Budgeting in the Hotel Industry
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Published: Tue, 27 Feb 2018
This study focuses on the concept of budgeting in hotel industry particularly on the case of Marriott Hotel and Resorts. It primarily identifies the current issues, challenges and opportunities faced by Marriott Hotel. It also aims to find out various aspect of budgeting within hotel industry specifically on how to develop more positive implementation of budget in terms of the company’s financial performance. Using data gathered from interview and personal experience upon placement, the researcher should be able to provide explanation and practical solutions or recommendations related to the general findings or perhaps the aim of the study.
1.1 Main Aims and Objectives of The Study
To provide a wide-ranging discussion on the concept of budgeting and their implementation within hotel industry is the main objective of this study. Through a case study approach, the following are the main specific objectives:
- To describe the process of budgeting employed by Marriott Hotel.
- To identify the current issues, challenges and opportunities faced by Marriott Hotel.
- To propose practical solutions and recommendations on the identified issues, challenges and opportunities.
1.2 Research Questions
Budgeting is an essential element in any industry. In this case, the concept of budgeting is focused on the following problems:
- How Marriott Hotel employs the process of budgeting?
- What are the current issues, challenges and opportunities faced by Marriott Hotel?
- What are some practical solutions and recommendations on the identified issues, challenges and opportunities?
1.3 Background of The Study
“Hoteliers use budgeting and forecasting for strategic planning and financial control, and as a standard against which to measure actual operating results. Financial forecasts and budgets can strengthen management’s control of hotel operating expenses and help determine the profitability of the property”. “Budgeting is planning. In order to make meaningful decision about the future, a manager must look ahead. One way to look ahead is to prepare budgets or forecast” Coltman, Michael M. (1998). In past few years the enormous booming of the tourism industry, budgetary practices in hotel industry has become a significantly studied area of business research and activity. “Previous research into budgeting practice was undertaken by Schmidgall and Ninemeier (1987 and1989) within the USA”, “Collier and Gregory (1995) dealt on practices of management accounting of six (6) organizations including budgeting”. “The early and limited accounts of management accounting particularly budgeting within hotel industry paved way for increased effort of few hospitality educators to the need of undertaking research into budgetary practices within the industry (Schimidgall et al., 1996)”. Now days, research work on management accounting and practice are growing unlike any other research field.
The findings of this piece of individual work to carry out a research work in the area of management accounting specifically on budgeting aspect and also to look on the relevance and applicability on the case of Marriott Hotel. It also emphasize that the literatures to be used on this study increases until the conclusion of the entire research activity. Other management accounting principle will also be considered.
1.4 Significance of The Research
At the end of the research project, the researcher should be able to provide a better way of planning budget as well as their proper use. After determining the important issues, challenges and opportunities on the budgeting approach or strategy of Marriott Hotel, this study will be beneficial to other hotel companies and related business in the hospitality industry especially those who are experiencing similarly related problems. This study will increase the consciousness and will provide a better understanding of the issues and problems concerning budgeting among most hotel companies and organizations.
It will improve knowledge through the use of accounting principle as well as definition of important concept, interpretation and analysis of financial statement is the main priority. Also, this will contribute an effective approach in addressing budgetary problems and difficulties. This paper is clearly important for organization that follows appropriate accounting standard and use it for planning the budget and control the cost and expenditure to deploy effective budgetary management within the hotel industry.
This is a descriptive research in terms of its purpose, qualitative in terms of its process, case study in terms of methodology, and applicable in terms of its outcome. The researcher used the Descriptive research since “descriptive research is used to obtain information concerning the current status of the phenomena to describe “what exists” with respect to variables or conditions in a situation. The methods involved range from the survey which describes the status quo, the correlation study which investigates the relationship between variables, to developmental studies which seek to determine change over time” “Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied”.
Further, “Qualitative research is all about exploring issues, understanding phenomena, and answering questions” It’s Mainly focuses on meaning of words and the research setting and in terms of designing the research is the main focal point. Similarly, case study is also used on this project “Case study research excels at bringing us to an understanding of a complex issue or object and can extend experience or add strength to what is already known through previous research”. It aims to develop complete understanding of the case as possible and is not linked with any particular research technique.
This method involves the researcher to inquire more in depth analysis and examine thorough a real life experience of a person. It is also noted how these behaviors change as the individual adapts and reacts to that particular situation. The discovery and identification of all the important variables which have contributed to the history or development of the chosen subject is also feasible through this method. In this study, the researcher used applied research since it includes the analysis of a real life situation and explores the problem, issues associated with a real life scenario, which is happening at the moment, and establishes a strong connection with the real environment.
2.2 Data Collection and Analysis
Data collection or requirement for the research covered both primary and secondary sources. The sources of data are the following: primary data – interview and personal experience and secondary data – published literatures directly linked on the subject. Data gathered from the interviews will be analyzed by comparing the common theme from the respondent. The interview involved managers working on Marriott Hotel who exercise management accounting particularly on the budgeting aspect. Interview is an effective way to accumulate some inside information of one particular company and discover important facts that any individual came across and also share experiential knowledge.
The information gathered from the interviewee were directly quoted or referenced to support the initial observations of the researcher. Analysis and discussion of findings were included to both literatures and the facts that obtained through investigation. Using the theories and principles of management accounting, the researcher came up with discussions, conclusion and recommendations as a par of the project and also to provide a clear understanding of the entire project.
The literature studies in terms of research work in management accounting as well as various other related topics in budgeting are extensive. This chapter covers the related literatures conducted on the area of study. By undertaking such approach , the research may be lead accordingly by discovering the source of the research, what and how much have been done in the past and what is still yet to be tackle. Besides providing background of the study, this study will also provide the necessary theoretical and various other related aspects in order for the research to stand convincing. References are taken form many different resources specifically, in the area of budgeting in hotel industry and issues on budgeting.
3.1 Budgeting in Hotel Industry
This section provides a fundamental understanding of budgeting concept in hospitality industry and their use in their daily operation. “The use of budgetary control is one of the key detective controls in many hotel businesses” Chin, J., Barney, W and O’Sullivan. The traditional idea on the concept of hotel is a sort of business establishment that offers paid temporary housing or simply lodging. Such services are provided in a short term basis and it concludes in a specified period of time. In the meantime, money is often referred as the income of the business and on the other hand budgets provides a guideline for any expenditure and increase the shareholders wealth and owners interest in terms of providing a standard service for the business to stand creditable. “The budget is like an airline Pilot’s flight plan; it sets out in figures where to steer in order to reach a given objective” Fenton, Lawrence, Fowler, Norman A., Parkinson, Geoff.
Without a clear budget in mind, the business would not achieve the targeted return or perhaps maximised return required by the owner of the business since it cannot identify the risks and costs involved in its future trend. “The process of budgeting is considered to be a valuable control tool in the hospitality industry”. The primary concept and as stated before, hospitality industry is an operation establishment that offers short-term paid lodging to mostly travellers, tourists and other people. This is the traditional and main or common idea of people when they hear the term hotel.
In the earlier days, hotels services were limited, such as a bed and its complete bedding, a locker, a small table – most of the time side table, and a washstand that includes bathroom and other comfort facilities. Additional features include telephone service, television (cable TV), and other necessary yet basic things like coffee or tea making accessories. In addition from the extended line of facilities and services, hotels also include some other special operations. At present time, the services provide by hotel has extended far more then their core business and presently hotels are offering events, banqueting and conference services.
Most commonly hotels are said to be service-oriented. The identity of a hotel is based on the service particularly on the quality and overall operational standards. The presence of a hotel classification based on stars rating system.
3.2 Why Budgeting in Hospitality Industry?
The use of budget and budgetary control is now a vital part of the Hospitality industry accounting and should then be use as a benchmark to measure their performance as well setting up their financial target. “The budgeting process is often used not only to plan ahead, but also for target setting and raising individual performance.” Adams, Debra. Hotel business alone is continuously growing in the 21st century. “The UK hotel market was valued at £14bn in 2006, having an increased by 28.9% since 2002”.
This industry comprises hotels and other accommodations, restaurants, fast food retail, bars, and catering. In order to sustain in this competitive market or to perform as a successful key player, any hotel industry must adopt budgeting; hence this will assist the management to plan ahead for their future target. “Budgeting is planning. In order to make meaningful decisions about the future a manager must look ahead. One way to look ahead is to prepare budget or forecast”. Gareth Owen (1998) has explained budgetary process in hotel business by drawing a budgetary cycle.
- Environmental Influences audit
- Internal resources audit
- Actual result
- Master Budget
- Departmental Budget
- Strategic Plan
- (3-7) years
- Annual Business plan
- Long term Strategic Gap
- Short term Operational gap
(Accounting for Hospitality Tourism & leisure Auth: Gereth Owen Second edition P: 297)
The author has explained the overall planning cycle a top down process and for a long term objectives should determine any short term activity that has a significant impact in operational process. A strong hand in controlling their daily operation; for instance what is done from minute to minute, hour by hour and day to day will have a direct impact on long term plans. On the other hand controlling in any short term activities will directly influence in any long term objective. Therefore long terms aim or objective needs support from short term objective.
There are several kinds of budgets are employed in hospitality establishment. For instance Capital Budget, Operating Budget, Master Budget, Departmental Budget, Fixed Budget, Flexible Budget. Each of these different kinds of budget comprise of many other type.
3.3 Budgetary process
The process of budgetary practices in a hotel starts with the departmental budget, the consequence behind that is a departmental budget will give overall cost related to the many parts of the hotel for instance a house profit cannot be estimated without knowing the cost associated with department like housekeeping, valet, repairs and maintenance, room service reception etc. Also cash budget cannot be prepared without the knowledge of departmental revenue and expense hence the overall cost of the hotel. Departmental budget is probably the most difficult to prepare after the sales budget and involve a lot of manpower and moreover time consuming. The departmental budgeting process can be summarised in four steps.
- Assign a task for the department managers to gather information such as revenue, cost and expenditure.
- Analyse the past trend and estimate any revenue generated by the revenue centres like Brassiere, Banqueting, Restaurant, Front Office (reception), business centre, room service.
- Subtracts any expenditure from the estimated revenue related to the department.
- Finalise the information with the department managers before combining into one report
At this point all the expenses and revenue should be combined with a detail report of explanation for the budgeted cost and revenue for that specific period, the department manager will have to decide whether this budget is feasible over that period or not, once this has been approved by the D.O.F it will then be combined in the Hotel Master Budget.
Once the departmental budget has been established its time to prepare the cash budget, this will help the management to see the detail view of their cash inflows and outflows and will enable to plan a head for any expenditure. In today’s financial world almost every company adopt a cash budget as its help the management making decision about their future abilities for paying any debt as well as expenditure.
Having discussed the budgetary process, many hotel industries uses more advanced, reliable techniques in addition to budgetary process to clarify any last minute adjustment prior to the budgetary period another word forecast is an updated version of the final budget. Forecasting is mainly use in budgeting and it also could be applicable to many other aspects in the industry. “A more accurate forecasting of room occupancy rates would facilitate strategic planning and enhance the decision-making procedures of hotel management companies”
Forecasting is normally done in monthly basis prior to the beginning of the month, many company has more frequent forecasting policy. Two most commonly use forecasting method is the “moving average” and “multiple regressions” and this process is normally carried out by the finance department of any hotel.
In Marriott, the hotel and its management start to prepare the budget in middle of the year for the upcoming next one year. The officers and members of the top level finance management are the ones responsible for the completion of the most appropriate and inclusive yearly budget. The hotel uses a bottom up approach budgeting system another word “participative budgeting method”. Participative budgeting involves employee’s participation in preparation of the budgeting at various level of organisational aspect, even though the final decision is made by the top level management. Participative budgeting gives employee an excellent opportunity to take the owner ship of their own budget document and motivation to meet the target. “A budgeting system in which all budget holders are given the opportunity to participate in setting their own budgets”.
In this method all the managers are responsible for preparing their own departmental budget with the assistant of a finance manager. The departmental managers normally start preparing the budget in the month of July based on past trend, the managers will look ahead for the whole year projected expense like wages and salaries, any fixed and variable cost like labour cost and then calculate the required profit by the owner. The managers will then evaluate the budget inside-out to clarify is it practical? Is it reachable? The finance manager will then put forward their draft budget to upper level finance management for approval. Once this has been approved by the Director of Finance, general manager and the executive team it will then unite in their master budget and finally a copy of the Master budget will be sent to their regional office for approved by the Area director of finance.
Marriott previously used a software package for helping the departmental manager preparing the budget which no longer supported and exchanged with the idea of using Excel spread shit Template. This template helps the manager whose are not very budget educated and has a limited understanding of budgeting concept. After end of each month the hotel publish an internal P&L (Profit and Loss account) report for the departments to evaluate the performance. The department head will be asked to critique on their result to the director of finance (DOF) and DOF finally create a critique report which will be reviewed by the regional office.
The following discussion is an example of Marriott Hotel Master Budget for a year. However, it is noted that specific figures are altered for the purposes of corporate confidentiality.
Please refer to a copy of the Master budget in Appendix I
Figure 1.1 is the detailed presentation of the hotel’s revenue target for the year 2006. As seen on the records, the room sales have a considerable portion in the total revenue because of the fact that this is the core of their entire business operations. This figure has been compared with the budget of the previous year 2005. Basing on the figures obtained from the comparison, the total room revenue significantly increased over12-month’s period. Depending on the upcoming business, the hotel management set this target for example, if any major function taking place in the month of August during the summer particularly this year, they then increase the target for the profit and revenue compared with the previous year.
The total number of room sales revenue holds 25.44% share in the total sales. In this particular hotel, we can also see that they make the most revenue from the banqueting service although the room sales are their core business. The banqueting service has a share of 63.21% of the total sales. Meanwhile, the total Food and Beverage sales revenue has a significant impact in the hotel business. As a primary section of the entire hospitality industry, it plays a significant role in any hotel industry business.
After determining the target for the total revenue of the hotel, the officers and members of the top level finance management who is in control of the overall budgeting process will start to look into the hotel’s expenses and wages. The department head will be asked to gather the needed information and come up with the numbers based on past business trends and experiences. The finance director will then discuss and undergo further clarifications with the department head before approving a unified master budget.
In Figure 1.2, figures show the breakdown of all the expenses. The General & Admin cost mainly consisted of the Directors’ remuneration and other hotel general expense including Directors’ Parks. From the data presented, it shows that this is one of their main expenses accounting to 32.42% of the total expense. Repairs & Maintenance is also a major cost centre. This is due to the fact that it takes off a great amount of the hotel’s profit especially in the case of providing finances in fixing and repairing hotel equipment and facilities. Meanwhile, Sales & marketing expenses are mainly accounted to finance hotel’s advertising campaign to promote their business and how to develop their services. On the case of Advertising, it is fixed over the whole year but could be changed depending on the business.
Lastly, Figure 1.3 gives an itemized breakdown of the payroll expense including rooms, food and beverages, and other departments. The Food and beverage section employs the biggest number of people. As an important part of the hotel and its entire operations, it needs a great number of manpower to provide services to the hotel clients. The changes in the wages are brought about by trends affecting the whole hotel business operations.
After determining all the expenses and the sales target, the officers and members of the top level finance management will then subtract the hotel expenses from the revenue figure to finalize the targeted profit figure.
A monthly forecast takes place at the beginning of each month in addition to their quarterly forecast. For example in their 2008 budget they will have a monthly forecast for the month of January as well an advance forecast for the up coming next three month to see if there is any rapid movements in the current trend and perform any last minute adjustment. A forecast can be described as a latest update for the operating budget where a budget is a permanent financial planning for the year. A forecast is not expected to balance with their budget figures as they are flexible in terms of their use and can be changed to meet the demand of the business.
3.4 Issues on Budgeting
It is argued that budgeting is considered as an “old system of control” (Malmi, 2001) or a “traditional” management accounting (MA) technique (Burns and Yazdifar, 2001). Moreover, it has weaknesses and pitfalls particularly in its entire process (Cruz, 2007).
Budgets are prepared on the base of some known factor as well as unknown factor which really means making a future plan just by predicting the possible future business. Budgets preparation also requires disclosing company’s financial information which could be use by the competitor such as their financial performance result. Moreover any surplus in the budget could lead to unnecessary spending; for instance if an expenditure budgets is overvalued then there might be a possibility to find ways to spend those extra fund.
There are so many limiting factors in budget and this has been criticised by many individual in the past. Following are the few criticism extracted from the “Management accounting-Performance evaluation book.
- Budgets are a commitment. They therefore act as a constraint on doing anything different.
- Traditional budget are seen as a mechanism for top down control by senior management.
- Traditional budget restrict flexibility
- Budget reinforces barriers between department”
During the interview with a Finance manager from Marriott hotel, the researcher has found out some specific problem that a manager encounter when preparing the budget which conclude a bad performance in their actual outcome. It was explained that why a manager or hotel don’t meet their budget could be subject to preparing a budget that is realistically unsuitable. Following are the highlighted points that came up during the interview.
Unrealistic / too optimistic: If the budget has been prepared by a senior level management based on their own assumption, might not be realistic or acceptable by a lower level manager and could even result a failure to meet the target. A departmental manager will have a better understanding of their target for the specified period rather then being too optimistic about the goal set by the senior managers.
Over estimate/ under estimate: A manager tends to make the common mistake when preparing the budget by either over estimating or underestimating the budget. From a budgeting point of view the both issues are identified as a bad influence.
Not much participation from the bottom level management: Sometime when preparing the budget becomes sort of an empowering issue and the senior level management ignore the fact of participation by a manager whom it will be assigned. On the other hand a lower level manager might not be interested to add any comment on their budget due to lack of understanding in this area.
Poor planning: A poor planning could really effect any budgeting; therefore use of proper time management is very important when preparing the budget.
Use of past trend: comparing the past trend result will give them more accurate information whether the set target will be achievable or not or anything particular they need to look at, compare to previous year result.
Communication gap: lack of communication between top level management and bottom level management.
Despite the first interview with a finance manager, the researcher has also interviewed a top level finance manager, who discussed the issues by putting them into two groups. This could be as follows.
Two Groups: 1. External Issue 2. Internal Issue
3.4.1 External issues
Unfortunate event (for instance natural disaster): A sudden natural disaster or any unfortunate tragic event could significantly affect the budget for any fiscal year.
Changes in government rules and regulation: Any changes in government law for instance health and safety issue or maybe increase in taxation might cause a review of the budget and to carry out a review process will cost more time and money.
3.4.2 Internal issues
Hotel renovation: This is a practical example even the researcher has came across during working for the Marriott hotel, the researcher has found out delays occurring through out the life time of the renovation could result to many changes in their budget and loss of revenue and as the hotel funds are limited it is very difficult for the management to tackle this kind of situation.
In relation to the bottom level management following are the major concern
- Lack of understanding
- Not knowing the operation properly
- Communication across department ( Example C&B)
It was identified by the management that the most difficult part of a budget in any hotel establishment is the sales budget. Prior to conclude any figure in the sales budget a forecast should be done. Consequently the forecast number of room sales will give an idea of the cost related to the budget and the management will have a clear picture of different type of cost such as variable and semi fixed cost. One of the major facts that will influence in the forecast for the sales is called as limiting factor also known as “principal budget factor. This means an additional increase in the sales volume will almost be impossible; for instance the number of rooms available is fixed and therefore the management cannot sell any more then what is available.
This has left them with no choice for any additional sale except an increase in the room price; as a consequence they must make sure that they are in line with a hundred percent occupancy rate during the festive season or if possible most of the time during the year. Same issues also influence their restaurant budget such as fixed number of seats available in their restaurant and not able to accommodate any extra guest and this may well result in loss of any potential sales as they cannot increase the seating capacity of the restaurant. There are several kinds of limiting factor can be found in the hospitality industry. According to “Richard Kotas and Michael Conlan” such limiting factors are like insufficient capital, shortage of efficient labour, management policy, consumer demand.
3.5 Budgetary behaviour and employee motivation
It is found that different aspects of budget/ budgeting can affect motivation of employees. “Kenis (1979) believed that a “tight but attainable” budget approach is the most effective way to motivate managers to perform better”. “The budget may be set as a target that management are motivated to meet, a realistic forecast of the likely outcome, or some combination of these goals. Hofstede and other have suggested that the target must be accepted by the budget holder, and this would usually be achieved with a bottom up or interactive approach” Collier, p., Gregory. Chris Argyris (1952-1953) has indentified that “budgets and budgeting can be related to at least four human relation problems:
- First, budgets pressure tends to unite the employees against management, and tends to place factory supervisor under tension.
- Second, the finance staff can obtain feelings of success only by finding fault with factory people.
- Third, the use of budget as ‘needlers’ by top management tends to make the factory supervisor to see only the problems of their own department.
- Finally, supervisor use budget as a way of expressing their own patterns of leader ship”
Further, to be able to understand the level of such effect, it is essential to include specific organizational or employee factors in the analysis. For example, not enough time to educate department manager’s on the subject of budget and without a clear understanding they are allowed to operate their own department by themselves even though there is substantial training for budget is necessary, Therefore, what is needed is a planned training schedule for managers and employee (where required) for budget rather then holding inspirational presentation or seminars. “Swieringa and Moncur (1975) found that greater participation in the budget-setting process increases the quality of budgets – in other words, that there is a direct benefit of budgetary participation on subordinates’ behavior”.
The absence of the “right” environment is the root causes of many budgeting issue specially those one relate to employee motivation. In many companies unit managers are acting like Gods because what they say is what would employees are intended to do and Even though at the end of budget preparing process “Is there any reactions?”, “is there any question or suggestion?” in most cases its seems like a bit of an empowering issue like a teacher is giving out the homework to the student. Budget matters are worst.
Managers are always allowed to contribute
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