SITXFIN004 Prepare and

monitor budgets
1. INTRODUCTION

STAFF INTRODUCTION

FINANCIAL CONTROLLER
Budget time is just frantic around here, I’ve
got reports coming out of my ears! I need to get all of
the figures together, for each department, by the end of
today.

The GM said he needs them tonight as he is travelling to

head office tomorrow, so there is no way I can delay.
Now he’s just asked me about the “what if”
scenarios and they had not been on my list, so I really
need to get a move on. Just as well Sally had already
updated all of the actual information for this year so I
can focus on the projected impacts from all of the cost
centres.

So if you could come back on Thursday instead I’d

appreciate it!

FRONT DESK MANAGER

I’d better get together with housekeeping to
check on the mini bar takings for last month.
The new brochure for the Happy Hour worked a
treat and we found that people drank more
bottled water once they went back to their
rooms. I really think the budget targets are
looking almost too easy!

Sam, the new marketing employee, has really

got some great ideas; she has just shown me the
new leaflet that she has done for the local beer
in the rooms. The brewery is stoked as quite a
few people have done the tour and it really
helps their brand.

1
CTI_SITXFIN004_ Learner Guide VI.2020
STORES MANAGER
Ed just gave me his returns for the big winemaker’s dinner and we found out that the
extra 20 people really came in handy. It brought
the food cost down by another 1.8%. There was
some surplus product, so now he is creating a few
specials to use it up. He is really switched on when
it comes to managing his budget and I must admit
the food is not half bad either!

Then again, without a brilliant and modest stores

person like me, he would only be half as good. The
deal that I got for him with the local asparagus
grower saves us a ton and the product is
outstanding.

I wonder whether the bar has finished with

their stocktake as yet?

EXECUTIVE CHEF
The new winemaker’s dinner was an absolute
success. Peter Howard did a fantastic job
showcasing the wines and some of the pairings were
simply awesome. We had budgeted for a revenue of
$12,000 which we exceeded as an extra group of
twenty turned up.

Now I just need to calculate our actual costs and

there are still a few things in the cool room to be
checked. Monitoring what goes on after an event
like this is really important so any mistakes can be
adjusted before the next big do!

Just as well stores has all of the prices added up for

yesterdays food already.

See you later then!

2
CTI_SITXFIN004_ Learner Guide VI.2020
RESTAURANT MANAGER
Hi, I am really busy today as I have to get the
budget done for the new wintergarden. I’ve really
had to get my head around the budgeting
process since I started working here. In my old job
we just ran the business and then got the figures
from the accountant. When I think back, I realise
that this had quite a few implications:

• We never knew how we travelled financially

• The boss just took money from the till and then
held off paying suppliers
• One guy pinched whisky from the stores. He was
eventually caught, but nobody knew how long he
did it for
• Eventually the business got sold but the boss
certainly lost money on the sale

Initially, I thought we had a bit of overkill here, but

it feels great when you reach your targets and by monitoring what we do we can always
adjust things straight away, rather than waiting until it is too late. I also find that the
staff prefer clear directions, so they know where they are going. Well, the wintergarden
will be fantastic and the winemaker’s dinners will just blow the customers away.

BAR MANAGER
Sorry if I am a bit distracted, but I am struggling with
the projections for my “happy hour” proposal.
It’s budget time and I’ve told my supervisor about this
great idea we had about these special offers. Lo and
behold now I have to put a report together to work out
how it will work out and maths wasn’t really my strength
at school! I thought I only needed to tell them and they
would do all of the number crunching for me.

I suppose in the end it’s good if I can see how

the financials affect the rest of the business. Simon from
accounts is always helpful and he told me as long as I
draw a bit of a mud map he can put it in a spreadsheet
and it will calculate everything automatically. I normally
only use computers to play games, but I suppose you
never stop learning.

I’d better go to see Simon now!

The success of a business is largely dependent on the management of income and

expenditure levels. Budgets are used to facilitate this management and should be applied in
all types of Hospitality businesses, whether that be a local café, a busy restaurant, a Club or

3
CTI_SITXFIN004_ Learner Guide VI.2020
an international hotel. Building on the information from previous units, now you will learn to
develop and implement a budget, why budgeting is essential and what to do if budgets are
not met.

1A. WHAT IS A BUDGET?

A budget is a financial document which
anticipates the future earnings and
expenditure of a business. It is also known
as a financial plan, forecast or target.
Budgets are used by owners, managers and
other employees as a guide for the future
of the business. It shows how the business
should perform and if these targets are not
achieved, there is a basis against which to
measure the shortfall.

Who compiles the budget depends on the

size and type of Hospitality business
involved. A small business would usually
employ their tax accountant to complete a budget at the same time as s/he completes the
tax return and financial statements. In a medium-to-large Hospitality business, a Budget
Committee would be formed. This would consist of the Financial Controller and General
Manager, plus a representative from every department. The committee would be
responsible for the overall budget preparation and would liaise with staff to prepare the
budget "from the bottom up". The bottom-up approach ensures that all staff are involved
in the preparation of the budget, which means they will work harder to achieve the
budget than they would if it were just handed down by management using a top-down
approach.

Budgets are generally set for a financial year (remember: in Australia this is usually from
1st July to 30th June, but in other parts of the world, including USA and Europe, it is 1st
January to 31st December). The budget is then broken down into monthly periods within
that, with some businesses going into more detail with weekly and/or daily cash budgets.
It is important to note that budgets do not only cover the dollar figures but also cover the
quantities sold and purchased e.g. number of covers and average spend. This information
is just as useful as the actual dollar amount, as it enables greater data analysis and
understanding of the business.

You can imagine that a revenue budget of $1,000,000 and an expenditure budget of
$900,000 would be fairly abstract to the average mind. In order to make the budget
relevant, it is broken down further into revenue and expense categories.

4
CTI_SITXFIN004_ Learner Guide VI.2020
BENEFITS OF BUDGETING

Preparing a budget can be an expensive and time-consuming exercise for a business. It is

important to understand the reasons for budgeting so that you realise it is a necessary
undertaking for businesses of all sizes. Here are some reasons for budgeting:

BUDGETS PROVIDE DIRECTION

Realistic targets are set for the future, without which, management and staff would have
no goals and would lack direction. People work better when they understand what they
are required to do. This means that you must set clear and realistic goals and
requirements.

BUDGETS MOTIVATE STAFF

Providing goals for staff and involving them in setting those goals will motivate staff to
achieve them. The key aspect is the involvement of staff at all levels. If staff are not
involved, the budget can actually demoralise staff and result in poor budget performance.
The manager must at least explain the budget to staff so they can understand the targets
and gain meaning from the process.

BUDGETS COORDINATE BUSINESS ACTIVITIES

Budgets look at the business as a whole and ensure that the activities of every department
are coordinated. It is no use if every department sets their own targets and then the
business overspends because it has forgotten about non-income-producing departments
such as Administration.

BUDGETS HELP EVALUATE BUSINESS PERFORMANCE

Without budgets, managers find it difficult to evaluate the performance of the business.
Evaluation cannot be done using the actual data alone as there is nothing to compare it
to. It also cannot be done by comparing the actual data to historical data. Management
needs to be able to compare it to their expectations of the current time. For example, if
food costs are high the chef would be questioned. Management cannot simply compare the
costs to the same time last year, as there are a number of things which can impact food
costs that may not be relevant now, such as costs of wheat during drought times. By
comparing to budget, management can see that the expenditure is higher than anticipated
and can then look into the reasons why. Are the prices being paid to the supplier too high?
Is there too much wastage occurring due to inefficient storage and/or ordering? Are prices
simply higher due to an uncontrollable external factor? Without budgets, management
would not even start to analyse the situation as they would be unaware there is anything
wrong.

5
CTI_SITXFIN004_ Learner Guide VI.2020
BUDGETS FOR DIFFERENT SIZED BUSINESSES
Every TH&E business will have different
needs in terms of their budgets and the
amount of control they wish to hold over
the running of the business.

In a small business e.g. a café, the

owner will probably work in the business
on a daily basis and be the primary
decision maker regarding expenditure
and income. There would be no separate
departments, only a single budget
prepared by the owner or their
accountant, which shows the Sales
Revenue, Cost of Goods Sold (COGS), Wages, Rent, Electricity, and other components.

It is often difficult for businesses of this size to check their progress against budget
throughout the year. It may be that until the accountant completes the financial
statements and tax return at the end of the year, the owner is unaware of any issues
which may be occurring. Alternatively, they may be aware that there is a shortage of cash
but may not be able to determine why or what to do about the problem. Simple control
measures such as the Quick check Sheet will provide a rough guideline of income and
expenditure on a weekly basis but excel spreadsheets are really only useful as a planning
tool. Programs such as Xero, MYOB and Cashwhiz can assist the small business owner in
keeping accurate, up-to-date information easily and without much accounting knowledge,
for little cost.

In a medium-sized business, such as a busy restaurant or club, a management team would

exist but there would be fewer layers of management than in a large business. An owner
may work in the business, but probably at a management level, rather than at an
operational level. The Budget Committee would prepare the budget in collaboration with
other staff in the business. Budgets will be created annually and monitored continuously.
Software such as Xero, MYOB, Quicken and Turbo Tax would be used to prepare financial
statements.

In a large business such as a hotel, it is likely that the owner does not work at the
establishment or even have much say in the running of the business. A management team
is employed to ensure the smooth running of the business and they are responsible for the
creation and adherence to the budget -however, they do have to answer to the owner if
the budget is not adhered to! Budgets are created annually and checked on a monthly
basis so that any variances are known and can be corrected immediately. Most of these
businesses will use more sophisticated accounting software such as Micros Fidelio to
account for guest room charges, etc.

6
CTI_SITXFIN004_ Learner Guide VI.2020
TYPES OF BUDGETS
Budgets come in many different forms, each of which has a slightly different purpose. The
common purpose among them all is to control the future of the business

MASTER BUDGET
The master budget is the budget for the entire business, including projected cashflow;
profit and loss; and balance sheet budgets. It includes all aspects of the operations and all
departments within the business and is created by the Budget Committee.

CAPITAL EXPENDITURE BUDGETS

This is a special type of budget used to purchase assets. Some examples of when a capital
expenditure budget would be prepared include a refurbishment and purchases of
equipment such as commercial ovens and dishwashers. The items included in this budget
are not expenses of the business; they are assets which will have a lifespan of a number of
years. They will not appear on the Profit and Loss Statement but will affect the Balance
Sheet and Cashflow Statement. The capital expenditure budget must be developed in
conjunction with the Master Budget, as the impact of large amounts of capital expenditure
has a significant effect on the Profit and Loss Budget and Cashflow Budget. This is because
there will be less cash which can be put towards the operating expenses of the business.

PURCHASING BUDGETS
Also known as expense budgets, they show the projected expenditure of the business.

SALES BUDGETS
Also known as a revenue budget, it shows the projected sales either in units sold or
revenue amount. When setting budgets, the revenue budget is the first to be determined.
This is because the expenditure and staff levels of the business must be in line with the
expected revenue.

EVENTS BUDGETS
These budgets are used for single events such as conferences. When quoting a potential
customer for a conference, it is important to ensure that a profit will be made for the
event. The budget would be in the format of a mini Profit and Loss Statement, and include
the revenue broken down into rooms, food and beverage, etc. F&B can be further broken
down into breakfast, lunch and dinner. Staff numbers and wages would need to be
determined based on the number of guests and the type of event being held. An estimate
of the food and beverage costs must also be included. It is important to complete this
budget in consultation with the Food and Beverage Manager and Executive Chef as they
will be aware of staff numbers required and food and beverage costs.

PROJECT BUDGETS
A project budget is just like any other type of budget but is prepared prior to a new
project commencing. It will analyse the costs and benefits of the new project and allow
management to decide whether it is a viable project.

7
CTI_SITXFIN004_ Learner Guide VI.2020
WAGE BUDGETS
Whilst wages will be shown in each departmental budget, there will also be a combined
wages budget which will show the total wages for the business. This is still broken down
into the different departments. This budget enables management to look at each
individual staff member as well as each department and the business as a whole and
determine individual staff performance and future wage rates. It is important to note that
the total wages for the business should sit at around 33% of revenue. It is necessary to
allow for non-income-producing wages in that percentage, so the income-producing
departments’ wages should sit below that figure.

DEPARTMENTAL BUDGETS
Each department within a business will have its own budget. Some departmental budgets
will show revenue and expenditure, e.g. rooms and food and beverage, whereas others do
not produce income so will only have an expenses budget e.g. administration. The budget
for each department will be like a mini Profit and Loss Statement and will show monthly
as well as annual targets, average spend data, number of covers data and will also show
percentages as well as dollar figures.

CASHFLOW BUDGETS
Also known as a cash budget, this is a forecast of the cashflow of the business. The
cashflow statement shows the physical cashflow in and out of the business and is a
separate financial statement from the balance sheet and profit and loss statement. It will
differ from the other financial statements as they record the assets, liabilities, revenue,
expenses and owner’s equity of a business, whereas the cashflow statement will use
information from the transactions and the actual cash impact on the business at that time.
For example, when a customer pays by cash, it has an immediate impact on both the
revenue (increase) and the cashflow (increase). However, if a customer were to charge to
their room, the immediate impact is on the revenue (increase) and the asset Accounts
Receivable (increase). There is no impact on the cashflow until the customer pays their
room account. The cashflow budget takes all of these timing issues into account and
produces a forecast of the bank balance at the end of each month.

FACTORS IMPACTING BUDGETS

There are two groups of factors that impact budgets: internal and external.

INTERNAL
Internal factors are things within the business that will have an effect on the budget,
which can be controlled by management and the owners. They include business
objectives, management restructures, Human Resource requirements, etc.

A management restructure will impact budgets as the new management team may run
things differently than the old team and will have different priorities for expenditure.

Human Resources requirements will impact on budgets as each new staff member required
will add additional expenditure to the budget. This includes not only the wage, but on-
costs such as superannuation and workers compensation insurance as well.

8
CTI_SITXFIN004_ Learner Guide VI.2020
New projects and other business objectives will impact on budgets as funds will need to be
diverted from their usual place to cover the new project. The scope of the project (how
large is the project, which departments it affects) will determine the size of the impact
the project has on the budget. Large projects such as refurbishment of an establishment
will require significant funding at the expense of other areas of the business.

Changes in commodity or service prices can impact on profit ratios. Changes in supplier or
availability of certain items may also impact. Budgets may need to be adjusted based on
the new requirements.

EXTERNAL
External factors are things outside the business, over which the owners and management
have no control. Examples include legislation and regulation changes, economics, market
trends and external venue costs. Other examples that have occurred are strikes where
airlines are grounded and holiday makers simply can't get to their destination. The SARS
epidemic was another instance where visitor numbers were severely affected and
businesses relying on international visitors were unable to control the impact.

Legislation and regulations can change periodically, particularly after the introduction of
a new government. This can be at a local, state or national level. Changes in legislation
can affect the business both operationally and financially. For example, many TH&E
workers are immigrants. If the laws regarding the number of immigrants accepted into the
country change, you may be faced with staffing problems due to the shortage of
hospitality workers in Australia. If WHS Laws change, this will impact every business in
TH&E and the uptake of any changes is not negotiable - WHS must be complied with.

Changes in the global economy may limit travel both domestically and internationally.
This can have a huge impact on turnover for TH&E businesses. When economies tighten,
people are less likely to spend on luxuries, one of which is TH&E. Holidays will no longer
be affordable. Consider the effects of rising petrol prices on both international and
domestic travel. Rising costs of living such as food or fuel costs can often trigger a more
careful spending approach by consumers, which affects the industry.

Market trends will affect the number of customers visiting your establishment and you
may need to change your product offering to move with the trends. This can be observed
in many establishments where menus and offerings are constantly updated and aligned to
trends. Many pubs and clubs are offering better food and entertainment than previously,
to appeal to a wider market and to diversify the business. If your business requires
external venues in order to provide its services, budget will be impacted if there is a
change in either the cost or availability of the venue.

9
CTI_SITXFIN004_ Learner Guide VI.2020
RESEARCHING FOR A BUDGET

Prior to a budget being created, managers must conduct research to ensure that the
outcome of the budget will reflect an accurate portrayal of the business situation. This is
important as the budget will be taken by owners and investors as representing what is
likely to occur in the business over the next 12 months. It must be accurate, reliable and a
true representation of the business. It is impossible to predict what will occur in the
future, but detailed research will enable you to present the best possible prediction.

2A. RESEARCHING

When researching a budget, there are a

number of factors that should be
considered. These include:

• the historical performance of the

business
• competitors' offerings and price levels
• management's view of the future
• departmental views and issues

It is important to allow enough time for

the research phase of the budget. Budget
preparation is often a stressful time in a
business and adequate research will make the process smoother, as it forms the basis of
the budget. Each Department Head within the business should be consulted regarding the
budget for their area.

When consulting other staff members, ensure there is enough time given for them to think
things through, complete the research and formulate their response.

SOURCES OF DATA
The data required to compile a budget can be found in many different areas, both
internally and externally. Commonly used data in budget preparation include the
following:

PERFORMANCE DATA FROM A PREVIOUS PERIOD

This data is taken from the financial statements of previous periods, particularly the Profit
and Loss Statement. Historical data is a very important part of budget research as it shows
exactly what the business has done in the past. There is no ambiguity or subjectivity
involved, the data reflects the history of the business. Many businesses will forecast their
future revenue and expenses based on the historical data plus a percentage margin, as
business owners and managers generally seek to increase their business every year.

FINANCIAL PROPOSALS FROM KEY STAKEHOLDERS

Business owners will have a vision of where they want to take the business, both in the
short term and long term. They must be consulted when researching a

10
CTI_SITXFIN004_ Learner Guide VI.2020
budget to ensure that the budget prepared will reflect their needs and wishes. For
example, they may be planning a refurbishment of the restaurant and the budget needs to
allow for the additional capital expenditure this would involve. Alternatively, they may
require a higher net profit as they are not experiencing a high enough return on
investment, so the budget would need to allow for this.

FINANCIAL INFORMATION FROM SUPPLIERS

Suppliers are contacted by the relevant Department Head to ensure that the expenses
recorded in the budget will reflect current pricing. Further to this, the Department Head
should also conduct an analysis of the costs from a number of suppliers in each area in
order to ensure that the best possible price is obtained for the quality of product
required. It is important to note that suppliers will not always be chosen on price – quality
is an essential factor, particularly in Hospitality, where the raw ingredients have such a
large impact on the quality of the finished product.

CUSTOMER RESEARCH
Research should be conducted on the customers of the business. Who are they? Where do
they come from? What are their needs and wants? It is important for any business to
understand their customers as this will ensure provision of services applicable to the
clientele. There is no point in a luxury hotel which caters for honeymooners and other
adult guests to spend money on having a kids club. Conversely, a family resort would have
a much more casual atmosphere and require suitable facilities. Business customers would
have different needs again, so it is essential to be aware of each type of customers’ needs
and ensure that they are able to be met. In a restaurant, it is important to establish the
type of food the customers wish to eat. In the city, it may be applicable to provide silver
service and hold degustation menus. However, in the suburbs, customers are more likely
to want a relaxed atmosphere with food they are accustomed to.

COMPETITOR RESEARCH
It is essential to conduct research on your competitors. SWOT analyses and other forms of
competitor research are useful for establishing opportunities for your business and also
threats that your business might face. You will need to try to find out what products and
services your competitors are offering, what their pricing strategy is and their future
plans, whenever possible.

MANAGEMENT POLICIES AND PROCEDURES

The running of a business relies on policies and procedures. Budgeting is no different.
There is a procedure and policy for the budget preparation, which

should discuss the process to be followed by management including who is responsible,

who should be involved, what steps must be carried out and what the overall goal is.
Other policies and procedures should also be considered when researching a budget, e.g.
staffing policies will impact on the handling of the wages budget. If your staffing policy
specifies a minimum number of staff per service period, then this will have to be
accounted for. It is advisable to document all of these details and to minute all meetings
to ensure that everybody is clear on the agreed outcomes.

11
CTI_SITXFIN004_ Learner Guide VI.2020
ORGANISATION BUDGET PREPARATION GUIDELINES
Guidelines may exist which specify how the budget should be prepared. These guidelines
will vary between types and sizes of business as well as with the different expectations of
management and owners. Staff should always adhere to the guidelines, policies and
procedures of their workplace, not only in budget preparation but in other aspects of their
job too!

DECLARED COMMITMENTS IN GIVEN AREAS OF OPERATION

Each Department Head should be asked whether there are any commitments already made
which affect their area of operation e.g. whether they have already entered into any
agreements with suppliers. These commitments will need to be taken into account when
preparing the budget as they will limit what else that department can do. Another budget
impact is accumulated annual leave for staff. You should not let your staff accrue large
amounts of annual leave, e.g. 6 months, as this will have a large effect on staff costs at
the time the leave is taken.

GRANT FUNDING GUIDELINES OR LIMITATIONS

Grant funding may be available for your business, depending on the State and Country
your business is located in, as well as the types of business you are running. For example,
a resort that attracts international customers may be able to claim the Export Market
Development Grant offered by the Australian Government Department known as Austrade.
Go to www.austrade.gov.au for more information. Regional development grants may
apply to further employment in specific areas and tourism grants may be accessed through
specialised Commonwealth Grants.

3.

3A. BUDGET PREPARATION PRINCIPLES

When preparing a budget it is important to follow both organisational and accounting

procedures. The budget must include all relevant components, use correct techniques for
estimation and provide supporting documentation. The appropriate software should be
used to ensure accuracy and timeliness in preparation.

When preparing budgets, it is not uncommon for the process to be completed a number of
times, whenever you realise there is an issue. Issues can include:

• net profit too low

• expenditure to revenue ratio too high
• one department is making a profit to the detriment of others

The process is simply to look at each area again and identify the problem. Once the
problem has been identified, the budget is amended to improve the situation. Budgeting is
a balancing act -the revenue must be produced to support the expenditure. However, if,
for example, there is not enough stock on hand because the expenditure was too high, you
may lose customers.

Click on Summary Profit and Loss Projection for information

12
CTI_SITXFIN004_ Learner Guide VI.2020
Master Budget should be broken down into following components:

OPERATING BUDGET
Operating Budget sets the revenue, expenditure and profit targets. The operating budget
is made up of:

• Sales or Revenue Budget – this budget is usually prepared first as all

expenditure depends on the level of revenue produced.
• Purchases and Cost Of Goods Sold (COGS) budgets – the purchases and
cost of goods sold budgets are prepared next as they are linked to the stock-on-
hand or inventory of the business, which is directly required in order to reach the
budgeted revenue figure.
• Wages Budget – covers both wages and employment costs, including
superannuation, payroll tax (if applicable), recruitment costs and training. When
preparing wages budgets, it is important to check whether Award wages apply and
allow for any increases as per the Award.
• Operating Expense Budget – prepared after the cost of goods sold and
purchasing budgets. These are the costs of operating the business e.g. rent, bank
fees and stationery.
• Budgeted Profit and Loss Statement – this statement is prepared after all other
operating budgets have been prepared. It is in the format of a Profit and Loss
Statement, but shows the budgeted amount instead of the actual data. When
preparing this statement, you will see the financial impact of the budget – whether
or not a profit will be made at the end of the year!

CAPITAL EXPENDITURE BUDGET (CAPEX)

Capital Expenditure Budget (Capex) provides for purchases of property. Plant and
equipment and other assets required for the long-term running of the business or
expansion of the business. The Capex should identify individual assets, when they are to
be purchased and for how much. Detailed research must be completed prior to setting the
Capex budget to analyse the business needs for the year as well as obtaining prices and
suppliers for the required equipment or other assets. If property is to be purchased,
research should be done into suitable areas as well as what type of property is desired and
how much is to be spent. When budgeting for property purchases, it is essential that you
include all transaction costs, such as stamp duty, solicitors fees and building inspections as
well as the actual purchase price as these fees can be quite significant and may make the
difference as to what you can purchase.

FINANCIAL BUDGET
Financial Budget looks at the cash management of the business and methods of raising
funds. The financial budget is made up of:

Cash Budget (Cashflow statement) – this budget is prepared in order to determine

whether the business has the cash available to cover the expenditure – both capital and
non-capital. It is a prediction of the bank account movements and shows all of the cash

13
CTI_SITXFIN004_ Learner Guide VI.2020
flowing into the bank account as well as the cash flowing out of the bank account. To
create the cash budget, you must anticipate when customers are likely to pay their bills as
well as when you will be required to pay the business’s bills. You must ensure that you
take every purchase into account, including direct debits and direct deposits which may
enter or leave you account without notification. The cash budget will show you the closing
balance of the bank account at the end of each month and whether you are likely to be
short of cash. It is important to ensure that
a master budget produces not only a
profit, but a positive cashflow.

Budgeted Balance Sheet – once the

budgeted profit and loss statement, capital
expenditure budget and cashflow have
been completed, the budgeted balance
sheet can be done. Any new assets and
liabilities or movements in existing assets
and liabilities should be entered for the
correct period. The budgeted net profit
should be added to the owner’s equity.
Note: the budgeted balance
sheet MUST balance! If it does not, an
error has been made or something has not
been included.

BUDGET ESTIMATION TECHNIQUES

A number of techniques are used to estimate data for entry into the budget. It is essential
that any information used to estimate data is reliable and relevant. If unreliable or invalid
information is used, the budget will not be an accurate reflection of the business.

Both the income and expenses need to be estimated prior to the budget being put
together. Every revenue and expense general ledger code must be estimated. The most
common method for estimating revenue and expenditure is to review past period financial
statements and look at how the business has evolved since then. For example, if actual
stationery expenses were $5,680 last financial year, this year's budget should be adjusted
to allow for changes in Consumer Price Index (CPI). Additionally, business needs should be
analysed to see whether a further increase is required. What if there are plans for a large
mail-out to be conducted on a monthly basis? This would significantly increase paper
needs and the budget must reflect this.

Another method, also using past period financial statements, is to estimate the total
revenue and then look at the percentages each revenue and expense code obtained in the
previous year. For example, Hotel Futura may wish to increase total revenue by 10%.
When you look at last year's financial statements, you find that Accommodation Revenue
was 65%, Bar Revenue was 3%, Conferences Revenue was 8%, Mini Bar Revenue was 1%,
Restaurant Revenue was 20% and Room Service Revenue was 3%. This year's revenue
amounts can be calculated by multiplying the new total revenue by each percentage.
Expenses can then be calculated based on their percentage of income. For example, Cost

14
CTI_SITXFIN004_ Learner Guide VI.2020
of Goods Sold may have been 36% of Total Revenue, so the percentage multiplied by the
total revenue will give you the new figure.

Last year’s = $2,150,900

turnover
Expected = 10%
increase in
turnover
Expected = $2,150,900 x 1.1 = $2,365,990
turnover this
year
Accommodation = $2,365,990 x 65% = $1,537,8 93.50
Revenue

Bar Revenue = $2,365,990 x 3% = $70,979.70

Conference = $2,365,990 x 8% = $182,279.20
Revenue

Mini Bar Revenue = $2,365,990 x 1% = $23,659.90

Restaurant = $2,365,990 x 20% = $473,198
Revenue
Room Service = $2,365,990 x 3% = $70,979.70
Revenue
Total Cost of = $2,365,990 x 36%
Goods Sold = $851,756.40

ESTIMATING REVENUE AND EXPENSES

Revenue can be estimated by looking at
the number of customers the
establishment will achieve in each
period. Depending on the type of
Hospitality business, this may include
number of rooms sold, number of covers
in the restaurant for breakfast, lunch and
dinner, number of covers in a
conference, etc. These estimates would
need to take into account seasonal
variations and known events. Historical
data can be used to analyse the
fluctuations and guide your estimates. It
is essential to include all known data so that an accurate picture of the revenue is
provided.

15
CTI_SITXFIN004_ Learner Guide VI.2020
When estimating the expenses, all known financial commitments must be included. It is so
important to ensure everything has been included. Otherwise you will be starting the
process with an inaccurate budget and you will find it difficult to ever obtain results that
are within or on budget. Similarly for revenue, you should include all known and reliable
information or you may go under or over budget and again cause issues. The budget must
be able to be obtained, but it should not be too easily obtainable. You should try and
make the budget as realistic as possible to keep staff motivated and interested in
achieving their budget. If a budget is too difficult to obtain, staff may wonder why they
should even bother. If the budget is too easy to obtain, they may not strive to perform
better.

For any of the methods of budget estimation discussed above, supporting information is
important. As discussed, the budget must be reliable, relevant and realistic. If no
supporting information is used in the estimation, the budget may not be realistic or
achievable. For example, if the cost of pre-mixed spirits have increased due to a change in
legislation and you have not obtained new quotes from the supplier, then your F&B budget
is likely to be too low. No matter what last year's costs were, if the goods required cost
more in this period, you must allow for that in the budget. Supporting information can
include quotes from suppliers, previous financial data, economic data and predictions,
management's plans for the future, etc.

SOFTWARE USED FOR BUDGETING

The most common software used for

budgeting is Microsoft Excel. Many
businesses, from small to large, use this
program to setup simple to complex
spreadsheets with formulae for
calculating any desired totals.

While Excel is a program which most

people have access to and have some
knowledge of, setting up a budget in this
program can be very time-consuming and
also requires fairly detailed knowledge of
how to create formulae.

You then also need to know how to set the spreadsheet up so you can import the actual
data from your accounting software.

Cashflow is the most difficult part of the budgeting process to create in Excel as it
requires you to calculate a number of variables, such as when and how much your
Accounts Receivable will pay, when you will pay your Accounts Payable, when BAS and tax
is due and so on. This involves a large amount of time and effort for the business owner or
Finance Department.

If your business uses MYOB for accounting purposes, you can enter a budget in and then
print reports off on a monthly basis to compare actuals to budget. This is fairly simplistic
and will not provide a cashflow analysis. You would need to prepare that in Excel.

16
CTI_SITXFIN004_ Learner Guide VI.2020
Software which has been designed specifically for budgeting and cashflow is available.
This software allows the business owner or their accountant to set up a master budget
with as many departments or categories as required. Revenue and expenses can be broken
down into details such as breakfast, lunch and dinner, as well as food and beverage. You
can even enter the budget as the number of covers and average spend if you prefer.

OTHER SOFTWARE USED FOR BUDGETING

The sample Hotel Futura file will allow

you to have a look at how a budget can
be set up fairly simply and actual data
imported from your software easily. Once
the file is data is entered into
appropriate software, a large number of
reports can be printed at the click of a
button. The types of reports available
include Profit and Loss Projections,
Cashflow Statements, Sales Budget,
Expenses Budget and Departmental
Reports on an annual or quarterly basis. Financial analysis can be performed at the click of
a button, with many financial ratio reports available. The business owner can drill down to
their desired depth, including finding out the net profit per customer! This software allows
the user to have advanced financial data available at their fingertips and is a low-cost
solution, especially when comparing the hours required for this type of reporting to be
compiled by hand.

Other systems exist, often as an online solution, however these are often quite costly.
Also, as you may not have the data on your server then you rely on being able to access
the internet whenever you want to access your data. It is important to assess the business
needs carefully and then make your decision on which management tool is best for your
enterprise.

3B. PREPARING A DRAFT BUDGET

STEP 1

PREPARING A DRAFT BUDGET

When preparing a budget, once all the data has been collated, a draft budget should be
put together. To do this, the estimates you have made for revenue and expenses should be
entered into the budget using the software available at your place of work.

Make sure you understand the policies and procedures your organisation has for budget
preparation. Different businesses will have different requirements as to what can be done
and when approval needs to be sought. Estimation techniques, data used and methods of
calculation may be specified. When entering the data, you should make sure you take into
account the business's objectives for this financial year. If the owners have determined
they wish to grow the business by 15%, the budget must reflect this. If they wish to

17
CTI_SITXFIN004_ Learner Guide VI.2020
renovate part of the operation, this will also affect the budget and may impact a number
of departments.

When making your estimates, you may have come up with a number of scenarios or
options. You may have the option of changing linen supplier as the current supplier is
increasing their prices. It would be wise to show the impact this decision will have on the
budget -while price is not everything, the options should be presented to the decision-
makers for them to choose from.

While some parts of the budget can be predicted fairly accurately, some parts of
budgeting are out of your control. This could include things such as the impact of a new
restaurant opening nearby, a large advertising campaign, or a worldwide food shortage. A
simple way to analyse this is to complete a What-if Report. This is a report that will
analyse the budget as it has been entered and then the user can specify "What if a new
restaurant opened and caused my revenue to decrease by 20%?" The percentage decrease,
or the decrease in the number of guests is entered and a report created which shows the
new projected profit or loss. Another useful report is a Break Even Report, which shows
the revenue required for the business to break even i.e. make zero profit or loss.

STEP 2

COMMUNICATING A DRAFT BUDGET

The draft budget should be compiled into a budget report, showing the budget for each
department as well as the Master Budget, projected cashflow (Cash Budget) and Capital
Expenditure Budget. This report should also include the What-if Report and Break Even
Reports performed and any options the Budget Committee need to consider.

Check your organisational policy about how the report should be presented -they may
require a bound copy, stapled copy or simply an emailed file. The front page should have
the business logo and state something like Hotel Futura Draft Budget Report 2014. It is
important to have a table of contents behind the front page so that each section of the
report can be found quickly and easily. The sequence of information held within the
report should be in a logical and easy-to-follow sequence. It is important to also provide a
written recommendation based on the reports submitted, i.e. what you suggest would be
the best options and outcomes for this year's budget.

Once the Budget Report has been prepared, it should be circulated to the appropriate
people for comment. The Budget Committee, owners, upper management and managers
of each department should receive a copy. Depending on the organisational policy, some
parts of the Budget Report may be given to certain people only, e.g. the master budget
may only go to owners and senior management, whereas the department managers may
only be given their Departmental Report and options. In large Hospitality organisations, it
is common for a budget meeting to be held where the draft budget is analysed in detail
and everyone can voice their opinion. Such a meeting should be clearly minuted so that
the required amendments to the budget can be completed later. If no meeting is held
within your organisation, it is important to give the people reviewing the budget a

18
CTI_SITXFIN004_ Learner Guide VI.2020
deadline. Let them know that any changes or recommendations must be back to you by a
certain date.

DAMAGE CONTROL: THE NEW PLAYER

SCENARIO
A 15 year old hotel had been operating successfully, drawing guests from the local area as
well as interstate and international. Occupancy rates were steadily high, until a sudden
drop. It became apparent that the drop in occupancy rates was due to the opening a brand
new hotel in the area at same accommodation level. Occupancy rates remained low until
new advertising materials could be produced and distributed. Even then the rates never
returned to the previous level.

How does occupancy affect budgets in each of the different areas of the hotel?
What is the effect on staff budgets? What is the effect on maintenance budgets? If
new budgets are constructed in response to the new hotel, then how will they be
received by each department? What will be the effect on cashflow? If market share
is reduced, then how much will the entire area's tourism need to increase in order
to return to previous occupancy levels? How much can you afford to spend to
improve and modernise your facilities in order to better the opposition?

4.

4A. ANALYSING DRAFT BUDGET FEEDBACK

Once the feedback from the draft budget

has been received, whether in a meeting
or from the individuals, you must analyse
the feedback. It is very rare for a draft
budget to simply become the final budget,
so some changes are to be expected.
When looking at the feedback, it is
important to consult others if you are
unsure as to the relevance of the change.
For example, the Front Office Manager
may have given feedback to suggest that
the Accommodation Revenue was
unachievable for a number of reasons.
You should consult with him/her as well
as senior management such as the General Manager to enable the correct decision to be
made. Not all feedback will be incorporated into the final budget, it is ultimately the
decision of the General Manager, Financial Controller and the owners as to its relevance.

The budget preparation must include an analysis of the priorities of each request. Every
department will feel that their request is the most urgent and important. The General
Manager and owners may have a different opinion. Each change requested should be given
a priority and the effects if implemented must be considered. Some may require more

19
CTI_SITXFIN004_ Learner Guide VI.2020
funding than others -if a high priority item is required, this may mean that many other
requests cannot be granted. If the feedback is relevant and approved, it should be
amended in the draft budget.

It may be useful to visualise the

budget as a pie that needs to be
shared between the different
departments. If one department's
piece of pie increases in size, then
some or all of the other pieces need
to shrink to accommodate it.

The budgeting process requires

strong negotiation skills as the
feedback provided on the draft
budget may be quite negative. It is
important to convince staff of the
achievability of the budget rather
than to simply tell them "That's the
budget and you must achieve it, or
else." The different options
presented in the draft budget and
the feedback on each situation must
be analysed thoroughly.

If a draft budget had to take into account certain changes, e.g. a new linen supplier, the
Food and Beverage Manager and Housekeeping Manager may have provided feedback to
show that you should continue using the current linen supplier as they are the most
reliable and have the best quality product, even though their prices have increased
significantly. In collaboration with the owners, you must decide whether this justifies the
additional costs and the effect of the costs on the bottom line. You must also weigh up the
potential service provision issues if you change to a cheaper supplier and the products are
of a poor quality or they are not reliable and you have no linen delivered one day. Also
consider that you may be able to negotiate with the existing supplier. If they are aware
you are considering changing supplier, they may be willing to give you a better price to
keep your business as a customer.

DAMAGE CONTROL: BUDGET CUTS

SCENARIO
The restaurant supervisor complains bitterly to the Budget Committee that the budget
allocated for next year is unfeasible and he cannot possibly take any cuts. He says that the
kitchen budget is too high and should be cut instead. He insists that the consumables
budget must be maintained. The Budget Committee considers his protest and the following
offer is made to him: Cut the consumables budget or save the required amount from the
wages component. The amount that needs to be saved is equivalent to a supervisor wage
or two operational staff.

20
CTI_SITXFIN004_ Learner Guide VI.2020
Consider

• How could the supervisor have acted differently? Is the committee unreasonable? Is
it always as black and white in budget situations? What are other alternatives
rather than cutting expenditure?

4B. COMPLETING FINAL BUDGET

After the decisions have been made based

on the feedback provided by your
colleagues, the Final Budget should be
completed. Any approved changes from
the feedback are entered into the draft
budget for each department and the
revenue or expenses category. The final
budget format is exactly the same as the
draft budget format and has the same
categories and types of budgets and
reports. It is essential that the changes to
the draft budget are taken up as quickly
as possible after approval.

The budgeting process can vary in the length of time it takes from start to finish
depending on the size and type of TH'E business, from a few days to a few months. In large
businesses, such as hotels, the budget process is complicated due to the number of
departments and contributors to the budget process. It is essential that every contributor
meet their timelines in order to have the final budget completed by the required date.
Remember -the budget must be completed prior to the new financial year starting. There
is no point in distributing a budget 3 months into the financial year and wondering why no-
one has met their budget!

Once the final budget has been prepared, a hard copy and soft copy should be kept in a
secure place, usually the Financial Controller's office. This step is essential as the budget
forms the basis of the business for the coming year and is required not only for reporting
purposes, but also for funding requirements and other needs.

4C. COMMUNICATING THE FINAL BUDGET

Once you have completed the final

budget, it should be distributed to the
appropriate people. This includes the
owners, senior management, and
department managers. The management
team should be informed of the budget
outcomes and its impact on their
operations.

Each Department Head should understand

their part of the budget and how it

21
CTI_SITXFIN004_ Learner Guide VI.2020
contributes to the overall business. They should be informed of any changes made from
the draft budget and be provided with an explanation for the change or why something
that was requested to be changed wasn't. If a particular expense item such as Guest
Amenities has not been increased in line with the increase in Accommodation Revenue,
the manager should be made aware of this and the reasons for it, so that they can try to
stay within that budget.

In addition to receiving the budget, the management team must be advised of their duties
in regards to providing financial information and reporting. Deadlines for each reporting
period should be created and passed on to managers with the final budget. This will
ensure that timely information is provided to the Finance Department and the monthly
accounts can be completed more quickly. Once the Financial Statements have been
completed and compared to budget, managers are required to provide a report on their
department for the month, commenting on any budget variances as well as an overall
picture of the running of the department.

4D. COMMUNICATING RESOURCE ALLOCATIONS

Once the management team has received and understand the budget, it is their
responsibility to filter this information down to their staff. All staff within a business
should have some knowledge of the budget for their area, from managers through to
operational staff, administration to financial staff. While they may not know or
understand the whole picture, it can be motivating for them to understand what their
sales targets or expenditure limits are and why they have been set. It will show them that
up-selling and on-selling are important and encourage them to make a positive
contribution to the department's outcome. If staff have some knowledge of the
expectations, they are more likely to actually meet them.

Staff should also be advised of the importance of budgetary control and meeting the
budget each month. Each organisation will have policies about budgetary non-compliance
and how this is dealt with. Some businesses may increase next month's budget if there is a
shortfall this month. Others may spread the amount over a number of months or simply
tighten the expenditure to rebalance the ratios. The manager of each department will
ultimately be responsible for their department. They must motivate their staff in order to
achieve budget. Budgets are only useful if there are procedures in place to ensure revenue
and expenditure are monitored and that the information provided from them is utilised.

5.

5A. MONITORING BUDGET

Even after the final budget is created, the

process continues. While having a budget
is a very important part of running a
business, if the budget is not referred to
throughout the year, then there is not
much point in having one. The budget
should be compared to the actual
accounting results on a monthly basis to

22
CTI_SITXFIN004_ Learner Guide VI.2020
ensure that the business is performing as expected. Small business owners may think it is
not necessary for them to monitor the budget that frequently, but to ensure the success of
the business it is a step which must be undertaken.

Every revenue and expense item on the Profit and Loss Statement for every department
should be compared to the budgeted figure. It is important to undertake further
investigation into budget variances, whether they are over or under. For example, if more
beverages were sold in the month than expected, you would want to know that it was
because of the delicious new cocktail menu and happy hour. This way you know that the
idea has been successful and should be continued. If the beverage revenue was below
budget, you would also investigate the reasons, but this time it would be to ensure that
you can change the current situation and maybe implement some new ideas to increase
revenue.

Monitoring budgets is important so that you can catch any variances in time. If you do not
realise that there are issues early enough, then you will not be able to adjust your
strategies to compensate.

5B. PREPARING ACCURATE FINANCIAL REPORTS

Financial reports must be prepared using

reliable, relevant, accurate data. This is
essential as it allows accurate decisions
to be made, as well as complying with
accounting regulations and tax laws. All
information available must be entered
prior to completing financial statements,
including any new or unexpected
financial commitments which have come
up during the month.

These financial reports also provide

statistical information about the business over a period of time. When financial reports
are produced by the business over a certain amount of time, the information can be used
to analyse the performance of the business over time, such as profitability. The time
period can be weekly, fortnightly, monthly, quarterly or annually. These statistics are
important as they will be used by the business to create future budget plans.

For more detailed information on preparing the accounts and the types of reports
commonly used in the TH&E Industry, please refer to Interpret Financial Information.
Remember -it is common for businesses in the TH&E Industry to prepare financial
statements on a monthly, quarterly and annual basis, with monitoring of transactions done
on a more frequent basis, i.e. daily or weekly.

Glossary term: reporting period refers to the frequency of financial reporting. Small
businesses may only prepare financial statements annually, larger businesses will report
more frequently e.g. monthly.

23
CTI_SITXFIN004_ Learner Guide VI.2020
COMPLETING REPORTS
Once the financial reports have been
prepared, a document should be compiled
which includes a variety of reports. The
reports included will depend on the size
of the business. A small business may only
include the Profit and Loss Statement,
Balance Sheet and Cashflow Statement,
whereas a larger business would also
include Departmental Reports, a Sales
Report and any number of other reports.
The exact reports included will depend on
the policies of the business and the depth
of reporting preferred by the owners.

No matter how many or few reports included in the document, it is essential that the
information provided is clear and concise and laid out in a logical manner. A cover page
with the logo should be attached stating, for example, "Hotel Futura -Month End Reports -
January 2014". The next page should be a table of contents, which is usually followed by a
written report by the General Manager and then the Financial Controller (in a large TH&E
business). This would be followed by the Profit and Loss Statement, showing both the
budget and the actual results. Following this would be the Departmental Reports and a
written report by each department manager explaining the results of their section of the
business. Financial ratios may be included as well, to assist in the interpretation of the
financial statements and the health of the business.

Always check the organisational policies in place at your workplace. The format, layout
and types of reports will vary between businesses.

Once the document has been prepared, it must be forwarded to the relevant staff.
Generally, as with the budget itself, the staff to be included are the General Manager,
Financial Controller, Department Managers and owners. TH'E businesses that are part of a
larger group will also need to send copies to Head Office. Some TH'E businesses will have a
different structure, so you should check the policy prior to distributing the reports.

Remember that the financial information pertaining to the business is strictly confidential,
so it is important to make sure that the staff member is supposed to receive the document
before handing it out. Another important consideration is that all staff who receive these
reports must be aware of the confidentiality and must not discuss the outcomes with
anyone outside the senior management team.

24
CTI_SITXFIN004_ Learner Guide VI.2020
TYPES OF REPORTS

CASHFLOW REPORTS
Cashflow Reports show movement of the bank accounts of a business. They show the
current cash on hand, forecast when money is likely to come into the businesses, and
when disbursements (money going out) are due.

Click on Example of a quarterly cashflow statement.

COVERS REPORTS
Covers reports are completed by restaurants and bars to record and allow analysis of the
number of guests served in a service period, such as dinner. This information is used to
determine the average spend per customer for food and beverage. Food may be further
broken down into entrée, main and dessert and beverage may be broken down further as
well. Management can then identify areas which are not meeting budget and determine
the reasons for this. For example, you may be charging too much for your entrées, so
customers are less likely to purchase a 3-course meal, or your waiters may not be up-
selling enough wine and beverage spend may be down as a result.

AVERAGE SPEND OR AVERAGE CUSTOMER SPEND

Average Spend or Average Customer Spend equals the income divided by the number
of customers for a given period. The information is used for projections and interpreting
financial data.

OCCUPANCY REPORTS
Occupancy reports are used to analyse the occupancy level of the establishment. Hotel
Reservations/Front Office Management construct these reports based on the number of
rooms booked each night, as well as the number of guests. These reports are very
important to the running of a hotel as empty rooms impact on all other areas of the
establishment. Low numbers will mean fewer guests to attend the restaurant and bar,
fewer sales in mini bar and so on. The minimum occupancy rates required to cover wages
and other fixed costs are known to the establishment so it is essential for the viability of
the business that occupancy rates stay significantly above this figure.

Click on Example of an occupancy report.

STAFF COST REPORTS

Staff cost reports are used to analyse staffing levels compared to revenue levels and
budgets. Staff costs are often shown as a percentage of revenue as well as the actual
dollar amount. In general, staff costs should be around 30% of income. If an organisation is
employing too many staff, or if existing staff are operating inefficiently, this will show in a
staff cost that is above budget.

25
CTI_SITXFIN004_ Learner Guide VI.2020
UNITS SOLD REPORTS
Units sold reports are a good way to analyse the success of different products. They
itemise each product and show the number of units sold of each, as well as the revenue
received for each. These reports are an excellent way for restaurants and bars to
determine the popularity of different dishes, drinks or cocktails. It is essential for the
effective running of a restaurant to know whether a dish is popular or not, particularly if
the dish has a high food cost or is labour intensive. Likewise you can analyse the
popularity and profitability of different tours. If there are 3 different options for a tour
you can identify which ones are more popular. If the most popular tour actually costs you
more to provide, e.g. because you must also include refreshment packages or there is a
higher access fee charges then understanding the number of units compared to cheaper
tours sold can help you make an informed decision on pricing.

SALES REPORTS
Sales reports are produced by each revenue-producing department within a business. The
different revenue categories, including food, beverage, rooms, gaming, conferencing, tour
bookings, massage and golf will be listed, showing the actual revenue for the period as
well as the budget and the variance between the two.

Sales reports are used for managers to analyse the performance of each department
compared to budget and to find any weak spots. This way, any underperforming areas can
be corrected before the situation becomes too negative.

Click on Example of a sales report.

STOCK REPORTS
Stock reports show the closing stock level at the end of the period. Each department will
have its own stock report, whether they are kitchen, cellar, or housekeeping. Analyses can
be done on which items are popular, with a high turnover, and which are less popular and
slower moving. Stock on hand can be a significant drain on cashflow as it must be paid for
upfront, sometimes a long time before any income is produced from it.

It is important for management to look at the stock levels regularly and set realistic par
levels and reorder points. This will minimise the amount of cash sitting in the store room.
For example, holding 20 bottles of Grange Hermitage will be a huge drain on cashflow and
will take a significant time to sell. It would be more pertinent to hold two bottles and
reorder more frequently. The storage space can be taken up by cheaper items that sell
more quickly.

VARIANCE REPORTS
Variance reports highlight deviations from budget. Budgets are set at the start of the
year, based on expected revenue and expenses. Each month the financial statements will
be analysed to show where any variances are occurring so that the issue can be rectified,
or at least explained to the senior management team. For example, if the number of
guests at the resort in October was 100 but the budget was 200, the Front Office Manager
would analyse why the variance has occurred. Is it just a downturn in this resort’s

26
CTI_SITXFIN004_ Learner Guide VI.2020
customers, or is it affecting the whole area? Was the latest marketing initiative a failure?
Each scenario will require a different approach for the business to rectify it.

WASTAGE REPORTS
Wastage reports show how much stock is wasted each period. Each time an incorrect
beverage is made or a stock item goes off, it must be recorded in the wastage report. This
report allows management to determine the reason for variances between income
produced and stock used up. If more stock is used up than could be accounted for by the
recorded sales, the wastage reports should be checked to discover the reason.

Behind the bar, beer is also wasted as part of cleaning out the lines and during the process
of pouring beer. This is referred to as ullage. Industry averages are a good indicator for
expected wastage and experienced staff may know the yield gained from a 50 litre keg of
beer.

PURCHASE SUMMARY REPORT

A purchase summary report is a summary of all purchases within the period. This
provides useful information for management as it is a quick reference point as to the
suppliers used and the amount spent with each. It is a useful tool for bargaining with
suppliers for cheaper prices or higher quality products.

Imagine if the vegetable supplier is supplying goods which are below the acceptable level.
The Chef can use the level of sales as a tool to persuade the supplier to provide better
produce. A supplier would not wish to lose the customer and will usually try to assist in
any way they can.

LABOUR AND WAGES REPORTS

Labour and wages reports show the amount spent on wages in each department of the
business. It will be broken up into fixed and variable wages, with fixed wages being
permanent staff and variable wages being casual staff. It can be quite difficult for a
tourism or hospitality business to balance the level of staff required compared to the level
of customers, particularly when trying to ensure that fulltime staff are given enough work
to keep them productive and casual staff are only used where needed to fill the gaps. The
wages report is useful as it shows the actual and budget for each type of staff and labour
for the period.

EXPENDITURE REPORTS
Expenditure reports can be in two formats – labour and non-labour. Labour expenditure
reports show the expenditure related to labour for a specific period. They will include all
factors relating to employment such as superannuation and Workers Compensation
Insurance as well as the actual wages.

Non-labour expenditure reports show all other expenditure of the business compared to
budget for the period. This will include selling expenses (advertising, etc.), administrative
expenses (stationery, etc.) and finance expenses (interest, etc.).

27
CTI_SITXFIN004_ Learner Guide VI.2020
BUSINESS ACTIVITY STATEMENTS
Businesses that are registered for GST are required to lodge regular Business Activity

Statements (BAS). The frequency of lodgement depends on the amount of GST collected
by the business – monthly or quarterly. The BAS is a double-sided, one page document.
The first side reports on the business’ total sales, export sales, GST-free sales, capital
purchases and non-capital purchases. On the back of the BAS, you will report on wages
paid, tax withheld from wages (PAYGW), other withholdings (such as ABN withholding), as
well as PAYG instalment (PAYGI) income. On the bottom of this side, a summary of the
GST collected, PAYGI and PAYGW owing and GST Paid is reported to work out the net
amount owing to the ATO, or that the ATO owes the business. Your business software
should provide a GST report which can be used to fill in the BAS. You will need to collate
other reports such as a wages report to be able to fill in all of the details.

Click on Example of a BAS.

COMPARING ACTUALS TO BUDGETS

Once the financial reports have been completed, every general ledger code should be
checked against budget and any variances noted. Variance refers to the difference between
the actual figure and figure that was projected. For example, you might have projected
that the F&B department would receive $50,000 in revenue last month but the department
actually received $55,000. In this case the variance is $5,000.

The variance can be in either direction -either above or below the budgeted amount. This
is known as either favourable variance or unfavourable variance. This will depend on
whether the budget is for revenue or expenditure. For a revenue budget, being over budget
is considered favourable variance as you have made more revenue than expected. For an
expenditure budget going over budget is considered unfavourable as you have spent more
than was expected.

Different businesses have different policies about how much variance from budget is
acceptable. Some may state 5%, others may state 10%, while with others it may depend on
the size of the budget. For example, a small expenditure item budgeted at $200 per month
would not have much impact on the profit if it was over budget by 30%, but a large
expenditure item of $10,000 per month would impact quite severely if it was over budget
by the same percentage. Check your business to see their policy regarding budget variance.

28
CTI_SITXFIN004_ Learner Guide VI.2020
VARIANCE ANALYSIS AND RECTIFICATION
When the variances for each
department have been identified, the
finance team would complete a general
ledger printout to check whether there
have been any errors in recording
transactions. Examples of such errors
include entering an invoice twice,
coding the invoice to the wrong
expense, or entering a statement as an
invoice. If there are no such errors, a
check should be done to make sure that
only invoices for that period are included and if others have been included, the reason
why. Sometimes an invoice will be sent quite late by the supplier and it may not have
arrived in time to be entered in the financial accounts last month. Therefore, it must be
included in this month instead.

If the budget variance is not due to a timing or accounting problem, it is likely that the
expenditure has simply been too high. The Department Head should investigate the
reasons for the over-expenditure. For example, Housekeeping may be replacing the guest
amenities (shampoo, etc.) on a daily basis even if the same guests are in the room and the
amenities have not been used up. This could cause the usage to be higher than budgeted,
thus increasing the expenditure. It is up to each Department Head to ensure that their
department meets budget, give explanations where budget is not met and come up with a
solution to prevent future budget variances. Other examples of why expenses may be over
budget include unexpected breakdown of equipment, poor stock control, inefficient
purchasing procedures, theft by staff or guests and price increases.

So far, we have discussed budget variances for expenses. If revenue is under budget, there
are also a number of reasons. Have all of the guests been charged correctly? Has the
invoice been raised in the correct period? Has there been a downturn in business?

Revenue variances can be more devastating to a business than expenditure variances as

overhead expenses will exist regardless of the amount of revenue coming in. For example,
rent must be paid regardless of the number of customers achieved -it is a fixed amount
per month. If the budget for Rent expense is $10,000 per month or 15% of Total Revenue
and revenue decreases by 10%, the business will be impacted as the dollar amount of rent
will still be the same, but the percentage will increase. This will flow through to the net
profit, which will decrease.

29
CTI_SITXFIN004_ Learner Guide VI.2020
MAXIMISING BUDGET PERFORMANCE

There are a variety of approaches to maximising the budget. An often used approach is to
cut expenditure as much as possible in order to minimise costs. This often entails cuts to
staff numbers, stationery and other expenses that are often seen as unnecessary. The
danger with this approach is that the level of service and product quality can fall. Any
reduction in the level of service quality can impact on the long-term viability of the
business.

An alternative approach to maximising the budget is to increase revenue. Increased

revenue is the main focus of the business and whilst the increase also involves an increase
in costs, the fixed costs decrease as a percentage of the revenue, thus making the
business more profitable. The danger is that costs rise too much, for example extra staff
are rostered on to cope with the increased demand.

It is important to remember than simply increasing revenue does not necessarily mean an
increase in profit. Often, an increase in revenue requires an increase in expense to cope
with the situation. You should always consider the impact of variations in expense and
revenue on net profit.

Revenue variances should be analysed and improvements suggested by staff within the
department as well as the manager. Often the staff on the front line will have more of an
idea of the reasons for the variance and will be able to give suggestions for improvement.
Revenue can be improved through relevant advertising and promotions such as a happy
hour, 2 for 1, and weekend specials. If a hotel's breakfast revenue is down, consider
creating more packages which include breakfast in the room fee. If a restaurant's lunch
trade is down, try offering a business lunch special with a set menu which can be
completed in a short time period. In a café, encourage your staff to up-sell -if you can get
each customer to purchase a cake or sandwich as well as a coffee, your average spend will
increase significantly -it takes a lot of coffees at $3 to make a successful business! If your
hotel receives regular conferences, why not include meal packages to ensure further
custom at your establishment. Extra opportunities
for up-selling and on-selling would then arise,
particularly in the bar.

Occupancy levels and covers are another key tool

for budget maximisation. The higher the
occupancy level or number of customers in an
establishment is the lower will be the cost per
capita. In a simple example if you have 10 staff
that earn $100 per shift your staff cost is $1,000
for the shift. If you have one customer spending
$100 you are losing $900 not considering COGS and
other overheads. If you serve 100 customers at
$100 your revenue is $10,000 with a 10% staff cost.

Wages can often vary from budget. Depending on the skills of the manager in rostering and
ensuring efficiency of staff, variances can be quite significant. The important aspect of
rostering is to ensure that enough staff are on to be able to provide the correct level of

30
CTI_SITXFIN004_ Learner Guide VI.2020
customer service, without having too many staff. If staff efficiency levels are high, you
should be able to cope with fewer staff than if they are inefficient or inexperienced.
Ensure that full-time staff are placed in the roster first, as you have to pay them
regardless. Then add in casual staff to fill the gaps. Make sure the largest number of staff
are rostered during service. You may only need two staff to set up the breakfast shift, but
will need many more during the busy part of service.

DAMAGE CONTROL: POOR ACCOUNTING PRACTICES

SCENARIO
At the end of the year you find to your excitement that you have made budget exactly.
Unfortunately, your accountant informs you that you failed to take GST into account, so
now you are forced to hand over 10% to the ATO. This has had a significant impact on your
profit, reducing it from an acceptable 10% to an uncomfortable 6%. This means there is
less money to spend on your planned refurbishments and you can't give out those staff
bonuses you promised.

• How could this have happened?

• What measures should you have taken to ensure your accounting procedures were
correct?
• What will be the effect on staff morale?
• How could that impact on future budgets?
• What will be the result in terms of customer satisfaction if you can't complete the
refurbishments?

DAMAGE CONTROL: STAFF HOLIDAYS

SCENARIO
Many of your permanent Housekeeping staff have been granted leave at the same time of
the year. All of the replacement staff are on a casual arrangement. They require extra
supervision due to their unfamiliarity with the tasks they are required to perform.
Towards the end of the holiday period, you
notice that you are receiving more complaints
than normal, including one guest who was
irate at finding blood on his sheets and having
to wait for a room change because none were
ready. At the end of the next pay period, you
receive an angry call from Finance, asking you
why your staff budget has not been adhered
to.

Why is it important to consider budgetary

requirements when conducting any planning?
What is the effect of paying casual staff, while
at the same time continuing to pay the
permanent staff their regular wage plus leave

31
CTI_SITXFIN004_ Learner Guide VI.2020
loading? What will be the effect on cashflow when service provision deteriorates? What
can you do about this problem during the next few pay periods?

REVIEWING BUDGET

You should collate all variances that are discovered throughout the year, as well as the
required changes, to enable the budget to be updated. The budget must be reviewed on a
regular basis to ensure that it is still relevant. Factors such as price increases, significant
downturns in customers and changes in operations can mean the budget should be updated
throughout the year. If a significant event occurs, there is no point in keeping the old
budget and trying, unrealistically, to meet it. You are better off amending the budget to
reflect both internal and external changes on a regular basis. This will ensure that the
budget remains up-to-date and relevant throughout the year.

In order to amend the budget, analysis

should be completed of the business
internally, as well as any external factors
which may have an impact.

Has there been a change in management?

A new Department Head can mean a
change to the budget is required -they
may have different ideas and ways of
running the department and may need
more budget in some areas and less
budget in others.

Has one of your suppliers increased prices

significantly? An investigation should be
done into other suppliers and their costs
versus the quality of the products offered.
The important thing to remember, just as
when you are setting the budget in the first place, is to ensure that the products you sell
will be of a high quality and good service can be provided. There is no point in changing
supplier only to receive poor quality vegetables which decrease the quality of your meals
and have a lifespan of only a day or two.

You should collate all variances that are discovered throughout the year, as well as the
required changes, to enable the budget to be updated. Any changes that are made to the
budget should be recorded so that future budgets can be made based on this information,
rather than using the outdated information from the start of the year. Any information
collected during your analysis and investigations should be collated and stored in the
Finance Department or owner's office for future reference.

32
CTI_SITXFIN004_ Learner Guide VI.2020
COMMUNICATING BUDGET STATUS AND IMPROVEMENTS

The budget status and any changes that

are made to the budget should be
communicated to the Budget Committee
as well as the department managers,
General Manager and owners periodically.
You must outline the advantages and
disadvantages of each change required
and present your recommendations in a
report. Check your organisational policy
for details of how the report should be set
out as well as the frequency of such
communication. You should include
details of budget variances, your investigations, the outcomes and your recommendations
for the future. This will be an ongoing process, to be completed regularly throughout the
year and coming years. Budgeting is a cyclical process which never ends!

APPENDICES

• Break Even Analysis

• Business Activity Statement - BAS
• Departmental Analysis
• Income Forecast
• Key Performance Indicators
• Payroll Advice
• Profit and Loss Projection
• Profit and Loss Statement with Prior
Year
• Quarterly Cashflow Statement
• Quartlery Profit and Loss Projection
• Example Unit Output Analysis
• What If Analysis
• Hotel Futura Financial Data
• Income Forecast
• Key Performance Indicators
• Profit and Loss Projection
• Profit and Loss (With Last Year)
• Quarterly Cashflow Statement
• Quarterly Profit and Loss Statement
• Unit Output Analysis
• Glossary

33
CTI_SITXFIN004_ Learner Guide VI.2020