5.1 Definitions

Budgeting is the main tool management uses to plan the future of a food and beverage operation in money terms and then to check that the plan is being achieved. A budget sets out the sales expected and the costs allowed for a coming period, and the system of budgetary control compares what actually happens with that plan, so that differences are found early and corrected. Budgets are prepared by a budget committee and controlled day to day by the managers responsible for each area. Example: the catering department of a police training college in Kiganjo prepares an annual budget each June, and the school's budget committee reviews actual results against it every month.

Budget

A budget is a detailed financial plan, expressed in money and often in quantities, prepared and approved in advance for a defined future period, setting out the income to be earned, the expenditure allowed and the resources to be used to achieve the organisation's objectives. In food and beverage operations it states, for example, the covers and sales expected, the food, beverage and labour costs allowed and the profit to be made, usually for a year divided into months.

Budgetary control

Budgetary control is the system of managing an organisation by preparing budgets that make each manager responsible for part of the plan, continuously comparing actual results with the budget, finding the causes of differences (variances) and taking corrective action, or revising the plan where necessary. It covers the whole cycle of planning, coordinating, recording, comparing and correcting.

Budget committee

The budget committee is the group of senior managers responsible for coordinating the preparation of budgets, approving them and reviewing performance against them. In a hotel it is usually chaired by the general manager, with the financial controller as budget officer or secretary, and includes the heads of the main departments, such as the food and beverage manager, executive chef, rooms division manager and human resource manager.

Budget control

Budget control is the day-to-day control of spending against each individual budget head by the manager responsible for it, the budget holder. No expenditure is committed unless it is provided for in the budget and authorised, and running totals of commitments and spending are kept so that each head is not overspent. Example: the executive chef may approve a purchase of kitchen equipment only if the kitchen's equipment budget for the year still has enough balance.

5.1.1 Budgetary goals and objectives

The goals of budgeting in a food and beverage operation are the results the organisation wants to achieve through its budget, and the objectives are the specific purposes the budget serves.

• Planning: To force management to think ahead and set clear targets for sales, costs and profit for each period.
• Coordination: To bring together the plans of the kitchen, restaurant, bars, purchasing and other departments so that they work towards the same targets.
• Communication: To make every manager aware of what is expected of their department.
• Control: To provide standards against which actual performance is measured, so that variances can be found and corrected.
• Responsibility: To make named managers accountable for their own income and costs.
• Motivation: To give managers and staff targets to work towards, especially where they take part in setting them.
• Efficient use of resources: To allocate limited money, staff and equipment where they are most needed.
• Profit and liquidity: To make sure the operation earns a satisfactory profit and has enough cash to meet its payments.

5.1.2 Advantages of budgets

• Clear targets: Managers know exactly what sales, costs and profit are expected of them.
• Early warning: Comparing actual results with the budget shows problems, such as rising food cost or falling covers, while there is still time to act.
• Better coordination: Departments plan together, so purchasing, production and staffing match expected sales.
• Control of spending: Expenditure must be provided for in the budget, which prevents overspending and waste.
• Cash planning: The cash budget shows in advance when there will be shortages or surpluses, so finance can be arranged or invested.
• Performance measurement: Managers and departments can be assessed fairly against agreed targets.
• Delegation: Senior management can delegate with confidence, because each budget holder works within approved limits.
• Better decisions: Budgets provide the information for pricing, staffing, investment and borrowing decisions.

Budgets also have limitations: they are based on estimates that may prove wrong, they can become rigid if not revised when conditions change, and managers may pad their budgets or spend unused balances at the year end to protect future allocations.

5.1.3 Functions of budget committee

• Setting the budget policy: Issues guidelines, such as expected price rises, wage increases and profit targets, to all departments.
• Setting the budget timetable: Fixes the dates by which each departmental budget must be submitted and approved.
• Identifying the key factor: Decides which factor limits activity, usually sales demand or seating capacity, so that all budgets are built on it.
• Coordinating departmental budgets: Receives, examines and fits together the budgets prepared by each department.
• Resolving conflicts: Settles differences between departments and reconciles budgets with the organisation's resources.
• Approving the budgets: Recommends the master budget for final approval by the board or owners.
• Reviewing performance: Receives regular budget reports, examines significant variances and calls for explanations and action.
• Revising budgets: Approves changes when conditions change significantly, such as a new tax or a major loss of business.

5.1.4 Budgetary control

The budgetary control process is the cycle by which budgets are prepared, used and acted upon throughout the year.

1. Set objectives: Management sets the organisation's goals for the period, such as sales growth and target profit.
2. Prepare budgets: Departmental budgets are prepared within the budget policy and combined into the master budget.
3. Approve and communicate: The budget committee approves the budgets and gives each budget holder their approved figures.
4. Record actual results: Actual sales, costs and covers are recorded in the same form and for the same periods as the budget.
5. Compare actual with budget: Budget reports show each variance, in money and as a percentage, usually against a flexed budget for the actual level of business.
6. Investigate variances: Budget holders find the causes of significant variances, such as price changes, waste, theft, overstaffing or a change in sales mix.
7. Take corrective action: Managers act to bring results back in line, for example renegotiating supplier prices, retraining staff on portion control or adjusting rotas.
8. Revise and feed forward: Where conditions have changed permanently, the budget is revised, and the lessons learned are used in preparing the next budget.

Requirements for effective budgetary control

• Clear organisation structure: Each budget head has a named responsible manager.
• Participation: Managers who will be held responsible take part in preparing their budgets.
• Realistic targets: Budgets are challenging but achievable.
• Accurate and timely records: Actual results are available soon after each period ends.
• Management by exception: Attention is focused on significant variances rather than on every small difference.
• Support from top management: Senior managers use the budget seriously in decisions and reviews.