Budgeting

What is a Budgeting?

· Budgeting is the process of:

1. Preparing a plan that defines the goal managers want their organization, division, or department to achieve and to specify how this goal is to be achieved. This step is referred to as the planning procedure
2. Exercising a leadership role in translating the plan into action. This step is called leadership procedure
3. Establish procedures for verifying whether or not, and to what extent, the planned goal was achieved. This step is referred to as the control procedure

· Budgeting sometimes might be called a profit plan that addresses all revenue sources and expenditure items. Moreover, a budget represents standards against which management can evaluate the actual results of the operations (i.e. Control Procedure). Lastly, budgets are prepared to cope with the uncertainty factor, and to utilize effectively the limited resources or factors of production a company has.

· Budgets are usually prepared on an annual basis then divided into semi-annual, quarterly, and/or monthly plans. The main reason for that is to give management more check-points to stop at, compare the actual with the planned figures and take necessary actions when needed which might mean even revising the budget

How a budget is prepared?

· Rooms Division Department budget shall be prepared, the Rooms Division manager shall only estimate next period’s room revenue, and direct expenses. Putting it in other words, the Rooms Division Manager shall not care about estimating capital expenses (i.e. Indirect Expenses) since in responsibility accounting; a manager is responsible and liable only for his department!

· The Rooms Division Manager shall first forecast demand for rooms for the next period in question, and then might use historical averages, industry average… to estimate Room Revenue and Room Direct Expenses

1. Estimating Room Revenue:

· By using an appropriate forecasting method, the Rooms Division Manager can forecast demand measured in room nights. Later, the Rooms Division Manager shall multiply the total room nights by the Average Room Rate (ARR), either using hotel historical or industry averages, to come up with the estimated Room Revenue.

·         Later, according to hotel historical figures, the Rooms Division Manager shall estimate the room allowances figure and subtract it from the estimated total room revenue to come up with the net room revenue.

2. Estimating direct expenses:

·         Direct Expenses (i.e. Variable Costs) in the Rooms Division Department can be divided into 4 categories:

1. Wage Expenses (Hourly Wage * Estimated Total Labor Hours needed)
2. Frills (i.e. Free of Charge Replenished Room Items)
3. Material (i.e. Cleaning Supplies, Utensils…)
4. Laundry & Linen Expenses (Cost of pressing, cleaning, pressing, storing…)

· The Rooms Division Manager might consider country averages, and or historical averages, along with current hotel / labor union collective bargaining contracts for the coming period, suppliers’ price increase intentions, the relative change of local currency against some major foreign currencies, to estimate department direct expenses

Refining Budget Plans:

·         If the actual operating figures and budgeted figures are distant from each other, then this suggests a refining or revision of our budget (i.e. revision of room demand, estimated room revenue, and rooms direct expenses).