Operating budget – controlling expenses – income statement

Using the operating budget as a control tool:

An operating budget is a valuable control tool to monitor the course of operations during a specified period. Controlling expenses in the housekeeping department means comparing actual costs with budgeted amounts and assessing the variances. When comparing actual and budgeted expenses, the executive housekeeper should first determine whether the forecasted occupancy levels were actually achieved. If the number of occupied rooms is lower than anticipated, a corresponding decrease in the department’s actual expenses should be expected. If occupancy levels are higher, then there will be a corresponding increase in expenses. In either case the expense variation will be proportioned to the variation in occupancy level. The executive housekeeper’s ability to control housekeeping expenses will be evaluated in terms of his/her ability to maintain the cost per occupied room expected for each category. Small deviations between actual and budgeted expenses can be expected and are not a cause for alarm but serious deviations require investigation and explanation. The executive housekeeper needs to formulate a plan to correct the deviation and get the department back ‘on budget.’ E.g. a re-examination of staff scheduling procedures or closer supervision of standard practices and procedures may be necessary. Other steps might include evaluating the efficiency and costs of products being used in the housekeeping department and exploring the alternatives. Even if the executive housekeeper finds that the department is far ahead of the budget it is not necessarily a cause for celebration. It may indicate a deterioration of service levels that were built into the original budget plan. Any serious deviation from the plan is a cause for concern and requires explanation. Identifying and investigating such deviations on a timely basis is one of the most valuable functions an executive housekeeper can perform in terms of the operating budget.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.

1. Accurate record keeping: It enables the executive housekeeper to monitor usage rates, inventory costs and variances in relation to standard cleaning procedures.
2. 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.
3. 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.
4. 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. The executive housekeeper needs to periodically re-evaluate the suitability of existing products for their intended purposes. Alternative products should be investigated and compared to existing products in terms of performance, durability, price and value. By comparing the cost per occupied room achieved by alternative products, the executive housekeeper can evaluate which products yield greater cost savings and base purchasing decisions accordingly.

Operating budget and income statement: An operating budget is identical in form to an income statement. The differences are:

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. The revenue generated by the rooms division is often the largest single amount produced by revenue centres within a hotel since housekeeping is a major source of expense incurred by the rooms division; the executive housekeeper plays an important role in the hotel’s overall financial performance. The hotel’s statement of income shows only summary information. More detailed information is presented by the separate departmental income statements prepared by each revenue centre. These departmental income statements are called schedules and are referenced on the hotel’s statement of income. The operating budget under which the executive housekeeper operates takes the form of monthly income statements for the rooms division. Projected revenues and expenses for each month of the budgeted period will represent the rooms division operational plan. The executive housekeeper will be held accountable for controlling the expense areas that fall within the housekeeping department’s area of responsibility. As the budgeted period progresses, monthly income statements will be produced that show the actual amounts alongside the amounts originally budgeted.Checklist for preparing a budget

1. Know the present position of the hotel.
2. Review the previous year’s financial statements.
3. Look at the major sports events, festivals and holiday events for the year ahead.
4. Check for any expansion plans, redecorating, raising standards, increase/decrease of staff.
5. Check on the supplies needed-consider automation, new technology and better products.
6. Take each cost heading separately and compile to form the final budget.
7. Plan for practical goals and do not over budget.
8. Take into account the inflation percentage. Prepare by looking at past experiences, present knowledge and judgement of what is likely to happen.
9. Identify areas which can or cannot be controlled.
10. Review wages and salaries, operating costs and expenditure that is variable, semi-variable, and fixed.
11. 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.
12. Prepare throughout the year for the next year’s budget noting changes and scope for improvement.
13. Make decisions of what is more cost-effective:

• Part time or full time staff.
• Cost of staff and how often they may be required.
• The cost of servicing a room i.e. overtime versus extra staff.
• Contract cleaners versus own staff.
• In-house laundry against contract.
• Use of cleaning agents as per dilution rates.