Chapter 7: Controlling Expense

7.1. The budget process

Budgeting is one of the main planning activities
of an executive housekeeper. It is the process by
which, based on the actual performance of
establishments in the past, estimates of
expenditure and receipts are made and
adjusted for forecasting future outcomes.
Budget can be defined in many ways:
• Budgeting is one of the main planning activities of an
executive housekeeper. It is the process by which, based
on the actual performance of establishments in the
past, estimates of expenditure and receipts are made
and adjusted for forecasting future outcomes. Budget
can be defined in many ways:Categorized by Type of
Expenditure
•
• Based on the types of expenses and assets involved,
budgets may be categorized into capital, operating and
pre-opening budgets.
• Capital budgets – These allocate the use of capital
assets that have a life span considerably in excess of
one year, these are assets that are normally used up in
day to day operations. Furniture, Fixture and Equipment
(FFE) are typically examples of capital expenditures.
Capital expenditures in the housekeeping department
may include room attendant’s carts, vacuum cleaners,
general floor machines, carpet shampoo machines,
sewing machines and laundry equipment. The hotel
building itself is also a capital asset.
•
• Operating budgets – These forecast expenses and
revenues associated with the routine operations of
the hotel during a certain period. Operating
expenditures are those costs the hotel incurs in
order to generate revenue in the normal course of
doing business. In the housekeeping department,
the most expensive operational cost is the salary
and wages or labor cost. The cost of all-recycled
inventory items, such as cleaning and
guest supplies, are also operational costs.
• Pre-opening budgets – These force the
planning necessary for the smooth opening of
a new hotel. These budgets allocate resources
for opening parties, advertising, generation of
initial goodwill, liaisons and PR. Pre-opening
budgets also include the initial cost of
employee salaries and wages, as well as
supplies, crockery, cutlery and other items.
• Housekeeping Budget
•
• Budgeting set-up depends on the function of the hotel or facility. A hotel
or facility can be smaller or larger scale operated. The larger they are the
more complex it gets.
•
• In a smaller scale hotel or facility usually there is Front Office,
Housekeeping and Maintenance and the expenses are controlled mainly
by the Owner through the General Manager. They were the key decision
maker in preparing the yearly budget with the assistance of an
accountant or accounting firm. The budgeted amount needed to operate
for the whole year is based on the expenses incurred on the previous
years and other related occasions that will affect the preparation of
budget for the coming year.
 7.2. Planning the operating budget

• 1) Operational Budget is the allocation of expenses for

each item/s required by the department in order to
operate smoothly. In case of hotel operation, control of
expenses are based on occupancy percentage. The
budgeted amount for the month can be variable since
there are certain period where occupancy forecasts in
other areas or countries are unreliable or unpredictable.
•
• The basic Housekeeping operational budget are as
follows:
• a) Staffing
• b) Linen & Towels
• c) Guest Supplies & Amenities
• d) Cleaning Supplies
• e) Laundry Supplies
• f) Machine, Tools & Equipment
• g) Decoration
• h) Miscellaneous
• i) Printing and stationeries
• types of housekeeping budgets
•
• Capital budget: It is an intended expenditure on assets that are not used up in the normal
course of operations; instead they have a life span that exceeds a single year.
•
• Operational budget: It is an intended expenditure of items of daily or short term
consumption i.e. those costs that the hotel incurs in order to generate revenue in the normal
course of doing business. In the housekeeping department the most important and
expensive operational cost involves salaries and wages. The cost of non-recycled inventory
items, such as cleaning and guest supplies are also considered operational costs.
•
• Pre Opening budget: It is an intended expenditure of allocation of the resources for opening
parties, advertising initial generation of goodwill, liasions and PR. It also includes the initial
cost of employee salaries and wages, as well as amenties, supplies, and other day to day
useful items like cutlery, crockery, etc
•
•
• PLANNING CAPITAL BUDGET: Capital expenditure involves large
sums on such investments that have a long term impact. It is thus
natural that decisions on these items are critical and should be
made by a group involving the general manager, financial controller
and executive housekeeper.
•
• Decisions to incur capital expenditure in housekeeping arise from:
•
• Renovation of rooms or public areas.
• Addition of rooms or public areas.
• Replacement of equipment, furnishings, carpets, etc.
• Introduction of automation in the department.
• The types of items that are provided for in the capital budget
are:
•
• Large equipment and machines.
• Furniture, fixtures and fittings in rooms and public areas.
• Linen and soft furnishings.
• Uniforms.
• Special project (construction of new rooms etc.)
• Miscellaneous- It is quite normal to have a certain amount of
money allocated under such a heading in order to make provision
for emergencies e.g. alterations required by law etc.
•
• PLANNING OPERATIONAL BUDGET: The first step in
planning the operating budget is always to forecast
room sales, which generates the revenue for
operating the various departments. Most of the
expenses that each department can expect are
most directly related to room occupancy levels. This
is especially true of the housekeeping department
where salaries and wages, and the usage rates for
both recycled and non-recycled inventories are a
direct function of the number of occupied rooms.
• The various heads of expenditure that are normally reflected in a housekeeping
operating budget are:
•
• Cleaning and guest supplies
• Office stationery and postage
• Tailor shop expenses
• Small cleaning equipment like brooms and brushes
• Salaries and wages-includes retirement, benefits, bonus, allowances, incentives, etc.
• Heat, light, and power-air conditioning, heating, electricity consumption
• Repairs and maintenance
• Pest control
• Laundry expense
• Horticultural expense: includes florist expense (flowers, oasis and vases) and
landscaping expense (seeds, manure, saplings and flower pots)
• Contract cleaning
• Controlling expenses: It means ensuring that actual expenses are consistent with the expected
expenses forecasted by the operating budget. There are basically four methods the executive
housekeeper can use to control housekeeping expenses.
•
• Accurate record keeping: It enables the executive housekeeper to monitor usage rates,
inventory costs and variances in relation to standard cleaning procedures.
• Effective scheduling: It permits the executive housekeeper to control salaries and wages and the
costs related to employee benefits. The housekeeping employees should be scheduled
according to the guidelines in the property’s staffing guide which is based on the level of room
occupancy. Thus it ensures that personnel costs stay in line with the occupancy rates.
• Careful training and supervision: It should not be overlooked as a cost control measure.
Effective training programmes that quickly bring new recruits up to speed can significantly
reduce the time during which productivity is lower than the standards set for more experienced
personnel. Close and diligent supervision, as well as refresher training can ensure that
performance and productivity standards are met and may even bring about improvements.
• Efficient purchasing: Efficient purchasing practices afford the executive housekeeper the
greatest opportunity to control the department expenses and to ensure that the hotel’s money
is well spent and the maximum value is received from products purchased for use.
7.3. Operating budget and the income statement

• Operating budget and income statement: An

operating budget is identical in form to an
income statement. The differences are:
OPERATING BUDGET INCOME STATEMENT

It is a forecast or plan for what is to come. It is a report of what has actually occurred.

It predicts or anticipates what the income statement It expresses the actual results of operations during an
will actually show at the end of that period often accounting period identifying revenue earned and
referred to as “pro forma income statement”. itemizing expenses during that period.
• Since a statement of income reveals the bottom
line-the net income for a given period-it is one of
the most important financial statements used by
the top management to evaluate the success of
operations.
• Although the executive housekeeper may never
directly use the hotel’s statement of income, this
statement relies in part on detailed information
supplied by the housekeeping department.
 Checklist for preparing a budget

• Know the present position of the hotel.

• Review the previous year’s financial statements.
• Look at the major sports events, festivals and holiday events for the
year ahead.
• Check for any expansion plans, redecorating, raising standards,
increase/decrease of staff.
• Check on the supplies needed-consider automation, new technology
and better products.
• Take each cost heading separately and compile to form the final budget.
• Plan for practical goals and do not over budget.
• Take into account the inflation percentage. Prepare by looking at past
experiences, present knowledge and judgement of what is likely to
happen.
• Identify areas which can or cannot be controlled.
• Review wages and salaries, operating costs and
expenditure that is variable, semi-variable, and fixed.
• Plan with the following year’s tax policies in mind.
Take into consideration any new laws or regulations
or policies that may come into effect.
• Prepare throughout the year for the next year’s
budget noting changes and scope for improvement.
• Make decisions of what is more cost-effective
• Controlling expenses: It means ensuring that
actual expenses are consistent with the
expected expenses forecasted by the
operating budget. There are basically four
methods the executive housekeeper can use
to control housekeeping expenses.
• Accurate record keeping: It enables the executive
housekeeper to monitor usage rates, inventory costs and
variances in relation to standard cleaning procedures.
• Effective scheduling: It permits the executive housekeeper
to control salaries and wages and the costs related to
employee benefits. The housekeeping employees should
be scheduled according to the guidelines in the property’s
staffing guide which is based on the level of room
occupancy. Thus it ensures that personnel costs stay in line
with the occupancy rates.
• Careful training and supervision: It should not be overlooked as a cost
control measure. Effective training programmes that quickly bring new
recruits up to speed can significantly reduce the time during which
productivity is lower than the standards set for more experienced
personnel. Close and diligent supervision, as well as refresher training can
ensure that performance and productivity standards are met and may
even bring about improvements.
• Efficient purchasing: Efficient purchasing practices afford the executive
housekeeper the greatest opportunity to control the department expenses
and to ensure that the hotel’s money is well spent and the maximum value
is received from products purchased for use. The executive housekeeper
must set a proper ‘par’ for the various inventories (recycled and non-
recycled), and must have a proper purchasing system with the quantities
and specifications submitted to the purchasing department.
 Operating Budgets and Income Statements

• An operating budget is management’s plan for generating revenue

and incurring expenses over the time of the budget. Operating
budgets are usually in effect for a fiscal year, but they are subject to
alterations if anticipated revenues or costs change markedly from
what was projected.
• A budget is developed by calculating projected sales, determining
required profit levels and fixed expenses, and calculating food costs.
• Example 43: Sales/Cost/Profit Equation
• Profit can only occur when sales exceed the break-even point. That
is,
• profit = sales − costs
• = sales − (labour + food costs + overhead)
• or sales = labour + food costs + overhead + profit
• Overhead is a fixed cost. Your rent payment usually is the
same regardless of the level of your sales. Labour costs are
semi-variable costs. As was explained earlier, some labour
costs are constant and must be paid even if sales do not meet
expectations while other labour costs are the result of
increases in sales.
• Since labour costs are not truly fixed, the variable part of the
cost of labour can be manipulated in times of poor sales by
cutting back on paid hours, introducing shift changes, and
even laying off personnel. Personnel working in the food
industry often learn how flexible their hours can become in
times of poor sales!
• Planning for a Profit
• The first step in planning for a profit is to determine how much return the
investor or company needs. The restaurant business is considered a risky
investment. Some people make a lot of money; more people go broke. If
people can earn 10% by investing their money in safer investments,
investors will expect to earn more than this as they have a chance of losing
all their money.
• Example 44
• A restaurant owner has put up $100 000. The owner wishes to have a profit
of 15%. The cost to the restaurant for the use of this money is:
• cost (profit) = principle × interest rate
• = $100 000 × 15%
• = $100 000 × 0.15
• = $15 000
• Planning for a Profit
• The first step in planning for a profit is to determine how much return the
investor or company needs. The restaurant business is considered a risky
investment. Some people make a lot of money; more people go broke. If
people can earn 10% by investing their money in safer investments,
investors will expect to earn more than this as they have a chance of losing
all their money.
• Example 44
• A restaurant owner has put up $100 000. The owner wishes to have a profit
of 15%. The cost to the restaurant for the use of this money is:
• cost (profit) = principle × interest rate
• = $100 000 × 15%
• = $100 000 × 0.15
• = $15 000
• Calculating Other Costs
• Remember, fixed costs include rent, heat, light, and other overhead
costs. For this discussion, assume the restaurant has been in business
for a number of years and last year the overhead costs amounted to
$55 000. These costs have been increasing at about 5% per year.
• Example 45: Projected Food Cost
• The projected fixed cost for next year will be:
• new overhead cost = old overhead cost + increase in overhead cost
• = $55 000 + (5% of old cost)
• = $55 000 + (0.05 × $55 000)
• = $55 000 + ($2750)
• = $57 750
• The semi-variable cost of labour can be treated in much the same
manner. Assume that last year labour costs were $75 000 which
was an increase of 5% over the previous year. Other indicators
suggest that labour costs will increase about the same for the
coming year.
• Example 46: Projected labour cost
• The projected labour cost for next year will be:
• new labour cost = old labour cost + increase in labour cost
• = $75 000 + (5% of old cost)
• = $75 000 + (0.05 × $75 000)
• = $75 000 + ($3750)
• = $78 750
• Income Statement
• An income statement is an official financial
document that presents the actual income
and expenses of a business for a declared
period of time—often the end of each month
and at the end of the fiscal year.
 7.4. Budgeting expenses

• Budgeting is one of the main planning activities of an executive

housekeeper. It is the process by which, based on the actual
performance of establishments in the past, estimates of
expenditure and receipts are made and adjusted for forecasting
future outcomes. Budget can be defined in many ways:
•
• A budget is a plan by which resources required to generate
revenues are allocated. A budget is a plan which projects both
the revenues the hotel anticipates during the period covered by
the budget and the expenses required to generate the
anticipated revenues.
•
• The advantage in preparing a budget is that it
provides an opportunity for taking a critical
look at the cost of the department, reviewing
past planning and present accomplishments,
and then taking appropriate steps to
accomplish more in the coming financial
years.
 TYPE OF BUDGETS

• Budget may be of different kinds, based on the

types of expenses involved, the dCategorized
by Type of Expenditure
•
• Based on the types of expenses and assets
involved, budgets may be categorized into
capital, operating and pre-opening budgets.
• epartments and the flexibility of expenses
• Capital budgets – These allocate the use of capital
assets that have a life span considerably in excess of
one year, these are assets that are normally used up in
day to day operations. Furniture, Fixture and
Equipment (FFE) are typically examples of capital
expenditures. Capital expenditures in the
housekeeping department may include room
attendant’s carts, vacuum cleaners, general floor
machines, carpet shampoo machines, sewing
machines and laundry equipment. The hotel building
itself is also a capital asset.
• Operating budgets – These forecast expenses and
revenues associated with the routine operations of
the hotel during a certain period. Operating
expenditures are those costs the hotel incurs in
order to generate revenue in the normal course of
doing business. In the housekeeping department,
the most expensive operational cost is the salary
and wages or labor cost. The cost of all-recycled
inventory items, such as cleaning and
guest supplies, are also operational costs.
•
• Pre-opening budgets – These force the
planning necessary for the smooth opening of
a new hotel. These budgets allocate resources
for opening parties, advertising, generation of
initial goodwill, liaisons and PR. Pre-opening
budgets also include the initial cost of
employee salaries and wages, as well as
supplies, crockery, cutlery and other items.
• Categorized by Department Involved
•
• Base on the department involved, budgets may be categorized into master
budgets or department budgets.
•
• Master budget – These represent the forecasted target set for the whole
organization and incorporate all incomes and expenditures estimated for the
organization.
•
• Department budget – each department of the hotel forwards a budget for
its estimated expenses and revenues to the financial controller. For instance,
there would be a housekeeping budget , an F&B budget, a maintenance
budget, and so on. In fact, the room division budget is in this case the
combine budget of the front office and housekeeping department.
• Categorized by Flexibility of Expenditure
•
• Budget may also be classified on the basis of the flexibility of
expenditure:
•
• Fixed budget – These budgets remain unchanged over a period of
time and are not related to the level of revenues. Such budgets
include budgets for advertising and administration.
•
• Flexible budgets – These budgets pre-determine expenditure
based on the revenue expected and differ with different volumes
of sale.
 7.5. Controlling expenses

How to control expenses in your business

• Are you keeping business expenses under control?
• Businesses that lose sight of how spending affects revenue are
putting themselves at risk. In today’s hyper-competitive market,
businesses that keep their costs low earn the highest profits.
• Cost control is the process of identifying, reducing, or
eliminating wasteful spending and inefficient expense
management processes to reduce costs and grow profits.
Although you can reduce business expenses in the short term
by cutting unnecessary expenses, making
structural improvements to your ability to track, manage, and
control your spending should be a top priority.
What Is cost control and why is it important?

• Cost control is important because it lets

businesses reduce expenses by analyzing and
tracking variances between budgets and
actual costs. If actual costs are higher than
budgeted, financial leaders have the
information they need to identify and address
the variance.
• Companies that practice effective cost control
have several competitive advantages.
• Improved business performance: Managing costs through regular cost analysis,
optimization practices, and automated spend management tools improves
profitability and cash flow.
• Project cost management: Building cost control into project management
policies enables managers to quickly identify and address cost overruns before
they spiral out of control.
• Stronger vendor relationships: Greater visibility into supplier costs and
improved AP processes help businesses reduce vendor disputes, get vendors
paid on time, and negotiate better supply contracts.
• Improves working capital: Predictable monthly costs mean predictable cash
flow, freeing up working capital and reducing the need for emergency financing.
• The expense management process starts with a realistic budget. It looks at how
much money a business expects to spend, how much it’s actually spending, and
what it’s spending it on. Although each company’s budgeting process is
different, the fundamental cost control process is similar.
• Understanding cost control
• Basic cost control includes two methods to determine cost targets:
target net income and variance analysis.
• Target Net Income
• Target net income is the expected business income after taxes for a
specific accounting period. It provides a yardstick to estimate
budgeted expenses to produce a target profit.
• The formula for target net income is:
• Target net income = revenue – variable expenses – fixed expenses
• Assuming revenue is fixed (set by leadership), reaching target net
income means reducing fixed and variable costs for the period.
• Variance analysis
• A financial variance occurs when there’s a difference between a
budgeted and actual result during an accounting period. Favorable
variances are when actual costs are below budget, and unfavorable
variances are when actual costs exceed the budget. Companies can use
variance analysis to identify variances, determine what’s causing them,
and take corrective action.
• Using our construction company example, say the company sets a
budget of $1 million in variable costs and $2 million in fixed costs. At
the end of the first month, variance analysis reveals that actual variable
expenses are $100,000 higher than budgeted for the month — a
significant negative variance. Using this information, the company can
identify the categories with cost overruns and take action to address
the variance by reducing spending.
• How expense control works
• Businesses incur expenses for operations and making sales.
Controlling expenses involves managing how a business spends
money by reducing expenditures, improving operational
efficiency, optimizing supplier relationships, and controlling
employee expenses.
• A modern spend management strategy involves three
functions:
• Identifying, categorizing, and tracking expenses.
• Improving spend management efficiency with automation.
• Controlling and reducing operational costs.
• Let’s break these out.
• Identifying, categorizing, and tracking expenses
• You need to know where your money is going before you
can control how you spend it.
• Group related expenses into expense categories to make
it easier to identify and manage controllable expenses.
Identify the categories your business uses the most and
will need in the future as the business grows. For
example, businesses usually group employee
entertainment and travel expenses into the
travel & entertainment category.
• You can break expenses into three main categories:
• Fixed expenses: Recurring expenses like rent, insurance premiums,
property taxes, and equipment lease payments that don’t change, or
change very little, in the future.
• Variable expenses: Expenses like utilities, communications, or payroll
that can change from month to month or season to season.
• Periodic expenses: Incidental expenses like vehicle repairs, travel, or
office supplies that a business incurs occasionally.
• To make tracking and controlling expenses for specific projects or
products easier, break the spending categories into direct and indirect
expenses.
• Direct expenses: Expenses involved with the production of a specific
product or service, like labor, raw materials, or equipment.
• Indirect expenses: Overhead expenses necessary for daily operations,
like office rental, employee benefits, and legal costs.
• Use automation to get more control over expenses
• As you go through the process of categorizing company expenses, you’ll identify
areas where you can reduce spending or improve process efficiency. However,
addressing these areas with slow and error-prone manual accounting processes
may be difficult. For example, manually checking every invoice and
B2B payment to identify overspending can tie up already busy AP team
members. Accounting automation solutions streamline spend management
workflows by automating manual processes and providing real-time data
tracking and transparency – giving you greater control over expenses.
• We’re going to look at four technologies that can help you control business
costs:
• Accounting software and ERPs.
• Accounts Payable automation and Spend Management.
• Employee expense management solutions.
• Credit card platforms.
•
• 6 Ways to Control Your Expenses
• 1. Create and Stick To a Budget
• You should have a budget in place that covers all of your
expected expenses and leaves room for any unexpected
costs.
• It should be realistic and reviewed periodically to make
sure that it still makes sense for your current financial
situation. A budget can be made by looking at each
spending category and understanding your spending
habits.
• 2. Keep a Detailed Track of Your Expenses
• Whenever any expenses are incurred, you should be
keeping the receipts and filing them. This means that when it comes to your
business’s tax return, all of your expenses can be accounted for.
• 3. Eliminate Unnecessary Purchases
• It can be tempting to buy on impulse. If you see something that you feel would be
beneficial to your business don’t buy it right away. Take the time to think about
whether you really need the object – you’ll soon realize that most of the time you
don’t.
• 4. Use Zero-Based Budgeting
• One way to keep tight control of your expenses in a company is to use zero-based
budgeting. Traditionally people create budgets based on what the previous budget
was. But things change and budgets tend to change with them.
• Zero-based budgeting begins the budget for each new period from a zero base. This
is then reviewed with past budgets and weighing in with any current spending
needs.
7.6. Purchasing systems