Budgets

Numbers have awesome powers, they have the capability to inspire fear such as in the budgeting process or they can amaze you by the amounts they represent. Let's see their potential in action.

THE

POWER of

NUMBERS

by Dorian P. Landers

First published in Sep.1993

At a time when many of us are sitting in front of our budget sheets, calculators in hand, or staring a blank computer screens, coffee and Aspirin within reach, here are a few words of support from someone who, after years of headaches discovered the easy way to budget. Yes! there is an easy way to do a budget, with some very simple principle.

This timeless article also explores the notion of forecasting yield and profitability.

easy download with pdf

Budget vs. Forecast

	A budget is a quantitative economic plan in respect of a period of time.
	A forecast is a prediction of what will happen as a result of a given set or circumstances.
	A budget is a plan, a forecast is not

The question is : can you eat in one week the same amount of food you eat in one entire year? Let me reformulate the question : most of us gobble up 600g to 1000g of food per day, 365 days a year : this sums up anywhere from 220kg to 360 kg of food per person.

Here is the query: Can you eat 50 kg of food in one day?

Probably not, even if you tried you would probably end up with a considerable stomach ache. So why are some executives still trying to do a budget in one week? For most of us a budget is a yearly exercise, but yearly should also mean year long. And it is probably the easiest way to do it. How ?

#1	Use *a personal computer with a good spreadsheet* (Excel). Nobody still uses a calculator to crunch numbers. Learn top use Excel properly. The irritating factor in budgeting lies in those lengthy calculations. The computer will calculate and recalculate for you - usually accurately - as often as you wish, while you concentrate on your forecasting accuracy and business strategies rather than on arithmetics
#2	Develop the good habit of tracking everything you need throughout the year. Collecting, organizing and digesting data and relevant information form the base for a sharp and easy to construct budget.
#3	Spot analyze key expenses throughout the year. It is easy to calculate the exact actual expenses per room (labor, energy, water, laundry, amenities, etc.), per restaurant cover or spa customer as you go on. It becomes very difficult to compile those in a short time and with appropriate accuracy when you are under time pressure to complete your budget.
#4	Do each month as you go. When you get the end result for May 2003, your should do the budget for May 2004, and so on. This means your budget is always ready and always current. You will only need to do an update before printing your final budget, which considerably lessens the burden. In addition it develops your sense of forecasting and you are always ready when your owner or boss needs a revised budget.
#5	Train and delegate. Most section heads can learn how to budget for their own areas. Advantages are multiple : they will be more aware of the costs of doing business, they will be keener on spotting opportunities, they will be motivated because they will be involved and finally (important for you) they will actually help you by doing some of the footwork. Of course, you need to train them to budget.

Technique: zero base budgeting	Zero Base budgeting is a concept that will help your prioritize where to spend your limited resources. It works on the base that no expenditure is justified each year because it was made last year. Every expense is re-analyzed on the basis it will yield more favorable result than spending the same amount in another way. This will give you a more realistic way to budget and you will avoid mistakes compounded year after year.
A word of caution	In some properties, the entire budget is done by the accounts department. Nice... and comfy for those executives who don't have to do it. But remember tht accounting personnel do not really know what is going on in your operation. And no matter what... you are responsible making those figures. Personally... I only trust those that I calculate and for which I have a proper business plan. More work... yes... more secure... definitely !

There are two main problems associated with budgeting : Most managers and supervisors are not trained to understand and produce figures, hence they abandon the task to accountants. Because budgeting is planning for profit it should be regarded as strictly a management function not an accounting function. Your accountant is to provide you with formats, data and guidance. The budget is to be made by operations personnel. Procrastination. Since budgeting is viewed as a difficult task (which really it is not) most executives postpone doing it until due date, consequently increasing the difficulty of the task and the inaccuracy of the budget.

Another stimulating point with numbers is the key ability they have to disclose profits or losses. Many of us, hotel executives, look only at the big figures without bothering much for the smaller ones. Let me give you a couple of examples of what pennies earned can do to your bottom line.

Let's say we have a 200 room hotel running at 70% occupancy. Nothing unusual. On average we get 1.7 guest per room. This all signify that 86'870 people transit by your hotel every year.

If they all spend $ 2.00 extra at your place (not much really), this is nearly $ 174'000 in additional sales. I would love to spend the extra profit generated on my next holiday!

Look at this second example: Iced Tea (the real stuff, not the tasteless colored water).

Any medium class restaurant in a hotel can sell this (or iced tea) for at least $ 2.00 each instead of pouring free iced water for each guest who sits down in your Coffee House. Cost of Iced Coffee $0.25 each. Gross profit:$ 1.75.

I imagine any given coffee shop can sell at least 30 of these a day without cannibalizing other beverage sales. That will bring you nearly $20'000 in additional profit for such a simple item, requiring no additional equipment and very little human skills. The same can be repeated with five or six different and affordable products yielding over $100'000 in additional profits.

The key there is not only upselling, but selecting profitable items to sell.

At this point, in your property, the selection of your profits may be entirely in the hands of your guests. This looks like an unstable proposition as far as I am concerned. Would you rather not be able to plan and direct those profits? If your profit is higher on a Coca-Cola than on a watermelon juice: why are you not promoting the soft drink, rather than letting your waiters be only order takers or even suggest watermelon juice? In addition, the watermelon juice requires additional labor and is subject to spoilage. Start a simple F&B Yield Management system.

The problem with low profits is often due to many F&B management people focusing on cost percent rather than dollar profits.

Menu merchandising.

Another area to look at in order to improve F&B profits is the design of your menu. Since your menu is one of your key marketing tool, it should provide more than a listing of items. You should emphasize the items you want to sell more than others. Their position on the menu will have substantial impact on sales. Make certain those items are the most profitable to you and those you are the best at preparing (Signature items).