Total revenue forecasting the key to maximizing profits in hotels

26 August 2021
For a long time, hotel revenue managers have focused on and become good at forecasting rooms and room revenue. However, other revenue streams have not received as much attention. It is time to take a holistic approach and forecast all revenues. A well-developed forecast for additional revenues is crucial to maximize total revenues, adjust variable costs to revenues and have better control of the hotel's cash flow.

Many hotels dropped their forecasting procedures during the pandemic because they thought there was nothing to forecast. It seemed like it was the end of the world for many hotels, and there was nothing they could do. Of course, it was more challenging to predict the future since no one had any idea about when the pandemic would be over, and travel would start to come back. There is a future, so because something is hard does not mean you should stop doing it. Maybe forecasting just became even more critical. To answer whether the hotel should stay open or close, you need to understand the future. A thought about the future is a forecast. Therefore, every hotel needs to keep and continuously update a total revenue forecast. Managing a hotel without looking into the future is to drive a car blindfolded.

The forecast should trigger actions

The primary purpose of forecasting is to trigger actions to enable hotels to capture a larger market share, adjust variable costs to increase profits, and manage cash flow to make future investments possible. Therefore it is critical for the success of a hotel to put some time and effort into total revenue forecasting.

Before the forecast can trigger any actions, the hotel needs to understand the total demand in the destination, estimate how much of the market the hotel will capture, and analyze the realism of the forecast.

Understand the travel reasons

The forecasting process starts with estimating the demand for hotel overnight stays in the destination. Historical benchmarking data is helpful to understand demand patterns. Changes in supply and primary reasons for travel to the destination are also part of the initial research of the market. Every hotel needs to understand the specific travel reasons to their destination, how many people the destination attracts, and when (day of the week, seasons, and other calendar variations). For example, during weekdays the reason for travel is for business. During weekends, the reasons are holidays and visiting friends and family. Then, based on the findings, the hotel needs to estimate the number of overnight stays for each day for at least 12 months into the future.

Find the high spending guests

The second step is to forecast how many guests the hotel will capture. Even if the demand is high, the hotel might not satisfy the guests' needs. For example, a hotel with only single rooms will not capture couples that want to stay in double rooms over a weekend. There might be many reasons for a discrepancy between the market need and what the hotel can offer. On the other hand, a hotel with the right fit for the market will have the opportunity to capture guests that spend money on additional products and services, such as meetings, F&B, spa, and anything else that the hotel offers. To capture all other revenue sources, a hotel needs total revenue forecasting. The revenue manager needs to involve each department head to get an accurate estimate for each revenue source.

The third and final step is to analyze the forecast so that it is realistic. An overly optimistic forecast leads to too few activities to ensure that revenues come in. A too pessimistic prediction tends to increase the spending of more money than necessary to bring in revenue. The hotel can set a budget and goals for the commercial team and all activities to capture revenue based on the realistic forecast. A well-functioning commercial team can use the resources so efficiently and smartly that the hotel exceeds the set goals.

Actions to increase market share 

First, take action to secure that the hotel will reach realistic estimates. Second, take action that will surpass the forecast and make you more successful and happier. To succeed with the second action, every hotel needs a commercial strategy and an action plan to capture the market's fair share and a bit more. The action plan includes marketing, campaigns, sales activities, pricing, and many other actions. A great action plan aligns with the 12-month rolling forecast.

It is like playing a game to gain market share. Through benchmarking data, hotels get a daily score to analyze if strategy and tactics work. The only way to win is to continuously update the forecast based on changes in destination demand and the pick-up pace at the hotel. If necessary, adjust the content in your offerings to increase the value for the guest. As a last resort, change prices according to guest's willingness to pay instead of following the price adjustments of your competitors.

Actions to adjust variable costs

The second critical action based on the forecast is to adjust the variable costs to the estimated volume of guests before it is too late. Again, the purpose is to convert as much revenue as possible to profit without compromising the guest service and risk making guests unhappy. Without a forecast, department heads can only follow the budget or make a qualified guess about the estimated number of guests. The lack of data or an accurate prediction will lead to undesirable losses. Instead, a well-prepared forecast by the team will increase guest satisfaction and hotel profitability.

Actions to manage cash

The third critical action based on the forecast is to manage cash. The CFO needs input to the cash flow projections to understand the need for additional financing or to handle a cash surplus. The CFO will also put together a profit & loss projection for the entire property. This forecast will be the foundation for decisions about future investments and long-term success for the hotel.

The pandemic exposed the importance of every single revenue source to survive in difficult times. Maybe this has opened the eyes of hoteliers to the possibilities of increased profitability in good times. The key to future success is to get started with total revenue forecasting.

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