Budgeting & Controlling Expenses
Objective: examining how the budget is prepared + exploring other management activities carried to control expenses
Types of Budgets
There are two types of budgets; the difference is because of the types of expenditures involved;
* Capital Budget
* Operating Budget
Capital Budget
* Plans for the expenditure of company assets for items costing $500 or more.
* These items are not used up in the normal course of operations, they have a lifespan of a year or more.
* e.g. room attendant carts, vacuum cleaners, carpet shampooers, pile lifters, rotary floor scrubbers, laundry equipment, sewing machines, trash handling equipment
Operating Budget
* Forecasts revenues and expenses associated with the routine operations of the hotel.
* Those costs occur during the normal course of business to generate revenue.
* E.g. salaries and wages, non-recycled inventory items - cleaning and guest supplies. outlines the financial goals of the hotel
* relate operational costs to the year’s expected revenues
* Projects both the revenues the hotel anticipates during the period covered by the budget and the expenses required to generate the anticipated revenues.
* Is not “set in stone”, it can be adjusted to changing circumstances e.g. the actual occupancy level
* Is a guide that helps managers to measure the success of the operation by comparing the actual expenses with allocated amounts.
* The yearly operating budget is broken down into budgets for each month, and each department prepares its own monthly budget.
The Executive Housekeeper is responsible for;
* anticipating the expenses the housekeeping department will draw in light of forecasted room sales
* ensuring the department’s actual expenses are in line with budgeted costs and with the actual occupancy levels
Planning the Operating Budget
The budgeting process involves;
Step 1. Gathering information about the forecasted room sales
Step 2. Formulating initial plans
Step 3. Reconsidering goals and objectives
Step 4. Making final adjustments
Gathering information about the forecasted room sales (occupancy level) is very important because;
* Room sales generate the revenue for operating departments
* Most of the expenses are directly related to room occupancy levels especially true in housekeeping since salaries and wages, and the usage rates for recycled and non-recycled inventory items are directly related to the number of occupied rooms. On the basis of this data, “cost per occupied room” can be calculated to
* (1) Determine the levels of expense in the different categories and
* (2) Measure the ability of the exec. Housekeeper maintains the expected costs.
Occupancy Forecasts
* Occupancy forecast, which is developed by the front office and general manager, based on
* (1) Historical data about the past occupancies and
* (2) Information supplied by the marketing department about the special events, advertising and promotions.
Using the Operating Budget as a Control Tool
* Controlling expenses in the housekeeping department means comparing actual costs with budgeted amounts and measuring the variances. While doing this, be careful to check whether the forecasted occupancy levels were achieved or not. e.g. if the occupancy is lower than forecasted, decrease in expenses must be expected proportionally. Serious deviations from the budgeted plan needs investigation in e.g. staff scheduling, supervision, efficiency and cost of products used etc.
Income Statements
* Expresses the actual results of operations during an accounting period, identifying both revenues earned and expenses gained during that period.
* Income statements that predict the results of current or future operations are called Performa income statements.
* The success of the department is measured by comparing the forecasted numbers on the budget with the actual numbers on the income statement.
Difference between an Income Statement and an Operating Budget;
* Income statement expresses the actual results of operations for a period that has ended, on the other hand, an operating budget expresses the expected results of operations for a current and coming period.
* Income statement is a report of what actually occurred, an operating budget is a forecast or plan for what will occur.
* The operating budget is a prediction on what the income statement will show at the end of that period.
The Hotel Income Statement
“Consolidated Statement”
* Provides financial information (net income) about the results of hotel operations for a given period, which may be a month or longer but not more than a year, to evaluate the success of the operation.
* The rooms division is seen on the hotel income statement as the hotel’s major source of income, housekeeping within the rooms division creates the most of the division’s expenses so that play an important role in the hotel’s overall financial performance.
The Rooms Division Income Statement
* has more detailed information compared to the hotel’s statement of income
* the departmental income statement’s are called “schedules”
* departmental statements are referenced on the hotel’s statement of income
Typical line items found on a Rooms Division Income Statement;
* Revenue: from room sales
* Allowances: rebates, refunds, overcharges of revenue
* Net Revenue: Total Revenue - Allowances
* Expenses:
* Salaries and Wages: regular pay, overtime pay, vacation pay, severance pay, incentive pay, holiday pay, employee bonuses
* Employee Benefits: payroll taxes, payroll-related insurance expense, pension, etc.
* Other Expenses: contract cleaning, laundry and dry cleaning, linen, operating supplies (the cost of guest supplies, cleaning supplies, printing and stationery), uniforms, other expenses (commissions expense, guest transportation, reservations)
In the Budget Planning Process;
* The room's manager’s goal is to maximize the department’s income by minimizing its expenses while enhancing the service level. Every controllable cost can be expressed as a percentage of revenue. For each expense category, there is a standard percentage considered to be an acceptable level of expense in relation to generated revenue.
* The executive housekeeper’s goal is to control the expenses of his department.
Monthly Rooms Division Budget Report
* Shows both budgeted forecasts and actual results and can also show the dollar and percentage variances (differences) of these results. No budgeting process is perfect, so it is expected that the actual results will differ from the budgeted amounts. If the variances are huge, management analysis and action becomes necessary. Ex. 3, pg. 155.
Budgeting Expenses
* “The projected number of occupied rooms” is the most important information because all expenses are measured in terms of the percentage of revenue on the budget. Almost all expenses are directly dependent upon the number of occupied rooms.
* The exec. Housekeeper can predict the expense levels for each category when he/she knows
* (1) The cost per occupied room for each expense category,
* (2) The number of occupied rooms forecasted for each budget period.
The budgeting process is simply relating costs per occupied room to the forecasted occupancy levels.
* Salaries and Wages: the staffing guide and the occupancy forecasts are used to determine the total labor hours cost for each job category.
* Employee Benefits: human resources and accounting staff help to determine what levels of expense to budget for the employee benefits e.g. charges for the cost of holiday or vacation pay, employee meals, payroll taxes, medical expenses or insurance, pensions, staff parties etc.
* Outside Services: contract or past invoices can be used to budget the cost of outside contractors for cleaning projects or dry cleaning or laundry.
* In-House Laundry: the cost of operating the hotel’s on-premises laundry is directly related to the volume of soiled items to be processed, in other words, the occupancy level.
* Linens: replacement cost for new linens is an expense which can be determined with the help of monthly physical inventories.
* Operating Supplies: includes non-recycled inventory items, such as guest supplies and amenities, cleaning supplies, and small equipment items.
* Uniforms: includes the cost of new and replacement uniforms, the cost of washing or dry cleaning uniforms and the cost of repairing damaged uniforms. Personnel turnover and new recruitments influence the cost of uniforms in the budget period.
Controlling Expenses
* Controlling housekeeping expenses means ensuring that actual expenses are consistent with the expected expenses on the operating budget.
There are four methods;
* Accurate recordkeeping
* Effective scheduling
* Careful training and supervision
* Efficient purchasing
* Accurate recordkeeping; helps to monitor the usage rates, inventory costs, and variances with standards
* Effective scheduling; with the help of the staffing guide, personnel costs stay in line with occupancy reports
* Careful training and supervision; important for controlling the cost of inventoried items. E.g. training in the proper use of cleaning supplies can improve usage rates, and lower the cost of cleaning supplies per occupied room
* Efficient purchasing; ensures that the hotel’s money is well spent and the maximum value is received from products.
Capital Budgets
Costs for most inventoried items appear in the operating budget as expenses against the revenue generated over the same period, however, costs for machines and equipments are planned as part of capital budgets since they have relatively high costs which require capital investments by the hotel. Capital budgets are prepared annually. In purchasing or replacing major machines and equipments,
(1) Useful life,
(2) High usage,
(3) Supplier’s services,
(4) Maintenance needs,
(5) Type,
(6) Quality,
(7) Quantity,
(8) Price should be considered.
Contract vs. In-House Cleaning
* Outside contractors are available for; laundry, dry cleaning services, floor cleaning, masonry cleaning, scouring of restroom fixture traps.
* In choosing the appropriate contractor, (1) cost estimates, (2) reputation, (3) visiting the contractor’s place should be considered. After selecting one supplier, (1) expected performance needs - quality, and (2) invoices should be checked to assess.
* Exec. Housekeeper should evaluate whether to contract outside services or undertake in-house operations and determine which would be the best to control costs, complete the tasks and achieve quality standards.
* The pros and cons of having an in-house operation must be considered. Here, the decision is; whether the initial investment (the machines and equipments - capital expense) is possible and worth the monthly savings (costs of wages & salaries, employee benefits, materials and supplies, training, supervision) or not. It would be required finding out the time needed to recover the initial start-up costs for machines and equipment through the monthly savings with an in-house cleaning program.
* Time needed to pay back the initial investment = the savings achieved each month / capital expenditure.
MANWAL