers to run management functions properly and achieve organizations goals.

Although almost every manager says that planning and controlling functions are important

and budget is necessary for every hotel, actual results do not match with those intentions

because of a list of reasons.

Reasons of failure in budgetingReasons for Failure of Planning and Controlling functions are as follows:

-Lack of top management support

-Lack of organizational conformity

-Lack of responsibility accounting

-Gathering wrong internal or external information which is not based on actuality

-Not complying with schedules

-Lack of flexibility

-Deficiency in observation and evaluation of actual results

-Not reflecting the evaluation of results back to business

Blocking factors above should be considered and eliminated for a successful budget

application in any size of hotel properties.

Before starting to set up the budgetConsider following information before starting to set up the budget:

1. Current years activity figures

2. General economic and industry conditions

3. Competitive environment

4. Prices(rates) being applied5. Industry forecasts and trends

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Structure of hotel budgets:For a multi-property situation following structure will be appropriate

1. Summary profit & loss schedule: This page includes revenues and expenses in total

and break down regarding major sources.a. Revenues: This part will be consisted of operating departmental revenues such as

rooms, F&B, outlet rents, communications, laundry, activity membership-sport and gym

outlets- etc.

b. Expenses: Expenses will be organized under major sub-total headlines such as cost of

sales, departmental expenses, payroll and related expenses, undistributed expenses.

c. Cumulative profit and loss figure of multi properties

d. Ratios:

Operational ratios: Occupancy rate, double occupancy rate, average stay, average room rate,

RevPar (Revenue per available rooms), F&B spending per person, Cost of sales ratio for F&B

outlets, payroll and related expenses ratio, total cost per occupied room

Profitability ratios: Net profit margin, Operating profit over assets, Operating profit overequity, Operating profit over long term assets

2. Single Property profit & loss schedule: Profit & loss page with some additions for

each property would be appropriate in the same format mentioned above for

cumulative values of all properties.

In property summary profit & loss schedule undistributed expenses should be given as

well below payroll and related expenses information.

Use of additional schedule for operated department analysis will be appropriate. This

schedule should include departmental profit and loss information for operational

departments.

3. Departmental budgets: It wouldnt be wrong to say that the most critical parts of a

hotel budget are departmental budgets since cumulative sheets of budget for a single

property of multi-property budget are derived by summing departmental budgets.

Departmental budgets include a summary sheet as follows:

a. Revenues: Departmental revenues (Not including details and market segmentation)

b. Expenses: Cost of sales, departmental expenses, payroll and related expenses

Departments here mean profit and loss centers which accounting system assigns and records

costs and revenues related with each of those centers separately. Revenue generating

departments are called as operated departments. Departments generating only costs such as

marketing, accounting and maintenance are called as support departments.

Department budgets also include budgeted amount and related cost driver information for

each expense.

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Schedule examples:

Multi-Property Executive Summary Schedule

Multi-Property Executive Summary Sheet

January

Previous

Year Budget Actual%A/B

YTDBudget

YTDActual

YTD%A/B

% ofTotalIncome

Revenues

Rooms

F&B

Communications

Laundry

Golf Course

Parking Lot

Rental and OtherIncome

Total Revenues

Expenses

Cost of Sales

DepartmentalExpenses

Payroll and relatedexpenses

UndistributedExpenses

Total Expenses

Income AfterUndistributed expenses

Key Figures

Rooms Available

Rooms Sold

Occupancy %

Double occupancy rate

Average stay length

Average room rate

RevPar

F&B spending per person

COS ratio F&B OutletsTotal cost/occupied room

Net Profit Margin

Operating profit/Assets

Operating profit/Equity

Operating profit/LTAssets

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Property Profit & Loss schedule (for each property)

Property Executive Summary SheetJanuary

Previous


YTDBudget

YTDActual

YTD%A/B

% ofTotalIncome

Revenues

Rooms

F&B

Communications

Laundry

Golf Course

Parking Lot


Total RevenuesExpenses

Cost of Sales

DepartmentalExpenses

Payroll and relatedexpenses

UndistributedExpenses

Total Expenses

Income AfterUndistributed expenses

Key FiguresRooms Available

Rooms Sold

Occupancy %

Double occupancy rate

Average stay length

Average room rate

RevPar

F&B spending per person

COS ratio F&B Outlets

Total cost/occupied room

Net Profit Margin

Operating profit/Assets

Operating profit/Equity

Operating profit/LTAssets

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Operating Department AnalysisJanuary

Previous

Year Budget Actual

%

A/B

YTD

Budget

YTD

Actual

YTD%

A/B

% ofTotal

IncomeRevenues

Rooms

F&B

Communications

Laundry

Golf Course

Parking LotRental and Other Income

Total Revenues

Cost of sales

Rooms

F&BCommunications

Laundry

Golf Course

Parking Lot

Rental and Other Income

Total Cost of Sales

Departmental Expenses

Rooms

F&B

Communications

Laundry

Golf Course

Parking Lot


Total Departmental Expenses

Payroll and related expenses

Rooms

F&B

Communications

Laundry

Golf Course

Parking LotRental and Other Income

Total payroll & related expenses

Profit / Loss

Rooms

F&B

Communications

Laundry

Golf Course

Parking Lot

Rental and Other Income

Total Profit / Loss

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Department Budgets

Department Profit/Loss ScheduleJanuary

Rooms department

Previous


YTDBudget

YTDActual

YTD%A/B

% ofTotalIncome

Revenues

Market segment 1

Market segment 2

Market segment 3

Market segment 4

Market segment 5

Market segment 6

Total Revenues

Cost of sales

Rooms

Total Cost of SalesDepartmental Expenses

Computers & computer supplies

China/glass

Cleaning Material

Ammenities

Flowers & decoration

Customer supplies

Room supplies

Laundry

Linen

Printed materials and office supplies

Total Departmental ExpensesPayroll and related expenses

Salaries

Employee Insurance

Employee Transportation

Employee Meals


Total department expenses

Department Profit / Loss

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F&B department revenue analysis schedule

F&B Department Revenue ScheduleJanuary

Restaurant 1 #ofcovers

Percover

Previous


YTDBudget

YTDActual

YT

D%A/B

% ofTotalIncome

Revenues

Breakfast Food

Inhouse

Walk InBreakfastBeverage

In-house

Walk In

Total Breakfast

Lunch FoodIn-house

Walk In

Lunch Beverage

In-house

Walk In

Total Lunch

Dinner Food

In-house

Walk In

Dinner Beverage

In-house

Walk In

Total Diner

Total Revenues

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F&B Departmental Budget Schedule

F&B Profit/Loss ScheduleJanuary

Restaurant 1

Previous


YTDBudget

YTDActual

YTD%A/B

% ofTotalIncome

Revenues

Breakfast

Lunch

Dinner

Total Revenues

Cost of sales

Breakfast

Lunch

Dinner

Total Cost of SalesDepartmental Expenses


China/glass

Cleaning Material

Amenities


Customer supplies

Room supplies

Laundry

LinenPrinted materials and office

suppliesTotal Departmental Expenses


Salaries

Employee Insurance


Employee Meals



Department Profit / Loss

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Support department budget schedule:

Support Department Budget ScheduleJanuary

Maintenance department

Previous


YTDBudget

YTDActual

YTD%A/B

% ofTotalIncome



China/glass

Cleaning Material

Amenities


Customer supplies

Room supplies

Laundry

LinenPrinted materials and office supplies



Salaries

Employee Insurance


Employee Meals



Department Loss

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Relation between departmental budget schedule and costdrivers

Housekeeping department CostDriver

Budgeted

UnitC

ost


Computers & computer supplies# of roomssold $1.00

China/glass# of roomssold $0.50

Cleaning Material # of guests $0.50

Amenities # of guests $1.00

Flowers & decoration# of roomssold $2.00

Customer supplies # of guests $0.50

Room supplies# of roomssold $2.00

Laundry # of guests $1.00

Linen # of guests $0.20

Printed materials and office supplies# of roomssold $0.30



Salaries Payroll PayrollEmployee Insurance Payroll Payroll

Employee Transportation # of Emp. $20.00

Employee Meals # of Emp. $50.00



Budgeting Mechanics:Budgeting process for hotels begin with identifying market segments. Sales and marketing

department segments the target market and clientele of the property regarding to various

segment parameters.A good example for such customer segmentation would be as follows:

Parameter 1 Reservation source

Parameter 2 Price category

Parameter 3 Room type

After identifying parameters, options for each parameter should be identified. An example set

of options for above parameters are as follows:

Parameter 1 Reservation source

Option 1,1 - Local Travel Agency

Option 1,2 - International Travel Agency

Option 1,3 Internet, GRS(Global reservation systems)

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Parameter 2 Price Category

Option 2,1 Rack Rate

Option 2,2 Corporate Rate

Option 2,3 - CIR 1 (Confidential Internal Rate - x% discount from Rack Rate)

Option 2,4 - CIR 2 (Confidential Internal Rate y% discount from Rack Rate)

Parameter 3 Room Type

Option 3,1 Single Room

Option 3,2 Double Room

Option 3,3 Suite

Market segmentation is found by multiplexing parameter options. For the particular example

given above, market is divided into 36 segments which can be found by multiplication of

number of options for each parameter (3x4x3).

Market segmentation can be shown with the following graphic.

The list of the market segment would be:

Local Travel Agency / Rack Rate / Single Room

Local Travel Agency / Rack Rate / Double Room

Local Travel Agency / Rack Rate / Suite

Local Travel Agency / Corporate Rate / Single Room

Local Travel Agency / Corporate Rate / Double Room

Local Travel Agency / Corporate Rate / Suite

.

.

..

The list will have 36 segments constructed as above.

Accounting department distributes corporate base information to be used in budgeting

process by other department managers. This information includes changes in outsourcing

contracts, sales costs of previous year, insurance costs, price indexes, level based salary and

related expenses gathered from HR department, base inflation rate that would be used in

estimation rate, currency exchange rate estimations for budget period etc

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Parameter 3

Room Type

Option 3,1 Single Room

Option 3,2 Double Room

Option 3,3 Suite

Parameter 1

Reservation Source

Option 1,1 - Local Travel Agency

Option 1,2 - International Travel Agency

Option 1,3 Internet,

Parameter 2Price Category

Option 2,1 Rack Rate

Option 2,2 Corporate Rate

Option 2,3 - CIR 1

Option 2,4 - CIR 2


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Following these processes, departments entersales estimation in to their sales budgets.

Following sales estimations and figures, price information for the products such as room rates,

F&B average spending, laundry average spending per person etc. will be entered in to the

budget schedules.

Some departments or some revenue/cost items of some department budgets are directly

related with sales budget of rooms department since demand for these revenue/cost centers

products or services is a percentage of number of rooms sold or number of hotel guests.

After Room department completes sales budget other departments will be able to complete

departmental budgets.

After completing departmental budgets accounting department will collect and merge

department budgets and top pages and overall figures for property will be established.

Property executive summary and department profitability analysis schedules will be put

together based on departmental budgets by accounting department.

Approval process is an ongoing tack during budgeting process. Final budget will beapproved by general manager of the property. After approval, accounting department will

publish and distribute approved budget to department managers and to necessary parties.

Formulti-property companies, approved property budgets will be merged by accounting

department based in head quarters of the corporate.

Tips for a successful budget:Budget schedules should include comparisons and related important information columns

such as Previous year, Plan, Actual, Actual/Planned ratio, Year to date plan, Year to date

actual, Year to date Actual/Planned ratio, related cost driver, budgeted activity level, actual

activity level, etc.

What else should be there?

A General Manager report should be included in the budget. General Manager Report

should include additional information besides financial figures such as competitive

environment, economic and political issues, modifications and restorations planned in the

property, unusual items, personnel, new outlets, prices, equity changes, cash flow, etc

Critical factors for a successful hotel budget:

Correlating information:

Activity level of the hotel should be correlated within departments to determine revenue and

expense figures. To achieve this objective revenue and expense items in department budget

schedule should be related with number of rooms sold and number of guests. This correlation

can be built stronger if market segmentation is applied by all departments in a hotel.

For example if revenue of the a restaurant can be formulized as multiplication of average

spending per person in breakfast and number of guests in each customer segment, then

accuracy of the budget will be increased substantially. Unless an efficient budgeting softwareis being used at a property, such accuracy in budgeting and controlling process would be

costly and unnecessary to apply.

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However, regardless of the technology being used for budgeting, overall hotel activity should

be reflected on department budgets schedules.

Understandable and comparable expression (ratios):

A successful budget should include ratios, percentages and other understandable expressions

other than raw numbers for better decision making.

Framework to set up successful budgeting system:Framework given below would help to establish a successful budgeting system in a hotel from

the scratch or transforming existing ineffective budgeting system in to a successful one.

System Analysis & Consultancy: This stage can be done by internal sources of the company

such as a special task team which includes accounting, sales& marketing, F&B and other

managers of the property. Outside help and consultancy can be used as well.

This step involves with evaluation of the accounting system and revenue/expense generatingbusiness units of the hotel and rendering transformation of the current system into

responsibility accounting system.Re-construction of revenue/expense centers may be required.

This step also identifies determination and planning of operational steps, which include

application methods, time schedules and document flows.

Management Training involves with the use of revenue/expense centers and responsibility

accounting by the management. Workshops to demonstrate operational task flows such as

defining unit cost for variable expenses by analyzing past data, sales estimation and data

entries in to budgeting sheets or system would be necessary.

Management training should include the basics of budgeting & financial analysis about how

to identify appropriate cost drivers and unit costs for departmental expenses and to analyze

financial reports.Application of the right technology and tools for budgeting:

A hotel budget can be put together by using spreadsheet applications such as Microsoft Excel

but for a larger scale property with many outlets or for hotel chains, deployment of special

budgeting software can be necessary to minimize budgeting time and maximize efficiency of

the whole budget system.

Tools being used in budgeting process and necessary ITinfrastructure for large scale properties:

Spreadsheets can be used for small sized hotels with cross-sheet formulations and macros.For large scale hotels with more than 200 rooms in general or for hotel chains specific

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software for budgeting should be implemented. Budgeting software should be integrated

with POS system and should be able to perform real time budget comparisons and reporting.

E-Profit Management developed by Servus International Hotel Development and

Management is a good example of hotel budgeting technologies. Such a technology would

reduce budgeting period from 2 months to 2 weeks for large properties and hotel chains with

increased efficiency of the budget system.

The software works on a database in which all revenue, expense and activity items are stored.

Budget information is stored in the database as separate revenue, cost and other items and an

average large scale 5 star hotel with 200 rooms will have ten thousands of information items

in its budget.

The software is capable of correlating information on the database by a formulating screen.

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After items formulated and budgeting template is formed, managers can simply enter

necessary budget data and estimation by using entry screens which they are authorized by a

security system.

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The software has a flexible reporting environment to get budget reports where reports can be

extracted to spreadsheet software for further analysis.

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Resources:

Principles of Uniform System of Accounts for Lodging Industry New York City Hotel

Association

Servus Hotel Development and Management (http://www.servushotel.com)
http://www.servushotel.com/http://www.servushotel.com/

hotel budgeting project report 4635

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