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Simple steps to Budgets
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04/12/23 Meyer Armand Salamon 1
BudgetingBudgeting
Budgets: financial statements that are prepared and approved prior to a defined period in accordance with the objectives and policies to be pursued in that period
Important management technique
Tool to help both planning and control
Determine the aims and objectives and how those objectives will reached
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PurposesPurposes
Planning for future activities
Combine ideas of different units
Coordinate the efforts of different units- coordinated management policy
Develop appropriate yardsticks to measure performance
Provide a method of control so that actual results can be evaluated against plans
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Types of BudgetsTypes of Budgets
Long term vs. short term budgets
Capital budget
Operating budget
Department budget
Fixed vs.flexible budgets
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Advantages and DisadvantagesAdvantages and Disadvantages
Give business a direction
Forces management to think ahead
Provide basis to measure performance
Encourage communication and coordination
Time consuming
Costly
Unpredictability of the future
Reveal confidential information
Tendency of “spending to the budget”
May create conflicts
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Budgeting FrameworkBudgeting Framework
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Determine targets
System of budgetaryControl to achieve targets
Operating BudgetsCapital Budgets
Budget Commitee
Draft Budget for Approval
Room OperationsF&B Operations
Minor Dept.sUndist. Expenses
Cash BudgetFixed Assets Bud.Debtor-CreditorCapital Funds
Budgeted I+SBudgeted B+S
Budget PreparationBudget Preparation
Bottom-up approach
Involve department heads at least
Budget committee for coordination
Formal presentation by the accounting department
Approval by the general manager and then by board of directors
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Budget CycleBudget Cycle
Establish goals and objectives
Planning to achieve these goals and objectives
Comparing actual results with the plans and analyzing differences (variances)
Take corrective action if required
Improve the effectiveness of budgeting
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Departmental BudgetsDepartmental Budgets Starting point
Most important and most difficult to prepare
Form the budgeted income statement
Estimate revenue levels by depatment
Deduct estimated direct operating expenses
Combine estimated departmental incomes
Deduct estimated undistributed expenses
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Rooms Revenue Rooms Revenue
June July AugustNumber of Rooms 30 30 30Average room rate 45 49,5 49,5Occupancy 75% 80% 90%Daily revenue $1.013 $1.188 $1.337Monthly Revenue $30.375 $36.828 $41.432
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Budgeted Rooms Revenue – PR Budgeted Rooms Revenue – PR 9.19.1
June July AugustRooms 30 30 30ARR 90 99 99Occupancy 75% 80% 90%Budgeted Rooms Revenue 60.750 73.656 82.863
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PR 9.2 – Annual BudgetPR 9.3 Budgeted F&B Revenue
PR 9.4 – Budgeted Sales RevenueFor Coffee Shop
PR 9.6 Budgeted Food Revenue
Flexible Budget – PR 9.5Flexible Budget – PR 9.5Revenue 800.000 900.000 1.000.000Food Cost 320.000 360.000 400.000Variable Labor Exp. 200.000 225.000 250.000Other Variable 96.000 108.000 120.000Total Variable 616.000 693.000 770.000Gross Margin 184.000 207.000 230.000Fixed Labor Cost 60.000 60.000 60.000Other Fixed Costs 120.000 120.000 120.000Total Fixed Costs 180.000 180.000 180.000Income Before Tax 4.000 27.000 50.000Tax 1.200 8.100 15.000Net Income 2.800 18.900 35.000
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Budgeting in a New OperationBudgeting in a New Operation Feasibility study could serve as a base
Forecasts based on a combination variables
Meal period revenue
Number of seats
Seat turnover
Average check
Days open in the month
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Variance AnalysisVariance Analysis
Comparison of budget and actual Dolar and percentage variances
over budgeted figure Dolar or percentage variance
investigated depending on the size and nature of establishment
Only variances exceeding the allowance will be investigated
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Variance AnalysisVariance Analysis
Analyze differences for each revenue and expense item
Total variance consists of: Price variance:
(Difference in price) * Actual quantity
Quantity variance (Difference in quantity) * Budgeted
price
Classified as favorable and unfavorablevariances
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ForecastingForecasting
Two common techniques
Moving averages
Regression
Regression depends on causal relationships
Y = a + bX
Number of restaurant meals = Meal to non-hotel customers + b (Number of guest nights)
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