Unit 2 Preparing & Managing Budget

September 08, 2020

PREPARING AND MANAGING BUDGET

UNIT-2

BUDGET AND BUDGETARY CONTROLS

INTRODUCTION

Budgeting is one of the main planning activities of an executive housekeeper. It is the process by which, based on the actual performance of establishments in the past, estimates of expenditure and receipts are made and adjusted for forecasting future outcomes. The housekeeping budget typically is presented as part of the room’s division budget. The room division budget is usually the largest in the property, and the housekeeping budget is one of its biggest categories of expense.

BUDGET:

· A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.

· It helps to co-ordinate the activities of the organisation.

An example would be an advertising budget or sales force budget.

A budget is a plan which projects both the revenues the hotel anticipates during the period covered by the budget and the expenses required to generate the anticipated revenues.

Budgetary control:

· A control technique whereby actual results are compared with budgets.

· Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.

For these reasons, the executive housekeeper’s ability to control costs has a significant effect on whether the room division meets its financial goals.

ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL

There are a number of advantages to budgeting and budgetary control:

· Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.

· Promotes coordination and communication.

· Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.

· Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.

· Enables remedial action to be taken as variances emerge.

· Motivates employees by participating in the setting of budgets.

· Improves the allocation of scarce resources.

· Economises management time by using the management by exception principle.

BUDGETARY CONTROL

Budgetary control is the process of determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances, if any. First of all, budgets are prepared and then actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time. The budgetary control is a continuous process which helps in planning and co-ordination. It provides a method of control too. A budget is a means and budgetary control is the end-result.

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.

2. To operate various cost centres and departments with efficiency and economy.

3. Elimination of wastes and increase in profitability.

4. To anticipate capital expenditure for future.

5. To centralise the control system.

6. Correction of deviations from the established standards.

7. Fixation of responsibility of various individuals in the organization.

Essentials of Budgetary Control:

There are certain steps which are necessary for the successful implementation budgetary control system. These are as follows:

1. Organisation for Budgetary Control committee

2. Budget Centres

3. Budget Manual

4. Budget Officer

5. Budget Committee

6. Budget Period

7. Determination of Key Factor.

1. Organization for Budgetary Control:

The proper organization is essential for the successful preparation, maintenance and administration of budgets. A Budgetary Committee is formed, which comprises the departmental heads of various departments. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. The Chief Executive is the overall in-charge of budgetary system. He constitutes a budget committee for preparing realistic budgets A budget officer is the convener of the budget committee who co-ordinates the budgets of different departments. The managers of different departments are made responsible for their departmental budgets.

2. Budget Centres:

A budget centre is that part of the organization for which the budget is prepared. A budget centre may be a department, section of a department or any other part of the department. The establishment of budget centres is essential for covering all parts of the organization. The budget centres are also necessary for cost control purposes. The appraisal performance of different parts of the organization becomes easy when different centres are established.

3. Budget Manual:

A budget manual is a document which spells out the duties and also the responsibilities of various executives concerned with the budgets. It specifies the relations amongst various functionaries.

4. Budget Officer:

The Chief Executive, who is at the top of the organization, appoints some person as Budget Officer. The budget officer is empowered to scrutinize the budgets prepared by different functional heads and to make changes in them, if the situations so demand. The actual performance of different departments is communicated to the Budget Officer. He determines the deviations in the budgets and the actual performance and takes necessary steps to rectify the deficiencies, if any. He works as a coordinator among different departments and monitors the relevant information. He also informs the top management about the performance of different departments. The budget officer will be able to carry out his work fully well only if he is conversant with the working of all the departments.

5. Budget Committee:

In small-scale concerns the accountant is made responsible for preparation and implementation of budgets. In large-scale concerns a committee known as Budget Committee is formed. The heads of all the important departments are made members of this committee. The Committee is responsible for preparation and execution of budgets. The members of this committee put up the case of their respective departments and help the committee to take collective decisions if necessary. The Budget Officer acts as convener of this committee.

6. Budget Period:

A budget period is the length of time for which a budget is prepared and employed. The budget period depends upon a number of factors. It may be different for different industries or even it may be different in the same industry or business.

7. Determination of Key Factor:

The budgets are prepared for all functional areas. These budgets are interdependent and inter-related. A proper co-ordination among different budgets is necessary for making the budgetary control a success. The constraints on some budgets may have an effect on other budgets too. A factor which influences all other budgets is known as Key Factor or Principal Factor. There may be a limitation on the quantity of goods a concern may sell. In this case, sales will be a key factor and all other budgets will be prepared by keeping in view the amount of goods the concern will be able to sell. The raw material supply may be limited, so production, sales and cash budgets will be decided according to raw materials budget. Similarly, plant capacity may be a key factor if the supply of other factors is easily available. The key factor may not necessarily remain the same. The raw materials supply may be limited at one time but it may be easily available at another time. The sales may be increased by adding more sales staff, etc. Similarly, other factors may also improve at different times. The key factor also highlights the limitations of the enterprise. This will enable the management to improve the working of those departments where scope for improvement exists.

Advantages of Budgetary Control:

The budgetary control system help in fixing the goals for the organization as whole and concerted efforts are made for its achievements. It enables ‘economies in the enterprise.

Some of the advantages of budgetary control are:

1. Maximization of Profits:

The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and coordination of different functions is undertaken. There is a proper control over various capital and revenue expenditures. The resources are put to the best possible use.

2. Co-ordination:

The working of different departments and sectors is properly coordinated. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.

3. Specific Aims:

The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal, of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.

4. Tool for Measuring Performance:

By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.

5. Economy:

The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

6. Determining Weaknesses:

The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.

7. Corrective Action:

The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviations can be determined only at the end of the financial period.

8. Consciousness:

It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.

9. Reduces Costs:

In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.

10. Introduction of Incentive Schemes:

Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.

Why is Budget Required?

The budgets act as a guide that provides the manager with the standards, by which they can measure the success of operation. A budget provides a financial framework within which all the department operates. The budget also act as a guide as to which things need repair or replacement it also help to determine what valuable pieces of equipment may be purchased and to pinpoint the areas which needs to be emphasized for the coming year.

It can be said that a budget is an instrument used by management for controlling and directing activities especially purchasing activities.

When beginning to put together the budget, the executive housekeeper needs:

· Data on labour costs and productivity

· Cost analysis for supplies and equipment

· An outline of any major repairs or capital equipment needed in the coming year.

PROCESS OF BUDGET PLANNING

The budget process is an infinite loop similar to the larger financial planning process. It involves:

· Defining Goals And Gathering Data;

· Forming Expectations And Reconciling Goals And Data;

· Creating The Budget;

· Monitoring Actual Outcomes And Analysing Variances;

· Adjusting Budget, Expectations, Or Goals;

· Redefining Goals.

Budget planning for housekeeping involves the following functions:

· Getting estimates of room sales or occupancy percentages of the hotel,

· Coordinating estimates on expected costs per room, estimating amount of resources available and their allocation

· Communicating the budget to responsible managers,

· Implementing the budget plan

TYPES OF BUDGETS

Budget may be of different kinds, based on type of expenses involved, the departments, and the flexibility of expenses.

1. Categorization by Type of Expenditure: Based on the type of expense and assets involved, budget may be categorized into:

Capital Budget: These allocate the use of capital assets that life span considerably in access of one year; these are assets that are not normally used up in day to day operation. Example: furniture and fixture. Capital expenditure may include vacuum cleaners, machines. The hotel building itself also comes under capital assets.
Operating Budget: Operating expenditures are those costs that are incurred in order to generate revenue in normal course of doing business. The cost of all non-recycled inventory items, such as cleaning and guest supply is also operation cost.
Pre-Opening Budget: These budgets allocate resource for opening parties, advertising, generating of initial goodwill. Pre-opening budget also include the initial cost of employee salaries, crockery, cutlery and other item.

2. Categorization by Department Involved: Based on departmental involved, budget may be categorized into:

Master Budget: These represent the forecasted targets set for the whole organization and incorporate all income and expenditure estimated for the organization.
Departmental Budget: Each department of the hotel forwards a budget for its estimated expenses and revenue to the financial controller. For instance there would be housekeeping budget etc.

3. Categorization by Flexibility of Expenditure: Budget may be classified on the basis of Flexibility of expenditure:

Fixed Budget: These budgets remain unchanged over a period of times and are not related to the level of revenues. Such budget include resource allocation for advertising and administration.

Flexible Budget: These budgets are predetermined expenditure based on the expected revenue and differ with different volumes of sale.

Zero base budgeting (ZBB)

After a budgeting system has been in operation for some time, there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present. The budget should be the first year of the long range plan. Thus, if changes are not started in the budget period for any differences or deviations, it will be difficult for the business to make the progress necessary to achieve longer term objectives.

One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is, a zero base). This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. For example, in the sales area, the current existing field sales force will be ignored, and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed. This might not include any field sales force, or a different-sized team, and the company then has to plan how to implement this new strategy.

The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. Hence, some companies carry out the full process every five years, but in that year the business can almost grind to a halt. Thus, an alternative way is to look in depth at one area of the business each year on a rolling basis, so that each sector does a zero base budget every five years or so.

Characteristics of a budget

A good budget is characterised by the following:

· Participation: involve as many people as possible in drawing up a budget.
· Comprehensiveness: embrace the whole organisation.
· Standards: base it on established standards of performance.
· Flexibility: allow for changing circumstances.
· Feedback: constantly monitor performance.
· Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.

HOUSEKEEPING EXPENSES

Budgeting set-up depends on the function of the hotel or facility. A hotel or facility can be smaller or larger scale operated. The larger they are the more complex it gets.

In a smaller scale hotel or facility usually there is Front Office, Housekeeping and Maintenance and the expenses are controlled mainly by the Owner through the General Manager. They were the key decision maker in preparing the yearly budget with the assistance of an accountant or accounting firm. The budgeted amount needed to operate for the whole year is based on the expenses incurred on the previous years and other related occasions that will affect the preparation of budget for the coming year.

In a larger scale hotel, expenses can be very complicated since the operation varies from the departments created for the smooth operation of the hotel. Some international hotels, the budget is being prepared by each department head through the assistance of the Financial Controller and General Manager then submitted to the owner/ corporation for approval. Once sanctioned, each department head is then held accountable in ensuring that the budget allocated is monitored and controlled based on the occupancy percentage. The General Manager gets a copy of the results of the budget every end of the month and discusses them with the department head.

Housekeeping and other departments in the hotel operate within two types of budget. The Operational Budget and the Capital Expenditure Budget.

Operational Budget is the allocation of expenses for each item/s required by the department in order to operate smoothly. In case of hotel operation, control of expenses are based on occupancy percentage. The budgeted amount for the month can be variable since there are certain period where occupancy forecasts in other areas or countries are unreliable or unpredictable.

The basic Housekeeping operational budget are as follows:

a) Staffing

b) Linen & Towels

c) Guest Supplies & Amenities

d) Cleaning Supplies

e) Laundry Supplies

f) Machine, Tools & Equipment

g) Decoration

h) Miscellaneous

i) Printing and stationeries

There are budgeted item/s or sections in Housekeeping that are usually divided between other departments such as follows:

1) Repairs and Maintenance

This type of operational budget is usually divided between housekeeping and Engineering

2) Uniform Budget

Uniform expenses is prepared by the Executive Housekeeper with all the elegance, comfort, durability, styles, colours and functionality of the uniform chosen for each department. Once a specific style of uniform has been chosen, it is then coordinated with the concern department and when the Executive Housekeeper gets the approval she then submits them to the General Manager for overall coordination of styles, colours, functionality etc. that reflects the proper image perception of the entire hotel in the eyes of the guests. The last step will be to endorse them to the Financial Controller for allocation of budgeted amount to each department.

3) Decoration

Housekeeping is one of the departments in the hotel which helps and assists in the beautification of the hotel inside and outside the building. Decoration can be flower arrangements, fresh and artificial depending on the policy of the hotel since there are hotels that prohibit the use of artificial flower arrangements for fire hazard issue, picture frames, statuary, carvings, tapestry, artefacts and many others are examples of decorations. Requests for flower arrangements seemed to be the most needed items in the hotel whether for the guestrooms, Food and Beverage functions, Outside Catering, Lobby of the hotel, Convention centres and other areas that requires flower arrangements.

4) Printing and Stationeries

Front Office and Housekeeping are the two departments that share this budget.

5) Miscellaneous

This type of budget can be charged between Housekeeping and any other department depending on what type of expenses is incurred.

Year ->

2001-02

2002-03

2003-04

2004-05

2005-06

(A)Room Sales (no.)

(B) Operating cost (Rs.)

50,000

1,80,00,000

360

49,000

191,10,000

390

52,000

2,08,00,000

400

53,000

2,17,30,000

410

30,000

1,29,00,000

430

Note: C = B / A

Fig. Sample historical data of operating expenses

The second type of Housekeeping budget is Capital Expenditure (CAPEX).

Capital Expenditure Budget is the allocation of funds for a specific project or items that will help and assist the operation of the hotel. In case of Housekeeping, projects can be something that require replacement or additional Housekeepers cart, Laundry washer & dryer, building a new Laundry Shop for outside customers, replacement of vacuum cleaners, replacement of worn out beds or furniture which is usually done floor by floor or by segments. Usually the CAPEX fund is allocated same way as how the operational budget has been allocated for the coming year. Therefore on a yearly basis project/s is/are accomplished and completed especially if the item/s have specific life span where replacement are made specifically each year. This way the hotel or facility is well maintained, equipped and preserved like new. It is through CAPEX fund that maintenance of the hotel works best and at the same time avoiding depreciation of items in large quantities where it is difficult to resolve since they require huge amount to achieve.

Therefore in order to have a smooth operating and well maintained hotel or facility, it is important that allocation of funds for the operational needs and maintenance of the hotel should be handled and monitored effectively based on occupancy percentage where key department heads are knowledgeable on how to adjust their budget accordingly. Key Personnel responsible for the preparation of the budget should see to it that the allocated fund is spent specifically for what it is intended for. Side tracking the set goal will be unending tasks that won't have a definite or specific achievement accomplished. Not being able to monitor the operating budget effectively will lead to the demise of Capital Expenditure

Capital Expenditure Budget is as important as Operating Budget when it comes to hotel business.

PLANNING

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

PROCESS OF BUDGET PLANNING

Budget planning for housekeeping involves the following functions:

· Getting estimates of room sales or occupancy percentages of the hotel,

· Coordinating estimates on expected costs per room, estimating amount of resources available and their allocation

· Communicating the budget to responsible managers,

· Implementing the budget plan,

PLANNING CAPITAL BUDGET:

Capital Budget is the allocation of funds for particular items that will help the functioning of the hotel. In Housekeeping, it can be replacement or additional Maid’s trolley, Laundry washer & dryer, building a new Laundry Shop for outside customers, replacement of vacuum cleaners, replacing out of order furniture. As the equipment have a certain lifespan, yearly planning of capital budget is made on the basis of items to be replaced during that period.

PLANNING OPERATING BUDGET:

In order to have a smooth operation in the hotel, it is important that allocation of funds for the operational needs and maintenance of the hotel should be handled and monitored effectively. If operating budget is not monitored efficiently it will lead to the demise of capital expenditure. The first step in planning the operating budget is to forecast room sales, as most of the expenses that each department can expect are directly related to room occupancy levels. The rooms’ manager gives the executive housekeeper the yearly forecast of occupancy levels broken down into monthly budget periods. Using historical data along with input from hotel’s marketing department, the rooms’ manager will provide an occupancy percentage for each budgeted period. In housekeeping department too, salaries and wages, the usage for recycled and non-recycled inventories are directly related to the number of rooms occupied. To executive housekeeper the concept of “cost per occupied room” is an important tool to determine the levels of expense across different heads. Once the executive housekeeper knows predicted occupancy levels, expected expenses for salaries and wages, cleaning supplies, guest supplies, laundry and other areas can be determined on the basis of formulas that express costs in terms of ‘cost per occupied room.’ The budgeting process simply involves relating cost per occupied room to the forecasted occupancy levels.

The Operating Budget

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 maintains the expected costs.

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.

The Capital Budget

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 we need to consider:

(1) Useful life,

(2) High usage,

(3) Supplier’s services,

(4) Maintenance needs,

(5) Type,

(6) Quality,

(7) Quantity,

(8) Price should be considered.

The rooms division’s budget planning process depends on two main factors:

1. Forecasted room sales or occupancy levels

2. Cost per occupied room

Forecasted room sales

The room sales for the year are forecasted by the front office manager. The monthly breakups are also outlined in this forecast. This information is given to the heads of departments far in advance for the preparation of departmental budgets.

Cost per occupied room

The executive housekeeper works out the cost per occupied room based on the historical data.

Cost per occupied room = Operating expenses / Room sales.

CONTROLLING EXPENSES

Controlling expenses in the housekeeping department means comparing actual costs with the budgeted amounts and assessing the variances.

	FAVOURABLE VARIANCE	UNFAVOURABLE VARIANCE
REVENUE	Actual exceed budget	Budget exceeds actual
EXPENSES	Budget exceeds actual	Actual exceed budget

While comparing the actual and budgeted expenses, the EHK should first determine whether the forecasted occupancy levels were actually achieved. As far as controlling operating expenses is concerned, the EHK must ensure the following:

· Effective documentation

· Zero-base scheduling

· Right purchasing

· Efficient training and supervision

To control expenses, the capital budget should be prepared with care as it involves a large sum of money to be spent on a small number of items.

* 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 hotel’s money is well spent and the maximum value is received from products

CONTROLLING OPERATING EXPENSES

As far as controlling operating expenses is concerned, the EHK must ensure the following:

1. Effective documentation

2. Zero-base scheduling

3. Right purchasing

4. Effective training and supervision.

MONITORING THE BUDGET

Once the budget has been approved, the EHK is responsible for making sure the department operates within its financial guidelines. Typically, budgets have built-in checking systems. In many properties, the EHK is also required to write a budget for each month as part of the annual budget. Each month, the EHK can compare actual performance to the budget forecast. Frequent checks on actual costs against budget projections will make sure the department is either on budget or can institute controls before the bottom line is out of reach.

MANAGEMENT ACTION AND COST CONTROL

Producing information in management accounting form is expensive in terms of the time and effort involved. It will be very wasteful if the information once produced is not put into effective use.

There are five parts to an effective cost control system. These are:

a) preparation of budgets

b) communicating and agreeing budgets with all concerned

c) having an accounting system that will record all actual costs

d) preparing statements that will compare actual costs with budgets, showing any variances and disclosing the reasons for them, and

e) taking any appropriate action based on the analysis of the variances in d) above.

Action(s) that can be taken when a significant variance has been revealed will depend on the nature of the variance itself. Some variances can be identified to a specific department and it is within that department's control to take corrective action. Other variances might prove to be much more difficult, and sometimes impossible, to control.

Variances revealed are historic. They show what happened last month or last quarter and no amount of analysis and discussion can alter that. However, they can be used to influence managerial action in future periods.

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 Performa 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.

PURCHASE AND SELECTION CRITERIA

Buying is one of the main functions of the housekeeper and a great deal of success in any establishment depends upon careful and intelligent buying whether it be cleaning materials, equipment, furniture or fabrics. The responsibility for buying varies according to the type and size of the establishment and the particular type of items required. However, whoever is responsible for buying should not simply reorder on the basis of past experience but should take into accounting the current requirements and prices.

Aims Of Good Buying

It is essential to do the following:

· Buy the best value for money available

· Keep up to date with current market trends, and prices

· Know the self- life of the products.

· Be able to assess quality in relation to costs

· Make sure goods are bought from reputable firm

· Make sure goods are ordered in good time and the correct details are given to the supplier

· Maintain optimum stock levels

· Ensure a continual source of supply and find substitutes where necessary

· Arrange goods to be delivered punctually- organization and flow of work can be disrupted if goods do not arrive on time.

· Check all goods on arrival for quantity and quality against the official order from and delivery note. Note and follow up any discrepancies immediately. It is essential that substitute goods are received or accredit note is issued by the supplier.

Principles Of Purchasing

There are five primary principles of purchasing that need to be upheld by the housekeeping and purchase departments: - Right Quality, Right Quantity, Right Price, Right Time, and Right Source of supply.

Stages In Purchasing

1. Pre-order stage –

· Receipt of purchase indent

· Floating of enquiries

· Procurement of samples for approval

· Quotation and ordering

2. Post-order stage –

· Issue of purchase order

· Confirmation of receipt of purchase order

· Follow-up

· Dispatch advice

· Receipt note

· Payment

PURCHASING

Purchasing is a process in which includes buying of materials and equipments needed by various departments of an organisation to ensure continuity in product production and supply of essential services to the guest. Therefore it is a very important and challenging function and has to be carried out efficiently to meet the purchasing requirements of the organization. Purchase department must be highly responsible to the organization needs in terms of quality, price, and delivery. The expenses for housekeeping purchases are planned in advance mainly in the form of a Capital Budget or an Operating Budget. The purchase can be of local or imported item. The housekeeping department generates the indents of non-stock items. Stock items are the regular operating supplies such as soap, shampoo, stationeries, and cleaning supplies. Non-stock items are non-consumable items such as crystal vases for flower arrangement. Efficient purchasing practices can make a significant contribution to the housekeeping department. Purchasing includes the process of buying, learning of the needs, identifying purchase locations, selecting best supplies, negotiating for best price, and other relating tasks such as to ensure deliveries in time. Purchasing is described as an art since it requires talent and satisfaction in judgement i.e. judging the right combination of colour, shape, size, and consistency of item.

Although different properties have different procedures for processing and approving purchases the evaluation of what is needed for the housekeeping department is decided by the Executive housekeeper. Purchasing in housekeeping is basically done for:

Recycled products: The Executive Housekeeper raises a purchase requisition/indent form and forwards it to the Financial Controller and General Manager. The Purchase Manager than makes out the purchase order which is send to the supplier. Once the items are received the Executive Housekeeper checks the quality and specification of the item before approving the consignment. Example-annual linen purchase. Linen is the most important recycled inventory item in housekeeping department. It is also the biggest expense. To ensure the purchased linen is worth the money spent the Executive Housekeeper should consider:

o The suitability of the product for its intended use.

o The expected useful lifespan of the linen.

o The purchase price.

o The cost of laundering.

Cost per use should be calculated in order to evaluate linen purchase using the following formula:

Cost per use=purchase cost+lifespan laundering cost/number of lifespan laundering

Where lifespan laundering cost=item weight * laundering cost per kg. * Number of laundering without by item.

The annual linen purchases are made using the following formula:

Annual order=par stock-linen on hand+expected annual consumption

Where consumption=discards + discrepancies

Non-recycled products: Worksheets are developed by the Executive Housekeeper to monitor usage rates and costs for the different type of non-recycled inventory items. For each product the monthly use report identifies the vendor. The product name and its intended use each month by physical inventory provides the Executive Housekeeper with information concerning how many purchase units of each items have been used. Every week or fortnight the floor supervisor takes an inventory of these items. They are compiled with the par stock to be maintained before ordering new supplies.

Principles of purchasing: There are five primary principles of purchasing that need to be upheld by the Housekeeping and the purchase department.

Right quality: The housekeeping department is responsible for providing the guests with a clean, comfortable, and safe environment as well as meet and exceed the guest’s expectations. In this regard the department needs to buy the best products. Value for money is the factor in each of the product supplies to the guestroom and public areas. The entire range of items has to meet the standards and specifications determined by the department and the hotel management.

Right quantity: Placing a purchase order of the right quality is of utmost importance for any organisation. Suppliers usually offer huge discounts large quantities but that should not influence the department’s decision. The following factors should be kept in mind while ordering the right quantity of material:

o The cost of the order being placed

o The cost of storage and carrying charges for holding stocks

o Quantity discount

o Stock level and order point

o Buffer stock

o Budgetary controls

Right price: One of the major concerns for both the housekeeping and purchasing department is to get the supplies at the right price. An in-depth knowledge of the market is vital to make sure that the right price is being paid i.e. the payment corresponds to the exact value of the material being purchased. While calculating the right price ex-showroom the terms of payment should also be attended.

Right time: The material should be made available at the right time. Lead time, which is the period between the indent originating from the housekeeping department and the time the material is ready for use, should be minimal. The total lead time which includes the supplier lead time plus the internal processing, clearance receipt, and inspection time should be as low as possible to work on lower inventory level. The time should also be right as regard ensuring immediate availability of a particular product in the market.

Right source of supply: The right source of supply is critical to the Executive Housekeeper. If the source of supply is correct, right quality, quantity, price, and time are a natural consequence. The selection of the ideal supplier is crucial for both the housekeeping and the purchase departments in which they are aided by:

o Knowledge and experience

o Catalogues, internet, etc.

o Hotel supplies directories

o Salespersons

o Trade associations and association companies

Stages in purchasing: There are two stages in purchasing.

Pre-order stage: It includes the following:

Receipt of purchase indent: The indent should be checked for specification, quality, and quantity required. The last supplies and the last supplier’s rate should be checked. If any correction is required, it should be referred to indenting authority at once. If the item indented is not part of the planned budget, it needs the approval of the unit head before the indent is processed.

Floating of inquiries: Where there is only one manufacturer of a particular product it is better to contact that manufacturer straightway instead of approaching commissioned agents or traders.

Procurement of samples for approval: The concerned people in the organisation must approve of the samples before an order is finalised.

Quotation and ordering: The order should be placed with the right supplier who must be identified on the basis of right quotation for right quality.

Post-order stage: The following steps are involved:

Issue of purchase order: The purchase order should be issued once the pre-order stage is complete and the right supplier has been identified. Since it is a legal contract between the buyer and the supplier the purchase order should include all the details of the transactions.

Confirmation of receipt of the purchase order: The supplier should confirm receipt of purchase order in writing. A duplicate copy of order should be signed and acknowledged accepting all the terms and conditions of purchase.

Follow-up: There should be a regular follow-up to ensure that the items requested will be delivered on time.

Dispatch advice: A dispatch advice note should be sought from the supplier to expedite the process of receipt.

Receipt note: When the items are received in good condition and are found to meet the desired standards after inspection the receiving department should make out a goods receipt note (GRN) before transferring it to the main store. If the items do not match the prescribed conditions on the purchase order, the purchase manager and the supplier are intimated immediately and the goods are rejected. If the items are seemed as suitable to be received they are accepted and a GRN is send to the department concerned to appraise it of the approval of the goods.

Payment: After the goods have been received and transferred to the department concerned via the main store the purchase department has the important function of following up on payment.

Types of purchasing: Various types of purchasing methods are used in hotels. A single purchasing activity may also be a combination of several types. Some of the methods are:

1. Formal purchasing/competitive bid buying: Formal quotations are invited from sellers against the written specification for each item to be purchased. These requests for bids may be made through newspapers or other publications that are widely distributed or they may be passed to interested sellers who may be contacted over the phone. The usual practice is to accept the quotation of the lowest bidder unless the products fail to meet the specifications.

2. Wholesale buying: In this method of purchasing the contract is signed with a wholesaler for the purchase of items at a specific price. For the future the agreement specifies the intervals between deliveries for the contract period.

3. Negotiated buying: this method involves negotiation between the buyer and the seller regarding the price and quantities. This method is generally used for items that are in limited supply where both the buyer and the seller are keen that the product be picked up quickly. In this case the buyer contacts the seller directly.

4. Contract purchasing: This method of purchasing assist the buyers and the sellers to improve the re-ordering of items that are repeatedly called for with minimal administrative expenses. This method is similar to blanket order purchasing except that the agreement is long term and the supplier are therefore not changed frequently. The rate of usage and frequency of ordering over the contract period need to be known under the system contract. The buyer receives only those brands which are produced or sold by the contractor. This method of purchasing is most commonly used for the purchase of housekeeping supplies.

5. Blanket order purchasing: A blanket order is an agreement to provide a specific quantity of listed items for a period of time at an agreed price if the price is not settled at the time of placing the order. A method of determining it is included in the contract. The blanket order method is best for items that are required in small quantities but more frequently and where the usage rate cannot be accurately forecasted.

6. Stockless purchasing: In this case the buyer does not keep the stock of goods ordered. The supplier warehouses them for the buyer instead. The inventory is thus owned by the supplier.

7. Purchase by paid reserve: In this method money is paid in advance for commodities to ensure continuity of supply throughout the year.

8. Total-supply purchasing: In this type of purchasing all the required items are supplied by a single supplier. This helps in reducing the paperwork and negotiations need to be done with only one person.

9. Cost-plus purchasing: In this method of purchasing a supplier buys all the commodities and provides them to the housekeeping department. The supplier is given a small commission for this.

10. Centralized purchasing: This type of purchasing is done mainly by the chain hotels. They purchase items for all their main properties together. This method helps them to source the items at a cheaper price as the quantity of the order is more resulting in economy of volume.

11. Standing order purchasing: In this method daily supplies are fixed for perishable items such as flowers or groceries.

12. Cash and carry method: This is the method of purchasing where the items are purchased from supermarkets so that the prices are competitive. There are no minimum order level orders of certain items in case of non-availability of delivery services.

13. Purchasing from van sales: This method is rarely used for purchasing in the housekeeping department. In this method purchasing is done from mobile shops which move from one place to another.

14. Weekly/fortnightly purchasing: In this type purchasing is done only weekly/fortnightly. This ensures regular availability of the items and makes the suppliers prices more competitive.

15. Daily market purchasing/petty cash system: In this method of purchasing item quantities in the store are checked on a daily basis and only items falling short are purchased. This method operates as a petty cash system. It is effective for purchasing small order from local market in exchange for bill so that a cash payment is made.

16. Cash-on-delivery buying: The ordering system involves payment on acceptance of delivery. The order may be placed over the telephone or through the internet.

17. Cheque-payment ordering: This is a purchase order and draft system. It is a combination of the order and a blank cheque for payment. Besides the products specification the order also contains delivery instructions, bank account number, unit price quantity, discounts if any, and terms of payment.

18. Auction buying: This method of is useful for purchasing furniture and equipment that are not obsolete. Sometimes certain export shipments that were rejected by the originally intended buyer are also auctioned to other buyer.

STOCK RECORDS – ISSUING AND CONTROL

Reason for developing an efficient and effective control system are as follows:

o Shortage or poor stock rotation will reduce standards and therefore directly reduce revenue.

o When supplies are lacking items may need to be borrowed from other sections.

o Excessive stock may constitute a safety risk and reduce cash flow.

o Losses may occur will must be identified, caused established, and controls implemented.

o Good storage control is necessary to implement health and safety procedures e.g. Care for substances hazardous to health safe procedures.

o Monitoring of use and product evaluation is better achieved.

o Budgetary control is facilitated.

o Standardization of quality is facilitated.

Storekeeper: The storekeeper plays a very important role in the control of stock and the smooth functioning of the day to day operations. The storekeeper must have:

o A good technical knowledge of the products especially the shelf life of the products.

o The ability to deal with suppliers, own staff, and personnel from other departments as well as the management.

o The ability to count and measure accurately and keep up-to-date record on costs and level.

o Knowledge of up-to-date legislation e.g. health and safety legislations.

o Absolute honesty and trustworthiness in all dealings.

Stores and stock control involves:

o Ordering

o Delivery of goods

o Storage

Stock Records:

An essential part of the storage function is the maintenance of clerical records to record all stock movements accurately in and out of the stores. The system used will depend on the type and size of the establishment. Upon arrival at the stores all goods must be recorded and added to the original stock “goods received books”.

Bin card: It is a record of all the receipt and issue of a particular item and is either attached to the particular books or kept in a file.

Monthly consumption sheet: to find out the total of items used over a period of time or to compare usage rate the information can be taken from the sheet.

Stock taking: It may be done monthly or quarterly or yearly depending on the policy of the establishment. It is an essential process to prove the accuracy of the stock records and should be carried out by the departmental head or an external auditor. In order to carry out stock taking it is necessary to suspend all movement of goods during the count and to make sure that all goods are checked and accounted for. Any discrepancy should be noted and investigated wherever necessary.

Issuing: The system of issuing goods from the stores in various departments will vary but a right system of issuing should be in operation. All issues should be made against requisition or specification for ease of control. In various departments forms items should be checked and weighed accurately before the order is made ready for dispatch. In some establishments stores may be issued daily, weekly, or monthly by a topping up system to meet a required basic stock imprest system.

New for old or full for empty: Whichever system is used spot checks should be made by the supervisor to check usage rate and prevent wastage and pilfering. Staff should be discouraged from ordering more than is actually required, and the issue should be permitted only on the stated day or time unless there is an emergency.

E-Books

http://epgp.inflibnet.ac.in/Home/ViewSubject?catid=1827

P-06, M-14

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