BUDGET

 

Topics covered:

ü  Budget and budgetary controls

ü  The budget process

ü  Planning capital budget

ü  Planning operation budget

ü  Operating budget-controlling expenses-income statement

 

Definition: A budget is a plan which projects both the revenues the hotel anticipates during the period covered by the budget and the expenses required to generate the anticipated revenues.

 

Budgetary control: The advantage in preparing a budget is that it provides an opportunity for taking a critical look at the costs of the department, reviewing past planning and present accomplishments, and then taking appropriate steps to accomplish more in the coming financial years. The executive housekeeper’s responsibility in the budgetary process is two-fold. First, the executive housekeeper is involved in the planning process that leads to the formulation of the budget. This entails informing the rooms division manager and general manager what expenses the housekeeping department will incur in light of forecasted room sales. Second, since the budget represents an operational plan for the year, the executive housekeeper ensures that the department’s actual expenses are in line with the budgeted costs and with the actual occupancy levels. The budget thus acts a guide that provides the managers with the standards by which they can measure the success of operations. By comparing actual expenses with allocated amounts, the executive housekeeper can track the efficiency of housekeeping operations and monitor the department’s ability to keep its expenses within the prescribed limits. Budgets provide a financial framework within which the housekeeping department operates. Thus, budgets should be carefully prepared and used to govern the department’s spending. The budget also acts as a guide as to which things need repair or replacement. It helps to determine what valuable pieces of equipment may be purchased and to pinpoint the areas where emphasis will be placed in the coming year. It can be said that the budget is an instrument used by the management for controlling and directing activities, especially purchasing activities.

 

Preparation of the budget: A budget should not be prepared at the last minute, but ideally the executive housekeeper should have a list prepared throughout the current year’s operation with records of relevance which will help with the forthcoming budget. Standard forms are usually issued to each department head for completion and a dead-line date is set for submission. Discussions should have previously taken place between the general manager and the other department heads in order that they are aware of future company objectives which may be reflected in the budgets. Past records and previous budgets may be used as a basis for the new budget, taking into account an inflation percentage. The housekeeper must also consider any changes in company purchasing policy. She should also be aware of new technology and better products which have appeared. When the budget forms have been completed and competitive prices obtained, the forms are usually forwarded to the financial controller in order that the costing may be evaluated against the forecasted profit of the establishment. Discussions take place. This is usually the time when the housekeeping has to state her case regarding the necessity of specific budget items. It is common practice to overestimate budget requirements in order that when any cut backs are made the department head still ends up with sufficient funds to meet the department’s needs. Under or over spending on the budget may have serious consequences for the department head responsible. When a budget is under spent, ideally the money saved should be allocated to a contingency fund for future projects or emergencies rather than being spent on unnecessary items. When a budget is overspent, the situation is usually more serious. The housekeeping department will have to submit a report accounting for the reasons why the budget is overspent. In some establishment it is regarded as a serious offence. Overspending may be carried forward to next year’s budget so that less money is available next year. On the other hand the establishment may realize that insufficient funds were allocated to the housekeeping department and thus extra funds may be given next year.

 

Types of housekeeping budgets

 

Capital budget: It is an intended expenditure on assets that are not used up in the normal course of operations; instead they have a life span that exceeds a single year.

 

Operational budget: It is an intended expenditure of items of daily or short term consumption i.e. those costs that the hotel incurs in order to generate revenue in the normal course of doing business. In the housekeeping department the most important and expensive operational cost involves salaries and wages. The cost of non-recycled inventory items, such as cleaning and guest supplies are also considered operational costs.

PLANNING CAPITAL BUDGET: Capital expenditure involves large sums on such investments that have a long term impact. It is thus natural that decisions on these items are critical and should be made by a group involving the general manager, financial controller and executive housekeeper.

 

Decisions to incur capital expenditure in housekeeping arise from:

 

ü  Renovation of rooms or public areas.

ü  Addition of rooms or public areas.

ü  Replacement of equipment, furnishings, carpets, etc.

ü  Introduction of automation in the department.

 

Having received a decision from management on capital expenditure the housekeeper should observe the following steps:

Supplier identification, receiving competitive quotations, selection of a supplier and finally purchase of the product taking into consideration freight and transport, and handling charges.

 

The types of items that are provided for in the capital budget are:

 

1. Large equipment and machines.
2. Furniture, fixtures and fittings in rooms and public areas.
3. Linen and soft furnishings.
4. Uniforms.
5. Special project (construction of new rooms etc.)
6. Miscellaneous- It is quite normal to have a certain amount of money allocated under such a heading in order to make provision for emergencies e.g. alterations required by law etc.

 

PLANNING OPERATIONAL BUDGET: The first step in planning the operating budget is always to forecast room sales, which generates the revenue for operating the various departments. Most of the expenses that each department can expect are most directly related to room occupancy levels. This is especially true of the housekeeping department where salaries and wages, and the usage rates for both recycled and non-recycled inventories are a direct function of the number of occupied rooms. The concept of “cost per occupied room” is the major tool the executive housekeeper uses to determine the levels of expense in the different categories. Once the executive housekeeper knows predicted occupancy levels, expected expenses for salaries and wages, cleaning supplies, guest supplies, laundry and other areas can be determined on the basis of formulas that express costs in terms of ‘cost per occupied room.’ By specifying expense levels in relation to room sales, the budget actually expresses the level of service the hotel will be able to provide. In this regard, it is important for department heads to report how service levels will be affected by budget adjustments. This is especially important for the executive housekeeper. If the top management tones down the operating budget submitted by the executive housekeeper, the executive housekeeper should clearly indicate what services will be eliminated and downgraded in order to achieve the specified reductions.

 

The various heads of expenditure that are normally reflected in a housekeeping operating budget are:

 

1. Cleaning and guest supplies
2. Office stationery and postage
3. Tailor shop expenses
4. Small cleaning equipment like brooms and brushes
5. Salaries and wages-includes retirement, benefits, bonus, allowances, incentives, etc.
6. Heat, light, and power-air conditioning, heating, electricity consumption
7. Repairs and maintenance
8. Pest control
9. Laundry expense
10. Horticultural expense: includes florist expense (flowers, oasis and vases) and landscaping expense (seeds, manure, saplings and flower pots)
11. Contract cleaning

 

Using the operating budget as a control tool: An operating budget is a valuable control tool to monitor the course of operations during a specified period. Controlling expenses in the housekeeping department means comparing actual costs with budgeted amounts and assessing the variances. When comparing actual and budgeted expenses, the executive housekeeper should first determine whether the forecasted occupancy levels were actually achieved. If the number of occupied rooms is lower than anticipated, a corresponding decrease in the department’s actual expenses should be expected. If occupancy levels are higher, then there will be a corresponding increase in expenses. In either case the expense variation will be proportioned to the variation in occupancy level. The executive housekeeper’s ability to control housekeeping expenses will be evaluated in terms of his/her ability to maintain the cost per occupied room expected for each category. Small deviations between actual and budgeted expenses can be expected and are not a cause for alarm but serious deviations require investigation and explanation. The executive housekeeper needs to formulate a plan to correct the deviation and get the department back ‘on budget.’ E.g. a re-examination of staff scheduling procedures or closer supervision of standard practices and procedures may be necessary. Other steps might include evaluating the efficiency and costs of products being used in the housekeeping department and exploring the alternatives. Even if the executive housekeeper finds that the department is far ahead of the budget it is not necessarily a cause for celebration. It may indicate a deterioration of service levels that were built into the original budget plan. Any serious deviation from the plan is a cause for concern and requires explanation. Identifying and investigating such deviations on a timely basis is one of the most valuable functions an executive housekeeper can perform in terms of the operating budget.

 

Controlling expenses: It means ensuring that actual expenses are consistent with the expected expenses forecasted by the operating budget. There are basically four methods the executive housekeeper can use to control housekeeping expenses.

 

1. Accurate record keeping: It enables the executive housekeeper to monitor usage rates, inventory costs and variances in relation to standard cleaning procedures.
2. Effective scheduling: It permits the executive housekeeper to control salaries and wages and the costs related to employee benefits. The housekeeping employees should be scheduled according to the guidelines in the property’s staffing guide which is based on the level of room occupancy. Thus it ensures that personnel costs stay in line with the occupancy rates.
3. Careful training and supervision: It should not be overlooked as a cost control measure. Effective training programmes that quickly bring new recruits up to speed can significantly reduce the time during which productivity is lower than the standards set for more experienced personnel. Close and diligent supervision, as well as refresher training can ensure that performance and productivity standards are met and may even bring about improvements.
4. Efficient purchasing: Efficient purchasing practices afford the executive housekeeper the greatest opportunity to control the department expenses and to ensure that the hotel’s money is well spent and the maximum value is received from products purchased for use. The executive housekeeper must set a proper ‘par’ for the various inventories (recycled and non-recycled), and must have a proper purchasing system with the quantities and specifications submitted to the purchasing department. The executive housekeeper needs to periodically re-evaluate the suitability of existing products for their intended purposes. Alternative products should be investigated and compared to existing products in terms of performance, durability, price and value. By comparing the cost per occupied room achieved by alternative products, the executive housekeeper can evaluate which products yield greater cost savings and base purchasing decisions accordingly.

 

Operating budget and income statement: An operating budget is identical in form to an income statement. The differences are:

 

OPERATING BUDGET	INCOME STATEMENT
It is a forecast or plan for what is to come.	It is a report of what has actually occurred.
It predicts or anticipates what the income statement will actually show at the end of that period often referred to as “pro forma income statement”.	It expresses the actual results of operations during an accounting period identifying revenue earned and itemizing expenses during that period.

 

Since a statement of income reveals the bottom line-the net income for a given period-it is one of the most important financial statements used by the top management to evaluate the success of operations. Although the executive housekeeper may never directly use the hotel’s statement of income, this statement relies in part on detailed information supplied by the housekeeping department. The revenue generated by the rooms division is often the largest single amount produced by revenue centres within a hotel since housekeeping is a major source of expense incurred by the rooms division; the executive housekeeper plays an important role in the hotel’s overall financial performance. The hotel’s statement of income shows only summary information. More detailed information is presented by the separate departmental income statements prepared by each revenue centre. These departmental income statements are called schedules and are referenced on the hotel’s statement of income. The operating budget under which the executive housekeeper operates takes the form of monthly income statements for the rooms division. Projected revenues and expenses for each month of the budgeted period will represent the rooms division operational plan. The executive housekeeper will be held accountable for controlling the expense areas that fall within the housekeeping department’s area of responsibility. As the budgeted period progresses, monthly income statements will be produced that show the actual amounts alongside the amounts originally budgeted.

Checklist for preparing a budget

 

ü  Know the present position of the hotel.

ü  Review the previous year’s financial statements.

ü  Look at the major sports events, festivals and holiday events for the year ahead.

ü  Check for any expansion plans, redecorating, raising standards, increase/decrease of staff.

ü  Check on the supplies needed-consider automation, new technology and better products.

ü  Take each cost heading separately and compile to form the final budget.

ü  Plan for practical goals and do not over budget.

ü  Take into account the inflation percentage. Prepare by looking at past experiences, present knowledge and judgement of what is likely to happen.

ü  Identify areas which can or cannot be controlled.

ü  Review wages and salaries, operating costs and expenditure that is variable, semi-variable, and fixed.

ü  Plan with the following year’s tax policies in mind. Take into consideration any new laws or regulations or policies that may come into effect.

ü  Prepare throughout the year for the next year’s budget noting changes and scope for improvement.

ü  Make decisions of what is more cost-effective:

1. Part time or full time staff.
2. Cost of staff and how often they may be required.
3. The cost of servicing a room i.e. overtime versus extra staff.
4. Contract cleaners versus own staff.
5. In-house laundry against contract.
6. Use of cleaning agents as per dilution rates.