Sample Hotel Budget Spreadsheet by eok30690

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									Hospitality Finance
Budgets and Cost-Volume-Profit
 Notes- Budgets
 Notes-Cost/Volume/Profit
       (omit Balance Sheet notes within this
        lecture packet)
   Assignments
     Business Plan Assg omitted
     Change in Budget spreadsheet
               What is a budget?

   A budget is part of a profit making business's
    annual business plan. The budget is a
    projection of the organization's income
    statement for the next fiscal year. It usually
    includes estimates of sales, expenses and net
    income. Other statistical information is
    frequently included as part of the budget. A
    budget, in addition to the income statement,
    will also include a cash flow projection and a
    capital expenditure budget.
    Why do companies, such as restaurant
       companies, develop budgets?

Companies develop budgets because of the benefits:
  It provides the organization with a goal.

   It provides control over revenues and expenses during the budget year.
    Management compares their actual results with budgeted forecasts and then must
    account for any significant variances. Significantly large budget variances may
    indicate the presence of problems in the restaurant's operations.

   It provides contingency plans for potential problems that may develop during the
    budget year.

   It requires coordination throughout the organization. Each department, or unit,
    within the organization is responsible to prepare its part of the budget, which is
    then coordinated with the overall company budget.

   Responsibility is assigned to Management in each organizational unit. They are
    responsible for the development of the budget and their department's subsequent
    performance against its budget.

   Budgeting is an integral part of the planning process. Successful companies plan
    for their futures through the discipline of preparing an annual business plan,
    stipulating their financial and qualitative goals and strategies. The budget is an
    integral part of that plan.
        What are the basics in developing a

Management needs to collect the following types of information in order to
  prepare an accurate and useful budget:

   The restaurant's actual operating and budget variance figures from the
    previous year.

   The restaurant's goals

   Sales statistics from the past

   Any change in restaurant operating policies

   Local and national economic conditions

   Sales and expense trends

   Statistics to back up budget numbers, such as menu prices, customer
    preference, portion size and food costs

   Payroll statistics.
Then management can go through the basic steps to prepare the
 Estimate sales revenue and volume. The forecast of sales is the
  most important and difficult part of the income statement due to
  its volatility, and its pronounced effect on expenses and profits
 Estimate expenses that are related of sales. Estimate other
  expenses based on planned activities.
 Management consolidates the department and unit budgets into
  an overall comprehensive income statement budget.
 The budgeted income statement is submitted to upper
  management for review, negotiation and revision.
 After the review and final revisions, the final budget and plan is
  prepared and submitted to the appropriate departments within the
        Budget Example
   Budget Example
Cost Approaches to Pricing
                Cost Approaches to Pricing
The concept of price elasticity of demand applies to hospitality operations
   Key Concepts:
   A basic economic concept states that, all other things staying the same, a price increase will
    reduce the quantity demanded for a product or service; the question a company must
    answer is, by how much will demand drop if we raise prices?

   Price elasticity of demand provides a means for measuring how sensitive demand is to
    changes in price

   Elastic demand: demand is sensitive to price changes—that is, a price increase leads to a
    disproportional reduction in unit sales; in other words, any additional revenue generated by
    the higher price will be more than offset by the drop in demand

   Inelastic demand: demand is not very sensitive to price changes—that is, a price increase
    will lead to a relatively small drop in quantity demanded; in other words, the price increase
    will generate more revenue than the drop in demand loses

   Demand is elastic where competition is high due to the presence of many operations and
    where products/services are fairly standardized (generally, quick-service restaurants,
    medium- and low-priced hotels/motels)

   Demand is inelastic where competition is low or nonexistent or where an operation has
    greatly differentiated its products/services (generally, some resorts, clubs, high-average

   Generally speaking, companies prefer to have inelastic demand for their products and
    services because this means that price increases will not drive away too many customers;
    when demand is elastic, raising prices will be counterproductive
Informal approaches to pricing and identify factors
   that modify cost approaches to pricing
 Key Concepts:
      Competitive pricing
      Intuitive pricing
      Psychological pricing
      Trial-and-error pricing

All informal approaches fail to consider costs
 Factors that modify cost approaches to pricing:
      Prices charged in the past
      Guests’ perceptions of value
      Prices charged by the competition
      Price rounding
Product Costs and prime product mark-up
  approaches to pricing food and beverage
 Key Concepts:
     Determine ingredient costs
     Determine the multiple to use in marking up
      the ingredient costs (based on desired
      product cost percentage)
     Multiply ingredient costs by the multiple to
      get the desired price
     Determine whether the price seems
      reasonable based on the market
                Hubbart Formula
$1 per $1,000 approach and the Hubbart Formula to pricing rooms.
 Key Concepts:
 $1 per $1,000 approach
        Sets price of a room at $1 for each $1,000 of project cost per room
        Fails to consider current value of facilities

   Hubbart formula
   Desired profits
   +     Income taxes
   +     Management fees
   +     Fixed costs
   +     Undistributed operating expenses
   + (–) Non-room departmental losses (profits)
   +     Direct expenses of the rooms department =
          Required rooms department revenue

   Bottom-up approach
   Similar approach used for food and beverage
Define and apply yield management
 Key Concepts:
     Yield management attempts to maximize revenue from
      rooms sold rather than focus on simply selling all
      available rooms

     Before selling a room in advance, an operation using
      yield management will attempt to determine if it will be
      able to sell the room to a client from a different market
      segment later at a higher price

     Sophisticated yield management considers the total
      revenue from all sources, not just from room sales, in
      making its pricing and booking choices—that is, one
      group may be willing to pay more for rooms, but the
      total revenue from a group paying less for rooms but
      also purchasing F&B and banquet services may be
Bottom-up approach to pricing
 Key Concepts:
     Like the Hubbart approach for pricing
      rooms, it is possible to price meals by
      starting at the ―bottom‖ of the F&B
      departmental income statement and
      working up from there—that is, by
      determining a desired net income and
      then adding expenses in order to come
      up with the price that will provide this
      net income
How changes in sales mix affect gross
 Key Concepts:
     Restaurateurs’ traditional focus on food cost
      percentage sometimes leads to sales mix
      decisions that result in less profit than other
      sales mixes might provide

     Comparing the profitability of potential sales
      mixes reveals which mix provides the highest
      gross profit—this mix will not always be the
      one with the lowest food cost percentage
The menu engineering approach to pricing
  food and beverage items.
 Key Concepts:
     Considers menu item contribution margin and

     Menus items are classified as stars, plow
      horses, puzzles, or dogs

     Menu engineering worksheet

     Emphasis is on gross profit or contribution
Advantages and disadvantages of
  integrated pricing by hospitality
 Key Concepts:
     Advantages:
          Maximizes profits for an entire property
          Coordinates pricing in all departments
     Disadvantage: generally results in some profit
      centers not maximizing their revenues and
      their departmental incomes; however, since
      overall property profits increase, this is not a
      significant disadvantage except as it might be
      perceived by some managers whose
      departmental revenues are being ―sacrificed‖
      for the greater good
General Formula
 The starting point to forecast covers in a food operation is
  the historical data.

   For example, if we were estimating covers for the coming
    Friday, we would start with last Friday's actual covers.
    Then, the manager would consider any trends that might
    be factored in.

   For example, if this week's covers are running 3% greater
    than last week's covers, the manager might adjust the
    Friday forecast upward by 3%. As the final step, the
    manager could incorporate his own judgment. This would
    entail all the surrounding factors and unusual
    circumstances that might effect the forecast;
   for example weather, or special local events that could
    have an influence on the forecast. After this the manager
    would determine the final forecast of covers.
Popularity Indexes
 Management can break down the forecast of
  total covers to individual menu items by use of a
  popularity index (PI). There are two ways to
  develop the index. One is in terms of the number
  of meals sold:
 PI =MenuItemMeals
 This historic factor is multiplied by total
  forecasted covers to arrive at a forecast broken
  down by menu items . Another way to develop
  the index is by use of sales dollars:
 PI =MenuItemMeals
         Capacity Management

   Capacity management is a strategy whereby restaurant
    operators attempt to achieve full utilization of the
    restaurant's capacity. Operators use procedures and
    methods to increase restaurant capacity to handle patrons
    during busy periods and to divert patrons to the slow
   Management may employ flexibility capacity strategies in
    order to adjust capacity to handle varying levels of
    patrons . Restaurant capacity can be adjusted by the
    following strategies:
   By increasing patron participation, such as buffet service.
   Faster seat turnover, which can be achieved by
    technologies or more servers.
   Optimization of kitchen capacity to handle a busy periods.
   Increased employee productivity.
Smoothing demand strategies
   Smoothing demand strategies involves the diverting of
    customers from peak to slower periods, thereby utilizing
    under used capacity. Some of these strategies are:
       Price incentives.
       Use of reservations.
       Customer queuing.

   Queuing is the situation where customers wait in line
    before being seated. The challenge for management is to
    make the queuing process as pleasant as possible to
    avoid the loss of customers. Management can do this
    through some of the following techniques:
       A comfortable lounge or waiting area.
       Serve hors d'oeuvres and beverages (can be complimentary).
       Take orders while waiting- this will increase seat turnover.
       Provide music or video screens to keep customers diverted
        and entertained.
                delivery system
   A restaurant operator needs to determine that her
    restaurant has the food service delivery system to handle
    forecasted customers. The food service delivery system
    comprises the various elements of the restaurant
    operation that determines its ability to handle patrons.
    These elements include:
       The type and sophistication of the menu and table service.
       The reservations capability of the restaurant.
       Parking availability and ease of utilization.
       Ability to track patron arrival and to serve them.
       Available production facilities.
       Dining space capabilities.
       Queuing capabilities.
       Availability and effectiveness of the restaurant's employees.
          Forecasting Methods

   There are four basic methods of making customer
   Judgmental methods are where management uses
    experience and intuition to forecast customer counts.
   The census or counting method is where management
    takes a sample of a selected population and use that
    information to project customer counts.
   Time series are quantitative methods projecting customer
    counts on the basis of historic trends. We will look at two
    of these methods: moving averages and exponential
   Causal methods are used to project customer counts
    based on other related statistical data. An example of this
    would be a hotel restaurant; projected restaurant
    customer counts could be estimated on the basis hotel
    room reservations.
          Moving Averages

   A moving average forecast of daily customers
    "C" for "n" periods is determined by the
    following formula:
   The moving average is illustrated in the
    following table.
   The forecast for day four is:
   225 + 224 + 194
           3         = 214
   The moving average for day five is:
   224 + 194 + 168
           3          = 195
   The following slide shows moving averages out
    to day 18
   The following graph shows the
    relationship between the moving
    average forecast and actual
    customer counts:
        Exponential Smoothing

   Another forecasting time series method is exponential
    smoothing. Under this method, the difference between the
    previous day's forecast and actual is multiplied by a
    smoothing factor, "a," which is added to the previous
    day's forecast to arrive at the current day's forecast. This
    is reflected in the following formula, where "C" is actual
    customers, "F" is the daily forecast of customers, "a" is
    the alpha factor, and "i" is the day:
    The most customary "a" factor is .5. Using the previous
    example's data the forecast for day two is:
    300 + (225 - 300).5 = 263
   The forecast for day three is: 263 + (244 - 263).5 = 244

   The following table illustrates the exponential smoothing
    method out to day 18. The first day's forecast was a guess
    of 300; thereafter exponential calculations are used.
     Qualitative Forecasting Methods

   Market research
   Jury of executive opinion
   Sales force estimates-from staff
   The Delphi method- measures the degree of consensus
    among the panel regarding future events.

Forecasting Method Selection Factors
 Effectiveness of the method
 Costs of using the method
 Frequency with which forecasts will be updated
 Turnaround required for an updated forecast
 Size and complexity of the hospitality operation
 Forecasting skills of personnel involved
 The purposes for which the forecasts are made
Decision Making, Part Two
        Cost/Volume/Profit (Relationship Factor)
One cannot assume that "good" cost to sales relationships automatically result in profit or that
   higher or lower cost percentages are necessarily desirable. What is desirable is to have the
   best relationship that yields the best profit

   Prime Costs= cost of sales (food, beverage , etc) and cost of labor

   Example
   Sales                    $925,000                  100.00%
   Cost of Sales   $309,875          33.50%
   Cost of Labor   $231,250          25.00%
   Cost of Overhead$277,500          30.00%
   Profit                   $106,375                  11.50%

   Satisfactory profit has been earned. However, it is also possible to earn acceptable profit at
    some sales level other than $925,000, even if prime cost increases

   Sales                    $1,300,000                100.00%
   Cost of Sales   $520,000            40.00%
   Cost of Labor   $390,000            30.00%
   Cost of Overhead$277,500            21.35%
   Profit                   $112,500                  08.65%

   Although the costs - to -sales ratios for the components of prime costs have increased, a
    satisfactory profit was still realized because lowered menu prices resulted in many new
    customers and the number of dollars required for overhead was the same in both cases.
    Consequently, as sales volume increased, the number of dollars required for overhead has
    represented a smaller percentage of sales. Profit percentage is lower but the dollar amount is
    higher This can also go the opposite direction if the decision you made did not improve your
    Price/Value relationship with guests
    Cost/Volume/Profit Equation

   Sales=cost of sales + cost of labor + cost of overhead +
   Which also equates to Sales = variable cost + fixed cost +
               S= VC + FC + P

   Within the normal range of business, the relationship
    between VC and S should remain relatively constant. This
    is why we watch our cost percentages (variable)

   Fixed costs remain constant in dollar terms, mutually
    exclusive to changes in dollar sales volume

   You can take an Income Statement and plug the figures in
    to the equation
    variable rate, contribution rate, break-even point
                 and contribution margin

   The concept of Variable Rate= ratio of variable cost to dollar sales

   Contribution Rate= percent of dollar sales needed to cover variable costs

   Break-Even Point= dollar sales covers both variable and fixed costs exactly

   Example
   Sales = $925,000
   Variable Costs = $402,375
   Fixed Costs = $416,250
   Profit = $106,375

   Variable Rate = .435
   Contribution Rate = .565

Variable Cost = $402,375 Sales= $925,000
   VR = Variable Cost (402,375) / Sales (925,000)
   VR= .435

Calculation for CR       CR= 1- VR
   CR = 1 - .435
   CR = .565
          Break Even Point

   Sales= FC + P / CR (this formula is used
    to determine the level of dollar sales
    required to earn any profit that one might
    choose to put into the equation)

   925,000 = 416,250 + 106,375 / .565
   925,000= 522,625 / .565
   925,000=925,000
   S= FC + P / CR
   S= 416,250 +0 / .565
   S=736,726
What is Variable Cost you can have beyond
          the break even point?

 This determines based on a certain
  amount of sales, what can the VC be
 1. Actual Sales – BE Sales
 925,000 - 736,726 (sales)= 188,274
 VC = S x VR
 VC= 188,274 x .435
 VC = 81,899
         Budget Exercise
   Questions

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