PREPARE AND MONITOR BUDGETS

1. Unit Codes: D1.HFI.CL8.05 D1.HFA.CL7.07D2.TRM.CL9.18 PREPARE AND MONITOR BUDGETS

2. Introduction Prepare and Monitor Budgets: • Classroom schedule • Trainer contact details • Resources you will need: • Calculator • Pen and Paper • Assessments.

3. Introduction Ice breaker: • What is your name? • Where do you live? • Why are you doing this course? • Do you work in the Hospitality or Tourism industry or why do you want to work in either of these industries?

4. Why budget? • Plan and monitor the flow of money through the business • Evaluate performance of the business • Seasonal fluctuations – this is particularly important for Hospitality and Tourism businesses • Encourage future planning. 60% of new businesses do not survive more than five years and 90% do not survive more than ten years.

5. Why budget? The downside to budgeting: • Expertise • Time • Cost of obtaining good quality information • Only a forecast or estimate.

6. What is a budget? • Your thoughts first? One definition: Financial document that details an estimate or forecast of revenue and expenses for a specified period of time (usually up to one year) in the future • Revenue – money flowing into the business • Expenses – money flowing out of the business.

7. Activity Correctly identify the following as Revenue or Expense items for the business:

8. Activity Correctly identify the following as Revenue or Expense items for the business:

9. Types of budgets • Smaller business – one budget • Larger businesses may budget a number of different ways • By department • Accommodation, Restaurant, Domestic sales • By activity • Profit centres - Income produced and expenses incurred • Cost centres - Expenses incurred only.

10. Types of budgets • By individual revenue or expenses • Labour, supplies • Summary budgets • Sales budget • Advertising budget • Cash budget.

11. Activity – Profit and Cost centres

12. The budgeting process Budgeting Process

13. The budgeting process Where do you begin? • Almost everything that happens in a business is determined by the level of sales activity • The first budget to be prepared is the sales budget • One or more revenue items are identified and calculated • May be a separate budget in a large organisation.

14. The budgeting process • Other Summary Budgets

15. Sources of data Information is researched and collected • Internal sources of data: • Information gathered from within the organisation or business • Advantages • Readily available • Assistance to interpret the information can come from within the business • Cost effective • Disadvantages • Based on past rather than future activities .

16. Sources of data Examples of internal sources of data • Policies and procedures • Financial commitments already made for the budgeted period • Previous periods revenue and expenses • Marketing plans • Planned promotions • Details of planned changes to products sold or services offered. Can you think of other information?

17. Sources of data • External sources of data: • Information gathered from outside the organisation or business • Is it reliable? • Is it relevant to the budgeted period? • Disadvantages • Time and cost outweigh the benefits • Difficult to find.

18. Sources of data Examples of external sources of data: • Commercially available customer research • Statistics on economic performance • Direct observation of competitors • Conversations with suppliers of goods or services to the business • Business associations aligned with the ASEAN community Can you think of other information?

19. Sources of information Analysis and review of data: • Quality in means quality out! • Time • Communication with stakeholders • Changing internal and external issues.

20. Sources of information An example: • Estimating sales • Combine internal and external sales data • Will price increase or decrease? • Will volume of sales change? • Is the timing of sales going to change? • Calculations.

21. Budgeting strategies • Smaller business – less people, less conflicts and opinions to manage • Larger organisation: • Different opinions • Competing demands between departments • Two strategies: • Top down approach • Bottom up approach.

22. Budgeting strategies • Top down approach • Direction given from owners and senior managers without consultation • Minimal stakeholder input and communication • Time and expertise.

23. Budgeting strategies • Bottom up approach • An example (Continued)

24. The budget committee Most common example of a bottom up approach: • Budget objectives discussed and set • Data reviewed and analysed • Conflicts resolved • Communication • Circulation of information. Budget Committee

25. Activity

26. The draft budget

27. The draft budget Policies and guidelines: • Enterprise policy • Details the budget process • Budget manual • Timelines • Templates and forms • Notes • Checklists (Continued)

28. The draft budget Policies and guidelines: • Methodology • Incremental budgeting • Zero based budgeting • Rolling budgets • Flexible budgets.

29. The draft budget Estimate revenue and expenses: • Budget objectives set • Data reviewed for: • Validity • Reliability • Relevance (Continued)

30. The draft budget Estimate revenue and expenses: • Budgeted sales calculated • Overall sales target • Previous sales data • Price changes • Volume changes (Continued)

31. The draft budget Budgeted sales: • An example: Number of tours x number of clients x price per client = Sales budget

32. The draft budget Budgeted sales • An example: 28 20 100 56,000 Number of tours x number of clients x price per client = Sales budget

33. The draft budget Budgeted sales: • An example: 25 20 100 110 55,000 Number of tours x number of clients x price per client = Sales budget

34. The draft budget Budgeted sales: • An example: 24 20 100 110 52,800 Number of tours x number of clients x price per client = Sales budget

35. The draft budget Estimate revenue and expenses: • Budgeted expenses calculated • Previous period expenses • Revised financial commitments • Expenses which need to be changed • New expenses (Continued)

36. The draft budget Budgeted expenses: • An example – Sales budget value of 56,000 16,800 16,800 16,800 11,000 11,000 560 28,360 Sales x expense % = Total expense

37. The draft budget • Consultation • Budget committee • Recommendations • Negotiation and co-operation • Circulation • Activity centre managers responsibility • Timely.

38. The draft budget Finalise the draft budget: • Final discussions, review and analysis • Timely • Correct templates and forms • Master budgets created • The final budget • Circulated and discussed as required • Master budgets distributed.

39. The final budget • An example: Sales minus expenses = Total profit or income

40. Monitor and review budget • Regular review • No point setting a budget unless it is used • Comparing actual results to budget is one of the greatest advantages of the budget cycle • Enables corrective action to be taken • Accurate calculations • Variances • Difference between actual performance and budgeted outcomes (Continued)

41. Variance analysis Variances are: • Expressed as monetary units, percentages or sales volume • Favourable – beneficial, positive • Unfavourable – need investigation • Evaluated according to the effect on profit.

42. Variance analysis 2 main calculations: • Horizontal analysis • Actual results and budgeted numbers for EACH line item in financial data is compared • Actual minus budget = Variance in monetary unit • Variance divided by budget x 100 = Variance percent.

43. Variance analysis 2 main calculations: • Vertical analysis • EACH line item calculated as a percentage of sales • Line item divided by sales x 100 = Variance • Budget and actual reports are calculated separately.

44. Investigating variances Should we investigate every variance? • Time and resource constraints • Some variances are easily explained • Management by exception • Tolerance limits • Only variances above the tolerance limits are investigated • Benchmarking • Questionnaire or checklist • Class activity: Discuss some questions that this document may ask. Focus particularly on those areas important to the Hospitality and Tourism Industry.

45. Investigating variances Management of significant deviations • Changes to the internal or external environment outside the control of the business • Revise budget • Changes that are within the control of the organisation • Identify cause • Investigate reason • Implement remedy or change.

46. Further analysis Trends and Patterns: • Consistent over time • Indicate a change in internal or external environment • Investigation to identify cause • Revise budget or action to remedy (Continued)

47. Further analysis Changes to the internal environment: • Upselling sales • Additional tours added to travel packages by sales staff • Room service packages offered on arrival • Loss of key staff • Unplanned financial commitment.

48. Further analysis Changes to the external environment: • Economic changes • Competitor leaves or enters the market • Changing laws • Natural disasters.

49. Preparing for the future… Continuous improvement to the budget process • Sources of data • Budget calculations • Negotiated agreements • Analysis of variances and remedies. Feedback into the budget manual ready for the next budget period