Unit codes d1 hfi cl8 05 d1 hfa cl7 07 d2 trm cl9 18
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Unit Codes: D1.HFI.CL8.05 D1.HFA.CL7.07 D2.TRM.CL9.18. PREPARE AND MONITOR BUDGETS. Introduction. Prepare and Monitor Budgets: Classroom schedule Trainer contact details Resources you will need: Calculator Pen and Paper Assessments. Introduction. Ice breaker: What is your name?

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PREPARE AND MONITOR BUDGETS

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Unit codes d1 hfi cl8 05 d1 hfa cl7 07 d2 trm cl9 18

Unit Codes: D1.HFI.CL8.05 D1.HFA.CL7.07D2.TRM.CL9.18

PREPARE AND MONITOR BUDGETS


Introduction

Introduction

Prepare and Monitor Budgets:

  • Classroom schedule

  • Trainer contact details

  • Resources you will need:

  • Calculator

  • Pen and Paper

  • Assessments.


Introduction1

Introduction

Ice breaker:

  • What is your name?

  • Where do you live?

  • Why are you doing this course?

  • Do you work in the Hospitality or Tourism industry or why do you want to work in either of these industries?


Why budget

Why budget?

  • Plan and monitor the flow of money through the business

  • Evaluate performance of the business

  • Seasonal fluctuations – this is particularly important for Hospitality and Tourism businesses

  • Encourage future planning.

    60% of new businesses do not survive more than five years and 90% do not survive more than ten years.


Why budget1

Why budget?

The downside to budgeting:

  • Expertise

  • Time

  • Cost of obtaining good quality information

  • Only a forecast or estimate.


What is a budget

What is a budget?

  • Your thoughts first?

    One definition:

    Financial document that details an estimate or forecast of revenue and expenses for a specified period of time (usually up to one year) in the future

  • Revenue – money flowing into the business

  • Expenses – money flowing out of the business.


Activity

Activity

Correctly identify the following as Revenue or Expense items for the business:


Activity1

Activity

Correctly identify the following as Revenue or Expense items for the business:


Types of budgets

Types of budgets

  • Smaller business – one budget

  • Larger businesses may budget a number of different ways

  • By department

    • Accommodation, Restaurant, Domestic sales

  • By activity

    • Profit centres - Income produced and expenses incurred

    • Cost centres - Expenses incurred only.


Types of budgets1

Types of budgets

  • By individual revenue or expenses

  • Labour, supplies

  • Summary budgets

  • Sales budget

  • Advertising budget

  • Cash budget.


Activity profit and cost centres

Activity – Profit and Cost centres


The budgeting process

The budgeting process

Budgeting Process


The budgeting process1

The budgeting process

Where do you begin?

  • Almost everything that happens in a business is determined by the level of sales activity

  • The first budget to be prepared is the sales budget

  • One or more revenue items are identified and calculated

  • May be a separate budget in a large organisation.


The budgeting process2

The budgeting process

  • Other Summary Budgets


Sources of data

Sources of data

Information is researched and collected

  • Internal sources of data:

  • Information gathered from within the organisation or business

  • Advantages

    • Readily available

    • Assistance to interpret the information can come from within the business

    • Cost effective

  • Disadvantages

    • Based on past rather than future activities .


Sources of data1

Sources of data

Examples of internal sources of data

  • Policies and procedures

  • Financial commitments already made for the budgeted period

  • Previous periods revenue and expenses

  • Marketing plans

  • Planned promotions

  • Details of planned changes to products sold or services offered.

    Can you think of other information?


Sources of data2

Sources of data

  • External sources of data:

  • Information gathered from outside the organisation or business

  • Is it reliable?

  • Is it relevant to the budgeted period?

  • Disadvantages

    • Time and cost outweigh the benefits

    • Difficult to find.


Sources of data3

Sources of data

Examples of external sources of data:

  • Commercially available customer research

  • Statistics on economic performance

  • Direct observation of competitors

  • Conversations with suppliers of goods or services to the business

  • Business associations aligned with the ASEAN community

    Can you think of other information?


Sources of information

Sources of information

Analysis and review of data:

  • Quality in means quality out!

  • Time

  • Communication with stakeholders

  • Changing internal and external issues.


Sources of information1

Sources of information

An example:

  • Estimating sales

  • Combine internal and external sales data

  • Will price increase or decrease?

  • Will volume of sales change?

  • Is the timing of sales going to change?

  • Calculations.


Budgeting strategies

Budgeting strategies

  • Smaller business – less people, less conflicts and opinions to manage

  • Larger organisation:

  • Different opinions

  • Competing demands between departments

  • Two strategies:

  • Top down approach

  • Bottom up approach.


Budgeting strategies1

Budgeting strategies

  • Top down approach

  • Direction given from owners and senior managers without consultation

  • Minimal stakeholder input and communication

  • Time and expertise.


Budgeting strategies2

Budgeting strategies

  • Bottom up approach

    • An example

      (Continued)


The budget committee

The budget committee

Most common example of a bottom up approach:

  • Budget objectives discussed and set

  • Data reviewed and analysed

  • Conflicts resolved

  • Communication

  • Circulation of information.

Budget Committee


Activity2

Activity


The draft budget

The draft budget


The draft budget1

The draft budget

Policies and guidelines:

  • Enterprise policy

  • Details the budget process

  • Budget manual

  • Timelines

  • Templates and forms

  • Notes

  • Checklists

    (Continued)


The draft budget2

The draft budget

Policies and guidelines:

  • Methodology

  • Incremental budgeting

  • Zero based budgeting

  • Rolling budgets

  • Flexible budgets.


The draft budget3

The draft budget

Estimate revenue and expenses:

  • Budget objectives set

  • Data reviewed for:

    • Validity

    • Reliability

    • Relevance

      (Continued)


The draft budget4

The draft budget

Estimate revenue and expenses:

  • Budgeted sales calculated

    • Overall sales target

    • Previous sales data

    • Price changes

    • Volume changes

      (Continued)


The draft budget5

The draft budget

Budgeted sales:

  • An example:

Number of tours x number of clients x price per client = Sales budget


The draft budget6

The draft budget

Budgeted sales

  • An example:

28

20

100

56,000

Number of tours x number of clients x price per client = Sales budget


The draft budget7

The draft budget

Budgeted sales:

  • An example:

25

20

100

110

55,000

Number of tours x number of clients x price per client = Sales budget


The draft budget8

The draft budget

Budgeted sales:

  • An example:

24

20

100

110

52,800

Number of tours x number of clients x price per client = Sales budget


The draft budget9

The draft budget

Estimate revenue and expenses:

  • Budgeted expenses calculated

    • Previous period expenses

    • Revised financial commitments

    • Expenses which need to be changed

    • New expenses

      (Continued)


The draft budget10

The draft budget

Budgeted expenses:

  • An example – Sales budget value of 56,000

16,800

16,800

16,800

11,000

11,000

560

28,360

Sales x expense % = Total expense


The draft budget11

The draft budget

  • Consultation

    • Budget committee

    • Recommendations

    • Negotiation and co-operation

  • Circulation

  • Activity centre managers responsibility

  • Timely.


The draft budget12

The draft budget

Finalise the draft budget:

  • Final discussions, review and analysis

  • Timely

  • Correct templates and forms

  • Master budgets created

  • The final budget

  • Circulated and discussed as required

  • Master budgets distributed.


The final budget

The final budget

  • An example:

Sales minus expenses = Total profit or income


Monitor and review budget

Monitor and review budget

  • Regular review

  • No point setting a budget unless it is used

  • Comparing actual results to budget is one of the greatest advantages of the budget cycle

  • Enables corrective action to be taken

  • Accurate calculations

  • Variances

  • Difference between actual performance and budgeted outcomes

    (Continued)


Variance analysis

Variance analysis

Variances are:

  • Expressed as monetary units, percentages or sales volume

  • Favourable – beneficial, positive

  • Unfavourable – need investigation

  • Evaluated according to the effect on profit.


Variance analysis1

Variance analysis

2 main calculations:

  • Horizontal analysis

  • Actual results and budgeted numbers for EACH line item in financial data is compared

  • Actual minus budget = Variance in monetary unit

  • Variance divided by budget x 100 = Variance percent.


Variance analysis2

Variance analysis

2 main calculations:

  • Vertical analysis

  • EACH line item calculated as a percentage of sales

  • Line item divided by sales x 100 = Variance

  • Budget and actual reports are calculated separately.


Investigating variances

Investigating variances

Should we investigate every variance?

  • Time and resource constraints

  • Some variances are easily explained

  • Management by exception

  • Tolerance limits

  • Only variances above the tolerance limits are investigated

  • Benchmarking

  • Questionnaire or checklist

  • Class activity: Discuss some questions that this document may ask. Focus particularly on those areas important to the Hospitality and Tourism Industry.


Investigating variances1

Investigating variances

Management of significant deviations

  • Changes to the internal or external environment outside the control of the business

    • Revise budget

  • Changes that are within the control of the organisation

  • Identify cause

  • Investigate reason

  • Implement remedy or change.


Further analysis

Further analysis

Trends and Patterns:

  • Consistent over time

  • Indicate a change in internal or external environment

  • Investigation to identify cause

  • Revise budget or action to remedy

    (Continued)


Further analysis1

Further analysis

Changes to the internal environment:

  • Upselling sales

  • Additional tours added to travel packages by sales staff

  • Room service packages offered on arrival

  • Loss of key staff

  • Unplanned financial commitment.


Further analysis2

Further analysis

Changes to the external environment:

  • Economic changes

  • Competitor leaves or enters the market

  • Changing laws

  • Natural disasters.


Preparing for the future

Preparing for the future…

Continuous improvement to the budget process

  • Sources of data

  • Budget calculations

  • Negotiated agreements

  • Analysis of variances and remedies.

    Feedback into the budget manual ready for the next budget period


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