You are working in a medium-sized hotel business. The business comprises a restaurant, cafeteria, a piano bar, lounge bar and front bar. There is also a small motel complex out the back with 20 rooms.
Relative to that hotel, answer all the following questions:
1. Now do you think this business could be divided into cost centres? Why might the organisation choose to make these divisions?
2. How will budgets contribute to operational efficiency and what types of budget might be appropriate for such an organisation? Why?
3. For each of the areas in the hotel, what direct and indirect costs would be applied and why must they be considered when drawing up budgets and developing financial reports?
4. What financial reports might be of benefit to this establishment? Why?
5. What types of waste might it be necessary to carefully monitor and control and why would this be necessary?
6. Who should be responsible for collecting, inputting and recording the data that contributes to budgets and who should be responsible for monitoring budgets — to determine how well performance is meeting expectations? Why? 7. What types of budget deviation might occur and what should be done if deviations are identified?
Dividing the Business into Cost Centres
The medium-sized hotel business, in the case study, has a restaurant, piano bar, longue bar, a motel complex with 20 rooms and front bar. All these have to be managed and financed by a single business.
This business could be divided into different cost centres for the ease of Management. These call centres are Administration, accommodation, bars, sales and marketing, cafeteria, room keeping (DuanYuanPeng, 2011).
The business might choose to make these cost centres so that each cost centre would manage its own departments cost and it would be easier for the business to keep track of the way in which resources are utilised and from where they are acquired. Each cost centre would be able to track different costs with respect to the use of resources. This way it would be easier to assess the effectiveness of the distribution systems. It would also be simpler to find out how the waste happens and the cost centres would be helpful in making the business operate with respect to the scope of budget. This would eliminate the money issues and also identify them, if any, and resolve it.
Budget will contribute to the operational efficiency in the below given ways:
- Target: the operators get objectives and aims through the budget and the staffs are also motivated to work in a more efficient manner.
- Scope: by the use of budgets, the workers and managers come to know of the scope of operations.
- Priorities: by use of budgeting, the allocation of resources can be prioritised
- Planning: budget can be defined as a measureable plan (Jost and van der Velden, 2008)
- Control: the budgets can be used for monitoring and reviewing the actual performance with respect to the budgeted performances.
The type of budget appropriate for this kind of business with the reasons for choice of such budget is as below:
Cash flow budgeting:
By the use of budgeted sales figures, this business can make a cash flow but it where in the comparison among inflow and outflow of the cash can be shown. This would help in determining the amount of cash that would be available with the business at a particular point of time throughout the year and also how much of the inflow can be allocated to different divisions.
This involves showing of the estimated amount which are required for promoting, advertising and building public relations so that goods and services of the business can be marketed.
This kind of budget is created by the businesses which produce one thing or the other (Guilding and Lamminmaki, 2007). It is an estimation of the number of units or items that have to be created for fulfilment of the sales objectives.
The different areas of hotel business with the direct and indirect costs are as given below:
Area of hotel business
Sales and Marketing department
· Rental cost for venue,
· Advertisement costs
· Wages of employees,
· charges of building public relations,
· charges of advertisement design
· Salary of management
· Costs of recruiting staffs, their clothing, transportation and miscellaneous costs
· Salaries of employees,
· Costs of tools and equipments
· Insurance fees,
· Equipment maintenance charges
· Salaries of housekeeping and accommodation employees,
· Expenses of replacement beddings and room cleaning
· Costs of renovating,
· Costs of electricity and other equipments,
· Costs of water usage (Iyengar, 2008)
· Costs of electricity, eatables, water and other facilities,
· Wages of Cooks and chefs
· Managing charges,
· Costs of cleaning,
· costs of publicizing
· Costs of renovation,
· Costs of drinks,
· Costs of serving staffs
· Costs of publicizing,
· Costs of recruiting,
· Performance charges
They must be considered when drawing up budgets and developing financial reports because only the business is aware of its cost centre and The way in which the profit and cost can assist in determination of prices, breakeven point and promotion.
- Weekly, monthly and yearly revenue reporting: for understanding the performance of the hotel it is important to track its revenue. It is important that weekly sales accounts are maintained for comparing the sales, occupancy and daily rate amounts so that comparison can be made with the targeted amounts (Turner and Guilding, 2012). The interim monthly performance reports are also important for the business.
- Trending reports: these reports are present, budgeted and past trending details of every cost centre and these can we customised for fulfilling the particular needs of reporting such as occupancy, sales of rooms, total sales, sales of the foods and beverages, operating income, average daily rates, etc.
- Financial statements: these are required for depicting the present and previous year’s performances and this report should be segregated into four key areas which are – balance sheets, profit and loss account summary is for different departments, statistics accounts for the hotel, detailed profit and loss by different cost centres.
- Yearly CPA-assessed financial statements: these are required for preparing the yearly tax returns for every department.
The wastes might be linked with the material, timing, labour hours or the employee hours, cost of supply and all the operational wastes. The wastes can be quantifiable and non-quantifiable in nature.
There are certain waste retired due to the utilisation of consumables, stocks, supplies and accommodation. When there is mismanagement of stock then also the waste. The wastes also occur in terms of employee hours and their efforts due to the mistakes and reworks (Lundberg, 2008). Even the complaints which are given by the customers also form part of wastage of efforts of the workers of the business.
Types of Budgets and Operational Efficiency
It is important to carefully monitor and control the waste because each and every waste is a cost for the business. When the cost is decreased then the profits can be improved. By overcoming these wastes, the business can enhance its profits and also improve its efficiency.
Even though the hotel industry has its own usual waste summary, there are also lots of causes why it can differ from hotel to hotel inside the similar corporate arrangement. The causes for divergences in waste profiles are excessively enormous to declare however it all revolves around how the hotels obtain their trade, administer their industry and develop their operations.
All the staff members must be involved in collection, important recording of data which contributes towards the budgets. In case they are not aware of what is budgeting and the way it works then they can't work towards ensuring that the budget expectations are fulfilled. In this way they won't be having any ownership of the budget processes.
The budget deviations that occur might be in terms of revenue shortfall is because of wrong estimations or image it or unexpected rise in operational expenses. Once these variances are identified then some of the revenue can be set aside for emergency contingency planning. Also after identifying these variances, and insure itself against certain possible variances like damages first one natural disasters.
One more unexpected variance can be due to the unknown equipment repair costs. Since the businesses rely majorly machineries and their regular maintenance is necessary, even a little possibility of mechanical deficiency can lead to major failure. Once this kind of variance is identified then it would require replacement of the equipment completely or payment of mechanic for quick repair. This kind of cost, once identified can be declared as expenditure towards repairs. The variance might also due to higher production cost which is caused because of more production volume on more prices of raw materials. Once these variances are identified then with the increase in the sales rise it is important that other expenses the reduced (Al Glanzberg, 2003). When the variances are due to lesser unit being sold then the expenses have to be reduced and promotional activities have to be encouraged.
Even though the most of the budget variances happened due to unpredictable happenings which are not in control of the individual or business, one of the highly known reason is that the most of the budget variances happen due to unpredictable happenings which are not in control of the individual or business, one of the highly known reason is easily avoidable: that is wrong. Wrong budgeting, can be created due to huge optimism or insufficient data which can bring realistic expectations and lots of inaccuracies. When search variances are identified then it is important that adequate data is gathered and re-estimation is carried out.
As per Kotas (2014), for managing any business, especially the hotel business given in the case study, the aim of my chatting involves the major three aspects:
- Forecasting the incomes and expenses that is useful for forecasting the profitability,
- Making important business decisions,
- Way to assess, monitor and control the business performance.
Al Glanzberg (2003). Hotel Opportunities in Thailand. Cornell Hotel and Restaurant Administration Quarterly, 34(3), pp.56-59.
DuanYuanPeng (2011). Differential Strategy Research of Budget Hotel. Energy Procedia, 13, pp.10089-10094.
Guilding, C. and Lamminmaki, D. (2007). Benchmarking Hotel Capital Budgeting Practices To Practices Applied in Non-Hotel Companies. Journal of Hospitality & Tourism Research, 31(4), pp.486-503.
Iyengar, A. (2008). Hotel finance. New Delhi: Oxford University Press.
Jost, P. and van der Velden, C. (2008). Organizational design of R&D after mergers and the role of budget responsibility. Journal of Economics and Business, 60(5), pp.469-484.
Kotas, R. (2014). Management Accounting for Hotels and Restaurants. Hoboken: Taylor and Francis.
Lundberg, D. (2008). The hotel and restaurant business. New York: Van Nostrand Reinhold.
Turner, M. and Guilding, C. (2012). Factors affecting biasing of capital budgeting cash flow forecasts: evidence from the hotel industry. Accounting and Business Research, 42(5), pp.519-545.
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