SITXFIN004A (S6523) Manage Finances within Budgets SITXFIN005A (S6524) Prepare & Monitor Budgets  

Budgeting 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.

A budget is a financial plan with measurable outcomes. 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.

What is a budget? 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.

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 short-term goals and in the long run, help the business achieve its long-term goals.

WHAT IS BUDGETING? 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.

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 short-term objectives and to ensure responsibility and accountability. Budgets can also serve as a means of control.

Why are budgets prepared? 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.

It is not enough to create budgets 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.

Important steps for an effective system of budgetary control 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 re- assessing future budgets or re-assessing the operations of the business or particular divisions or departments within the business.

Budgets can only work if controls are in place and formulated with careful consideration. 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.  

In summary, budgeting: 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.