Hotel Budgeting

A guide for planning and controlling processes in hotels by Cem Adiguzel University of North Alabama

Instructor and Class Information Dr. Jerry Ferry Managerial Accounting AC-626 Spring 2003

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INTRODUCTION...........................................................................................................4 TARGETS OF HOTEL MANAGERS:...........................................................................4

Increase hotel occupancy rate................................................................................................................................4 Increase profitability of sales..................................................................................................................................4 Cost control..............................................................................................................................................................4

THE BENEFITS OF SUCCESSFUL BUDGET APPLICATION...................................5 INDUSTRIAL COMPARISONS ....................................................................................5 RELATION BETWEEN MANAGEMENT FUNCTIONS AND BUDGET:.....................5
Four Functions of Management.............................................................................................................................5 Relationship between the Functions of Planning, Controlling and Organizing ...............................................6

REASONS OF FAILURE IN BUDGETING...................................................................6 BEFORE STARTING TO SET UP THE BUDGET........................................................6 STRUCTURE OF HOTEL BUDGETS:.........................................................................7 SCHEDULE EXAMPLES:.............................................................................................8
Multi-Property Executive Summary Schedule.....................................................................................................8 Property Profit & Loss schedule (for each property)..........................................................................................9 Department Budgets..............................................................................................................................................11 F&B department revenue analysis schedule.......................................................................................................12 F&B Departmental Budget Schedule..................................................................................................................13 Support department budget schedule:................................................................................................................14

RELATION BETWEEN DEPARTMENTAL BUDGET SCHEDULE AND COST DRIVERS.....................................................................................................................15 BUDGETING MECHANICS:.......................................................................................15 TIPS FOR A SUCCESSFUL BUDGET:.....................................................................17
What else should be there? ..................................................................................................................................17

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CRITICAL FACTORS FOR A SUCCESSFUL HOTEL BUDGET:.............................17

Correlating information: .....................................................................................................................................17 Understandable and comparable expression (ratios):.......................................................................................18

FRAMEWORK TO SET UP SUCCESSFUL BUDGETING SYSTEM:.......................18 TOOLS BEING USED IN BUDGETING PROCESS AND NECESSARY IT INFRASTRUCTURE FOR LARGE SCALE PROPERTIES:......................................18 RESOURCES:.............................................................................................................22

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Introduction
This study is prepared to be used as a guide to identify the context and content of budget in hotels. It is designed as a source to build relation between managements targets and use of budget as a strong tool to achieve those targets.

Targets of hotel managers:

Increase hotel occupancy rate
Increasing hotel occupancy rate depends on the success of marketing plan, which involves product, sales channels, promotions and prices. Marketing plan will be successful only when management has a thorough understanding of the target market and needs of potential customers. Marketing environment conditions - economic, social-cultural, legal, competitive and technological-, are directly correlated with the success of marketing plan.

Increase profitability of sales

Increasing profitability can be rendered through reaching the most profitable customer groups. As we all know, customers, who stay at higher rates, may not be the most profitable customer group. Another customer group which stays at a lower rate may bring higher revenue by benefiting from other outlets of the hotel such as spa, F&B outlets, etc. At this point, management should find the answers to the following: a. Who is the most profitable customers? b. What are the most profitable products? c. What are the most profitable departments? d. And why are these more profitable? Answers to these questions are keys to increasing sales and profitability.

Cost control
a. Finding the owners of revenues and expenses Purpose of all company expenditures is to realize company objectives. According to this point of view, each expense should have a purpose and an owner. Here, owner of an expense indicates a department rendering any one of management functions. Similarly, revenues should have generators and owners. It is crucial to define the owners of revenues and expenses and determine their generator -in line with responsibility accounting structure. This method will enhance the performance of relevant revenue and expense owners. The golden rule in organizational behavior is "concerning the topics and problems that you own or you are liable for." b. Relating expenses and revenues Revenues brought by each market section and expenses made for these sales should be correlated. This way, it can clearly be seen that how efficient the management resources are being utilized. The operations which stay below organizations expected and targeted "expenditure rate for unit revenue" are determined, problems can be observed, regenerations can be rendered or these operations can be cancelled out entirely. Laundry is a good example for this: Should we have laundry service in our hotel or should we outsource it? In order to Page 4 / 22

make a decision, you should know the exact costs of laundry service and their effects on revenues. But first, these should be correlated to one another.

The benefits of successful budget application

Deployment and application of a proper budgeting system brings 5 main advantages: 1. Forces managers look at the future and develop plans for possible outcomes 2. Enhances communication in the organization 3. Provides information to share holders and between different functions and levels of the organization 4. Sets a benchmark for performance control including organization as a whole, departments and individual employees. 5. Sets a goal oriented organizational behavior

Industrial Comparisons
To determine and evaluate performance level, it is needed to know the hotel's service standards and the revenues and expenses compared to regional competitors. Thus, financial reports for the lodging industry should be put up in compliance with Uniform System of Accounts, which contains reporting standards for hospitality industry. This way, all financial and statistical comparisons can be made. Principles of Uniform System of Accounts were first published in 1926, and now currently its 9th revision is being used. It is accepted as the financial & operational reporting standards of the hospitality industry. Accounting structure and technological infrastructure should allow reporting to be done in compliance with Uniform System of Accounts standards. Mostly accounting and finance departments prepare these reports in line with Uniform System of Accounts requirements with the information that they gather from different sources of information. A successful hotel budget should be compliant with Uniform System of Accounts reporting system and the financial reporting should be converted to budget results and comparison between planned and actual values for decision making purposes.

Relation between management functions and budget:

Four Functions of Management
It is crucial that the four basic functions of management -planning, organizing, leading and controlling- function properly and are well balanced. Otherwise, organizations tend to lose their strength.

Basic problems that managers face are poor applications of planning and control functions or not applying these functions at all. When market volume is large and intensity of the competition is less -meaning, when the demand-supply balance does not prevent the endurance of weak organizations- organizations which has not implemented planning and

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control functions can proceed with their existence in the market. However, when demand shrinks, when the number of competitors rise or when both happen at the same time, organizations which does not implement planning and control functions well tend to respond lately to the changes in their environment and face situations that ruin their financial structure.

Relationship between the Functions of Planning, Controlling and Organizing

Planning: Planning function depends on forecasting based on the combination of evaluation of the current market information and the market environment with organization's internal and external information and experience and determining action plan based on these forecasts. Three types of planning exist: Short, mid and long term planning. Organizing: It is the implementation of the plan and utilizing company resources effectively in order to succeed it. Controlling: It is the process of performance evaluation. After this evaluation is done, results reflect back to the plan as feedback. Relation between the plan and the actual results and deviations from plans supply inputs for organizing and leading functions. Budget is a tool that runs planning and controlling functions in a hotel and supplies management necessary feedback to make decisions. Thus budget is a critical tool for hotel managers to run management functions properly and achieve organizations goals. Although almost every manager says that planning and controlling functions are important and budget is necessary for every hotel, actual results do not match with those intentions because of a list of reasons.

Reasons of failure in budgeting

Reasons for Failure of Planning and Controlling functions are as follows: -Lack of top management support -Lack of organizational conformity -Lack of responsibility accounting -Gathering wrong internal or external information which is not based on actuality -Not complying with schedules -Lack of flexibility -Deficiency in observation and evaluation of actual results -Not reflecting the evaluation of results back to business Blocking factors above should be considered and eliminated for a successful budget application in any size of hotel properties.

Before starting to set up the budget

Consider following information before starting to set up the budget: 1. Current years activity figures 2. General economic and industry conditions 3. Competitive environment 4. Prices(rates) being applied 5. Industry forecasts and trends

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Structure of hotel budgets:

For a multi-property situation following structure will be appropriate 1. Summary profit & loss schedule: This page includes revenues and expenses in total and break down regarding major sources. a. Revenues: This part will be consisted of operating departmental revenues such as rooms, F&B, outlet rents, communications, laundry, activity membership-sport and gym outlets- etc. b. Expenses: Expenses will be organized under major sub-total headlines such as cost of sales, departmental expenses, payroll and related expenses, undistributed expenses. c. Cumulative profit and loss figure of multi properties d. Ratios: Operational ratios: Occupancy rate, double occupancy rate, average stay, average room rate, RevPar (Revenue per available rooms), F&B spending per person, Cost of sales ratio for F&B outlets, payroll and related expenses ratio, total cost per occupied room Profitability ratios: Net profit margin, Operating profit over assets, Operating profit over equity, Operating profit over long term assets 2. Single Property profit & loss schedule: Profit & loss page with some additions for each property would be appropriate in the same format mentioned above for cumulative values of all properties. In property summary profit & loss schedule undistributed expenses should be given as well below payroll and related expenses information. Use of additional schedule for operated department analysis will be appropriate. This schedule should include departmental profit and loss information for operational departments. 3. Departmental budgets: It wouldnt be wrong to say that the most critical parts of a hotel budget are departmental budgets since cumulative sheets of budget for a single property of multi-property budget are derived by summing departmental budgets. Departmental budgets include a summary sheet as follows: a. Revenues: Departmental revenues (Not including details and market segmentation) b. Expenses: Cost of sales, departmental expenses, payroll and related expenses Departments here mean profit and loss centers which accounting system assigns and records costs and revenues related with each of those centers separately. Revenue generating departments are called as operated departments. Departments generating only costs such as marketing, accounting and maintenance are called as support departments. Department budgets also include budgeted amount and related cost driver information for each expense.

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Schedule examples:
Multi-Property Executive Summary Schedule
Multi-Property Executive Summary Sheet
January Previous Year Revenues Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Revenues Expenses Cost of Sales Departmental Expenses Payroll and related expenses Undistributed Expenses Total Expenses Income After Undistributed expenses Key Figures Rooms Available Rooms Sold Occupancy % Double occupancy rate Average stay length Average room rate RevPar F&B spending per person COS ratio F&B Outlets Total cost/occupied room Net Profit Margin Operating profit/Assets Operating profit/Equity Operating profit/LTAssets % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income

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Property Profit & Loss schedule (for each property)

Property Executive Summary Sheet
January Previous Year Revenues Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Revenues Expenses Cost of Sales Departmental Expenses Payroll and related expenses Undistributed Expenses Total Expenses Income After Undistributed expenses Key Figures Rooms Available Rooms Sold Occupancy % Double occupancy rate Average stay length Average room rate RevPar F&B spending per person COS ratio F&B Outlets Total cost/occupied room Net Profit Margin Operating profit/Assets Operating profit/Equity Operating profit/LTAssets % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income

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Operating Department Analysis

January Previo us % Year Budget Actual A/B Revenues Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Revenues Cost of sales Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Cost of Sales Departmental Expenses Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Departmental Expenses Payroll and related expenses Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total payroll & related expenses Profit / Loss Rooms F&B Communications Laundry Golf Course Parking Lot Rental and Other Income Total Profit / Loss YT D % of YTD YTD % Total Budget Actual A/B Income

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Department Budgets
Department Profit/Loss Schedule
January Previous Rooms department Year Revenues Market segment 1 Market segment 2 Market segment 3 Market segment 4 Market segment 5 Market segment 6 Total Revenues Cost of sales Rooms Total Cost of Sales Departmental Expenses Computers & computer supplies China/glass Cleaning Material Ammenities Flowers & decoration Customer supplies Room supplies Laundry Linen Printed materials and office supplies Total Departmental Expenses Payroll and related expenses Salaries Employee Insurance Employee Transportation Employee Meals Total payroll & related expenses Total department expenses Department Profit / Loss % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income

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F&B department revenue analysis schedule

F&B Department Revenue Schedule
January #of covers Previous Year % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income Per cover

Restaurant 1 Revenues Breakfast Food Inhouse Walk In Breakfast Beverage In-house Walk In Total Breakfast Lunch Food In-house Walk In Lunch Beverage In-house Walk In Total Lunch Dinner Food In-house Walk In Dinner Beverage In-house Walk In Total Diner Total Revenues

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F&B Departmental Budget Schedule

F&B Profit/Loss Schedule
January Previous Restaurant 1 Revenues Breakfast Lunch Dinner Total Revenues Cost of sales Breakfast Lunch Dinner Total Cost of Sales Departmental Expenses Computers & computer supplies China/glass Cleaning Material Amenities Flowers & decoration Customer supplies Room supplies Laundry Linen Printed materials and office supplies Total Departmental Expenses Payroll and related expenses Salaries Employee Insurance Employee Transportation Employee Meals Total payroll & related expenses Total department expenses Department Profit / Loss Year % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income

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Support department budget schedule:

Support Department Budget Schedule
January Previous Maintenance department Year Departmental Expenses Computers & computer supplies China/glass Cleaning Material Amenities Flowers & decoration Customer supplies Room supplies Laundry Linen Printed materials and office supplies Total Departmental Expenses Payroll and related expenses Salaries Employee Insurance Employee Transportation Employee Meals Total payroll & related expenses Total department expenses Department Loss % Budget Actual A/B YT D % of YTD YTD % Total Budget Actual A/B Income

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Relation between departmental budget schedule and cost drivers

Budgeted Unit Cost $1.00 $0.50 $0.50 $1.00 $2.00 $0.50 $2.00 $1.00 $0.20 $0.30 Payroll Payroll $20.00 $50.00

Housekeeping department Departmental Expenses Computers & computer supplies

# of rooms sold # of rooms China/glass sold Cleaning Material # of guests Amenities # of guests # of rooms Flowers & decoration sold Customer supplies # of guests # of rooms Room supplies sold Laundry # of guests Linen # of guests # of rooms Printed materials and office supplies sold Total Departmental Expenses Payroll and related expenses Salaries Payroll Employee Insurance Payroll Employee Transportation # of Emp. Employee Meals # of Emp. Total payroll & related expenses Total department expenses

Budgeting Mechanics:
Budgeting process for hotels begin with identifying market segments. Sales and marketing department segments the target market and clientele of the property regarding to various segment parameters. A good example for such customer segmentation would be as follows: Parameter 1 Reservation source Parameter 2 Price category Parameter 3 Room type After identifying parameters, options for each parameter should be identified. An example set of options for above parameters are as follows: Parameter 1 Reservation source Option 1,1 - Local Travel Agency Option 1,2 - International Travel Agency Option 1,3 Internet, GRS(Global reservation systems)

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Cost Driver

Parameter 2 Price Category Option 2,1 Rack Rate Option 2,2 Corporate Rate Option 2,3 - CIR 1 (Confidential Internal Rate - x% discount from Rack Rate) Option 2,4 - CIR 2 (Confidential Internal Rate y% discount from Rack Rate) Parameter 3 Room Type Option 3,1 Single Room Option 3,2 Double Room Option 3,3 Suite Market segmentation is found by multiplexing parameter options. For the particular example given above, market is divided into 36 segments which can be found by multiplication of number of options for each parameter (3x4x3). Market segmentation can be shown with the following graphic. Parameter 2 Price Category Option 2,1 Rack Rate Option 2,2 Corporate Rate Option 2,3 - CIR 1 Option 2,4 - CIR 2

Parameter 1 Reservation Source Option 1,1 - Local Travel Agency Option 1,2 - International Travel Agency Option 1,3 Internet,

Parameter 3 Room Type Option 3,1 Single Room Option 3,2 Double Room Option 3,3 Suite The list of the market segment would be: Local Travel Agency / Rack Rate / Single Room Local Travel Agency / Rack Rate / Double Room Local Travel Agency / Rack Rate / Suite Local Travel Agency / Corporate Rate / Single Room Local Travel Agency / Corporate Rate / Double Room Local Travel Agency / Corporate Rate / Suite . . .. The list will have 36 segments constructed as above. Accounting department distributes corporate base information to be used in budgeting process by other department managers. This information includes changes in outsourcing contracts, sales costs of previous year, insurance costs, price indexes, level based salary and related expenses gathered from HR department, base inflation rate that would be used in estimation rate, currency exchange rate estimations for budget period etc

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Following these processes, departments enter sales estimation in to their sales budgets. Following sales estimations and figures, price information for the products such as room rates, F&B average spending, laundry average spending per person etc. will be entered in to the budget schedules. Some departments or some revenue/cost items of some department budgets are directly related with sales budget of rooms department since demand for these revenue/cost centers products or services is a percentage of number of rooms sold or number of hotel guests. After Room department completes sales budget other departments will be able to complete departmental budgets. After completing departmental budgets accounting department will collect and merge department budgets and top pages and overall figures for property will be established. Property executive summary and department profitability analysis schedules will be put together based on departmental budgets by accounting department. Approval process is an ongoing tack during budgeting process. Final budget will be approved by general manager of the property. After approval, accounting department will publish and distribute approved budget to department managers and to necessary parties. For multi-property companies, approved property budgets will be merged by accounting department based in head quarters of the corporate.

Tips for a successful budget:

Budget schedules should include comparisons and related important information columns such as Previous year, Plan, Actual, Actual/Planned ratio, Year to date plan, Year to date actual, Year to date Actual/Planned ratio, related cost driver, budgeted activity level, actual activity level, etc.

What else should be there?

A General Manager report should be included in the budget. General Manager Report should include additional information besides financial figures such as competitive environment, economic and political issues, modifications and restorations planned in the property, unusual items, personnel, new outlets, prices, equity changes, cash flow, etc

Critical factors for a successful hotel budget:

Correlating information:
Activity level of the hotel should be correlated within departments to determine revenue and expense figures. To achieve this objective revenue and expense items in department budget schedule should be related with number of rooms sold and number of guests. This correlation can be built stronger if market segmentation is applied by all departments in a hotel. For example if revenue of the a restaurant can be formulized as multiplication of average spending per person in breakfast and number of guests in each customer segment, then accuracy of the budget will be increased substantially. Unless an efficient budgeting software is being used at a property, such accuracy in budgeting and controlling process would be costly and unnecessary to apply. Page 17 / 22

However, regardless of the technology being used for budgeting, overall hotel activity should be reflected on department budgets schedules.

Understandable and comparable expression (ratios):

A successful budget should include ratios, percentages and other understandable expressions other than raw numbers for better decision making.

Framework to set up successful budgeting system:

Framework given below would help to establish a successful budgeting system in a hotel from the scratch or transforming existing ineffective budgeting system in to a successful one.

System Analysis & Consultancy: This stage can be done by internal sources of the company such as a special task team which includes accounting, sales& marketing, F&B and other managers of the property. Outside help and consultancy can be used as well. This step involves with evaluation of the accounting system and revenue/expense generating business units of the hotel and rendering transformation of the current system into responsibility accounting system.Re-construction of revenue/expense centers may be required. This step also identifies determination and planning of operational steps, which include application methods, time schedules and document flows. Management Training involves with the use of revenue/expense centers and responsibility accounting by the management. Workshops to demonstrate operational task flows such as defining unit cost for variable expenses by analyzing past data, sales estimation and data entries in to budgeting sheets or system would be necessary. Management training should include the basics of budgeting & financial analysis about how to identify appropriate cost drivers and unit costs for departmental expenses and to analyze financial reports. Application of the right technology and tools for budgeting: A hotel budget can be put together by using spreadsheet applications such as Microsoft Excel but for a larger scale property with many outlets or for hotel chains, deployment of special budgeting software can be necessary to minimize budgeting time and maximize efficiency of the whole budget system.

Tools being used in budgeting process and necessary IT infrastructure for large scale properties:
Spreadsheets can be used for small sized hotels with cross-sheet formulations and macros. For large scale hotels with more than 200 rooms in general or for hotel chains specific

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software for budgeting should be implemented. Budgeting software should be integrated with POS system and should be able to perform real time budget comparisons and reporting. E-Profit Management developed by Servus International Hotel Development and Management is a good example of hotel budgeting technologies. Such a technology would reduce budgeting period from 2 months to 2 weeks for large properties and hotel chains with increased efficiency of the budget system. The software works on a database in which all revenue, expense and activity items are stored. Budget information is stored in the database as separate revenue, cost and other items and an average large scale 5 star hotel with 200 rooms will have ten thousands of information items in its budget.

The software is capable of correlating information on the database by a formulating screen.

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After items formulated and budgeting template is formed, managers can simply enter necessary budget data and estimation by using entry screens which they are authorized by a security system.

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The software has a flexible reporting environment to get budget reports where reports can be extracted to spreadsheet software for further analysis.

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Resources:
Principles of Uniform System of Accounts for Lodging Industry New York City Hotel Association Servus Hotel Development and Management (http://www.servushotel.com)

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