5.7. The Budgeting Process
Budget is an estimate of the income and expenditures during a given period based on the mission, goals, and objectives of an organization. It is the organization’s business plan expressed in financial terms. A good budget does much more than quantify the allocation of resources. It makes sure those resources are being used to accomplish the overall purpose of the organization, rather than to support the agendas of individual managers.
There are several reasons for preparing a budget:
- Budget sets parameters for activities to be done during some period, giving guidance to the managers about the financial resources available to carry out the work. It makes managers plan ahead and think about the risks of their decisions.
- Budget serves as a control device for regulating spending in the organization.
- Budget provides an objective set of criteria against which a manager’s performance can be measured.
When a business first starts up, the operating budget is based upon a careful analysis of the market and the expertise senior management brings with them to the new enterprise from other jobs in the food service industry. Creating a first budget is beyond the intent of this book.
A budget is created by estimating projected sales, determining required profit levels and fixed expenses, and calculating food costs. For new foodservice operations, developing a detailed budget based on historical data is not feasible since there are no previous records to inform the plan. Without past operational trends to guide them, management must instead rely on a mix of known facts. For instance, a restaurant manager may use industry-wide data for similar businesses. Additionally, standard financial formulas specific to the food and hospitality industry, available through associations like the Restaurants Canada, can help estimate anticipated revenue and costs.
Given the current focus on cost control and efficient resource management, it is crucial for foodservice managers to understand the budgeting process and the techniques for creating a realistic budget. Many managers avoid using a budget due to the time required for preparation, the difficulty of making accurate predictions, and incomplete records that fail to provide necessary data. However, the importance of a budget and the budgeting process must be recognized and embraced by management. Otherwise, even if a budget is created, it may not be used effectively or serve its intended purpose.
