Most of us know that an annual budget is a set of financial targets, calculated monthly over a calendar, accounting or fiscal year. In preparing a budget, however, many proprietors and managers believe that producing it is an accountant’s role; alternatively, they do it themselves. In either case, there is overwhelming evidence that most budgets just become a set of statistics. How can they be made more meaningful and, more important, more useful to the business?
The answer is simplicity and total management involvement: these are the key factors that not only make a budget work, but make it a working tool throughout the year.
First, a budget should not be over-complicated. The simplest way of doing this is to have three sets of figures side by side – the actual figures achieved, the budgeted figures and the variance. In this way, the figures are easily compared. And remember, no budget can be properly prepared without involving members of the management team. They are the ones who will achieve the financial targets identified in the budget, so their involvement is essential because each team has to take ownership of the part that relates to its own department.
When the final set of financial targets is agreed, it automatically becomes the management team’s set of financial goals for the year. It’s well known that when we can focus on a specific quantifiable target, improved results are always achieved and any establishment introducing this process will find this is so.
What is vital to remember is that that management teams must review actual performance to budget on a monthly basis. Without this monthly oversight, there is absolutely no point in drawing up a budget in the first place. If the budget is only compared on a quarterly or, far worse, an annual basis, there is no possibility that any action, which could rectify a damaging situation, can be taken during the year. In other words, it will be too late.
Below is an example of a P&L account of an 11 room hotel. It gives the headings and, where appropriate, the cost percentages of the hotel enjoying 60 per cent occupancy. The recommended percentage costs will act as a guide to putting your budget together.
|Payroll/ NI @29.8% of total revenue||178,882|
|Food @30% of food revenue||65,149|
|Beverages @ 30% of revenue||26,059|
|Commission @12½% of room revenue||36,887|
|Total direct costs||306,977||306,977|
|Gross profit @ 48.9%||292,158|
|Rates and water rates (est)||40,000|
|Energy @ 4% of total revenue||23,965|
|Telephone, broadband, mobile and fixed line (est)||3,000|
|Sales and marketing @3% (inc website costs)||17,974|
|Repairs and Renewals @ 5% of revenue||29,956|
|Admin and General @ 4% of revenue (see note)||23,965|
|Misc : Rooms @5% (see note)||14,755|
|Misc: Food @5% (see note)||10,858|
|Misc: Beverages @ 1% (see note)||868|
|Total Indirect Costs||171,841||171,841|
|Gross operating profit (EBITDA) @20.3%||120,317|
|Depreciation @ 5% of revenue||29,956|
|Interest repayment @4.5%||18,000|
Beverage stocktaking, unfortunately, is seen by many as a boring part of management and is often considered unnecessary due to the fact that stock takers appear to be an expensive luxury. They are not.
In my view, this could not be further from the truth. Professional stock taking can reveal inconsistencies in pricing, pilferage and any other misdemeanour. It is often suggested that a beverage stock take should be carried out quarterly and undertaken internally – but this is just not good enough. A three monthly stock takes leaves less time to address the challenge that has been identified, while an internal stock take, is, in the vast majority of cases, unintentionally biased and is rarely fully completed.
A beverage stock take should be carried out on a monthly basis, by an experienced stock taker; needless to say, a beverage stock taker who can also carry out a food stock take is ideal.
Analysing beverage stock taking, even after two monthly stock takes, will in the vast majority of cases reveal inconsistencies in cost to selling price. To show the effectiveness of reading a monthly stock take, let’s show the key elements of a stock take and what action can be taken to increase your beverage gross profit.
|Name||Units||Net cost per unit||VAT(inc selling price)||GP percentage|
The stock take on this particular item reveals that the gross profit on this wine is well under target. With house wine, the GP should be a maximum of 72 per cent and to achieve this in this example, the selling price should be £20.78. It is always the house wines that need to make a minimum of 72 per cent GP because they make up 80 per cent of wine sales.
Having spotted this, the management has two options: renegotiate the cost price to £4.65 per unit and increase the selling price to £19.95; alternatively, just raise the selling price to £20.78. Both these actions would achieve a gross profit of 72 per cent, but an increase of this size would have to be carried out in stages. Such an immediate jump to the desired selling price would surely be noticed by guests.
This might be a small example, but taken over the establishment’s annual wine sales – say £60,000 – an increase from 65 to 72 per cent GP represents an increase in profit of seven per cent – £4,200. This is not a huge amount, but if all other beverage sales are similarly analysed, the potential saving is significant.
About the author
Peter Nannestad, of Hospitality Business Improvement Management (HBIM), is a co-author of the book ‘How to Buy and Manage Your Own Hotel by Peter Nannestad and Miles Quest. The book gives much further detail on how to complete a budget and as well as more information on stock taking. It is available on eHotelier – just click HERE.
How to Buy and Manage Your Own Hotel takes readers step by step from the time of their initial interest in buying a hotel to the day they take over – and beyond. Complete with sound bites and advice from industry experts who have first-hand experience of ownership, it unravels the purchase process – and much more.[/fusion_text][fullwidth background_color=” background_image=” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ background_repeat=”no-repeat” background_position=”left top” video_url=” video_aspect_ratio=”16:9″ video_webm=” video_mp4=” video_ogv=” video_preview_image=” overlay_color=” overlay_opacity=”0.5″ video_mute=”yes” video_loop=”yes” fade=”no” border_size=”0px” border_color=” border_style=” padding_top=”20″ padding_bottom=”20″ padding_left=” padding_right=” hundred_percent=”no” equal_height_columns=”no” hide_on_mobile=”no” menu_anchor=” class=” id=”][fusion_text]