210 ACCOUNTING FOR MANAGERS
žany new initiatives or projects that are planned and require resources;
žthe headcount and historic spending by the business unit.
In preparing a budget it is important to carry out a thorough investigation of
current performance, i.e. to get behind the numbers. For example, as many costs
(particularly in service industries) follow headcount (as we saw in Chapter 10), it
is essential that salary and related costs are accurately estimated, and the impact of
recruitment, resignation and training is taken into account in cost and productivity
calculations.
The complexity of the budget will depend on a number of factors, such as:
žknowledge of past performance;
žunderstanding of market trends, seasonal factors, competition etc.;
žwhether the business is a price leader or price follower (see Chapter 8);
žunderstanding the drivers of business costs;
žthe control that managers are able to exercise over expenses.
How well these factors can be understoodand modelled using a spreadsheet will
depend on the knowledge, skills and time available to the business. Typically,
budgets either at the corporate or responsibility centre level will contain a number
of subjective judgements of likely future events, customer demand and a num-
ber of simplifying assumptions about product/service mix, average prices, cost
inflation etc.
Once the budget is agreed in total, the budget needs to be allocated over each
month. This is commonly based on working days or takes into account seasonal
fluctuations etc. This is a process ofprofilingor time-phasing the budget. Profiling
is important because the process of budgetary control (see Chapter 15) relies
on an accurate estimation of when revenue will be earned and when costs will
be incurred.
Table 14.1 is a simplified example of a budget for a small hotel. It shows some
statistics that the Superior Hotel has used for its budget for next year. Both last
year’s and the current year’s figures are shown. For ease of presentation, the budget
year has been divided into four quarters and some simplifying assumptions have
been made. The hotel capacity is limited to the number of rooms, but in common
with the industry rarely achieves full occupancy, although there are substantial
variations both during the week and at peak times. The main income driver is
thenumberofroomsoccupied,thepriceabletobecharged(whichcanvary
significantly depending on the number of vacant rooms) and the average spend
per head on dining, the bar and business services.
The statistical information, together with estimations of direct costs (food and
drink) and expenses, is based on historical experience and expected cost increases.
The budget for the year for the Superior Hotel, based on these assumptions, is
shown in Table 14.2.
A budget for a retailer will require an estimation, separate from the sales forecast,
of the level of inventory to be held. This results in a purchasing budget. Similarly,
a budget for a manufacturing business will involve developing a production
budget (materials, labour and overhead) by cost centre in order to produce the