Hotel Budget Season: Are you Ready for 2023?

No time to lose, the next year is almost here. And a good hotel budget plan isn’t made overnight.

How far are you with your targets, budget, and plan of attack for next year? What REVPAR and GOPPAR do you need to achieve? Have you gone over what next year will look like in terms of performance, and does it describe all actions in detail? Does everyone on the team know what the objectives are and which steps to take to get there? Did you make your new hotel budget already or are you right in the middle? What methodology are you using? Are you simply adding 3% to 5% each month based on last year’s performance? Or are you really putting your teeth into it and drilling down per segment, per channel, per account, and per day?

Now is the time to take action to build your hotel budget plan! Read through our step-by-step guide explaining how to get ready for 2023 with our hotel management company´s best hotel budgeting practices.

This article answers all your hotel budgeting questions:

• What is a Hotel Budget Plan & When do you Start?
  • Does your Hotel Budget have to be Adjusted throughout the Year?
• Should Every Hotel Create a Budget Plan?
  • So, Why are Budgets so Important for Hotels?
• It´s a Team Effort: So Get Them Evolved!
• Where Many Hotels Go Wrong: The Budget Pitfall
  • Lack of Hotel Budget Sophistication
• Step by Step Guide to Creating a Hotel Budget Plan
  • How to Get Started: a Breakdown per Department
  • Key Considerations per Hotel Department
    • Revenue Management
    • Marketing
    • Revenue Management & Distribution
• Budgeting Approach: Is there a Best Way to Budget for Expenses?
  • 1. Expense budgeting approach: Last Year with X% Increase
  • 2. Zero-based budgeting
  • 3. Cost per room occupied (CPOR)
• Get your Data on Time: Setting Deadlines for your Team
• Final Word

What is a Hotel Budget Plan & When do you Start?

A hotel budget is a plan that explains how revenue will be generated and spent each month for the upcoming year to reach the goals and objectives. It also helps hotels to make sure there’s enough money every month to pay the bills and reserve money for other expenses such as investments.

In other words, the budget shows you how much money you´re going to make and can be seen as a roadmap of how next year will look like in terms of performance.

Typically, the hotel budget season starts towards the end of August with presentations to management starting the following month. However, with trends ever evolving and Covid-19 impacting booking behaviour, it is important to take factors such as booking windows, cancellations trends, increasing room rates, and inflation into account. All of these factors can heavily influence the accuracy of your hotel budget plan. In practical terms, taking an agile approach and adjusting your budget later this budget season can be beneficial for any hotel.

Does your Hotel Budget have to be Adjusted throughout the Year?

The budget generally doesn´t change, this is where the hotel forecast comes into play where you start comparing your budget vs. your forecast.

Should Every Hotel Create a Budget Plan?

The answer is simple: YES Simply running a hotel on intuition doesn’t cut it anymore.

Whether your hotel is a boutique property with 15 rooms, or a 400 key large scale urban hotel, it is essential to have sophisticated planning and reporting in place to maximise results.

So, Why are Budgets so Important for Hotels?

The hotel industry is a highly competitive industry. To compete, hotels need to be accurate with their budgeting to ensure financial results are aligned with the business objectives, and that their teams are organised and prepared to reach those goals.

Without giving your team the much-needed goals, there´s no clear direction making it nearly impossible for them to know if they’re on the right track to reach the goals by the end of the year.

It’s A Team Effort: So Get Them Evolved!

So who should be involved in the budget-making process?

Understanding how each department contributes to the performance of the hotel is essential.

So, why not include all department heads in the process?

• Marketing
• Sales
• HR
• Front of House
  • Front Office Manager
  • Rooms Director / Head of Operations
  • Other departments: Spa, F&B, outlet managers, Golf, Housekeeping etc.
• Hotel Manager / GM
• Finance Team
• Revenue Managers

Where Many Hotels Go Wrong: The Budget Pitfall

It seems that not everyone goes into as much detail when making their budget. I have to share with you a funny story about budgeting with you. So we are working with many different hoteliers, and in this case, it pertains to the management of a resort. Hotels in vacation markets for many have been influenced (indoctrinated) by tour operators on how to manage their property. As a result, budgets are made per person rather than per room, meaning that the total revenue objectives become ‘flexible’ if the measurement of results does not incorporate enough factors.

In this particular case, the hotel’s management was under the impression the hotel was performing on target as the correct average rate per person was achieved. Unfortunately, the average occupancy per person per room was actually 20% lower than normal, which made it impossible to reach the total revenue target, because the average room rate was totally off.

Hold on, it gets even funnier. When we were working through the budget for each month, we noticed that several months had targets at revenue levels below last year. Upon probing the reasoning behind this, we were explained that some tour operators had informed them they were expecting 10% fewer bookings from a particular country. No one ever raised the thought to initiate partnerships with other distribution channels to offset this possible decrease in demand. Capturing more market share, or penetrating new markets was just not in their mindset.

Sorry, I just had to get this rant off my chest. But unfortunately, it is very typical for our industry. Especially in resort hotel markets, tour operators have for too long influenced hoteliers on how to run their business. Hoteliers need to get more strategic insight and understanding of the financial side of the business. Moreover, they have to become more creative in methods and revenue strategies to increase the performance of their property.

Lack of Hotel Budget Sophistication

An industry colleague I respect highly called me last week, asking if I knew of any online tool which helps hoteliers develop a professional plan of approach. Not just a standard one, like most hotels, punch out, listing a few trade fairs and showing a % increase per segment. No, he was looking for a system that really guides you through every detail and forces you to look at all aspects that need to be incorporated. And he is right; marketing plans in general are too superficial. It is time they are taken to a more professional level, and become complete. Hotels are multi-million dollar or euro businesses and they demand an expert strategic and structural approach.

Step-by-Step Guide to Creating a Hotel Budget Plan

First, let’s talk about some ground rules before jumping into the specifications of budgeting. Make sure to consider the following points for improving accuracy and maximizing accuracy:

• Provide context around the numbers, not just enumerate – Telling the story of how revenue will be generated in the coming year, and which factors contribute to bringing in business will help your team to understand and contribute to the plan, benefiting the quality of the end result.
• Multi-scenario – as we all know and have seen lately, trends can shift rapidly. Therefore, taking a proactive and agile approach is important to better navigate market fluctuations.
• Don’t overcomplicate – keep explanations and other overcomplicated jargon out of the reports. Again, simplifying allows for clear communication and will make it easier to get your team on board.

How to Get Started: Create a Breakdown per Hotel Department

Now we have cleared some ground rules, we can take a look at some of the elements you need to incorporate in the plan for next year.

Taking into consideration the continuing growth of online sales and the quick adoption of mobile technology by consumers, we have put together some questions that will need your attention in the upcoming year:

Key Considerations per Hotel Department

Revenue Management

The basis of the target or budget lies in a detailed demand calendar. Get a clear overview of what drove revenues each day. Map the events, conferences, expositions, trade fairs, concerts, holidays, vacations, long weekends, etc to the following year. You will start seeing a clear shift already.

Perform displacement calculations on all segments, channels, and accounts to uncover hidden revenue potential. Incorporate channel distribution costs like travel agent commission, agency fees, and marketing investments, payroll for sales, marketing, and reservation, to determine the true net value of each segment.

Here are some questions you should include in your budgeting process:

Marketing

• How much revenue do we expect our hotel website to produce next year?
• What growth are we expecting from the current year?
• What is the balance between print and internet marketing?
• Are we shifting the budget from offline to online?
• What is our plan to attract more traffic to our website?
• What will we do to increase the conversion of our hotel website?
• What new online marketing initiatives will we launch next year?
• How will we collect more emails, mobile phone numbers, and FaceBook connections to be able to directly engage with our guests?
• How will we attract our different client target markets and niche guest segments?
• How will we measure the effect and ROI of all our marketing actions?
• What will we focus on, how much financial and human resources will you dedicate;
  • Website Redesign or Optimization
  • Links from local and travel directories
  • Search engine marketing SEM / PPC
  • Search engine optimization / SEO
  • Banner advertising
  • Advertising on Meta-Search, Review Websites, and Travel Forums / Communities
  • Interactive campaigns/promotions (contests, games, quizzes, sweepstakes)
  • Email marketing
  • Mobile Website
  • Mobile Search Engine Marketing SEM / PPC
  • Social media marketing / Travel 2.0
  • Online reputation management
  • Blog output and maintenance
  • Video
  • Backlink building
  • Analytics / ROI tracking
  • Webmaster tasks
  • External hotel marketing agency

Revenue Management & Distribution

• Have you identified new local or international sales channels your hotel needs to be on?
• What are your key segments, niche segments, and feeder markets?
• Are there any travel agency channels or forums out there that can help you attract these customer target markets?
• How will you manage to keep a healthy balance between direct and indirect (third-party) sales online?
• What is your approach to protecting your hotel from brand hijacking by OTA?
• Are your FIT and wholesalers respecting the contract?
• How will you prevent wholesalers from distributing and publishing package rates as room-only deals on online travel agency websites?
• How will you control your cost of distribution?
• Will we use rate parity as a strategy to drive business through more cost-effective distribution channels?
• Will we guard against cannibalization by costly distribution channels like Flash, Group, and Lastminute sales websites?
• Will we let ourselves be caught up in website trends and hypes which only lead to an erosion of the hotel’s net rate?

Rooms Division

Just to give a few examples, here are some expenses to include:

Rooms/Housekeeping

• Minibar
• Cost of guest amenities
• Staff cost to clean rooms
• Cleaning products
• Complimentary/turndown gifts

Team

• Uniforms (cost per uniform, laundry, reparations, tailoring fees)
• Training

Front Desk

• Printing costs
• Software & hardware tools
• Complimentary services (welcome drink etc.)
• Guest Relocation

Public Areas

• Cleaning supplies (public areas & rooms)
• Decorations
• Maintenance

Miscellaneous Income

• Resort Fees
• Package Breakage
• Commissions
• Business Interruption Insurance
• Foreign Currency Exchange
• Unused or Forfeited Gift Certificates
• Interest Income

Budgeting Approach: Is there a Best Way to Budget for Expenses?

Mainly, there are three ways to approach budgeting for hotels, and we´ve dived deeper into which key metrics are involved in our article about USALI (Uniform System of Accounts for the Lodging Industry), which is the standard system that any hotelier should familiarise themselves with.

In this article, we´ll briefly take you through the common methods used in hotel asset management and the hotel finance world, namely:

1. Expense budgeting approach: Last Year with X% Increase

Let’s start with the most simple approach. This way of creating budgets can be easily performed by taking this year´s figures and adding a fixed percentage to each category, for example, to account for inflation or required revenue growth, and is a method to use if your costs are more predictable and have the tendency to be similar year over year (YOY).

Pros

• Simple, easy, and no complex calculations are required which reduces the chances of errors
• Saves time for your hotel
• Consistency – it can help to increase consistency of the budget over the years

Cons

• Discourages management to proactively look into savings and expenses
• External factors and unforeseen changes aren’t taken into account
• This might lead to unnecessary spending – some departments might not need a budget increase, leading to managers having the perceived freedom to spend more towards their budget even though no changes were required.

2. Zero-based budgeting

As the name suggests, the Zero-Based Budgeting approach starts with a zero starting point, and is a great way to identify essential expenses and eliminate unnecessary expenses.

Without referring to last year’s numbers, this method requires managers to create and justify each budget item and category, pushing the team to review what´s most vital to running your hotel business.

Pros

• Accountability of managers – making them accountable for costs and overinflated budgets
• Works well for getting rid of unnecessary expenses
• A budget approach that minimises negative impact on operations in the efforts to control cost

Cons

• Time and resource consuming
• Possibility of short-term thinking to be rewarded over long-term thinking – initiatives that require a longer time to develop, for example, a brand awareness marketing campaign, requiring funds to ramp up impact, might be left with lower budget allocations in the short run as it is considered a long-term investment even though they´re needed to achieve the short term goals.

3. Cost per room occupied (CPOR)

This method is not recommended as it doesn’t show you what key necessities are needed across each category.

The calculation for this budget approach is based on dividing each expense category by the number of rooms sold.

Pros

• Quick and simple calculations to get an overview of expenses

Cons

• Only generic conclusions can be drawn with this approach, as it lacks granular insight into each category

Get your Data on Time: Setting Deadlines for your Team

As we all know, there are a million things on a hotelier’s mind. For this reason, setting clear deadlines for when deliverables should be handed in from each department is crucial both for getting the final budget ready in time, but also helping to alleviate some of the workload from your team by giving them proper planning.

Furthermore, provide your team with guidance during the budgeting season.
In case deliverables are not of expected quality when deadlines are reached, our hotel consultants always recommended to set team meetings to discuss earlier drafts of the budget per department to avoid any delays or inaccuracies of data when closing in on the final deadline.

Final Word

As you can see many things have to be considered and included in your hotel budget plan. We need to look at these aspects of the business, and many more, as they influence your financial results.

Most importantly, the budget is not only about the numbers, it needs to be combined with an action plan. The steps and investments that need to be taken to achieve the budgeted financial result. Without such a strategic roadmap, the numbers are merely some numbers put on paper … It’s the plan behind it that will make it stick and turn it into an achievable budget.

Hopefully, these thoughts from our hotel management company have helped you to make a more complete hotel budget plan of attack for next year!

Cheers,

Patrick Landman

PS. Any doubts or uncertainties about running your hotel & marketing strategies? Contact us for hotel management or hotel consulting services to help build a solid plan to outperform your competition.

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