tourism

Learner guide

Manage finances within a budget SITXFIN003

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Version number 2.0

Copyright 2016

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© 2016 Didasko Digital. All Rights Reserved.

Contents

Overview ........................................................................................................ 3

Section 1: Allocate budget resources ............................................................. 3

Section 2: Monitor financial activities against budget ................................... 19

Section 3: Identify and evaluate options for improved budget performance . 39

Section 4: Complete financial and statistical reports .................................... 63

Glossary ....................................................................................................... 73

Please note the following condition

This Didasko learning resource should be used as a training tool for students and trainers. While the information contained within addresses the elements and performance criteria, and the knowledge and performance evidence of individual competencies it remains the responsibility of the training organisation to ensure it meets training framework requirements and to provide additional documentation where necessary.

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Overview

Everyone at some point in their life has made a budget. Have you ever wanted something that you had to save for? A new bike? A new pair of shoes? The latest computer game? Or, later in life, maybe a car or house? If so, then you probably set yourself a goal, calculated what you needed to save each week and worked towards achieving your goal. In other words, you prepared a budget and managed your finances to achieve the desired results.

Budgeting in business is essentially the same. It is about estimating and planning for something that you want to achieve (a profit!), working towards your goals, and then reviewing your budget at a later date to see if you achieved it.

Personal budgets can be changed or altered and may not be strictly adhered to. However in business, budgeting requires careful planning and is crucial in the day-to-day operation, profitability and growth of your business.

A budget is only as reliable as the information it is based on. Accurate information on your business’s operation, analysis of previous budgets and an understanding of your industry will help you manage your current budgets.

So let’s look at how you can successfully interpret your budgets and manage your finances.

Let’s look at what you will learn on completion of this unit.

Section 1: Allocate budget resources.

Section 2: Monitor financial activities against budget.

Section 3: Identify and evaluate options for improved budget performance.

Section 4: Complete financial and statistical reports.

Section 1: Allocate budget resources

In this section you will learn the following.

• How to allocate funds according to budget and agreed priorities. • How to discuss changes to income and expenditure priorities. • How to consult and inform personnel about resource decisions. • How to promote awareness of budget control. • How to maintain detailed records of resource allocation.

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What is my role when it comes to budgets? As a manager, you must allocate resources within the business to achieve the best results. Budgets provide a framework for your decisions.

In many businesses, particularly medium and large ones, the person who prepares the budget is not necessarily the same person who manages the budget.

Click on the tabs to learn more about your role.

Control

Managers control operations with the help of a yearly sales budget. From this, the person responsible for preparing budgets can calculate forecasted sales for each day, week, or month of the year. This, in turn, helps them determine the stock, staffing, equipment and finances they require to meet forecasted sales.

Evaluation

At the end of the budget period, you can compare the actual figures of the business or specific outlet with the goals set in your budgets. Then, you can evaluate your performance. Did you perform better than expected? Or worse? Did you meet your targets? The person responsible for preparing budgets can use your reports and budget outcomes to assist with future planning and identify opportunities for improvement.

Note...

In this unit you'll develop the skills and knowledge you need to manage prepared budgets, allocate resources, monitor income and expenses and report on budgetary deviations. Before you can do this, however, it's important you know what a budget is, can recognise the different types and interpret them correctly.

What is a budget? In simple terms, a budget is a detailed financial plan that shows estimated revenue and expenses (glossary) for a given time period. This information is then used to determine a business’s profitability.

Click on the icon to find out more.

A budget provides a plan for activities to be undertaken in the business and a means of comparing actual figures to budget forecasts to determine if the business, department or outlet has achieved a profit or loss.

They can be very simple: for the production or sales of a specific product or service, or for a small business such as a sole proprietor. They can also be very complex: for example, for larger businesses with multiple outlets, or organisations with a number of sites, such as a hotel chain.

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How can budgets assist my business? Budgets are very versatile tools. They can be tailored to suit a wide variety of situations and levels within an organisation. For example, a budget could show expected revenue for all food and beverage outlets in a hotel, for one specific outlet, or for a trading period within any given day.

Click on the tabs to see how a budget can assist your business.

Planning

Information from past and current budgets are used as a basis for many aspects of operational planning, including forecasting revenue, expenditure, capital expenditure requirements and staffing levels. They can help determine if a business can afford to undertake a renovation program or introduce new products or services.

Allocating resources

Budgets can show what resources are required where and when to meet forecasted demand. They will indicate when extra financial assistance might be required to cope with off-peak season expenses or how many extra staff are required for the busy summer period.

Controlling operations

Budgets set very clear and specific targets so areas of concern are usually indicated quickly, allowing management to respond and resolve problems before they escalate. Budgets help you monitor and control cash flow and expenditure, reduce wastage and maximise profitability.

Improved communication

Budgets clearly communicate the goals and targets to be achieved to management and staff at all levels of the business.

Performance evaluation

Past and current budgets give immediate, fast and ongoing evaluation of the performance of a department, an outlet, a team or a specific product or service. This information can be used in a wide variety of situations, including when conducting personnel performance appraisals, developing marketing campaigns, or analysing cash flow.

Note...

Budgets can be developed for short-term or long-term goals. They can also be modified and updated at any time to reflect changes in the business’s operation, or external factors such as price increases.

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What is the purpose of a budget? A budget is both a planning and performance evaluation tool. They are prepared prior to a specific period to assist in the business’s planning processes and allocation of funds within business. At the end of a period, the budget is then used to assess performance by comparing actual figures to those originally budgeted.

A key component of the planning process is allocating where the business’s funds will be spent and determining where revenue will be generated.

For the purpose of this unit, it’s assumed that your budgets have already been prepared for you. Your role is to manage them and report on any variations.

Allocating funds Budgets allocate an organisation’s precious resources to the areas it considers will create income or are necessary for the ongoing operation of the business.

Click on the icon for an example.

Funds may be allocated to the marketing budget to promote the business in the hope of generating sales. Funds can also be allocated to operational outlets so they can produce goods and services for sale, and to liabilities (glossary) such as utilities (glossary), as they are vital for the ongoing operation of the business and indirectly contribute to generating revenue. Funds may also be allocated to address specific needs, such as the purchase of a new point-of-sale system or refurbishment of the accommodation rooms.

Because there is a wide variety of areas within the business requiring funds, and as the allocation and use of these funds should be controlled, a number of different budgets are developed to control each aspect of the business.

Budget format There are two basic formats for a budget: fixed and flexible. All budgets are prepared in either one of these formats. Which one you use can depend on the type of budget, how far in advance the budget is being prepared, and your organisation’s specific needs.

Click on the signs to see the difference between a fixed and flexible budget.

1. Fixed (static) budgets

These budgets are usually prepared at the start of a budget period for an area or outlet, for specific goals, or for areas which do not have a direct relation to production or sales. This means the figures remain static no matter what the organisation’s actual revenue or expenses are throughout the budget period. They may be based on past history plus anticipated increases in business activity, or specific, identified targets.

For example, a hotel bar may have set targets for daily and monthly sales for the entire outlet or for sales of specific products (cocktails, Boags beer, etc.) based on anticipated numbers of customers. Alternatively, the budget could be for fixed items such as capital expenditure (glossary), specific marketing campaigns or repair projects.

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2. Flexible (variable) budgets

A flexible budget allows for adjustments based on changing conditions and can show figures based on various scenarios. This allows staffing requirements and stock expenses to be planned at these different levels.

Alternatively, a flexible budget can be used as an evaluation tool, where the initial fixed budget is adjusted to reflect events which occurred during the budget period that had a direct effect on its outcomes. The budget is usually updated at the end of the budget period. This allows the business to compare and assess performance based on what actually happened.

We will look at this in more detail later.

What are the different types of budgets? Businesses use different types of budgets to suit the nature of their operations.

Click on the pictures to identify each budget type.

 Master budget  Operational budgets  Sales budget  Cash flow budget  Profit and loss (P&L) budget  Capital budget  Event or project budget  Cash budget

Let’s take a look at each of these budgets in more detail over the next few screens.

Master budget This shows the budget for the whole of the organisation and is made up of a summary of all the individual departmental budgets.

Operational budgets These are usually short-term budgets which provide forecasts of revenue and/or expenses generated in the process of running the business. It doesn’t include revenue from other sources, for example, investments or expenses such as long-term capital purchases.

Click on the tabs to learn more.

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Budget breakdown

Operational budgets can be targeted to specific areas: sales, labour or wages, purchasing, marketing and advertising. These budgets can be components of the master budget as well as being components developed for each operational outlet. They can assist with staff rostering, purchase of materials, and maintaining cost of goods ratios.

Click on the other tabs on this screen to see examples of the different operational budgets.

Operational/departmental budget

The format, type and breakdown of information included can vary between organisations, depending on their individual needs.

Operational budget Outlet: ________________ Period: _______________

Number of customers 3,980

Breakfast $ 36,579.00

Lunch $ 59,035.00

Dinner $ 51,689.00

Total food sales $ 147,303.00

Alcoholic $ 21,805.00

Non Alcoholic $ 15,206.00

Total beverage sales $ 37,011.00

Total sales $ 184,314.00

Expenses

Wages $ 95,850.00

F&B purchases $ 38,600.00

Equipment purchases $ 2,300.00

Utilities $ 4,420.00

Stationary / printing $ 1,900.00

Advertising $ 8,000.00

Total expenses $ 151,070.00

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Labour/wage budget

Labour budget Outlet: ________________ Period: _______________

No. staff Gross wages Super Leave

entitlements TOTAL COSTS

Full time staff 3 $ 7,150.00 $ 643.00 $ 595.00 $ 8,388.00

Part-time staff 2 $ 2,600.00 $ 234.00 $ 216.00 $ 3,050.00

Casual staff 2 $ 1,730.00 $ 156.00 $ 1,886.00

Total costs $ 11,480.00 $ 1,033.00 $ 811.00 $ 13,324.00

Purchasing budget

Purchases budget – Food Outlet: ________________ Period: _______________

Fruit and vegetables $ 2,294.00

Dairy products $ 3,670.00

Meat, fish and poultry $ 6,423.00

Fish & seafood $ 2,890.00

Dry goods - food $ 2,560.00

Dry goods - other $ 1,345.00

Total purchases $ 19,182.00

Sales budget A sales budget is one of the most important operational budgets. Most organisations have a sales budget for each individual business unit showing their expected sales. For example, a hotel might have a separate budget for front office, tour desk and food and beverage.

Click on the icon to see an example.

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Sales budget

Sales budget Outlet: ________________ Period: _______________

Breakfast Lunch Dinner TOTAL

No. covers 1,410 2,090 1,375 4,875

Average spend per cover - food $ 18.85 $ 23.94 $ 35.41

Average spend per cover - beverages $ 3.50 $ 6.10 $ 8.90

Average seat turnover 1.25 1.5 1.0

Food sales

Breakfast $ 33,223.13

Lunch $ 75,051.90

Dinner $ 48,688.75

Total food sales $ 156,963.78

Beverage sales

Breakfast $ 6,168.75

Lunch $ 19,123.50

Dinner $ 12,237.50

Total beverage sales $ 37,529.75

TOTAL SALES $ 194,493.53

Cash flow budget A cash flow budget is based on information from the sales and operational budgets and predicts the cash flow into and out of the business. This allows you to determine how much cash or funds are available or must be outlaid during any given period.

Click on the icon to find out more.

Using a cash flow budget allows you to plan for periods of increased cash outflow, assess your ability to finance additional projects such as renovations or capital purchases, or determine if you need to apply for a bank loan or overdraft (glossary) to meet your commitments. A cash flow budget can be prepared for all levels of a business and is one of the most important budgets used by managers. We will discuss cash flow budgets further, later in this resource.

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Profit and loss (P&L) budget P&L budgets, also known as revenue or income budgets, are a forecast of what you hope or anticipate your profit and loss (or income) statement will show at the end of that period. It indicates your forecasted revenue and expenses for a specific period of time and shows whether you might make or lose money at the end of the period. This is a very useful accounting tool, as it shows what volume of sales or revenue you need to achieve to make a certain profit.

Click on the icon to see an example.

Profit and Loss

Master profit and loss

Food sales

Café $ 45,878.00

Bistro $ 61,936.00

Restaurant $ 80,287.00

TOTAL FOOD SALES $ 188,101.00

Beverage sales

Club bar $ 31,337.00

Café $ 23,212.00

Bistro $ 26,695.00

Restaurant $ 35,979.00

TOTAL BEVERAGE SALES $ 117,223.00

TOTAL SALES $ 305,324.00

Cost of sales

Food purchases $ 52,669.00

Beverage purchases $ 26,961.00

TOTAL COST OF SALES $ 79,630.00

GROSS PROFIT $ 225,694.00

Less expenses

Wages $ 91,597.00

Departmental overheads $ 115,743.00

TOTAL EXPENSES $ 207,340.00

NET PROFIT $ 18,354.00

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Capital budget This budget is used to plan for long-term financial outlays, which are not covered by operational budgets. Examples can include the purchase of fixed assets such as equipment and machinery, fittings and fixtures. As this budget is used for larger resource acquisitions, often the purchase price must be over a pre-determined value (such as $2,000) for it to be included in a capital budget. This budget is often used in conjunction with a project budget.

Event or project budget An event or project budget is developed for a specific task, goal or event. For example, renovations, a large conference, an open day, etc.

Cash budget Cash budgets assess whether or not your business has sufficient cash to fulfil its regular operations. By creating a cash budget your business can determine when there will be a need for more cash resources, and when there may be an excess of cash. It helps your business avoid cash shortages during periods when you might have numerous expenses.

Does size matter? No matter what their size, all businesses need and use budgets. However, the number and type of budgets used may vary.

Click on the tabs to find out more.

Micro and small businesses

A small family-run catering business may have only one master budget incorporating all its financial forecasts and objectives.

Medium to large business

Medium to large organisations often use all the different budgets you’ve learned. This is especially true if they’re part of a national or international entity which uses many budgets at every level of the business. If appropriate, all of the following may have their own separate operational, sales and cash flow budgets.

• Divisions: food and beverage, accommodation, marketing, finance, tours, events, etc. • Departments: front office, housekeeping, tourism, etc. • Outlets: restaurant, bar, gym, gift shop, etc. • Cost centres: maintenance, security, etc.

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What does financial viability mean? Financial viability means the business has generated enough income to pay all their liabilities (glossary) and still make a profit.

Two important components of financial viability are profitability and liquidity.

Click on the pictures to learn more about each one.

1. Profitability This is a business’s ability to achieve an adequate return from its assets to cover all costs associated with operating the business. It shows the profit earned by the business measured against the amount invested in assets. This may be expressed as a percentage or ratio. The profitability of your business is reflected in your profit and loss statement (glossary).

2. Liquidity

This refers to the availability of cash, or assets (glossary) that can be quickly converted into cash, and used to pay for the purchase of goods, services and capital assets (glossary).

The liquidity of the business will be reflected in the cash flow budget. The more liquid assets you have, the quicker and easier you can pay your creditors (glossary).

What is a budgeting cycle? The budget cycle is the process which begins with the initial development of the budget and ends with the final transaction in the budget period. Since resources are allocated to budgets on an annual basis, the cycle covers the costs or expenditures for a single year.

A 'year' can mean three different things in accounting terms. Click on the pictures to see what they are.

 A financial year (1 July to 30 June)  A calendar year (1 January to 31 December)  A corporate financial year (1 October to 30 September)

What are budget priorities? Every business has specific areas they want to focus on in the short term, in a certain budget period, or over a longer period such as a financial year.

Priorities are determined by departmental goals and/or the primary concerns of business owners, shareholders or financial backers. These may fluctuate during busy periods or when in the process of growth or change.

To manage budgets and allocate funds, you need to know what these priorities are, and how they relate to the budgets.

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Click on the tabs to find out more.

Profitability

Every business wants to be profitable. This is the aim (and ultimate goal!) of all budgets.

Expenditure

Most businesses make controlling and reducing expenditure a priority.

Sales

Again, maximising sales is the aim of any business. However, sales of specific products or services, or increasing the number of customers for a service period might also be a priority.

Marketing

Promoting your business is always a priority. However, the type or method of marketing may change, or what you wish to promote can vary. New products or services, new facilities, or the refurbishment of accommodation rooms could all become a priority for a particular budget period.

Who do you need to consult with? Consult with and inform all relevant personnel about resource decisions. Discuss the budget with them. Help them to understand what the business aims to achieve and the reasons for the allocation of resources.

Do you need to tell staff everything? Click on the icon to find out.

Staff work better when they know what’s required of them. However, they don’t need to know everything!

Most businesses have a policy about which information can and should be relayed to staff and which is for management only. For example, staff aren’t likely to see the details of a wages budget or the profit margin on sales. This information isn’t necessary for their job performance and could even cause discontent.

In a nutshell

Managers can set targets, but in most cases it's the entire team who have to work together to achieve them. For example, if the budget allows only a limited amount of funding for wages, let staff know they must stick to their current roster to properly manage this.

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Who needs to know about changes to the budget? Anyone who has an impact on the budget needs to know whenever the budget is changed. This includes staff who generate revenue or incur expenses as a result of their daily duties.

Discuss any changes to income and expenditure priorities (budget cuts, sales targets, etc.) with colleagues prior to implementation. This allows them to identify any areas of concern or potential problems with the proposed changes. Keeping them informed also helps to gain their commitment to the achievement of budgetary goals. Let's look at this in more detail on the next screen.

Promoting the importance of budget control Knowing what the targets are helps staff feel like they're part of a team, and encourages them to contribute towards the achievement of budgets. They need to know and understand exactly how their daily duties impact on the budget.

Click on the employees to see how they impact the budget.

I understand now why I can't have extra staff rostered on ‘just in case’ I get busy.

I understand why I need to promote the wine list, encourage customers to have dessert, and turn the lights off when I go home. They're some simple ways I can help cut costs in my department.

I understand why it's so important to follow stock control systems. Simple things like not throwing clean linen into the laundry basket (just because it's easier than putting it away!) can make a big difference to whether or not my department meets its budget targets.

I couldn't believe how much we were spending on paper each month! No wonder we were never meeting our targets. Now we’re much more careful about reusing scraps of paper where possible. We also think twice before hitting the print function.

Knowing our target figures helped us choose the best fresh produce supplier and decide on our new spring menu. Simple changes can make a big difference to whether or not we achieve our budget.

Note...

• Keep staff informed of their progress during the budgeted period. • Provide a running sales total for overall sales or for specific products or services being

promoted. • Give them periodical comparisons of actual figures (such as food and beverage menu

sales) against the budgeted figures. • You can then determine whether to implement actions for improvements.

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How can you promote awareness? Click on the pictures to find out the answer.

Hold a team meeting

• Explain the goals and answer questions to clarify understanding. • Discuss why the goals have been set. • Inform staff of the products or services to be promoted and relevant external marketing

strategies such as advertising campaigns. • Discuss techniques to reduce expenditure, including any cuts or constraints. • Inform staff of the benefits to them if they achieve budgeted goals.

Noticeboards

Place copies of budgets, information on advertising campaigns or details of promotions on noticeboards for staff to look at after the meeting.

Posters

Put reminders of cost cutting methods (rotating stock, turning off equipment when not in use, etc.) in strategic positions.

Wall charts

Show budget targets and the outlet’s actual figures in a visible position to help staff track their progress.

Recording allocation of resources Part of your role involves maintaining detailed records of resource allocation.

Click on the question marks to find out more.

Why record resource allocation?

• To track performance • To analyse efficiency and productivity • To manage costs and cash flow • To identify and rectify deviations • To report on opportunities for future improvements

How do you record resource allocations?

How you record the allocation of resources depends on the monitoring and recording system used in your workplace.

You'll learn how to monitor financial activities against budget in the next section.

What sources of information do you use?

Budgets aren’t the only source of information relating to where resources are allocated and controlled within a business.

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Although you may not be involved in preparing financial documents, it's important you’re familiar with financial terminology, the type of reports available and the information they contain.

Click to the next screen to find out more.

Documents pertaining to resource allocation What are the types of reports available? What information do they contain?

Click on the pictures to see some examples.

Profit and loss (or income) statements

One of the budgets used is a P&L budget. This then becomes a P&L statement at the end of the budgeted period, where the business’s actual performance is recorded and its profitability can be assessed.

Balance sheets

Information from your P&L statement is used to develop a balance sheet. This summarises the assets, liabilities and owner’s equity of your business. It essentially shows what you own, and what you owe.

Purchasing documentation

This includes purchase orders, delivery dockets, invoices, receipts, departmental requisitions, stocktakes and other stock control documentation. These documents show where resources, in the form of inventory, have been distributed in the business.

Payroll documentation

Timesheets, sick and annual leave applications all document costs associated with the provision of your business’s products and services.

Taxation records such as BAS (glossary) records and tax returns.

Bank account records

Bank statements show cash flow through the business in the form of deposits and withdrawals, and loan agreements and investment records show sources of income.

Business agreements

These include contracts with suppliers, service providers such as pool cleaner, contract cleaners, garden maintenance, equipment maintenance, florist, etc.

End of section You have reached the end of section 1.

Click to the next section to continue.

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Section 2: Monitor financial activities against budget

In this section you will learn the following.

• How to use financial records to check actual income and expenditure against budgets. • How to include financial commitments to ensure accurate monitoring. • How to identify and report deviations. • How to investigate options to manage deviations. • How to advise colleagues of budget status and targets.

Comparing the figures There’s no point going to the trouble of developing a budget if you're not going to regularly update it and use the information produced. So your next step is to record the actual figures against the various budgets. This is the first stage in monitoring and evaluating what has transpired against the budget to determine if there are any variances (glossary).

Click on the tabs to find out more.

Why record and compare figures?

• To find out if the budgets are being adhered to • To discover if the resources you’ve allocated are appropriate to the level of business

generated • To work out if the budgets are realistic

Can you really predict the future?

No! The manager who prepared the budget may have been far too optimistic or careful when making their projections. Therefore, the budget may not reflect the real operational situation.

Also, the conditions in which the original budget was developed may change. These changes can have a significant impact on the budget outcomes.

• External factors such as economic climate, price rises and bad weather • Internal issues such as equipment breakdown or loss of key staff

When do you record the figures?

When you record the figures depends on three things.

i. The type of budget

ii. Who is doing the recording

iii. The policies and procedures of the individual workplace

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What systems do you use?

Another major factor is the use of computerised systems such as POS (glossary), purchasing and accounting systems. Many establishments today have computers with spread sheet software or computerised front and back of house systems, so updating budgets can be a relatively easy task.

Computerised systems provide quicker turnaround times compared to manual systems. Why?

They can more quickly process, update and distribute information (especially when the various systems are linked together and can share data).

Click to the next screen to learn more about computerised systems.

Is a computerised system error free? Remember, just because a system is computerised it doesn’t automatically mean all figures are correct. Human error when entering data into the system can lead to incorrect prices, quantities, stock items or levels, or wages. The computer will then base its calculations on this data and you end up with misleading information.

Click on the managers to see how to record figures on two types of budgets.

Sales budget

Our actual sales figures for all outlets are recorded on our sales budgets daily. The end- of-day accounting is completed as part of the business’s computerised night audit (glossary) process. It compiles the sales figures from all outlets into individual reports for each outlet as well as a master report with accumulated figures. This goes to the manager in charge of preparing the budgets.

In a smaller establishment the sales budget may only be updated weekly when the accountant is on site or the manager is doing the accounts.

Operational budgets

Some of our budgets cannot be updated daily as the information is not available that quickly. For example, our wages and payroll budgets can only be updated fortnightly after the end of our pay period. The purchasing budget can be updated weekly once the purchasing and accounts departments have processed all the invoices. I can get an understanding of how we are performing compared to the budgets throughout the month, but may not have a complete picture until towards the end of the budget period.

Other organisations may be able to produce the required information faster if they have a weekly pay period for wages, more administration or accounting staff, or fully integrated computer systems.

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Where are financial commitments recorded? Budgets record information on financial commitments as well as income.

Click on the icon to find out more.

Financial commitments are funds the business has to spend in order to operate; for example, food and beverage purchases, wages, utilities, costs, debts, rent, council rates, insurance, taxation payments, and loan repayments.

Most operational budgets include not only income earned but also expenses incurred while earning that income. Profit and loss budgets and balance sheets record other forms of financial commitments such as loan repayments, interest or lease payments.

It's just as important to include financial commitments in budgets as it is to include income. Funds need to be allocated to meet these commitments. Accurate information on business performance cannot be calculated without them.

You'll learn how to prepare budgets and allow for financial commitments in the unit Prepare and monitor budgets. For now, it's important you know where to find this information so you can regularly check actual income and expenditure against the budgeted figures.

What financial records do you use to check income and expenditure? You need to regularly access financial records to check actual income and expenditure against your budgets.

Click on the icon to see the financial records that provide you with the information you need.

 Bank deposit documentation  Bank statements  Bank summaries  Business activity statements (BAS)  Cheque books  Credit card transaction statements  Invoices  Journal entries  Labour and wages reports  Merchant statements  Merchant summaries  Transaction reports

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How are financial commitments shown in a budget? Financial commitments are usually shown as expenses in operational budgets as they are costs incurred by the business. How and where they are recorded depends on the type of expense. You need to know where to find these figures so you can accurately monitor progress and report on any deviations.

Click on the pictures to learn about the basic cost categories.

Fixed costs

Fixed costs include rent or lease payments, salaries, loan repayments and some aspects of the marketing budget. These don’t vary (no matter how busy or quiet you are, how many people you serve or tours you sell).

Variable costs

The most obvious examples are wages and inventory (food, beverages, dry goods, souvenirs, etc.). These costs fluctuate with the level of activity within the business. If sales increase, so do the variable costs.

Direct costs

Direct costs are those directly linked to the provision of products and services. These include the costs of wages, souvenirs, and equipment purchased as well as food and beverage items produced and sold.

In larger establishments, these costs are usually included in departmental or outlet budgets, as they’re directly associated with revenue earned in that area.

Indirect costs

These are costs which can’t be directly attributed to a sales item or operational outlet. Indirect costs are included in master and profit and loss budgets, with a percentage of the total allocated to individual budgets. For example, 20% of wages from a conference centre accounts department may be allocated to the centre’s kitchen and food outlets.

Cross categories

The four types of costs aren’t mutually exclusive. An expense can be a variable and direct cost. This is the case with purchases of wine, fruit and vegetables for a restaurant.

Alternatively, an expense could be variable and indirect (electricity bills) or fixed and indirect (loan repayments).

Determining if an expense is direct or indirect will control where it is recorded. Fixed and variable figures determine what amount is recorded.

Do the recorded figures match budget targets? Compare actual figures to the budgeted ones to determine if your actual income and expenditure are meeting budget targets. If there’s a difference between the two figures, it's called a variance. When a variance occurs, you need to analyse the results to determine why it happened.

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Click on the numbers to see the steps to follow when comparing and analysing budget results.

1. Identify and isolate each area of income, cost of sales or expense that has a variance.

2. Determine whether the variance is acceptable or not.

3. Investigate why the variance occurred.

4. Discuss with managers options available to help them reduce variations.

5. Hold staff meetings to discuss the causes of the variations and strategies to meet targets.

Note...

Let's begin by completing step one. A comparative analysis report helps you get started. Click to the next screen to learn what this is.

What is a comparative analysis report? This report allows you to compare actual figures to specific budgeted figures. The format is simple, making it easy to distinguish results.

Initially, you can make a direct comparison of budgeted figures against actual performance and determine if or where variances have occurred.

Before you can do this, you need to know how to calculate variances in dollar terms and as a percentage.

Click to the next screen to find out how it’s done.

How do I calculate variances in dollar terms and percentages?

Click on the pictures to find out the answer.

1. Calculating a dollar value variance

Actual sales - budget = variance

$10,150 - $11,000 = -$850.

As the actual figure is less than the budgeted figure, the variance is a negative value. Some accounting systems express this as ($ 850) to clearly show it is a negative amount. We will use that system in this resource.

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2. Calculating a percentage variance

Variance can also be shown as a percentage: 15% under- or over-budget.

(Actual sales - budget)/budget x 100 = variance%

$10,150 - $11,000 ÷ $11,000 = a variance percentage of (7.7%)

3. Using a spreadsheet to calculate variance percentages

If you are using a spreadsheet to calculate this formula, you must include brackets to show which part of the formula must be calculated first.

($10,150 - $11,000) / $ 11,000

Click on the icon to see an example of a basic comparative analysis report.

Comparative analysis report For period 01.10 to 31.10.20XX

Actual Budget Variance Variance %

No. of covers 5,000 5,500 (500) (9.1%)

Sales $ 235,200 $250,000 ($ 14,800) (5.9%)

Wages $ 100,800 $ 93,750 $ 7,050 7.5%

Inventory $ 38,600 $ 38,750 ($ 150) (0.4%)

Electricity $ 11,400 $ 11,875 ($ 475) (4.0%)

Gas $ 4,100 $ 4,375 ($ 275) (6.3%)

Water $2,900 $ 3,125 ($ 225) (7.2%)

Rent $ 8,000 $ 8,000 - 0%

Overall performance or profit/loss $ 69,400 $ 90,125 ($ 20,725) (23.0%)

How do you interpret positive and negative variances? Now you need to determine whether these results are favourable or unfavourable for your business operation. A negative variance doesn’t automatically mean it’s unfavourable.

Click on the pictures to see how to identify the difference.

Income related variances (sales, revenue, profit) are favourable if above budget, unfavourable when below budget.

A positive variance here means you have received more income than you planned. This is good! A negative variance means you have not achieved your targets; not so good.

Expenditure related variances (purchasing, marketing, rent, utilities) are unfavourable if above budget, favourable if below budget; basically the reverse of income variances.

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A negative expenditure variance means you have spent more than planned. Unless you have a good reason, you could have some explaining to do. A positive variance means you have not spent as much as planned and have saved money. This is usually considered to be a good outcome.

We will look at interpreting the effect of favourable and unfavourable budget results shortly.

Reading a comparative analysis report Now, let’s apply your knowledge of interpreting variances to the comparative analysis we looked at earlier.

Click on the icon to see which results were favourable or unfavourable.

Comparative analysis report Period: 01.10 to 31.10.20XX

Actual Budget Variance Variance % Favourable Unfavourable

Sales $ 235,200 $250, 000 ($ 14,800) (5.9%) Unfavourable

Wages $ 100,800 $ 93,750 $ 7,050 7.5% Unfavourable

Inventory $ 38,600 $ 38,750 ($ 150) (0.4%) Favourable

Electricity $ 11,400 $ 11,875 ($ 475) (4.0%) Favourable

Gas $ 4,100 $ 4,375 ($ 275) (6.3%) Favourable

Water $2,900 $3,125 ($ 225) (7.2%) Favourable

Rent $ 8,000 $ 8,000 - 0%

Profit/loss $ 69,400 $ 90,125 ($ 20,725) (23.0%) Unfavourable

Why do variances occur? There are many reasons variations occur. However, they generally fall into four basic categories.

Click on the pictures to learn about each category.

1. Too high/too low

One obvious reason for variations is the budgeted targets were set too high or too low. This may mean the information used to develop the initial forecasts was not accurately evaluated, appropriate information was not available when setting the targets, or they were set some time ago using information which is no longer applicable.

2. Unforeseen circumstances

You can’t predict every factor which may affect a budget. An unforeseen circumstance could be as simple as a week of bad weather affecting customer numbers or fruit and vegetable supplies, an industrial dispute at a company manufacturing one of your products, equipment breakdown, or influenza sweeping through your staff.

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3. Changed conditions

Another reason a variation may occur is the information or conditions the budgets were originally based on have changed. For example, a new, unplanned advertising campaign run during the budget period could have affected sales figures.

4. Operational factors

This is the most common reason why variances occur; the one we have the most control over and ability to influence. We will look into operational factors shortly.

Realistic results You’ve completed a basic comparative analysis of your budget, determined where variances have occurred, and whether you think they’re positive or negative results.

Now you need to determine if the news is as good or as bad as it first appears. Are the results a true indication of how your team or department performed?

To find out, you need to 'flex' the budget. Flexing is when a budget changes in response to changes in sales and expenses. You alter the format of the budget from a fixed budget to a flexible budget by modifying it to reflect the changed conditions.

Click to the next screen to learn how.

How do you flex the budget? You need to compare apples to apples, not apples to pears. At the moment, the budget compares the actual results to what was originally predicted by the manager who prepared the budget.

Click on the icon to find out more.

In the previous example, the actual number of covers was under budget by 500.

A basic assumption would be that if sales are down, the direct, variable costs attributed to the production of those sales should be too. In most cases they were, except for wages, which were over budget. But were they down by the same amount or ratio as sales?

To find out, you'd need to compare the actual figures for 5000 covers against figures for a similar number from another budget period. Alternatively, recalculate the budget to show what the budgeted figures would have been if the original prediction was 5000 covers.

You would then be comparing actual figures with a budget whose figures are also based on 5000 covers.

Click on the icon to see how this is recorded.

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Comparative analysis report Period: 01.10 to 31.10.20XX

Actual Updated budget Variance Variance %

No. of covers 5,000 5,000

Sales $ 235,200 $ 227,272 $ 7,928 3.5%

Wages $ 100,800 $ 85,227 $ 15,573 18.3%

Inventory $ 38,600 $ 36,227 $2,373 6.6%

Electricity $ 11,400 $ 11,500 ($ 100) (0.9%)

Gas $ 4,100 $ 4,550 ($ 450) (9.9%)

Water $2,900 $ 3,050 ($ 150) (4.9%)

Rent $ 8,000 $ 8,000 - 0%

Overall performance or profit/loss $ 69,400 $ 78,718 ($ 9,318) (11.8%)

How has flexing changed the budget results? Before you begin interpreting the results, compare the two budgets: the original fixed budget and the updated, flexible budget.

Click on the icon to see the comparison.

Actual Original budget Updated budget

Original variance

Updated variance

Original variance

%

Updated variance

% No. of covers 5,000 5,500 5,000 (500) - (9.1%) -

Sales $ 235,200 $250, 000 $ 227,272 ($ 14,800) $ 7,928 (5.9%) 3.5%

Wages $ 100,800 $ 93,750 $ 85,227 $ 7,050 $ 15,573 7.5% 18.3%

Inventory $ 38,600 $ 38,750 $ 36,227 ($ 150) $2,373 (0.4%) 6.6%

Electricity $ 11 400 $ 11,875 $ 11,500 ($ 475) ($ 100) (4.0%) (0.9%)

Gas $ 4,100 $ 4,375 $ 4,550 ($ 275) ($ 450) (6.3%) (9.9%)

Water $2,900 $3,125 $ 3,050 ($ 225) ($ 150) (7.2%) (4.9%)

Rent $ 8,000 $ 8,000 $ 8,000 - - 0% 0%

Profit/ loss $ 69,400 $ 90,125 $ 78,718 ($ 20,725) ($ 9,318) (23.0%) (11.8%)

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If you compare the figures, you can see that flexing the budget has made some significant changes to the variance figures and percentages. The change in the sales variance from an unfavourable to favourable result is a great outcome!

The changes in wages and inventory aren’t so positive. However, overall, their total variance is less than the original budget.

Now you can realistically see the performance over the budgeted period: what was achieved (actual figures and what should have been achieved for the number of covers (updated budget figures).

Let’s have a look at the significance and impact of the variances on the next screen.

Interpreting deviations to budget The next step is to understand why the variances occurred and how this might affect operations. An unfavourable variance doesn’t always indicate mismanagement. There might be other factors causing the budget variations. A good manager doesn’t take the results of the budget at face value and start looking to place blame for unfavourable variances. They start by asking questions.

On the next screen we’ll look at the results from the previous comparative analysis example. We’ll base our interpretations solely on this budget from now on.

Comparative analysis example Click on the pictures to view the analysis report and the results.

Analysis report

Comparative analysis report Period: 01.10 to 31.10.20XX

Actual Updated budget Variance Variance %

No. of covers 5,000 5,000

Sales $ 235,200 $ 227,272 $ 7,928 3.5%

Wages $ 100,800 $ 85,227 $ 15,573 18.3%

Inventory $ 38,600 $ 36,227 $2,373 6.6%

Electricity $ 11,400 $ 11,500 ($ 100) (0.9%)

Gas $ 4,100 $ 4,550 ($ 450) (9.9%)

Water $2,900 $ 3,050 ($ 150) (4.9%)

Rent $ 8,000 $ 8,000 - 0%

Overall performance or profit/loss $ 69,400 $ 78,718 ($ 9,318) (11.8%)

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Results

• Actual sales were higher than budget: a favourable result. • Wages were significantly higher than budget: an alarming result. • Inventory was higher than budget: not a favourable result. • Electricity, gas and water were all under budget: a favourable result.

The end result is that the business has recorded a loss. The higher sales figures weren’t enough to compensate for the much higher expenses figures. This is not a good result for the business. It's likely the manager will now be under pressure to keep a tighter control over expenses.

Let's investigate possible reasons for the variations on the next screen.

Investigating deviations It’s rare to achieve exactly the same figures as those in your budget targets. Budget variances are common. However, not all deviations have to be investigated. Small variances in the budget comparisons usually don’t require follow up. Ask yourself one key question: is the variance a significant cause for concern?

If the variance in your electricity budget is relatively small (0.9%), it may not be worth further scrutiny. However, if the variance is significant (18%), more investigation would be required.

When should I investigate deviations? When monitoring budgets, you need to determine what constitutes a problem and the indicators or trigger points which lead to further investigation.

Click on the icons for points to help you decide whether a variance is significant and worth further investigation.

Regularity of variance

If a variance occurs only once, it may not be an issue. However, regular variances can indicate problems with the following.

• Budget targets • The method or type of information gathered • The accuracy of the information used • An outlet or area isn’t performing as expected.

Size of the variance

If a variance is substantially different from previous reporting periods, then investigation is often warranted. This is especially true if there’s no obvious cause for the variation.

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Cost of investigation

Is it worth looking into the variance further?

Are the costs in time, effort and manpower worth the potential benefits of finding out the cause?

This partially depends on the size and regularity of the variance.

Consequences of investigation

Are you prepared to take action once the cause of the variance is located?

Do you have the authority, or can action be taken by others?

If variances are occurring due to personnel or contractor issues, does your business have the human resources skills or legal ability to take action?

When is further investigation required? Click on the trigger points that could indicate sufficient reason for further investigation.

Dollar cut-off

A specific dollar value is set as a trigger point for further investigation. This can be different for each budget or type of income or expense.

Percentage cut-off

A percentage can be set as the trigger point for investigation instead of a specific value. For example, if the variance is greater than 10%, you might investigate. This figure can then be established as a standard trigger across a range of areas rather than setting different dollar values for each area.

Note...

Trigger points may or may not be determined by you. They could be set by the person responsible for preparing the budgets. You'll learn more about this in the unit Prepare and monitor budgets.

What could have caused the variation? There are usually reasons a deviation from budget occurs. Earlier, we mentioned four of them. Do you remember what they are?

You have 30 seconds to think of the answer.

Click start to begin.

What are the four common reasons for a deviation from budget?

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Type your answer in the space below.

How did you go? Compare your answers to these.

1. Too high/too low

2. Unforeseen circumstances

3. Changed conditions

4. Operational factors

As the manager, your role is to identify the variances and investigate appropriate options for more effective management of deviations.

What operational factors can cause variations to budgets? There’s one basic question you need to ask: Why were the sales and expenses above or below budget? Often factors which cause a variation in sales figures also cause deviations in expenses. But wait! Don't fall into the trap of not looking at each variance independently.

Let’s begin by looking at the expenses budget.

Causes of variations in expenses budgets Click on the piggy banks to learn potential reasons expenses could be over- or under-budget.

Expenses figures over budget

This isn’t a favourable result, as it means you've spent more producing sales than anticipated. This reduces profit margins and hurts cash flow.

Here are some reasons for being over budget.

• Increased wastage can cause real problems for an inventory budget. Lack of stock rotation, over ordering (especially of perishables), using poor quality products, inefficient usage, and over-production can all increase inventory costs.

• Price rises which haven’t been calculated into the budget predictions. • Inefficient purchasing systems such as over ordering, stock purchased from more

expensive suppliers (for example, from a supermarket) or more expensive substitutes used to cover stock shortages.

• Poor rostering procedures resulting in overstaffing. • Increased payroll costs due to changes in pay rates, use of more expensive agency

staff, leave expenses, increased overtime payments. • Poor management of staff during operation: staff not being sent home early when it’s

quiet or working longer than required. • Poor staff performance requiring more staff than anticipated to produce and provide

products and services. This could be due to lack of training, poor skills, inefficient work practices or lack of effective supervision.

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• Inappropriate allocation of costs to a budget. For example, the wages of an employee who has transferred to another outlet still being charged to the wrong department, or the entire cost of at item being charged to one department when it should be split over a number of departments.

• Equipment breakdowns which lead to higher payroll costs and maintenance expenses.

Expenses figures under budget

This can be a good result as it means you've spent less than planned. Here are some possible reasons for being under budget.

• Price reductions on products and services used. For example, the price of chicken or lamb has gone down.

• Optimising order procedures to obtain bulk price discounts, thereby reducing costs. • Efficient use of utilities, inventory and staff leading to cost savings.

Click the next screen to look at possible causes for variations in sales budgets.

Causes of variations in sales budgets Click on the tabs to learn what can cause variations in sales budgets.

Sales figures over budget

This is a favourable result. It means you've sold more products and services than forecasted. Here are some possible reasons for being over-budget.

• The staff used great selling techniques to increase sales. • Customers spent more per person. • Prices were increased. • An in-house promotion helped increase customer awareness leading to increased

customer numbers.

Sales figures under budget

This is an unfavourable result. It means you've sold fewer products and services than predicted. Here are some possible reasons for being under-budget.

• The staff didn’t use their selling techniques and missed many opportunities to sell more.

• Customers spent less per head, as they purchased cheaper items or bought fewer items.

• Menu items weren’t available, reducing sales. • Service was slow and customers didn’t stay to order dessert or other menu options.

How does customer spending affect my sales figures? How much a customer spends has a direct effect on your sales figures. Even though customer numbers might be below budget, sales can still be over budget if they spent more per person. Alternatively, customer numbers can be over budget, but sales below budget because they spent less per person.

This means that how much money a customer spends, and what they spend it on, matters.

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Click on the icon to see a customer spending analysis.

Example of customer spending

Customer spending analysis Period: 01.10 to 31.10.20XX

Actual Budget Variance Variance %

No. of customers 5000 5000

Total sales $ 235,200 $ 227,272 $ 7,928 3.5%

Food sales $ 152,880 $ 136,364 $ 16,516 12%

Beverage sales $ 82,320 $ 90,909 ($ 8,589) (9%)

Average per customer (food) $ 30.58 $ 27.27 $ 3.3

Average per customer (beverage) $ 16.46 $ 18.18 ($ 1.72)

No. items sold (food) 9600 7900 1700 22%

No. items sold (beverage) 4550 4500 50 1%

Average items per customer (food) 1.92 1.58 0.34

Average items per customer (beverage) 0.91 0.90 0.01

What does the analysis of customer spending tell me? Let's continue with the example provided on the previous screen and analyse the results.

Click on the numbers to see what you can determine by analysing customer spending.

1. Overall sales were over budget. However, in reality, only food sales were over. Beverage sales were not.

2. The increased food sales compensated for the lower beverage sales.

3. Customers spent more per head on food, but less on beverages.

4. Customers purchased more food menu items than anticipated. This is reflected in the average number of items sold. Customers purchased 1.92 food items per person compared to the 1.58 per person budgeted for.

5. The number of beverage items sold was slightly over-budget. The increased number made little impact on the average number of beverage items sold per person.

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How do these results explain the budget variances? Continuing with the previous example, you can now explain possible reasons for the variances in the sales budget.

Click on the pictures to see the results of the food sales analysis.

Average spend

The average spent per customer and the number of items sold were both higher than forecasted. This combination definitely helped push the total sales over budget.

Inventory expenses

However, because the business was selling more items than anticipated, the inventory expenses increased. The business needed to buy more food to produce the higher number of items sold. The increased inventory costs were reflected in the poor budget results. Customers bought 22% more food items, but food sales were only over-budget by 12%. This means they bought more, but it didn’t generate an equivalent increase in sales revenue.

Revenue earned

Customers, on average, purchased the same number of drinks as predicted. However, they bought cheaper items and spent less per drink. This meant the revenue earned from beverage sales was down even though the business sold the same number of drinks as budgeted for.

Digging deeper... Now that you have more specific information on where or why the variances occurred, you can dig a little deeper into the sales statistics to gain an even better idea of the causes of the variances.

A computerised POS system can obtain a detailed breakdown of sales for each service period and for all individual items. This will tell you how many of each item was sold and their contribution to the total dollar value of sales.

Click on the icon to see the outcome of further investigation into the sales statistics of the previous example.

Results of further investigation

• Sales of side dishes and add-ons were up, which helped explain why the average number of food items per customer was over-budget.

• Sales during the breakfast period were up. More guests were dining during the morning period.

• More than one of the higher priced dinner menu items was sold. This also helped contribute to the increase in sales figures. However, it would also have contributed to higher inventory expenses, as some of its ingredients are expensive.

• Less wine was sold, especially the top end wines, and more soft drink. This would help explain why average customer spend for beverages was down. You could look at customer demographics (glossary) to find out if this was a contributing factor.

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Why is it important to investigate budget deviations? Budget deviations directly affect cash flow and profitability, either positively or negatively. This, in turn, affects the long-term viability of a business. Every business aims to stay in business for a long time. The only way to survive in a very competitive marketplace is to keep an eye on what you earn, and control what you spend.

Who do you report budget deviations to? This will depend on the size and internal structure of your workplace. Most organisations have a clear hierarchy outlining who staff, supervisors and managers report to, and who they are responsible for. This same chain of command will usually also apply to reporting budget deviations. However, sometimes other personnel such as the Finance Manager may also be included.

Departmental budget variations are rarely reported externally. Deviations in a master or project budget for a business may be, especially if they are part of a larger organisation such as a hotel group or chain.

How often do you report deviations? The degree of emphasis placed on the importance of budget control is a factor when considering how often budgets are discussed and formally reported on. Businesses with structured financial plans usually have equally structured reporting processes.

Deviations may be discussed informally throughout the budget period and reported formally through weekly or monthly meetings.

Click on the icon to see examples of what to report on.

What to report on

• The previous month’s results and where deviations occurred. • What processes are being used to identify deviation patterns. • What techniques are going to be implemented to reduce and rectify the deviations in

future budgets. • Follow-up required during the current budget period to identify if deviation trends are

re-occurring. • The long-term effect of identified deviations. • Targets to be achieved in the next budget period.

Hot tip

Consider the significance of the deviation when deciding when and how to report it.

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Do you need to advise colleagues of budget status? Yes! It would be difficult to achieve your budgets without the support and assistance of your colleagues. This includes internal and external financial specialist staff, other managers and operational staff.

Click to the next screen to find out what type of information you should share.

Keep them updated! You should report back to your colleagues soon after the end of the budget period. Update them on the budget status in relation to targets. Congratulate the team on successes and improvements made.

Click on the pictures to see examples of what to discuss.

Successes

• What targets did they achieve? • How did they reach them? • How they can continue performing at this level?

Concerns

• What targets did they miss? • What external factors or circumstances beyond their control affected performance? • What internal factors may have caused unfavourable deviations?

Improvements

• How can they improve? • What can they do better? • What changes do they need to introduce to raise performance to the budgeted targets?

New goals

• Are there any changes in budget targets? • How will this affect work practices? • Are there new procedures, techniques, products and services to introduce?

How can you reduce the possibility of deviations occurring? Pay close attention to your budget information, keep control of expenses and use effective management skills.

Click on the dot points for some tips on controlling deviations.

 Update actual figures regularly so that deviation trends can be identified quickly.  If a trend in the figures begins to appear, investigate it immediately. Don’t leave it

until the end of the budget period.

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 Investigate the reasons why the deviations have occurred. Don’t take results at face value; find out if there are any underlying issues which need to be addressed. Lack of investigation could lead to implementing inappropriate procedures to rectify the deviation, potentially making the situation worse.

 Investigate options for reducing variable expenses with the purchasing and finance managers and other appropriate personnel.

 Control staffing levels and rosters. Ensure payroll costs are managed shift by shift, not just weekly or monthly.

 Ensure stocktakes are conducted regularly to manage stock levels effectively.  Ensure staff understand and follow stock control procedures, such as stock storage,

rotation and ordering processes.

 Use efficient energy management techniques.

End of section You have reached the end of section 2.

Click to the next section to continue.

This page has been intentionally left blank.

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Section 3: Identify and evaluate options for improved budget performance

In this section you will learn the following.

• How to assess existing costs and resources. • How to discuss desired budget outcomes. • How to undertake appropriate research to investigate budget management techniques. • How to define and communicate the benefits and disadvantages of new approaches. • How to take account of impacts when developing new approaches. • How to present clear and logical recommendations for budget management.

What is a trend analysis? A trend analysis is the process of collecting information and identifying changes in business patterns.

They can be positive or negative trends. Either way, the trend affects the future trading and development of the business.

Click on the icon to learn more.

When managing budgets, trend analysis is used in conjunction with variance analysis to assist in better planning and control.

Specific information or statistics are used to determine trends. When statistics are compared over a period of time, a trend or pattern may emerge. The types of information used are called ‘indicators’. These can be both financial and non-financial. Trend analysis can be used in a wide variety of situations, using multiple sources of information to gain specific feedback on the business. You just need to choose what you want to investigate.

How do you identify trends? A trend may become obvious when statistics and budget variances are compared over a period of time. Consecutive years, months or budget periods could be compared to help identify changes.

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Remember, it’s important to compare similar time periods to achieve relevant, useful results. A seasonal resort, for example, wouldn’t compare winter trading statistics to summer ones. Instead, they might compare winter trading statistics over a three-year period.

Click on the icon to see an example of a trend analysis.

Trend analysis: breakdown of expenses as percentage of total expenses

Winter 200X Previous 2 years

June July August Total for period Winter 20XX

Winter 2XXX

Wages 82% 79% 80% 80% 79% 78%

Purchases (food) 11% 13% 12% 12% 11% 10%

Purchases (beverage) 5% 6% 6% 6% 7% 8%

Utilities 2% 2% 2% 2% 3% 4%

Total expenses 100% 100% 100% 100% 100% 100%

Cost of goods sold (COGS) (glossary) 45% 49% 47% 47% 45% 41%

Using the analysis to identify trends Let’s look at some of the trends shown in the trend analysis example.

Click on the numbers to see the trends for the three-month period.

1. Utilities costs remained stable for the period.

2. June wages were significantly higher than other months.

3. July showed a clear decrease in wage expenses from June, but food and beverage expenses rose.

4. The cost of goods rose in July as well. This means revenue from sales didn’t increase as much as the expenses.

5. The decrease in some of the expenses in August was reflected in the cost of goods sold.

6. Overall, the business performed better in August with expenses either decreasing or remaining stable.

What do you do once you've identified a trend? Click on the icon to find out the answer.

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It's important to establish the difference between a trend and a ‘one-off’ situation. Is it an ongoing problem? Or a hiccup that's not likely to reoccur? It's dangerous to take corrective action in response to a trend until you determine its short-term and long-term effect.

Variances in statistics over a short period of time, such as the three-month comparison of June, July and August, should be investigated using the same criteria as with variance analysis. Many of the causes of trend variations over a short-term period could be due to the same factors identified in section 2 when we analysed causes of budget variances. This is one reason why these two management tools are often used in conjunction with each other.

Once you've investigated the trend, you may need to take corrective action to reduce, resolve or possibly encourage the situation. Part of this process isn’t only determining the cause, but seeking methods to improve performance in the future. By taking a proactive approach, you can try to ensure any trends lead to long-term benefits rather than problems.

Investigate new approaches to budget management It’s your role when managing finances within a budget, to undertake research and investigate new approaches to budget management.

Most hospitality businesses focus on increasing sales and reducing their expenses.

Click on the checkboxes to see areas to research.

 Have discussions with existing suppliers to reduce stock costs.  Source new suppliers if required.  Evaluate staffing and rostering requirements to reduce wage costs.  Investigate potential roster changes.  Review operating procedures.

Hot tip

Remember to keep colleagues informed of budget goals, budget outcomes and your suggestions for improvement. If you expect to achieve positive outcomes, everyone needs to know what they’re working towards and why.

Assess existing costs and resources It's not enough to just analyse budgets on a daily, weekly, monthly or annual basis. You also need to consider what you can do better. How can you lower costs? How can you increase sales? How can you use resources more efficiently?

One area that requires ongoing monitoring is your stock. Let’s look at areas where you can reduce stock expenses on the next screen.

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Identify areas for reducing stock expenses Stock control is a key factor in reducing expenses in many businesses. This is especially true of food and beverage, accommodation and tourism retail outlets. Poor purchasing, storage and production procedures usually lead to increased wastage and big bills from suppliers.

Businesses need to control everything they use. Every dollar saved goes straight to profit margins.

Click on the pictures to learn about the stock your business might need to control.

 Guest consumables: napkins, portion control goods, takeaway containers, soap, toilet paper

 Linen: tablecloths, napkins, tea towels, cleaning cloths  Perishable stock: dairy, meat, poultry, seafood, fruit, vegetables, frozen goods  Semi-perishable: canned, bottled or sealed packaged goods; dry goods such as

flour, rice, chips, etc.

 Alcoholic and non-alcoholic beverages: beer, wine, spirits, juices, and soft drinks in various containers such as bottles, cans, kegs, casks, etc.

 Small equipment: preparation and service equipment such as teaspoons, tongs and salad bowls

 Stationery: menus, envelopes, office stationery, business cards  Brochures and promotional material  Cleaning supplies and chemicals

Note...

You need to control stock at all levels from the initial purchasing of stock, through to final production. Talking to existing suppliers can help you identify opportunities to reduce stock expenses.

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What methods can you use to control stock? Great stock control requires clear procedures that everyone understands and can follow. The procedures need to detail what everyone’s responsibilities are and what processes must be followed at every stage of the stock’s progress from its initial purchase from the supplier to the customer.

Click on the chart sections to learn the various ways to control stock.

Purchasing

• Standardised forms (purchase orders, requisitions, etc) for accurate accounting. • Product specifications for many menu ingredients to ensure quality standards and

reduce wastage. • Contracts with preferred suppliers, including details on quality, quantity, discounts,

delivery and product return. • Maintenance of par stock (glossary) levels. • Review current supplier costs to ensure best rate.

Receiving

• Mandatory quality checks of all perishable deliveries. • Spot-checks on semi-perishables and other deliveries. • Time controls on processing and storage of stock.

Receiving

Storage

Selling

Issuing

Production

Purchasing

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Storage

• Regular temperature checks of all fridges and freezers. • Maintenance programs for all fridges and freezers. • Cleaning schedule for all storage areas. • Storage areas secured when not in use and after hours to reduce theft. • Regular stocktakes conducted to compare purchases, issuances and stock on hand

figures.

Issuing

• Stock only issued when an appropriately signed internal requisition is provided. • Computerised system updated to ensure accurate stock levels. • Most outlets restocked once daily to control type and amount of stock issued.

Production

• Regular revision of stock quality and specification standards. • Use of standardised recipes to aid portion control, requisitioning and cost calculations

and to reduce wastage. • Maintenance of par stock levels for bar, front of house, accommodation and most

kitchen stock items.

Selling

• All sales processed through the POS and front office systems to provide accurate sales, revenue and stock usage figures.

• Regular stocktakes conducted to compare stock levels with sales.

Investigate new approaches Now that you've identified what your current control systems are, let’s research new approaches that help reduce expenses. Whether your workplace can implement any of these suggestions depends on how your business operates and the procedures you currently have in place.

Click on the pictures to learn more.

1. Increasing par stock levels

Talk to your suppliers. You may gain better discounts if you order certain stock items in bulk. However, you need to carefully weigh the discounts gained against the costs of holding the additional stock (electricity for refrigeration, for example). You must also weigh up whether you have sufficient storage space, and if stock quality will have deteriorated by the time you use it. This is a major concern with perishable items which require refrigeration or freezing and have set use-by dates.

Ordering in bulk may mean bigger discounts, but it also means bigger invoices to be paid. You'll have to determine how cash flow will be affected by the larger payments.

2. Decreasing par stock levels

Decreasing par stock levels reduces the amount of stock wasted through deterioration. It also potentially releases storage space for other uses. Check if your suppliers can deliver more often, whether this increases delivery costs, and how much you could lower the minimum stock levels for each item in the outlets while still meeting potential demand. Running out of stock isn’t going to help your sales figures or keep customers happy!

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3. Sourcing new suppliers

It is always good practice to shop around. New suppliers and new products regularly enter the marketplace and you may be able to better negotiate a deal with a different business. If you are happy with the service and quality of products from your current supplier, you can try to negotiate a new contract for a better deal based on your knowledge of what their competitors are offering.

4. Reviewing stock

This means identifying what you turn over quickly and what sits on the shelf. Do you have ready-to-sell products that sell very slowly? Do certain menu items only sell well at specific times of the year? Should you consider removing these items or modifying the menus? Are there alternative ingredients which can be used for some menu items, which will not affect quality? Do you review and update menus based on the seasonal availability of products and cheapest prices?

5. Conducting spot checks

While we do have good controls in place, spot checks and internal audits will help ensure that our processes are being followed accurately. These can help identify problem areas, reduce theft and maintain awareness of stock control procedures.

What other approaches should you investigate? There are other approaches you can recommend to help keep expenses down.

Click on the tabs to learn what they are.

1. Provide staff training

Ongoing training helps increase awareness. It ensures staff follow correct ordering procedures, use correct production processes (such as standard recipes), reduce wastage and, therefore, reduce costs. Controlling stock and reducing expenses requires everyone’s involvement, not just that of management or purchasing personnel.

2. Make or buy?

Does the business make all products in-house or do they buy them? Which option is most cost effective for an equivalent product? Look at cost of ingredients, labour, overheads, storage and turnover, as well as consistency of quality.

3. Use new software and hardware

Introducing new computerised systems may help reduce costs. For example, using a bar code scanning system for receiving and issuing stock and conducting stocktakes could speed up purchasing and stock control. This could reduce wages or allow staff more time for other duties. It could also ensure greater accuracy of figures in the purchasing system and subsequent reports.

4. Review operating policies and procedures

A review of operating procedures could lead to improvements in internal and external ordering systems, production processes, productivity rates, quality of end product, and staff morale. Staff may have some great suggestions for improvement. You could hold management or team meetings specifically aimed at brainstorming new ideas, or use an external consultant for a fresh perspective.

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5. Establish contingency plans

Contingency planning is a risk management system where you identify potential problems and how they affect the organisation’s ability to meet budget goals. Businesses develop plans to minimise or prevent the risk and overcome the problem if it occurs. You need to have contingency plans for operational issues such as equipment breakdown, power failure and suppliers unable to supply key stock items. If you plan ahead, you can keep unexpected additional costs to a minimum, lower potential customer complaints, and reduce the impact on budgets and profits.

Note...

Your role in managing finances within a budget isn’t likely to extend to implementing any of these suggested changes. This is typically done by the person responsible for preparing and monitoring the budget. Your role is simply to identify possible areas for improvement and investigate new approaches to budget management.

Evaluating staffing and roster requirements Payroll costs are another major expense in all tourism, hospitality and events businesses. Staffing levels, hours of work, hourly rates, overtime and leave entitlements all impact on profit margins.

Can you control all payroll costs? Click on the icon to find out.

No. You can’t control all costs associated with payroll. Some payments (workers compensation, superannuation contributions, etc.) are legal requirements and must be paid. The amount varies depending on the number and type of staff employed and the total payroll. However, this expense must be accounted for in any labour budgets.

Investigating new approaches to managing payroll costs These might include evaluating staffing and rostering requirements and looking at potential roster changes that can help keep labour costs down.

Click on the keys to unlock some payroll tips.

 Determine anticipated customer numbers and associated workload in advance when preparing rosters.

 Where possible, roster a mixture of full-time, part-time and casual staff for greater flexibility.

 Consider fulltime and casual pay rates when allocating weekday and weekend shifts.

 Revise staffing levels and individual staff’s start and finish times each day as customer numbers become clearer.

 Send casual staff home early if anticipated customer numbers don’t materialise or the area is quieter earlier than expected.

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 Whenever possible, schedule annual leave to coincide with quieter periods such as off-season.

 Keep overtime to a minimum. A manager should be required to approve all overtime.

 Pay staff appropriately and at the correct pay rate for the role undertaken. Don’t pay the public bar attendant cocktail bar person rates.

 Regularly check timesheets to ensure they are completed accurately and by the actual employee, not another member in the team.

What other methods can reduce payroll expenses? There are a number of other methods of reducing payroll costs. It's important to determine the benefits and possible disadvantages of any major changes before implementing them. Sometimes cutting costs in one area can lead to increased costs in another or decreased staff morale and customer service.

Click on the pictures to see other approaches to consider.

1. Restructure staff

2. Manage performance

Let's look at an example of how to apply these approaches on the next screen.

Restructure staff Can you make any suggestions for reducing payroll expenses by restructuring staff?

You have 30 seconds to think of at least one suggestion.

Click on the icon to see an example of a kitchen wages table and then click start to begin.

Category Number Status Gross wage Total gross wages

Head chef 1 Full-time $ 6,000 $ 6,000

Second in charge 1 Full-time $ 4,500 $ 4,500

Qualified cook 3 Full-time $ 3,500 $10,500

Qualified cook 4 Casual $ 1,500 $ 6,000

Third year apprentice 1 Full-time $ 2,500 $ 2,500

Kitchen hand 4 Casual $ 2,000 $ 8,000

Total gross wages per month $ 37,500

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Can you make any suggestions for reducing payroll expenses by restructuring staff?

Type your suggestions in the space below.

How did you go? Compare your answers to these suggestions.

• Reduce the number of kitchen hands to three and change their status from casual to part-time. Although the number of hours worked is the same, part-time pay rates help reduce the wage bill.

• Convert casual cooks to full-time to reduce their rate given the number of hours they’re currently working.

• Reduce fulltime qualified cook's wages by rostering casuals on a cheaper rate to work weekends.

What do you report on? It's important to discuss the potential changes with colleagues.

Click on the dot points to see what to report on when evaluating staffing and potential roster changes.

 Budget performance and variances  Changes in customer service or product quality  Timing of production, delays in service  Productivity levels and time management  Inventory and wastage control  Wage cost of casuals  Team work and staff morale

Manage performance Evaluating what staff do during their shift, how they do it, and how long it takes them can help maximise their productivity. You want staff working to maximum efficiency and not wasting time on inefficient procedures or tasks. If you have competent and capable staff, you should be able to better manage rosters, and, therefore, labour costs.

Click on the tabs to check out some simple areas where you can increase performance.

Production

• Use of standard procedures to reduce production times and ensure consistency of end product.

• Standard plate and beverage presentations for menu items. This keeps both labour and wastage to a minimum while maintaining quality standards.

• Kitchen or bar area layouts including placement of equipment, storage areas and service points will affect the flow of work through an area. Inefficient design means time lost in moving between areas and slower service.

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Time and motion

Time and motion studies help show where, how and why time is lost during production processes. You can then decide if it's possible to improve efficiency in the current environment, what procedures or equipment need to be introduced, and if additional training is required. The initial outlay of funds could reap long-term rewards.

Time and motion studies give you a labour cost per dish, product, service, beverage item, guest check-in or room cleaned. This can be used to calculate cost of goods for future budgets to provide more accurate targets.

Skills analysis

Many people are thrust into positions or tasks they do not have the skills to complete. Alternatively, some people have better skills in certain areas than others. Matching people and their strengths to job roles and tasks creates greater efficiency and a generally happier staff.

What other factors can affect payroll expenses? Controlling wages through effective rostering and shift management helps reduce expenses. However, there are other factors which can cause variances in payroll budgets.

Click on the pictures to learn more about these factors.

Labour turnover

Recruiting, employing and training staff costs time and money. High staff turnover means high payroll expenses, both for the human resources budget and the outlets. Training new staff usually means higher wage costs until the new team members are fully trained.

If staff turnover is high in a particular area or for the whole establishment, it’s important to discover why. The outflow of staff could be due to many factors.

• Current economic conditions • Poor pay rates • Type of people employed • Poor working conditions • Bad management practices • Staff conflict

Finding and fixing the cause can significantly reduce overall payroll expenses.

Absenteeism

Unacceptable working conditions or conflict within the workplace generally cause dissatisfaction among employees and increase the rate of absenteeism. Staff who are happy and enjoy their work turn up. Unhappy staff don’t. Last minute shift changes and overtime all add to your wage bill.

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Labour structure

The staff mix and their terms of employment can affect your labour budget. How many full- time, part-time and casual staff you employ can make a distinct difference to the final wage bill. The pay rates, terms and conditions of enterprise agreements as well as State and Federal Awards can vary.

You can also consider sub-contracting some services to external businesses or employing staff from specialist agencies to cover busy periods, rather than employing directly.

Staff training

Lack of effective staff training can have a major impact on wages and revenue. Poor skills lead to poor quality products, lower productivity, slow service, more staff required to serve customers, increased customer complaints and higher staff turnover.

Induction and training programs may create added expense at the point of initial employment, but the long-term benefits for a business far outweigh these costs.

Equipment malfunction and breakdown

Think about all the equipment you use as a normal part of daily operations. What happens when one of them isn’t working? What if your POS system breaks down and staff have to revert to manual ordering and cashier systems? More staff and longer shifts to cope with the increased workload resulting from the breakdown are going to hurt your budget figures.

The rate of equipment breakdowns could be affected by the age of the equipment, the effectiveness of maintenance and cleaning programs, and the level of staff training in the proper use and care of equipment.

Note...

You can apply nearly all of the control and improvement techniques you’ve learned so far, regardless of which area of business you're currently working in.

Stock control procedures, for example, are the same whether controlling fruit and vegetables or guest supplies.

Managing cash flow budgets Variations in expenses affect your cash flow budget. Reducing expenses helps release money to purchase more stock, pay wages or consider capital purchases. Cash flow is also affected by two other major areas of the business: accounts receivable (debtors) (glossary) and accounts payable (creditors) (glossary).

Cash flow budgets were discussed at the start of this resource. Can you remember what they are?

If not, click on the icon to refresh your memory.

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Cash flow budget

A cash flow budget is based on information from the sales and operational budgets. It predicts the cash flow into and out of the business. This allows you to do the following.

• Determine how much cash or funds are available or must be outlaid in any given period.

• Plan for periods of increased cash outflow. • Assess your ability to finance additional projects such as renovations or capital

purchases. • Determine if you need to apply for a bank loan or overdraft (glossary) to meet your

commitments.

A cash flow budget can be prepared for all levels of a business and is one of the most important budgets used by managers.

Let’s take a closer look at managing a cash flow budget through accounts receivable and payable on the next screen.

Why are cash flow budgets important? Click on the icon to find out the answer.

Picture this. Your business purchased wine from a supplier at the start of the month. You have to pay the supplier for the wine 30 days after purchase, but your customers aren't likely to buy the wine until later in the month. If the customer is paying on a business account, then you might not receive payment until one month after purchase.

So basically, your business has to pay for the wine long before they earn any revenue from it!

The business has to work out how to have enough cash flow in time to purchase what they need so they can generate enough income to pay for the next lot of purchases.

Click to the next screen to see two examples of how you can work this out.

Cash flow examples A cash flow budget helps businesses plan when they will receive income so they can coordinate their payments. Careful planning is required so you don’t drain all financial resources and place the business in jeopardy.

Click on the cash flow diagrams below to enlarge them.

1 June 30 June 1 July 31 July

Wine Customer Supplier Customer purchased purchases paid pays

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from supplier wine account

What are accounts receivable and payable? Account receivable, or debtors, is the money you're owed for the products and services you've sold. Most customers pay for goods and services when they're received (such as after dinner in a restaurant) or when they check out of a hotel. However, some guests pay later. These are usually corporate clients purchasing products and services through a business account.

Accounts payable, or creditors, are people and businesses you owe money to.

How much money you owe to others and how much is owed to you has a major impact on the cash flow budget and your potential to meet financial commitments. Control and management of these two areas is important to the long-term viability of the business.

Let’s look at each in more detail over the next few screens.

Accounts receivable Click on the arrows.

 Income How most businesses receive income

• Cash and direct debit purchases • Credit card purchases • Accounts receivable

Cash on hand

Inventory and materials

Accounts receivable

Product or service

Sale

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 Expenses Typical expenses a business needs to pay from its income

• All operating expenses (wages, suppliers, utilities, etc.) • Repayments on any loans and leases • Payment of all taxes (GST, payroll tax, company income tax, etc.) • Payment of dividends (glossary) to shareholder • Provision of funds for future investment opportunities

Note...

Once you understand how much and when income comes into the business, you can construct an accurate forecast to compare against expenses. Let's look at this in more detail on the next screen.

Outstanding payments It's very important to know what proportion of income is outstanding at any time.

Click on the icon to look at an example.

40% of a business's sales are paid via accounts receivable. Their payment terms are 30 days and their annual sales figure is $2.82 million.

To calculate how much income is received through accounts receivable per annum, they use the following formula.

Total sales of $2,820,000 x 40% paid by accounts receivable = $1,128,000 of sales paid via accounts receivable per annum.

So how do you calculate how much income might be held in accounts receivable every month? It’s done like this.

(30 days payment period ÷ 365 days per year) x $1,128,000 = $92,712 which is outstanding in accounts receivable every 30 days.

This helps determine how much money might be readily available to pay for expenses and how much is yet to be received.

However, when a business develops a cash flow budget, they also need to know when they'll actually receive payment.

Receiving payment The most common business trading terms are payment in full 30 days from the date of invoice (usually expressed as net 30 days). However, it doesn’t guarantee the invoice will be paid on time. Some businesses pay quickly, others will stretch payment to 45, 60, 90 or even 120 days.

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A standard accounting practice is to ‘age’ accounts. Aging accounts records when debtors have actually paid their accounts, which are still overdue and by how much.

Click on the icon to see an example of accounts receivable aging.

Accounts receivable aging

Accounts receivable aging 0 to 30 31 to 60 61 to 90 Over 90 Total

Client 1 1,750 1,750

Client 2 5,850 1,250 7,100

Client 3 9,950 9,950

Client 4 2,200 2,200

Client 5 3,008 3,008

Client 6 2,750 2,750

Total $10,608 $1,250 $12,700 $2,200 $26,758

This example shows that only half of the clients pay on time and nearly half of the accounts receivable income isn’t received until 61 to 90 days after purchase. This has serious consequences for cash flow and must be budgeted for.

Aging also identifies who the problem customers are. The business might need to reassess their collection procedures and focus attention on reducing payment periods to ensure they receive payment faster.

How is cash flow affected? Let's continue with the results shown in the previous example of accounts receivable aging. If debtors paid on time, this month’s invoices would become next month’s income. However, the account aging shows this is not the case.

Click on the icon to see what they must do.

The business must consider the effect overdue payments have on their cash flow. They need to plan to have either sufficient income from other sources or to keep income from the previous period to cover shortfalls and be able to pay for their own operating expenses.

Figures shown in sales budgets indicate how much income the business will earn eventually, assuming all accounts are paid. Managers must understand that not all of the revenue they’ve ‘earned’ is actually in the accounts. Only a portion is available for immediate use to pay expenses.

The higher the amount outstanding in accounts receivable and the longer the payment period, the greater the cash flow problems. Sales figures may give the impression that the business is doing well, but slow payments can cause serious cash flow issues.

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Accounts payable Accounts payable are creditors who the business owes money to: food and beverage suppliers, linen service, utility suppliers, accountant, printer, cleaning contractor and web designer.

As this is money the business is spending, you want maximise value for money. Deciding who to deal with and reviewing payment policies can help you.

Click on the tabs to see what to consider.

Buying bulk

Some suppliers offer a discount as an inducement to place larger orders. This helps suppliers plan their own buying and production activities and keep costs down.

Investigate the benefits and disadvantages of buying in bulk. Earlier, we discussed increasing par stock levels and considered the costs associated with storing additional stock versus the savings gained from cheaper purchase prices.

Just In Time

Alternatively, you could use Just In Time (JIT) inventory systems. This means the business only orders stock as it's needed. As a result, you only store the minimum stock required at any time, reducing your storage costs and space required.

To use a JIT system effectively, you must do the following.

• Know how long it takes for items to be delivered after ordering. • Find out if there are additional delivery fees. • Work out what the minimum par stock levels should be. • Carefully monitor stock levels to ensure you don’t run out.

Let’s talk

It's more beneficial to purchase stock from companies that you can negotiate with. Discussions should include unit price, discounts, delivery charges and account payment. Longer trading terms (60 days) allows you to use the stock without paying for it immediately. The funds used to pay accounts straightaway can now be used in other areas of the business.

When does the business pay?

Finally, you need to consider when the business will pay the creditors. This requires careful consideration, as you must look at when the business receives income to ensure you actually have the funds to pay.

Some creditors offer discounts as an incentive to pay early. 10% off the net amount, for example, if the account is paid within 10 days. Over a period of time, early payments could save the business a lot of money.

When you pay the account will affect their cash flow, just as when your debtors pay affects yours. Some businesses charge late penalties if accounts are paid past the due date, and this additional cost can affect cash flow and profits, especially if payments are regularly late. However, the greater cost might be to the relationships you have with creditors. Consistent late payments are likely to ruin any trust and goodwill developed.

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How does accounts payable affect the cash flow budget? How you manage accounts payable can have as big an impact on the cash flow budget as accounts receivable does.

Click on the pictures to learn about some effects.

Bulk purchases

If you take advantage of bulk discounts and buy larger quantities of stock, the unit price is cheaper, but the invoice total will be higher. If you can afford to pay the higher amount on the invoice, will you have the funds available when the invoice is due for payment? This depends on your income and when your accounts receivable are paid.

Just in Time

JIT systems mean smaller orders and smaller invoices. They may still add up to the same amount, but the payments could be spread over a wider time period. Smaller amounts may not place as much pressure on cash flow compared to lump sums. You also have to assess if it increases internal costs, as a JIT system probably means higher workload for the purchasing, stores and finance teams.

Discounts

Taking advantage of purchase or invoice payment discounts means the business pays less. This means less money leaving the business, lower expenses and better profits.

What procedures help improve the cash flow budget? To help the cash flow and make sure you maximise income and profits, you must have well established accounting policies and procedures.

One of the most important areas is the business's credit policy. This details who you offer credit to and what your terms and conditions are.

Click on the tabs to look at some of the topics covered in a credit policy.

Offering credit

Not everyone should be allowed to become a debtor and pay their bill later. The business must determine whether they think the customer is a risk worth taking. (Will they pay?)

Most businesses have a policy requiring customers to apply for credit before granting approval. The credit application form usually sets out the terms and conditions of credit as well as both parties’ rights and obligations.

Part of the approval process is assessing the applicant’s credit worthiness (glossary). This can involve checking if they already have previous history with the business, obtaining a credit rating (glossary) from a credit reference agency, or asking industry sources for feedback on their previous history.

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Credit limit

Most businesses set a limit on how much credit any one debtor is allowed. This avoids carrying large sums in their account receivable. This is similar to a credit card limit, where you wouldn’t be allowed to make any more purchases on credit until some or all of the account has been paid.

Credit status

Consider cutting off access to credit if a debtor’s accounts are overdue by a specified period, for example over 90 days. The ramifications of this policy have to be carefully considered before a business makes any changes, as it could damage relations with important clients.

Credit terms

To try to reduce aged debtors’ accounts, consider the benefit of offering discounts as an incentive to pay earlier or on time.

If this doesn’t have the desired result and the business still has a high percentage of overdue payments, consider instigating overdue account fees.

Payment

How an account is paid can affect how much money is actually received. Some forms of payment, such as credit cards, have fees associated with them. Consider whether you're willing to absorb those fees or pass them on to clients who pay with a credit card. If you pass them on, do you charge a flat fee surcharge or percentage of the account total?

Collection procedures

Businesses need to have clear procedures on how they collect money. If they send an account to a client and don’t follow up later, it's likely they'll have a high number of aged debtors.

By listing the steps to follow when collecting payments, you're likely to receive faster payment. This also keeps you aware of potential problems so you can be proactive, rather than reactive, when chasing payments.

Late payments

The last stage is deciding what to do if an account is seriously overdue and collection procedures haven’t resulted in payment. You have three options.

• Write off the debt. • Place the account in the hands of a debt collection agency. • Take legal action.

A key consideration is the size of the debt. Writing off the debt may seem the easiest option. However, you don’t want to appear to be a ‘soft’ target to other debtors, increasing the possibility of more bad debts. You must also weigh up the costs associated with the other two options, as obtaining payment in these ways may may cost more than the actual amount owing.

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Continuous improvement systems It's important to measure actual budget performance at appropriate times in the operating cycle. Waiting until the end of the quarterly or annual operating cycle before making changes to day-to-day work practices is financial suicide. You need timely, accurate information on how you're performing so managers can make immediate changes to control and improve their operation.

There are two forms of control systems used by most businesses.

Click on the arrows to learn what they are.

Arrow 1: Post action control

This involves making adjustments to daily or monthly operations after the cycle has been completed and the results are known. This is a reactive method of control, as changes are only made once a situation becomes apparent.

Arrow 2: Continuous action control

Continuous action controls are part of the continuous improvement system. They’re an ongoing measure of performance and improvement where results are sought and acted upon throughout an operational and budget cycle. For example, you might measure the success of a new menu in a restaurant on a daily and weekly basis even though your budget cycle is monthly. Continuous corrective action ensures that the business is always brought back into line to meet its objectives.

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How can continuous improvement systems help the budgets? Using continuous improvement systems ensures ongoing refinement of systems and procedures. You can identify areas for improvement long before any issues actually arise, reducing unfavourable budget variances and tightening control systems. This helps keep expenses down and improves quality standards. This, in turn, leads to an increase in customer satisfaction, return business and, eventually, profits. We’ll look at increasing profits in more detail next.

Increase profits The profit and loss statement (P&L) shows whether the business has made a profit or a loss for the budgeted period in both a particular area and the business as a whole. Results from the P&L are then reported into the balance sheet. The balance sheet shows the net worth of the business, its financial viability and ability to continue operation.

There are a number of ways of improving performance which can increase the bottom line in the P&L.

Click on the numbers to find out what they are.

Increase volume of business

To increase volume, you need to increase the number of orders received: more menu items sold, beverages drunk, rooms booked, tours sold.

• Use up-selling techniques to gain more revenue for each item sold. • Use product combinations to sell more items and increase overall profit, for example,

cake and coffee, meal and glass of wine. • Use incentives to sell more, such as loyalty cards and membership deals. • Improve or change products and services to make them more competitive or one-of-a-

kind. • Change packaging or marketing techniques to increase saleability and recreate

interest. • Increase the number of dedicated sales staff. • Reduce selling price. This is a last resort, as reducing price might increase volume but

decrease profit margins.

Create more output

• Use resources better with more efficient rostering, allocation of duties, planning of events and recording of bookings.

• Increase working hours with consideration to overtime and other wage costs. • Employ more per shift. This is only an option if the work site has the capacity for

increased numbers resulting in increased production; otherwise increased staff numbers may only lead to inefficiencies and waste. In most hospitality establishments staff numbers are increased in direct ratio to increased customers.

• Buy or lease equipment to either increase efficiency, speed of production or production capacity.

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Change price structures

Increasing prices should increase profit margins, assuming expenses remain the same.

• You could increase prices of all or specific products and services. For example, you could increase the price of popular dishes, but make sure customers will accept an increase. The business could lose sales if the item becomes too expensive.

• Placing surcharges on orders under a specific quantity or charging based on final numbers for functions and other events.

• Reducing price discounts for bulk orders. For example, offering a discounted rate for bookings or conferences that book over a specific number of rooms, tours or meals.

Improve profitability

• Increase the sales of more profitable items: those with the highest profit margins. Use internal or external marketing techniques to achieve higher sales of targeted items which create the most income for the business.

• Use staff incentive schemes to increase sales. • Reduce expenses to increase profit margins. As you've learned so far, this isn’t as

easy as it sounds!

Implementing improvements You’ve learned a wide range of methods to increase sales and profits, reduce expenses and manage cash flow. Now you need to decide which, if any, are likely to have a positive impact on the business.

The first step is to investigate what improvements are suitable for the business. You can then present your recommendations for change.

What do you need to consider when investigating new approaches? So, you've identified what you think needs to happen. Now you can busily implement the changes to reap financial reward, right?

Not unless you’re the sole manager and owner of the business! You must consider the consequences of your suggestions and decide if they’re financially and operationally viable.

Click on the tabs to identify the three key areas to consider before sharing your ideas.

Effect on others

Any improvements that are implemented can have a direct effect on other areas of the business. The changes may save money or increase sales but could also cause increased expenses or harm sales in another area. This can cause friction between departments and managers, while the gains for the business overall could be negligible. The worst case scenario is that the changes actually cause the business harm.

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Customer service

No business can afford deterioration in their level of customer service. Poor service as a result of cuts in services or staffing levels can eventually lead to less return business and reduced income. The business might gain good short-term budget results but the long- term consequences could be profoundly negative.

Staff morale

Staff morale is often discounted when trying to improve the performance of a business. However, as we discussed earlier, unhappy staff either don’t turn up to work or leave. Unhappy staff don’t sell products and services as well as keen and enthusiastic staff. Implementing new systems and procedures might reduce expenses, but it could also reduce sales if staff aren’t supportive of the suggested improvements.

Hot tip

In most cases, the person who manages the budget is different to the person who prepares and monitors it. The latter is responsible for making any revisions, so refer your recommendations to them.

Who do you present recommendations to? Click on the people to find out.

The general manager

This person is responsible for and understands the operation of the entire business.

Finance experts

This includes accounting staff, an accountant or a finance manager.

The purchasing manager

If your suggestions affect purchasing procedures, involve the purchasing manager in any decision making processes.

The marketing manager

Again, if the suggestions directly affect their area and how the business is marketed internally and externally, consult marketing personnel.

The management team

You may informally consult other managers to obtain feedback or present recommendations to the management team at one of the business's regular meetings.

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How do you present recommendations? Have your information prepared and communicate clearly when sharing your ideas. Make sure your recommendations are logical and practical.

Click on the dot points to see what information to include in your presentation.

 The area of the operation you're trying to improve: increased productivity, increased sales, reduced payroll costs, reduced overheads, etc.

 A clear outline of details of changes or improvements to be made.  How and when the changes will be implemented and by whom.  Any immediate or up-front costs associated with the changes.  How the changes will improve the operation or affect the budget performance.  Direct consequences on business operations.  Anticipated effect on sales and expenses.

Note...

It's not enough to say you have a great idea. You need to show why it’s a great idea. Clearly define and communicate the details of the changes as well as the benefits, disadvantages and outcomes for all concerned. Allow for the feedback, opinions and possible concerns raised by others.

End of section You have reached the end of section 3.

Click to the next section to continue.

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Section 4: Complete financial and statistical reports

In this section you will learn the following.

• How to complete financial and statistical reports. • How to prepare and present information for informed decision making.

Preparing reports Part of the budget process is reporting on performance, the results from the various budgets used, and analysing the information you've gained from them.

You’ve learned a number of commonly used reports already.

Click on the icon to see what they are.

 Short-term and long-term budget reports: monthly, quarterly, annual reports  Planning reports: for future trends or changes to systems and procedures  Statistical reports: analysis of sales and expenses, marketing demographics, cost of

goods, budget variance and customer spending analysis

 Profit and loss reports  Balance sheets

What other reports can you use? Every establishment has its own reporting systems and requirements. Some are legal requirements; others are developed internally.

Here are some other reports you might prepare and use.

• Flash reports: a report devised to show budget performance at that point in time within the budget period, for example, a daily revenue summary report

• Breakeven analysis: analysis of breakeven points for menu items, accommodation rooms and other saleable items

• General ledger: a summary of all accounts including receivable and payable

What information is included in financial reports? Most financial and statistical reports focus on key areas of the business; sales, revenue, expenses and performance.

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The information provided varies based on the type of report, its focus and who it will be distributed to. For example, the information a daily revenue summary distributed to staff in a specific revenue area (e.g., restaurant, front office, tour desk, gift shop) will be different to a monthly statistical sales analysis report issued to the management team.

Click on the icons to see some examples.

Daily revenue summary for front office department

• Number of rooms sold • Breakdown of occupied rooms – sold, discounted, complimentary • Average room rate • Total revenue • Comparison to budget to evaluate performance; revenue, occupancy rates, average

room rate

Monthly sales analysis report for reception centre

• Sales trends • Occupancy rates • Revenue from room hire, equipment hire and other sources • Cash flow • Average financial return for reception areas

Weekly budget performance report for a kitchen

• Expenses – stock, wages, utilities • Number of covers • Wastage • Yield • Cost of goods • Variances

Monthly revenue report for a travel agency

• Summary of transactions • Sales performance • Sales returns • Staff costs • Commercial account activity • Commission earnings • Income • Expenditure • Cash flow

Reports need to include all relevant data specific to the topic and area of the business you're reporting on. Computerised systems compile and print standardised reports at pre- determined intervals. These assist employees at all levels to make decisions about the operation and performance of their area.

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What other information is included in a formal report? Formal financial and statistical reports often include an analysis of the information contained in the report, summarising the outcomes, reasons for deviations and suggestions for changes or improvements.

Click on the icon to see what other information is included in a report.

 Statement of purpose: why and what you're reporting

 Methods: how you went about collecting the information included in the report.

 Costing trends: changes in wages, materials, overheads and other relevant expenses

 Market trends: identified shifts in the industry, competitors and markets

 Outcomes: the results and how they affected the business

 Distribution list for the report: who the report is prepared for and given to

 Causes of variance: possible reasons for variances; whether they’re one-off situations or ongoing causes for concern; short-term and long-term effects on the business

 Performance of department, project, products and services

 Recommendations for improved budget controls

Report formats A report should provide clear, concise and relevant information. It should be easy for the reader to understand and enhance their ability to make decisions and take corrective action. Ensure the format of the data and any analysis is appropriate to the formality of the report as well as the type and amount of information being presented.

Don’t forget the diagrams!

A report doesn’t need to be in a totally written format. Often financial and statistical information can be more clearly represented pictorially using graphs, charts and other diagrams.

Many software packages include this facility as part of their standard features to assist business operators in understanding the sometimes complex or diverse information they are assimilating.

What could make a report inefficient? The information prepared in reports should address the needs of the user. Decision- making and operational staff generally require more detailed reports than front line staff who need only be aware of general budget performance. Top management may require a lot less detail on individual aspects of the operation; their information may be summaries of overall performance with graphs or charts to relay information and trends.

What makes a good report? Click on the icon to find out.

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Reports should be user-friendly, using simple and appropriate language for the intended recipient. If reports are too complex or unclear, those reading them will have difficulty in deciphering the information and determining appropriate actions.

What could cause difficulties for a person using a report?

• Relevant information omitted • Irrelevant or inaccurate information included • Inappropriate format for the intended reader • Duplication of information • Missing attachments or appendices • Information and statistics not presented clearly or in a logical sequence

When do you prepare a report? A report should be produced in a timely manner according to company policies. It may be produced periodically or produced only when a problem appears.

Click on the icon to learn more.

Earlier we discussed setting parameters for investigating budget variances. The same benchmark can be used to determine when a report is generated; for example, variances over 5% will initiate a report.

Budget reports usually contain specific details about performance in relation to the area or topic that budget controls.

Let's look at an example on the next screen.

Part 1: Reporting on your findings Your completed report should include the following.

• Feedback on the results from the budgeted period • Possible causes for variances • Trends you've identified • Suggestions for improvement

Click on the report pages to enlarge them.

Food sales

Actual Actual % of sales

Budget Budget % of sales

Variance

Food sales $803,906.25 65.15% $ 727,986.25 58.42% 10.43%

Budgeted target was nearly achieved with only a minor variance recorded. Contributing factors included a menu-focussed advertising campaign and an increase in local customers visiting the establishment.

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Beverage sales

Actual Actual % of sales Budget

Budget % of sales Variance

Beverage sales $429,968.75 34.85% $ 518,227.50 41.58% (17.03%)

Sales were below budget by 17%. This is a concern, especially if it signals a trend in customer purchasing. Causes for the variance include:

1. Change in clientele mix: majority of increased local customer base in older age groups purchasing fewer alcoholic beverages.

2. Staffing: new staff rostered in bar areas with limited training provided prior to commencement, unfamiliar with beverage menu, limited product knowledge and no customer sales training.

Food and beverage purchases

Food purchases $ 253,230.47 31.50% $ 203,836.15 28.00% 24.23%

Beverage purchases $ 98,892.81 23.00% $ 114,010.05 22.00% (13.26%)

Total cost of sales $ 352,123.28 28.54% $ 317,846.20 25.50% 10.78% Food purchase expenses were much higher than anticipated. This is partially explained by the increased food sales. Other factors could include price rises higher than allowed for, and changes in where the business purchases stock.

Investigation is required on the price difference between market purchased and supplier delivered food items. If the price differences are significant, the chef may need to return to purchasing food at the market or find someone to go in his place.

Beverage purchases were down due to lower sales. However, sales were down 17%, while purchases were only down 13%.

Wages & salaries

Actual Actual % of sales

Budget Budget % of sales

Variance

Wages & salaries $ 401,009.38 32.50% $ 382,375.00 30.68% 4.87%

Payroll expenses were over budget. A number of factors contributed to this result, which should not appear in the next budget period.

1. The roster manager being away on leave meant rosters weren’t as tightly controlled and additional staff were required to cover the supervisor’s role while he was acting manager.

2. Poorly trained bar staff leading to lower productivity and longer shifts to complete tasks.

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Overheads

Accounting fees $ 5,645.00 0.46% $ 6,000.00 0.48% (5.92%)

Advertising $ 58,955.00 4.78% $ 60,000.00 4.81% (1.74%)

Postage $ 2,955.00 0.24% $ 3,600.00 0.29% (17.92%)

Utilities $ 41,250.00 3.34% $ 39,000.00 3.13% 5.77%

If payroll costs are removed from expenses, the budget variance is only 0.06% for all other expenses. The most significant results are those for advertising, postage and utilities.

1. Postage was under budget significantly. This is probably a result of the decision to email newsletters to customers rather than post them. The business needs to assess the success of using email as a communication tool before reassessing the ongoing dollar value of this expense in future budgets.

2. Utilities were over budget. This could be partially due to increased food sales and therefore increased use of power sources in the kitchen as well as wastage.

Part 2: Reporting on profits and cash flow Let's continue with the previous example and look at how to report on profits and cash flow.

Click on the report pages to enlarge them.

Gross profit

Actual Actual % of sales

Budget Budget % of sales

Variance

Gross profit $ 881,751.72 71.46% $ 928,367.55 74.50% (5.02%)

Gross profit was 5% under budget, mainly due to the blow-out in food purchase expenses. Revenue was only 1% under budget, whereas cost of sales was 11% over.

Net profit

Actual Actual % of sales

Budget Budget % of sales

Variance

Profit/loss $ 105,059.74 11.91% $ 170,447.13 18.36% (38.36%)

The net profit was less than budgeted for, reflecting lower gross profit and higher total expenses. The amount of variance (38%) is a concern. This is the busiest period when the business needs to make good profits to get through the off-season.

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Cash inflow

Cash inflow Actual Budget Variance

Cash sales $1,093,750.00 $ 1,109,130.00 (1.39%)

Accounts receivable (payments received) $ 140,125.00 $ 137,084.00 2.22%

TOTAL INFLOW $ 1,233,875.00 $ 1,246,214.00 (0.99%)

Cash sales were down slightly for the period, which means more funds are being held in accounts receivable than planned. However, payments received is up, possibly due to the new collection system instigated by the accounts department at the end of the last period.

Cash outflow

TOTAL OUTFLOW $ 1,017,315.26 $ 964,236.62 5.50%

Major contributors to this variance are F&B purchases (11% over), payroll (5% over) and utilities (5% over). While savings were made in other areas, the smaller dollar values of those expenses could not outweigh the figures for the main expense items.

Bank balance

Bank balance

Opening bank balance $ 53,527.90 $ 64,554.17 (17.08%)

Receipts less payments $ 217,559.74 $ 281,977.38 (22.85%)

Closing bank balance $ 271,087.64 $ 346, 531.55 (21.77%)

The opening bank balance was less than anticipated due to unexpected equipment expenses at the end of the previous period. Lower sales figures and increased expenses have led to a closing balance 22% under budget.

Part 3: Other inclusions So far the report has discussed budget results and some of the consequences. Let’s now look at an example of what else you might include in a financial report.

Click on the report pages to enlarge them.

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Corrective actions

Action is required in a number of areas of concern to reduce or eliminate causes of variances and bring future budgets back into line with desired outcomes.

Action Desired outcome Responsibility Beverage staff training: urgent action required

1. Conduct staff training program for all new staff.

Outlet managers, HR

Price comparison: market purchased products with supplier purchased. Associated staff wages to be included.

1. Determine effect on quality, food expenses and cost of sales.

2. Determine most cost effective purchasing method.

Purchasing manager, accounts

Customer spending analysis for each outlet.

1. Determine shifts in customer spending. Focus on beverage sales.

2. Revision of upcoming promotional campaigns.

Outlet managers, marketing

Trends

Analysis of budget results and comparison to previous budgets has indicated the following trends developing:

• Increased local customer base in mature demographic groups. • Decrease in young single or married demographics. Accommodation and F&B sales

down. • 20% increase in conference enquiries to marketing department in last six months. • Steady increases in cost of food purchases. Significant price rises in meat, especially

in prime cuts.

Discussion topics

Discuss topics prior to the next management meeting.

• Increases price across all outlets for food and beverage items to compensate for increasing cost of sales.

• Focus of future marketing campaigns and promotions. What and who should we be targeting?

• Update food menus to reduce food costs, especially of high cost or slow moving items. • Revise beverage menus to include different beverage items for changing customer

demographics.

Reports do differ Keep in mind that every report from every business differs depending on the following.

• Results of the budget • Subsequent investigation • The nature of operations • The business's reporting procedures

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The examples provided are merely an indication of the type of information you might report on and how to report it.

When does the report need to be prepared by? The purpose of the report is the main factor when allocating timelines for preparation and distribution. Some reports are prepared daily (such as a flash report), while many are completed on a regular basis throughout the financial year on a monthly, quarterly or annual basis.

Who will the report be distributed to? This depends on who needs to know the information contained within it, if the report relates to their area of responsibility, if they are required to take action, or are affected by the consequences of decisions made within the report.

It also depends on the purpose of the report; is it designed to inform, motivate or instruct the recipient?

Click on the icon to see who might need a copy of your completed budget analysis report.

Distribution of your report

• General manager • Finance manager • Department manager • Purchasing manager • Human resource manager • Business owner

How is the report distributed? With increasing use of electronic communication systems, many reports are now distributed via email irrespective of whether the target audience is internal or external to the business.

Formal reports to external clients may need to be presented bound or in a folder, in which case Australia Post or a courier service is used.

General reports on budget performance may be posted on noticeboards or in staff communication books so that staff can easily access the information provided.

End of section You have reached the end of section 4.

Click to the next screen to read the unit summary.

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Summary Monitoring your budget performance and controlling both your income and expenses is vital to the long-term viability of any business.

Paying attention to where and how you receive your income and what you spend your money on helps you make better decisions.

Budgets can be prepared and used in any type and size of operation; the only decision you need to make is which ones will provide you with the information you need to run a successful business!

GLOSSARY

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Glossary

Word Meaning

Assets Items owned by the business.

BAS Business Activity Statement.

Capital assets Larger items purchased by a business: kitchen equipment, a shuttle bus, a marquee, etc.

Capital expenditure

Funds used by a company to acquire or upgrade physical assets such as property or equipment.

Cost of goods sold (COGS)

The direct costs attributable to the production of the goods sold by a business; for example, materials used and direct labour costs associated with producing the goods. COGS appears on the income statement and can be deducted from revenue to calculate a business’s gross margin. It can be shown as a dollar value or as a percentage of total revenue.

Credit rating An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

Credit worthiness

The demonstrated ability of the individual or company to meet their obligations on time.

Creditors A person or business to whom money is owed for the purchase of products or services.

Debtors Customers who have purchased an item on credit and will repay you according to your set terms.

Demographics The statistical data of a population showing average age, income, education, marital status, family composition, population density, spending patterns, etc.

Dividends An amount distributed out of a company's profits to its shareholders in proportion to the number of shares they hold.

Expenses Costs incurred by a business in earning income such as rent, advertising, wages, etc.

Goods Movable items purchased by a business, such as food and beverage stock.

Liabilities A financial obligation, debt, claim or potential loss. An obligation that legally binds an individual or company to settle a debt.

Liability A financial obligation, debt, claim or potential loss. An obligation that legally binds an individual or company to settle a debt.

Night audit An internal audit process, usually conducted at night time, where all transactions for a hotel’s guest ledger are checked, verified, posted to accounts if necessary, the accounts balanced and management financial reports produced.

Overdraft An extension of credit from a lending institution.

GLOSSARY

2016 Edition 74

Word Meaning

Par stock Par levels are the quantities of stock set by management to make sure you don’t run out of certain items. For example, if you go through at least five bottles of scotch in a week, management may set a par level of six.

POS Point of Sale. A computerised ordering system.

Profit and loss statement

Shows the revenue and expenses of a business for a specific period of time (a month, a quarter or financial year). It’s also called an income statement.

Revenue Income, such as cash or other items, received in exchange for merchandise or services.

Services Tasks provided by people or businesses, such as cleaning and maintenance contractors.

Utilities Include gas, electricity, water and communication suppliers.

Variance In financial terms, a variance is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold. Variances can be calculated for both costs and revenues.

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