FORECASTING AND BUDGETING

Budget is said to be projection for the future. This projection may also be called a forecast.

It is a financial as well as quantitative statement of what an organization is expecting about its business in terms of1. Quantity of the product that the establishment will be producing 2. What is going to be the revenue generation For a specific time period.

It can also be called a benchmark in terms of quantity and revenue generation. A budget is a comprehensive and co-ordinated plan expressed in financial terms, for a specific future period of time. It is a tool devised by the management to keep a proper balance between the income and expenditure. Budget is a mirror that shows the future income and expenditure of the organization. Most budgets are prepared in terms of money. A budget has been compared to a road map which indicates an accurate route and serves as a guide.

IMPORTANCE OF BUDGETING It sets the parameter of earmarked expenditures. It reflects the efficiency of the organization as it helps to operate within the budget. It helps in fixing the priorities of the establishment. It acts as a control tool and helps in gauging diversions. It becomes easy for the operators to understand how to achieve the targeted figures. The resources can be put to best utilization, with the view to maximize profits. A control through budget indicates where the management policy has gone wrong and why. Productivity can be increased to meet the budgeted revenues. Budget provides cost consciousness. Budgeting process forces the management to become effective and efficient.

PREPARING OF BUDGET The first thing to be done is to recognize the prime function of the property/ business. Know the needed profits The budget is prepared under two heads1) Capital expenditure- covers equipment, furniture, artwork etc 2) The revenue expenditure- is the total of operational costs. Budgets are generally prepared at the end of the fiscal year, generally in the month of March. It is presented to the board of governors. Once approved by the BOG, it is implemented from April 1

BUDGET PERIOD For a big establishment, an annual budget is appropriate while for smaller catering units, usually two budgets, on-season and off-season, should be planned. Even monthly or weekly budgets can be planned for the smaller units.

BUDGETRY CONTROL The budget establishes definite objectives with regard to operating performance. It sets the limits to stay within the limits. The management must establish adequate controls to prevent any 1. Wastage 2. Loss 3. Pilferage

KIND OF BUDGETS 1.Capital budget- deals with the assets and capital funds of the business. Budget for plant, equipment, cash and stock, is therefore capital budget. 2.Operating budget is concerned with income and expenditure of the business and the operating costs. Budget for sales, purchases, labour costs and overheads is therefore, operating budget. 3.Sales Budget- this essentially consists of one estimate- volume of business. It Helps to estimate separately the volume of sales of each F & B outlet. It is the future projection regarding the number of portions to be produced and the possible revenue that is expected to be generated. This estimate can be based on the following Analysis of the past trend of the business Reports by the sales department Market research and market survey Overall economic conditions in the market.

4.Advertising cost budget- the budget of advertising is related to sales. Usually it has been seen that the product which is selling well, does not require an advertisement. Usually the advertising budget is fixed in the form of a fixed amount for a specific period of time. 5. Production Budget- it is basically a forecast of the quantity ( number of portions ) that should be prepared. The material cost that is the food cost estimation, is done in the budget that shall tell the forecast quantities of various raw material and their costs. The following points should be considered while preparing this budget It should be relative to sales forecast Production capacity Stock of raw material Policy of the management

6.Purchase budget- the material has been classifies under two heads- direct and indirect. The budget that tells about the quantity and volume of raw material required to be purchased during a specific period. The opening and the closing stock of the raw materials should be kept in mind while forecasting. 7. Human Resource Budget- this budget tells about the requirement of the human resources in order to meet the projected production, during the budgeted period.

8.Finance Resource Budget- this budget is an estimate of cash required for business for the specified period. The function of this budget is that the management should never be short of funds to operate the business. This budget tells that if money is short, what steps to be taken to overcome this problem 9.Overhead Cost Budget- this budget shows various types of overheads that will be incurred during the budgeted production period. Overheads should be classified under the following heads-fixed, variable, semi-variable

VARIANCE ANALYSIS The term variance means difference. In regard to the food service operations, variance means the difference between the projected/ budgeted or forecasted figure and the actual figure achieved. The main objective of the business is to earn profit and profit depends on two factors- cost and sales. The management should fix targets in terms of both costs and sales and then make plans to achieve these targets. The objective should be to maximize the sales and minimize the costs. This will result in maximization of profits and accumulation of funds.

Different types of cost variance1. Direct Material Cost Variance- is the difference between what should have been the cost and what has been the cost. This variance may be due to High consumption of raw material due to inefficiency of the staff, lack of skill and faulty workmanship. Wastage due to incorrect processing of the material. Break down of plant and machinery Inter- transfer of material from job to another. Lack of supervision and inspection Excessive spoilage

2. Direct Labour Cost Variance- the variance in the cost of labour is due to two main factorsdifference in actual rates of the labour and the standard rates. Difference in actual time taken to perform the job and the standard time prescribed to perform the job. Other reasons responsible for the variance are Appointing of labour that is more skilled than the required level, demanding higher payment. The labour being paid higher rates as there is shortage of labour in the market. Lower than the standard rate paid as unskilled labour is employed to do the job. Overtime paid to the labour required to put in extra time, resulting in higher wages. Changes in the standard wage rates.

3. Direct overhead Cost Variance- overheads are related to different operations in the food service operations. Overheads are of two types- variable overheads and fixed overheads. Reasons for variances are Advance payments made for any of the overheads. Due to outstanding expenses but payments not done. Due to abnormal expenses incurred such as repairs to machinery, spoilage.

4. Sales Variance- this is the difference between what should have been the sales and the actual sale. In case the actual sales is more than the budgeted sales, the variance is termed as favourable. Sale is an important activity and the profit depends upon it.

CHARACTERISTICS OF BUDGET Forecast- budgets are not actual but only future projections based on the past happenings. Flexibility- a budget should have flexibility and should be capable of changing with the changing situations. Clear and realistic- the goals set in the budget must be achievable. Creation of responsibility centres- people should be made responsible for following the budgeted guide. Effective communication- this is key to success to forecasting.