BUDGETING

Prepared by:-

SUJAY

What is a budget?

Budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending.

• 1. They are plans for 1 to 10 years for all of the business units.

• 2. Estimates are compared to actual as a means of evaluating performance.

• 3. Budget variances are often used as a means of punishing and rewarding behavior.

• 4. Budgets are updated to reflect outcomes

Budgeting Process

Preparation of departmental budgets

Changes made by departmental heads

if required

Goes to board Of

directors and senior

management for approval

Reviewed by reviewing committee

Coordination of departmental budget into a comprehensive

operations budget

Control and review of budget

• It is the process of determining various budgeted figures of the hotel and comparing them with the actual performance for calculating the variance.

• This enables the management to find out discrepancies and take necessary actions.

Objectives of budgetary control

• To ensure perfect planning for future by setting up various budgets.

• To increase revenue.• To reduce cost• To have proper coordination among various

departments.• To maximize profits• To maximize capital investments• To operate departments with efficiency and

economy.• To anticipate expenditure for future.

• Elimination of waste and increase in profitability.

• Fixation of reponsibility.

Essentials for a good budget

• Qualified and experienced staff

• Perfect future estimates

• Participation of all departments

Budget manual

• A budget manual is a document which spells out the duties and responsibilities of various executives concerned with the budget.

• It covers the following matters:-

• The duties and responsibilities of various people dealing with the preparation of budget.

• Information about sanctioning authorities

• A specimen form and no. of copies to be made.

• Name of the budget centre

• The length of various budget periods.

• The type of budget.

Advantages

• Maximization of profits

• Coordination

• Specific aims

• Tool for measuring performance

• Determining weakness

• Corrective actions

• Cost reduction

Limitations

• Uncertain future

• Budgeting revision is required

• Budgets may be too easy to achieve

• Non achievable budgets discourage the staff

• Needs a lot of time.

Types of budget

Length of time

Long term budget5 to 10 years

Medium term budgets 2 to 5 years

Short term1 to 2 years

Current budgetsDaily or weekly

Flexibility

Fixed Flexible

• Capital budget

It is the budget of a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.

• Revenue budget

This is the budget for revenue expenditure or expenditure not meant for creating assets. It covers salaries of staff and other expenses which are incurred to create sales.

• Operational budget

Detailed projection of all estimated income and expenses based on forecasted sales during a given period (usually one year). It generally consists of several sub-budgets, most important one being the sales budget which is prepared first. Since an operating budget is a short term budget, capital outlays are excluded because they are long-term costs.

• Incremental Budgeting:  this method is widely used in the hospitality industry and generally entails budgeting revenues and expenses based on the prior period adjusting for inflation by a percentage

Zero Budget

• Zero based budgeting derives from the idea that such budgets are developed from a zero base; that is, at the beginning of the budget process, all budget accounts have a value of ZERO.

• The goal of preparing a zero base budget is to achieve an optimal allocation of resources that incremental and other budgeting methods are less likely to present.

• Zero Based Budgeting forces managers to justify their work by saying to them that unless and until they put forward a budget that more senior management can support, at least to a large extent; then the budget will not be approved.

• If Zero Based Budgeting is applied as literally as it is designed, then unjustified work and expenses would simply stop. 

• It combines planning and budgeting into a single process .

• It identifies and eliminates wastage and obsolete operations

Limitations of zero budget

• .Difficult to administer and communicate the budgeting process because more managers are involved in the process.

• It is very time-consuming if justification sheets are done.

• Forced to justify every detail related to expenditure.

• Necessary to train managers on the concept. Zero Based Budgeting should be clearly understood by managers at various levels otherwise it cannot be successfully implemented.

• Difficult to administer and communicate the budgeting process because more managers are involved in the process.