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According to hotel management consultant
Kirby Payne, ‘Managing expenses is among
the most important things a manager does.
(I never say it is the most important because
everyone knows, nothing happens until
somebody sells something. But, it is close!)
The most central elements of effective
expense management are proactive rather
than reactive.
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Budgets are route maps for a business to reach its destination. A
budget is not of much use unless it is monitored and used as a
means of control. A budget should be realistic and should take
into consideration all possible variables. If prepared accurately, it
is an excellent diagnostic tool for management. Budgets and
control go hand in hand: one is not effective without the other.
Controls involve:
checking actual income and expenditure at regular intervals
including financial commitments in all appropriate
documentation to ensure accurate monitoring
identifying and reporting deviations, and the significance of
deviations, according to enterprise policy
investigating appropriate options for more effective management
of deviations
advising appropriate personnel of budget status in relation to
targets within agreed time frames.
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A budget is a statement that a business
prepares. It provides anticipated figures for a
certain level of activity. A budget may be used
for predicting future or expected
performance. For example, a Sales Budget
illustrates the anticipated quantity of unit
sales (level of activity) and the amount of
revenue the business expects to earn from
these sales.
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A budget may also be used to make
comparisons between actual and anticipated
performance. When the time period the
budget has been prepared for has elapsed,
the
business will find it useful to compare the
budget estimates with the results actually
achieved in this period. This will indicate if
the business has performed as expected
and/or if the budget needs to be revised.
Budgets generally relate to a
maximum period of 12 months and
may also be prepared for 1 month, 3
months and/or for 6 months. These
budgets can help to achieve shortterm goals and in the long run, help
the business achieve its long-term
goals.
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A budget is a forecast in monetary or quantitative
terms, and budgeting is the term used for the
process of forecasting. A budget translates
management policies and goals into measurable
outcomes.
Strategic plans outline the long-term goals of an
organisation and provide direction.
Various other plans stem from the strategic plan,
but it is the budget that breathes life into the
strategic plan. Budgets give a sense of tangibility
to a strategic direction. They allocate limited
resources to achieve optimum results in
quantifiable terms.
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All plans cost money, either directly or indirectly,
while the ultimate goal of a business is to make a
profit. Even in non-profit organisations costs need to
be recovered in order to remain in operation.
The process of planning, allocating resources and
identifying measurable outcomes is called budgeting.
Hospitality budgeting requires a good understanding
of the hospitality industry and the various sectors
within the industry as well as of external factors
which impact upon the hospitality business, such as
economic conditions, future trends, competition and
cost structures. Budgets allow for the monitoring of
deviations, as mentioned above, and for management
to initiate corrective action if necessary. This involves
variance analysis of both actual results and
forecasted figures.
Budgets provide organised estimates of
revenue, expenditure, staffing levels and
equipment needs, with departmental
breakdown for different time periods. They
can be used as a communication tool by
management to express long- and shortterm objectives and to ensure
responsibility and accountability. Budgets
can also serve as a means of control.
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Budgets are prepared for many reasons and there are
many benefits associated with their use. Budgets are
important as they help in the decision-making process
faced by every organisation. It is important to remember
that short-term and long-term goals and objectives of the
organisation are going to drive the decisions made.
Effective use of budgeting can help an organisation make
more informed decisions that allow for the most effective
and efficient use of the organisation’s resources.
Budgets also assist in the planning, coordination and
control elements of an organisation. Planning allows the
organisation to consider future goals and expectations and
to use budgets to reflect how future goals may be met.
If budgeting is to be effective, coordination between
departments and divisions within the business needs to
take place.
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It is not enough to create budgets. Control is
required to ensure that budgets are being met.
Comparisons need to be made between budgeted
results and actual results to
determine if budgeted results are being achieved.
This comparison is summarised in the form of
performance reports.
Performance reports may help management when
devising future budgets and when making decisions
to enable the attainment of organisational goals and
objectives.
Analysing budgeted and actual results can illustrate if
the business is performing as expected and/or if the
budgets devised are realistic and attainable.
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Setting targets for anticipated performance. These are
illustrated in the form of budgets. They can be prepared as
fixed/static budgets or flexible budgets.
Identify actual performance.
Compare anticipated performance with actual
performance. This is shown in the form of a performance
report.
Determine the variance between actual performance and
anticipated performance.
Determine the reasons for any variances.
Take action to correct the variances. This may involve reassessing future budgets or re-assessing the operations of
the business or particular divisions or departments within
the business.
Information sources for budget preparation may include:
 performance data from previous periods;
 financial proposals from key stakeholders;
 financial information from suppliers, particularly pricing;
 customer and supplier research;
 competitor research:
 industry trends;
 planned local events or issues which may have an impact
on the budget;
 management policies and procedures;
 enterprise budget preparation guidelines;
 declared commitments in given areas of operation; and
 grant funding guidelines or limitations.
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allows for evaluation of business decisions
sets targets in quantifiable terms
provides benchmarks
is a good means of communication
serves as a summary sheet for a large amount
of information
allows for controls and checks at various
intervals
ensures accountability by managers and
departments.