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Budgeting
Definition

A budget is the monetary or and quantitative expansion of business plans and policies to be pursued in the
future period of time. The term budgeting is used for preparing budgets and otherprocedures for planning.

• Profit-planning or budgeting is a systematic approach for attaining effective

management performance.
• A budget is a comprehensive and coordinated plan expressed in financial terms, for the
operations and resources of an enterprise, for some specific period in future.

According to I.C.W.A London “A Budget is a financial and or quantitative statement prepared priorto a defined
period of time , for attaining a given objective.
Budget portrays the intentions of Management about future plays … it indicates sales to be made,the expenses
to be incurred, and the profit or income to be received.

Importance Of Budget

It is difficult to overstate the importance of a meaningful budgeting process for a hotel. Ultimatelythe budget
represents the implementation of the Owners and Operators vision for the hotel. It the means by which the
Owners and the operators achieve the qualitative goals we associate with thebrand or style of the hotel and
the quantitative goals of achieving a well-run , efficient and profitable business. Moreover, it is often used as
a means to judge the performance of the operator.

Classification ............. according to time

1. Long-term Budgets
2. Short-term Budgets.
3. Current- Budgets

On the basis of functions

1. Functional or subsidiary Budgets

2. Master Budget

On the basis of flexibility

1. Fixed Budget
2. Flexible budget

TYPES OF BUDGET
1- MASTER BUDGET – A master budget is a comprehensive projection of how managementexpects
to conduct all aspects of business over the budget period, usually a fiscal year.
Most master budgets include interrelated budgets from the various departments. Managerstypically
use these subset budgets to plan and set performance objectives. Master budgetsare generally used in
larger businesses to keep many managers on the same page.

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2- OPERATIONAL BUDGET– The operational budget covers revenues and expenses

surrounding the day-to-day core business of a company. operating budgets are usuallybroken
down into smaller reporting periods, such as weekly or monthly.
3- CASH FLOW BUDGET– A cash flow budget examines the inflows and outflows of cash in a
business on a day-to-day basis. It predicts a company’s ability to take in more money than it pays
out. Managers monitor cash flow budgets to pinpoint shortfalls between expenses and sales.

4- SALES BUDGET- an estimate of future sales, often broken down into both units andcurrency.
It is used to create company sales goals
5- REVENUE BUDGET– consists of revenue receipts of government and the expenditure metfrom
these revenues. Tax revenues are made up of taxes and other duties that the government levies.

6- FLEXIBLE BUDGET– Flexible budgets are, as their names suggest variable and flexible depending
on the variability in the results expected in the future. Such budgets are most useful for businesses that
operate in an ever changing business environment, and have theneed to prepare budgets that are able
to reflect the many outcomes that are possible.

7- FIXED BUDGET– Fixed budgets are used in situations where the future income and
expenditure can be known, with a higher degree of certainty, and have been quite predictable
over time.

METHODS OF BUDGETING
In general, there are two methods of budget development: incremental budgeting and zero- base
budgeting. The incremental method is most often used in the General Fund, whereas zero-base
budgeting (ZBB) employs a “bottom-up” approach. It involves a re-evaluation of all programs, a
review of their associated revenues and expenses, and a projection of how much it will cost to run
each program during the upcoming fiscal year. Many of the larger campus auxiliary operations utilize
the ZBB approach.

▪ Incremental Budgeting
▪ The incremental budgeting process begins with last year’s continuing budget figures as the base budget.
These numbers are then adjusted to reflect inflation, growth, changing conditions and other information
gathered from financial forecasts for the upcoming fiscal year. The advantage to using the incremental
method of budgeting is that the work is greatly simplified, since this approach starts with a budget that is
already in place. The disadvantage to incremental budgetingis that the inefficiencies and inadequacies of the
prior year’s budget are automatically built into the budget for the upcoming fiscal year.

• Zero-Base Budgeting
▪ Zero-Base budgeting (ZBB) employs a “bottom-up” approach. This method starts with a base budget of zero
and calculates the costs of running each program from scratch. On an annual basis, each cost associated with
running a program must be justified before it can be included in the budget. The advantage of the ZBB method
resides in the extensive review it gives each program. While the ZBB approach can uncover operating
inefficiencies and identify weaker programs, it also can highlight those programs that are most vital to the
organization. The effort and time requirements of ZBB are its principal disadvantages.

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ZERO BASED BUDGET (ZBB): If the approach adopted in the formulation and preparation of budgets
is based on current level of operations or activities, including current level of expenditure and revenue, such
budgeting is known as traditional budgeting .This type of budgeting process generally assumes that the allocation
of financial resources in the past were correct and will continue to hold good for the future as well. In most cases,
an addition is made to the current figures of cost to allow for expected (or even unexpected) in-creases.
Consequently, the budget generally takes an upward direction year after year, in spite of generally declining
efficiency. Such a system of budgeting cannot be expected to promote operational efficiency. It may, on the other
hand, create several problems for top management. Some of theseproblems are:
Programmes and activities involving wasteful expenditure are not identified, resulting in avoidable financial
and other costs.

• Inefficiencies of a prior year are carried forward in determining subsequent years' levels of
performance.
• Managers are not encouraged to identify and evaluate alternative means of accomplishing the same
objective.
• Decision-making is irrational in the absence of rigorous analysis of all proposed costs and benefits.
• Managers tend to inflate their budget requests resulting in more demand for funds than their
availability. This results in recycling the entire budgeting process.

Thus, the traditional budgeting technique may be quite meaningless in the present context when management
must review or re-evaluate every task with a view to utilize the scarce resources in a better manner or to improve
performance. The technique of zero base budgeting provides a solution for overcoming the limitations of
traditional budgeting by enabling top management to focus on priorities, key areas and alternatives of action
throughout the organisation.

The technique of zero base budgeting suggests that an organisation should not only make decisions
about the proposed new programmes, but should also review the appropriateness of the existing
programmes from time to time. Such a review should particularly be done of such responsibility centres
where there is relatively high proportion of discretionary costs. Costs of this type depend on the discretion or
policies of the responsibility centre or top managers. These costs have no direct relation to volume of activity.
Hence, management discretion typically determines the amount budgeted. Some examples are: expenditure
on research and development, personnel administration, legal advisory services.

Zero base budgeting, as the term suggests, examines or reviews a programme or function or
responsibility from ‘scratch’. The reviewer proceeds on the assumption that nothing is to be allowed. The
manager proposing the activity has, therefore, to justify that the activity is essential and the various amounts
asked for are reasonable taking into account the outputs or results or volume of activity envisaged. No activity
or expense is allowed simply because it was being allowed or done in the past. Thus according to this
technique each programme, whether new or existing, must be justified in its entirety each time a new budget
is formulated. It involves:d
• dealing with particularly all elements of mangers' budget requests
• critical examination of on-going activities along with the newly proposed activities
• Providing each manger a range of choice in setting priorities in respect of different activities and in
allocating resources.

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ADVANTAGES OF ZERO BASE BUDGETING:

1. It provides the organisation with systematic way to evaluate different operations and programmes
undertaken. It enables management to allocate resources according to priority of the programmes.
2. It ensures that each and every programme undertaken by managers is really essential for the
organisation, and is being performed in the best possible way.
3. It enables the management to approve departmental budgets on the basis of cost-benefit analysis. No
arbitrary cuts or increase in budget estimates are made.
4. It links budgets with the corporate objectives. Nothing will be allowed simply because it was being
done in the past. An activity may be shelved if it does not help in achieving the goals of the
enterprises.
5. It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting
alternative courses of action.
6. It facilitates the introduction and implementation of the system of `management by objectives'. Thus
it can be used not only for fulfilment of the objectives of traditional budgeting, but also for a variety
of other purposes.

It is contended that zero base budgeting is time consuming. Of course, it is true, but it happens only in the
initial stages when decision units have to be identified and decision packages have to be developed or
completed. Once this is done, and the methodology is clear, zero base budgeting is likely to take less time
than the traditional budgeting. In any case, till such time the organisation is properly acclimatized to the
technique of zero base budgeting, it may be done in a way that all responsibility centres are covered at least
once in three or four years.

Zero base budgeting as a concept has become quite popular these days. The technique was first used by the
U.S. Department of Agriculture in 1962. Texas Instruments, a multinational company, pioneered its use in
the private sector. Today, a number of major companies such as Zerox, BASF, International Harvester and
Easter Airlines in the United State are using the system.

BUDGET CYCLE
Budget Cycle describes a process of budget planning and control which includes the actions of developing a
financial plan, comparing the financial plan to actual performance, and taking corrective action to bring
substandard performance into line with the plan or adjusting the plan to reflect changing financial conditions.

The budgeting process is a cycle comprised of two main phases: the planning phase and the control phase. The
planning phase identifies the goals to be attained during the fiscal year, and the financial plan (budget)
necessary to achieve them. The control phase focuses on actual performance towards achieving the plan. It
involves implementation, monitoring and control functions. The control phase emphasizes a comparison
between the budget and the actual revenue and expense activity as recorded in the Finance System and
displayed on the monthly statements. When actual revenue and expense varies from the plan articulated by
the budget, the control phase will then include corrective action. Corrective action might involve adjusting the
budget to reflect the actual financial activity, adjusting revenue projections and collections, or adjusting
expenditures.

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The following diagram illustrates cycle.

Control Planning
• Take corrective action •Develop goals, objectives

Monitoring BUDGET CYCLE Development

• Compare budget •Estimate cost of attaining
to actual rev, exp each goal
• Investigate variances •Project revenues

Implementation
• Record budget in
Finance System General Ledger

Working With the Budget throughout the Budget Cycle

In your departmental finance role, you are likely to be involved in each and every step of the
budget cycle.

Planning and Development

The budget must be well conceived and based upon a combination of historical data and future
financial projections. During this step of the budget cycle, employees who handle the day-to-
day finances for a department are often asked to provide information to management about
past and anticipated revenues, expenses and transfers.

Implementation
Verify that the budgets recorded in the Finance System at the beginning of each fiscal year
are correct. Contact your area accountant if you find errors or if you have questions.

Monitoring
Revenue and Expense Statement Detail
Revenue and Expense Statement Summary
Balance Sheet Summary and Balance Sheet Detail

Control
Departmental management must be informed when the “budget to actual” comparison
indicates a significant deviation, or when the balance sheet indicates an unfavorable balance,
so that appropriate corrective actions can be initiated.

Although reports are made available to all who possess a fiscal role on a FOPPS, if you
notice a problem or a potential problem developing in budget, it’s best to err on the side of

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caution and inform management rather than assume they noticed it during their review. This
makes for good interactive teamwork within the department.

MAKING A FRONT OFFICE BUDGET

1. The most important long term planning of the Front Office Management team is Budgeting theFront
Office Operations.
2. Every hotels Annual Operation Budget is a Profit Plan that addresses all Revenue Sources andExpense
Items.
3. Annual Budgets are divided into Monthly Plans which in turn are divided into Weekly and DailyPlans.
4. The Revenue management team and accounting division plays a great role in forecasting thebudget for
the department.

FACTORS AFFECTING BUDGET PLANNING

The following are the elements, which have an n, affects on the front office budget planning.

1. Accommodation: This is one of the most critical key factors operating in hotels. When all the rooms
are sold, it is impossible to increase the volume of room sales except through anincrease in room rates.
When the sales budget is being prepared it is essential to examine patterns of occupancy to establish
what level of room sales may realistically be expected during the forthcoming budget year. Where
there is a high degree of room sales instability, evidenced by pronounced swings in occupancy rates,
it is desirable to examine the possibility of shifting demand from peak to off-peak periods.

2. Shortage of labour: This particular key factor is potentially powerful, but there is no evidence that
it exerts much influence on the volume of hotel and restaurant sales. In somelocations, labour shortages
may, in fact, be a severe limiting factor.

3. Consumer demand: Consumer demand is often found to be a potent key factor. Itsoperation
may be due to several reasons.
The price level of the establishment may be too high, and this may result in a low ARR or lowoccupancy
or both.

5. Quality of management: The management and its operation however do not have abearing
over short period. Over longer periods, the quality of management will have a direct and
powerful influence on the volume of sales generated.

6. Other factors:
• Political state of affairs
• Natural calamities
• Terrorist activities
• Climate conditions
• Events (sports, festival celebration, etc)
• Importance of the city (climate, industries- IT, BPO, Biotechnology)

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CAPITAL AND OPERATIONAL BUDGET FOR FRONT OFFICE

The main objective of the cash budget is to determine the cash inflow, cash outflows and theresulting cash
balance over a future period.

In order to determine future cash inflows it is necessary to identify the sources of cash flows. (room,fitness
center/florist/laundry/business center etc.). Each of these sources may generatecash credit sales. Cash
sales constitute an immediate cash inflow. Credit sales, however, taketime to result in a cash inflow.

Most expenses for front office operations are direct expenses in that they vary in direct proportionto room’s
revenue. Historical data can be used to calculate an approximate percentage of room’srevenue that each
expense item may represent. These percentage figures can then be applied tothe total amount category for
the budget year.

Typical rooms division expenses are payroll and related expenses: guestroom laundry (linen, guest towels),
guest supplies (bath amenities, toilet tissue, matches), hotel merchandising (in-room guest directory, hotel
brochure), travel agent commission and reservation expenses. When these costs are totaled and divided by the
number of occupied rooms, the cost per occupied room is determined. The cost per occupied room is often
expressed in rupees and as a percentage.

REFINING BUDGET
If the actual operating figures and budgeted figures are distant from each other, then this suggestsa refining or
revision of our budget.

• revision of room demand

• estimated room revenue
• rooms direct expenses

Departmental budget plans are commonly supported by detailed information gathered in the budget preparation
process and recorded. These documents should be saved to provide an explanation of the reasoning behind the
decisions made while making departmental budget plans.Such records also help to solve issues that arise during
the budget review. The documents may also provide valuable assistance in the preparation of future budget
plans.

Forecasting room revenue

Forecasting is an important tool for front office manager, as it can help predicting the future outcomes with
respect to foot fall in the hotel, room revenue and occupancy.
Room revenue is an essential part of the hotel income and so it becomes immensely important toforecast the
revenue from the rooms division on daily, weekly, monthly and yearly basis.

Forecasting involves-
• Calculation of the total number of rooms available.
• Calculation of the occupancy percentage
• Calculation for average daily rate

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Forecasted Rooms Revenue = Rooms Available X Occupancy Percentage X Average Daily Rate

As the duration changes rooms available should be multiplied with number of days.

For example, forecasting for the year,

Rooms Available = Total Rooms X 365 Days

A more detailed approach would consider the variety of different rates according to room types, guest profiles,days of the
week, and seasonality of the business. These are some factors which affect room revenue forecasting.

Budgetary Control
Budgetary control, as the term suggests ,is the financial control through the proper implementationof budget ,
which means fixing responsibilities among the concerned managers for any deviationsthat may result between
budgeted and actual results. It is a control technique because it providesa standard for evaluation of actual
performance . Any deviation must be promptly brought to the notice and corrective actions must be taken on
time.
Budgetary control involves the use of budgets and budgetary reports though out the period of budget to co-
ordinate evaluate and control day to day operations in accordance with the goalsspecified by the budget.

Budgetary control system

1. Operations: to have a successful preparation, maintenance and and administration of abudget, a

proper organisational structure is essential,

2. Budget centre: it is the part of the hotel for which the budget is being prepared.
3. Budget committee: should include the manager of the front office, finance manager, HRmanager
and the General Manager.

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4. Budget Manual: it is the document which spells out the duties and responsibilities of the various
executives concerned with the budget. It focuses the management attention on thegoals, procedures,
and timing of the budget.
5. Budget period: the period for which the budget is made.it can be short term budget,medium trm
budget and long term budget.
6. Monitoring of the budget: the budget should be continuously monitored for variances. The report
generated provide timely information for continuous evaluation of the front officeThe budget report
should show monthly variance and year to date variances.

The variances could be favourable or unfavourable.

Advantages of Budget and Budgetary control

1. It estimates uncertainty
2. It is the result of various brains .
3. It is good incentives to workers .
4. It helps in optimum use of resources .
5. It helps in effective co-ordination .
6. It helps in fixing responsibility .
7. It helps in spotlighting the deviations .
8. It helps in optimum use of Men , Material and Money.
9. it serves as a beacon light.
10. Maximization of Profits
11. Co-ordination
12. Specific Aims
13. as tool for Measuring Performance
14. Determining Weaknesses
15. Corrective Action
16. Reduces Costs
17. Introduction of Incentive Schemes
18. Consciousness amongst employees
19. systematic planning

ADVANTAGES & DISADVANTAGES OF BUDGETING

ADVANTAGES
• Coordinates activities across departments.
• Budgets translate strategic plans into action.
• Budgets provide an excellent record of organizational activities.
• Budgets improve communicationwith employees.
• Budgets improve resources allocation, because all requests are clarified and justified.
• Budgets provide a tool for corrective action through reallocations.

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DISADVANTAGES
• The major problem occurs when budgets are applied mechanically and rigidly.
• Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarilyimposed top
down, employees will not understand the reason for budgeted expenditures, and willnot be committed to them.
• Budgets can cause perceptions of unfairness.
• Budgets can create competition for resources and politics.
• A rigid budget structure reduces initiative and innovation at lower levels, making it impossible toobtain
money for new ideas.

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