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Preparing the revenue budget 2023

30 August 2022
September is around the corner and the starting point of the budget season. It is time to look ahead into 2023 and figure out which revenue mix will maximize next year's profit. Bring out your spreadsheets and hope they are correct and will produce accurate figures. Beware of all the stories about companies that went under due to mistakes in the formulas in vital spreadsheets. Hopefully, errors in spreadsheets will never happen in the hotel industry.

Start with the room revenue budget

The core business of a hotel is to provide overnight accommodation. Room revenue is the largest revenue source in a hotel, and that is the reason to start with the room revenue budget. Before you begin, collecting information that will affect the demand for overnight accommodation is vital. Every hotel needs to build a demand calendar with detailed information about holidays and events at the destination. The more information a hotel has about everything planned for next year, the better for estimating the demand and setting a realistic budget. These are the essentials that need to be in the demand calendar.

Essential information in a demand calendar

The concept of a calendar is to show details about every day of the year. Demand for hotel rooms varies from almost none to excessive depending on travel reasons to the destination for each day. Therefore the information has to be specific for each day of the year. Every day should have a note of the following information.
  • Holidays
  • Events at the destination
  • Historical performance of the hotel
  • On-the-books data for the hotel
  • General destination travel patterns
  • Historical comp set performance

Changes in the destination

The next step is to find information about changes at the destination that would affect the demand for overnight accommodation and changes in the supply of hotel rooms. Examples of vital changes are opening a new multi-sports arena, new direct flights from potential feeder markets, investments in infrastructure, and marketing campaigns to attract visitors to the destination. New supply will increase the competition for the guests and probably affect the overall occupancy at the destination.

Changes in the economy

The demand for hotel rooms correlates directly with the GDP changes in a country (and the feeder markets). If the economy is expanding, the demand will increase and vice versa. Therefore, keep an eye on the development of the economy to be prepared to take action, such as increasing rates when the economy is growing, if needed.

Forecast the number of occupied rooms and ADR

If the hotel has collected the information discussed above, it is as good as it gets, and the hotel is now well prepared to start forecasting how many rooms and at what rate the hotel will be able to sell day by day for next year. The first part of the budget process is to forecast, which means that based on all the information, the hotel makes a realistic estimate of how many rooms they will be able to sell at which ADR. The result is a realistic view of how the next year will unfold. However, it is unlikely that owners, top management, or the general manager will be happy with a realistic outlook for next year. They want to capture more market share, increase revenue at a higher pace, sell more, and maximize profits. The message is clear: "You can do better than this." The second (third, fourth, and ...) round assesses if the hotel could increase occupancy and for which days the hotel can adjust occupancy. After a few rounds, when everyone is happy, the hotel converts the forecast to next year's budget.

Budget all other revenue sources

Many other revenue sources are directly related to the guests staying in the hotel. Guests use the meeting facilities, eat and drink in restaurants and bars, go for treatments in the spa, and participate in activities. Hotels start with the room revenue budget because of the relationship between rooms and other revenue sources. The starting point for budgeting other revenue sources is the number of rooms sold and the number of guests. More guests in the hotel mean more opportunities to sell additional products and services. Fewer guests in the hotel mean that the hotel needs to find local guests for meeting rooms, restaurants, bars, spas, and activities or minimize operations on days with less demand.
There are two options to budget for other revenue sources. One is to budget everything as a percentage of room revenue or an average spend per guest. The advantage of this method is that the hotel has already estimated the demand, and all revenue from other sources will automatically be updated when the number of sold rooms or hotel guests changes. The hotel will always have an updated forecast as long as the revenue manager keeps the forecast up to date. The disadvantage of the method is that the hotel has to add revenue separately for all local external guests. Still, the advantage is that the hotel will better understand how much revenue hotel guests and external guests generate. Another advantage is that the hotel revenue manager can have complete control over the total budget.
The other option is to budget each revenue source based on historical data updated with changes in the economy and consumer behavior. However, this method means the hotel must follow the same procedure when budgeting hotel rooms for each revenue source.

Budget features in Demand Calendar

The budget process in Demand Calendar is probably the fastest in the industry. Forecast rooms, ADR, and all other revenue sources. All stakeholders can access Demand Calendar to view the budget to speed up communications to finalize the budget. As a result, the hotel saves time and frustration and will reach a higher quality of all budgeted figures. During the year, the revenue manager and others can easily update forecasts and compare them to the budget to keep track of the actual expected performance. Tight control of budgets and forecasts will help the hotel to make better decisions to grow revenue and maximize profits.