Controlling Expenses

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CHAPTER 6

• Controlling Expenses
• Objective examining how the budget is prepared
  exploring other management activities carried to
  control expenses

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Types of Budgets

• There are two types of budgets, the difference
  is because of the types of expenditures involved
• Capital Budget
• Operating Budget

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Capital Budget

• plans for the expenditure of company assets for
  items costing 500 or more.
• these items are not used up in the normal course
  of operations, they have a lifespan of a year or
  more.
• e.g. room attendant carts, vacuum cleaners,
  carpet shampooers, pile lifters, rotary floor
  scrubbers, laundry equipment, sewing machines,
  trash handling equipment

4
Operating Budget

• forecasts revenues and expenses associated with
  the routine operations of the hotel.
• those costs occur during the normal course of
  business to generate revenue.
• e.g. salaries and wages, non-recycled inventory
  items - cleaning and guest supplies. outlines the
  financial goals of the hotel
• relate operational costs to the years expected
  revenues

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• projects both the revenues the hotel anticipates
  during the period covered by the budget and the
  expenses required to generate the anticipated
  revenues.
• is not set in stone, it can be adjusted to
  changing circumstances e.g. the actual occupancy
  level
• is a guide that help managers to measure the
  success of the operation by comparing the actual
  expenses with allocated amounts.
• the yearly operating budget is broken down into
  budgets for each month, and each department
  prepares its own monthly budget.

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The Executive Housekeeper is responsible for

• anticipating the expenses the housekeeping
  department will draw in light of forecasted room
  sales
• ensuring the departments actual expenses are in
  line with budgeted costs and with the actual
  occupancy levels

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Planning the Operating Budget

• The budgeting process involves
• Step 1. gathering information about the
• forecasted room sales
• Step 2. formulating initial plans
• Step 3. reconsidering goals and objectives
• Step 4. making final adjustments

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Gathering information about the forecasted room
sales (occupancy level) is very important
because

• room sales generate the revenue for operating
  departments
• most of the expenses are directly related to room
  occupancy levels especially true in housekeeping
  since salaries and wages, and the usage rates for
  recycled and non-recycled inventory items are
  directly related to the number of occupied rooms.
  On the basis of this data, cost per occupied
  room can be calculated to (1) determine the
  levels of expense in the different categories and
  (2) measure the ability of the exec. housekeeper
  maintain the expected costs.

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Occupancy Forecasts

• Occupancy forecast, which is developed by the
  front office and general manager, based on (1)
  historical data about the past occupancies and
  (2) information supplied by the marketing
  department about the special events, advertising
  and promotions.

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Using the Operating Budget as a Control Tool

• Controlling expenses in the housekeeping
  department means comparing actual costs with
  budgeted amounts and measuring the variances.
  While doing this, be careful to check whether the
  forecasted occupancy levels were achieved or not.
  e.g. if the occupancy is lower than forecasted,
  decrease in expenses must be expected
  proportionally. Serious deviations from the
  budgeted plan needs investigation in e.g. staff
  scheduling, supervision, efficiency and cost of
  products used etc.

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Income Statements

• expresses the actual results of operations during
  an accounting period, identifying both revenues
  earned and expenses gained during that period.
• income statements that predict the results of
  current or future operations are called pro forma
  income statements.
• the success of the department is measured by
  comparing the forecasted numbers on the budget
  with the actual numbers on the income statement.

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Difference between an Income Statement and an
Operating Budget

• income statement expresses the actual results of
  operations for a period that has ended, on the
  other hand, an operating budget expresses the
  expected results of operations for a current and
  coming period.
• income statement is a report of what actually
  occurred, an operating budget is a forecast or
  plan for what will occur.
• the operating budget is a prediction on what the
  income statement will show at the end of that
  period.

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The Hotel Income StatementConsolidated
Statement

• provides financial information (net income) about
  the results of hotel operations for a given
  period, which may be a month or longer but not
  more than a year, to evaluate the success of the
  operation.
• the rooms division is seen on the hotel income
  statement as the hotels major source of income,
  housekeeping within the rooms division creates
  the most of the divisions expenses so that play
  an important role in the hotels overall
  financial performance. Ex. 1, pg. 151

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The Rooms Division Income Statement

• has more detailed information compared to the
  hotels statement of income
• the departmental income statements are called
  schedules
• departmental statements are referenced on the
  hotels statement of income
• Ex. 2, pg.152

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Typical line items found on a Rooms Division
Income Statement

• Revenue from room sales
• Allowances rebates, refunds, overcharges of
  revenue
• Net Revenue Total Revenue - Allowances
• Expenses
• Salaries and Wages regular pay, overtime pay,
  vacation pay, severance pay, incentive pay,
  holiday pay, employee bonuses
• Employee Benefits payroll taxes, payroll-related
  insurance expense, pension, etc.
• Other Expenses contract cleaning, laundry and
  dry cleaning, linen, operating supplies (the cost
  of guest supplies, cleaning supplies, printing
  and stationery), uniforms, other expenses
  (commissions expense, guest transportation,
  reservations)

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In the Budget Planning Process

• The room's managers goal is to maximize the
  departments income by minimizing its expenses
  while enhancing the service level. Every
  controllable cost can be expressed as a
  percentage of revenue. For each expense
  category, there is a standard percentage
  considered to be an acceptable level of expense
  in relation to generated revenue.
• The executive housekeepers goal is to control
  the expenses of his department.

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Monthly Rooms Division Budget Report

• shows both budgeted forecasts and actual results
  and can also show the dollar and percentage
  variances (differences) of these results. No
  budgeting process is perfect, so it is expected
  that the actual results will differ from the
  budgeted amounts. If the variances are huge,
  management analysis and action becomes necessary.
  Ex. 3, pg. 155.

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Budgeting Expenses

• the projected number of occupied rooms is the
  most important information because all expenses
  are measured in terms of the percentage of
  revenue on the budget. Almost all expenses are
  directly dependent upon the number of occupied
  rooms.
• the exec. housekeeper can predict the expense
  levels for each category when he/she knows (1)
  the cost per occupied room for each expense
  category, (2) the number of occupied rooms
  forecasted for each budget period. The budgeting
  process is simply relating costs per occupied
  room to the forecasted occupancy levels. Ex. 4,
  pg.156

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• Salaries and Wages the staffing guide and the
  occupancy forecasts are used to determine the
  total labor hours cost for each job category.
• Employee Benefits human resources and
  accounting staff help to determine what levels of
  expense to budget for the employee benefits e.g.
  charges for the cost of holiday or vacation pay,
  employee meals, payroll taxes, medical expenses
  or insurance, pensions, staff parties etc.

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• Outside Services contract or past invoices can
  be used to budget the cost of outside contractors
  for cleaning projects or dry cleaning or laundry.
• In-House Laundry the cost of operating the
  hotels on-premises laundry is directly related
  to the volume of soiled items to be processed, in
  other words, the occupancy level.
• Linens replacement cost for new linens is an
  expense which can be determined with the help of
  monthly physical inventories.

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• Operating Supplies includes non-recycled
  inventory items, such as guest supplies and
  amenities, cleaning supplies, and small equipment
  items.
• Uniforms includes the cost of new and
  replacement uniforms, the cost of washing or dry
  cleaning uniforms and the cost of repairing
  damaged uniforms. Personnel turnover and new
  hirings influence the cost of uniforms in the
  budget period.

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Controlling Expenses

• Controlling housekeeping expenses means ensuring
  that actual expenses are consistent with the
  expected expenses on the operating budget. There
  are four methods
• accurate recordkeeping
• effective scheduling
• careful training and supervision
• efficient purchasing

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• accurate recordkeeping helps to monitor the
  usage rates, inventory costs, and variances with
  standards
• effective scheduling with the help of the
  staffing guide, personnel costs stay in line with
  occupancy reports
• careful training and supervision important for
  controlling the cost of inventoried items. E.g.
  training in the proper use of cleaning supplies
  can improve usage rates, and lower the cost of
  cleaning supplies per occupied room
• efficient purchasing ensures that the hotels
  money is well spent and the maximum value is
  received from products.

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Capital Budgets

• Costs for most inventoried items appear in the
  operating budget as expenses against the revenue
  generated over the same period, however, costs
  for machines and equipments are planned as part
  of capital budgets since they have relatively
  high costs which require capital investments by
  the hotel. Capital budgets are prepared
  annually. In purchasing or replacing major
  machines and equipments, (1) useful life, (2)
  high usage, (3) suppliers services, (4)
  maintenance needs, (5) type, (6) quality, (7)
  quantity, (8) price should be considered.

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Contract vs. In-House Cleaning

• Outside contractors are available for laundry,
  dry cleaning services, floor cleaning, masonry
  cleaning, scouring of restroom fixture traps.
• In choosing the appropriate contractor, (1) cost
  estimates, (2) reputation, (3) visiting the
  contractors place should be considered. After
  selecting one supplier, (1) expected performance
  needs - quality, and (2) invoices should be
  checked to assess.
• Exec. housekeeper should evaluate whether to
  contract outside services or undertake in-house
  operations and determine which would be the best
  to control costs, complete the tasks and achieve
  quality standards.

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• The pros and cons of having an in-house operation
  must be considered. Here, the decision is
  whether the initial investment (the machines and
  equipments - capital expense) is possible and
  worth the monthly savings (costs of wages
  salaries, employee benefits, materials and
  supplies, training, supervision) or not. It
  would be required finding out the time needed to
  recover the initial start-up costs for machines
  and equipment through the monthly savings with an
  in-house cleaning program.
• time needed to pay back the initial investment
  the savings achieved each month / capital
  expenditure