Operations budgeting

Operations Budgeting and
Cost-Volume-Profit Analysis

BAC-5132 Food and Beverage Management-II-Menu Engineering: Operations Budgeting
Monday, October 29, 2012 Slide 1 /25

Recap of Pricing Methods

• Explain the Subjective Pricing methods.
• Itemize the Objective Pricing methods.
• Recall the formulas for All Simple Mark
Up pricing methods.
• Recall calculation formulas of Contribution
Margin Pricing method, Ratio Pricing
method, Simple Prime cost method and
Specific Prime cost Method.


Scope of the Session

1. The Budget Process Overview.
2. Multi-Unit Budgeting.
3. Calculate Projected Revenue Levels.
4. Determine Profit requirements.
5. Calculate Projected Expense Levels.
6. Budget Development Process.
7. Variance Analysis.


The Budget Process Overview
• The Operating Budget.
• Plan.
• Estimates.
• Meet the financial requirements and
Goals.
• Long term, Short Term, Capital and Cash.
• Short Term is the most commonly used in
Food and Beverage Business.

• What happens if the expense category
gets overshot.
• What happens if the income levels fall
below the forecasted levels.
• How does one compare Income and
Expense with the actual % age levels.
• Why is it important to have a reasonable
budget projection in the F & B business.


• The Main Goals set are for:
1. Revenue.
2. Profit Requirements.
3. Operating Expenses.
• Goals must be attainable and must not
compromise with establishments quality
requirements.


• The Budget evaluates the past to plan
corrective actions for the future as well.
• The current period budget is used often to
develop budgets for the next fiscal period.
• It helps in defining responsibilities, and
empowers management personnel to
meet the financial ends and be
accountable for their actions.

Multi-Unit Budgeting
Bottom-up budgeting
• Operating budgets assembled at unit level
• Unit-level budgets “rolled” up the
organization
• Budgets geared specifically to individual
operations
• Creates “ownership” at unit manager level


Bottom Up Budgeting
• Bottom-up budgeting, also called
participatory budgeting, is a somewhat
modern approach to planning the use of a
company's financial resources.
• Reserved for somewhat larger
organizations, it differs from top-down
budgeting where the high level executives


Top Down Budgeting
• Operating Budgets developed at
Corporate Levels.
• Budgets are passed down to unit levels.
• Corporate profit requirements made part
of individual unit plans.


The Top Down Budget
• A top-down budget process means that a
binding decision on budget aggregates is
taken before allocating expenditure within
that aggregate.
• In each step of the budget process, the
allocation of expenditure is subject to the
constraints that have been set at the
previous stage.

Top Down and Bottom Up


Budget Development Process
• The Budget development process is
based on three important steps to
minimize reforecasting unless the
revenue earned reduces.
• Calculate Projected revenue levels.
• Determine profit requirements.
• Calculate project expense levels


1. Calculate Projected Revenue
Levels
1. The easiest way is to first take the
average check and multiply by Projected
customers.
• Revenue histories
• Current factors
• Economic variables
• Other factors
• Special concerns in forecasting
beverage revenue

Levels
• Revenue Histories: Past revenue level
analysis and trends, commonly in times
where there is a consistent rise every
year.
• Current factors: New competition,
Government projects, liability laws.
• Economic Variables: Inflation, Public
Habits and life style change.

Levels
• Other factors: Mix between connected
revenue from Room and derived revenue
of F & B. Any mix of revenue like F & B
connected to banquet revenue if not
documented separately may lead to a
merger.
• Special Concerns: Mix in the beverage
product sales estimates because there is
no segregation of Beverage sales.

2. Determine Profit
requirements
• Two basic ways to treat profits when
budgets are developed:
1. Profit = Revenue – Expenses.
2. Revenue - Required Profit = Allowable
operating expenses.
a. Treats Profit as a cost b. Generates
revenue.
c. Plan for desired profit. d. Have money to
meet the expenses required to generate
revenue.

3. Calculate Projected Expense
Levels
• Fixed Costs: • Variable Costs:
• Management • Food Costs.
Salaries • Beverage Costs.
• Rent Expense. • Labor Costs.
• Insurance. • Supplies Costs.
• Property Taxes
• Depreciation.
• Interest Expense

3. Calculate Projected Expense
Levels
• Profits
• Profit Margin Ratio = Net Income
Total Revenue
• Return on Investment= Net Income
Average Owners Equity
• Return on Assets = Net Income
Average Total Assets

Budget Development Process
Calculate projected expense levels.
• Simple mark-up method
• Percentage method
• Zero-based budget calculations.
• Special Concerns in estimating
beverage expenses in beverage
revenue.
• Estimating other expenses.

Estimating Expenses—Mark-Up
Method
• Estimates future expenses on basis of current
expense levels.
• Amounts of current expense levels are
increased/decreased for new operating budget.
• Assumes all costs were reasonable during
current year.
• Inefficiency could be extended into the
new budget.

Estimating Expenses—Percentage
Method
• Based on current percentage of each
expense relative to revenue
• Applies same cost percentages of current
year to upcoming year
• Assumes all costs were reasonable
during current year
• Inefficiency could be extended into the
new budget

Estimating Expenses—Zero-Based
Method
• Builds new budgeted expenses from a zero
base
• Current and previous years’
amounts/percentages are ignored
• Each expense item justified on its own
merit
• Avoids extending inefficiency into new
budget but requires considerable time/effort

Example
• Exhibit-2,3, 4,5 & 6- Page 109 Operations
Budgeting and Cost-Volume- Profit
analysis.
• Planning and Control for Food and
Beverage Operations 7th Edition, 2009
American Hotel and Lodging Association
2113 N High street, Lansing Michigan
48906-4221. ISBN: 978-0-86612-339-6
• Jack. D. Ninemeir

Variance Analysis
Identifies differences between budgeted
plans and actual results
Equations below: positive variances are
favorable; negative variances are
unfavorable
Revenue Variances = Actual Amount −
Budgeted Amount
Expense Variances = Budgeted Amount −
Actual Amount

Questions
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