The budget challenge
Budgeting is not particularly difficult, but it is time-consuming. The first part is to find historical data to analyze past performance and patterns. The second part is to look into the future and register all known events at the destination that drives demand for overnight accommodation. Budgeting rooms and room revenue based on occupancy patterns at the destination, the historical performance of the hotel, and events at the destination driving demand is an easy task for an experienced revenue manager. From a revenue manager's perspective, the difference between forecasting and budgeting is minimal. However, both must be realistic to ensure that the hotel uses its resources best to grow revenue and maximize profits.
Another challenge is to convince the Owner/CEO/GM of a budget based on reality and, therefore, is both realistic and likely to reach. A key to convincing the boss is to explain the difference between forecast, budget, and goal. A goal is a dream and something that the hotel wishes to reach in the future. A forecast is a realistic estimate based on the current level of many external and internal variables. A budget is a financial plan assigning resources to accomplish objectives such as strengthening the products and services to attract more guests and reach higher revenue.
The third step in the budget process is to present and sell the budget to the decision-makers. A GM/CEO/Owner will always want a higher revenue and profit, so the boss will push to increase the revenue in the budget. One reason might be that they think the revenue manager tends to be cautious and slightly pessimistic about being able to deliver the number in the budget. From the revenue manager's perspective, it is about getting the necessary resources (both human and financial) to spend on actions to reach a higher revenue target. Every increase in the revenue budget should also mean additional marketing, sales, and revenue resources.
Hotels (and many other companies) spend a lot of time budgeting and planning. A few months into the new fiscal year, revenue budgets tend to be obsolete because something has dramatically changed outside the hotel, such as a pandemic, inflation, labor shortages, etc. When the budget becomes obsolete, all hotels conclude that we had a good plan (the budget). Still, the reality did change in ways we could not anticipate six months ago, so we must closely follow and adjust all resources based on forecasts.
It seems like the budget process wastes a lot of time. There is, however, a good reason for the budget process. It makes people stop and think, create new ideas on how to make the hotel more successful, and fosters better financial knowledge and relationship between top management and department heads.
Improving the budget process
What if the budget process could be both faster and more accurate? Here are a few ideas on how to improve the budget process.
Automate data collection
One reason the budget process takes time is that hotels have not automated data collection. Hotels need instant access to historical data and information about future events at the destination as a starting point for budgeting. Hotels can easily automate the data collection, eliminating wasting time on meaningless tasks that would alienate highly skilled people.
Establish solid processes
Another reason is that hotels do not have solid processes for budgeting. A straightforward process has these essential steps, including many sub-tasks.
- Owner/CEO/GM communicates if there are any plans to strengthen the hotel's market position, such as renovations, additional facilities, products, or services that will impact revenue. In addition, the owner/CEO/GM advise if they plan to add marketing and sales resources to boost revenue.
- Based on current market conditions, planned events at the destination, and plans to strengthen the hotel's market position and additional resources, the revenue manager makes a realistic day-by-day forecast for rooms and room revenue.
- Discussion and negotiation about the room revenue budget between the Owner/CEO/GM and the revenue manager. Conclude and agree.
- Forecast all other revenue sources based on the demand for rooms and from local guests. Base all variable costs and expenses on the budgeted revenue to reach a healthy profit.
- Communicate and distribute the budget to all stakeholders.
Reporting the progress
A vital part of the budget process is to follow up on the actuals compared to the budget to take corrective action before it is too late. Speed and accuracy are essential. Revenue reporting should be available daily, and the monthly overview showing deviation against the budget should be available on the first day of the month. The revenue manager should immediately analyze and comment on the monthly revenue report and send the information to the Owner/CEO/GM. Minimize the time lag between the month's end, making decisions, and taking action.
Very few, if any, hotel PMS have features for budgeting and forecasting on the granular level hotels need. Standard accounting systems lack day-by-day budgeting and forecasting modules. Likewise, many revenue management systems have forecasting but lack budgeting features. Hotels need a commercial system focusing on revenue, where all revenue sources can be budgeted, forecasted, and followed up.
Develop the thinking
All of the above improvements are basic and should already be in place in hotels. However, it is time to level up and look into new metrics to improve the long-term financial success of hotels. For example, customer Acquisition Cost (CAC) is primarily a concept and rarely budgeted or forecasted in hotels, even if the CAC is estimated to be between 15 % and 25 % of revenue. Customer Lifetime Value (CLV) is another metric that hotels are late to adopt. Focusing on and measuring CLV would open hotels' minds to new ideas on how to increase total revenue.
Hotels struggling with the budgeting process need to improve the basics. When a solid budgeting process, including the follow-up reporting, is in place, it is time to take a step forward and focus on CAC and CLV.