In the fast-paced world of hospitality, the saying “failing to plan is planning to fail” is highly significant.
NB: This is an article from Demand Calendar
Whether they run luxurious resorts or small bed-and-breakfasts, hotel companies spend considerable time and effort creating annual budgets. This process is meticulous and time-consuming. However, there is an ironic twist to this story.
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Despite the significant amount of time and effort invested in budgeting, many hotels often find that the budgets they have created do not align with the reality that unfolds just a few months into the new year.
As I explore the various reasons – unpredictable market conditions, internal obstacles, and global turmoil – it’s important to reflect on whether the traditional approach to budgeting is still relevant. Is there a more agile and efficient method that better aligns with today’s rapidly changing landscape? Let’s start with the steps in budgeting for hotels. All steps except the first are straightforward but time-consuming, primarily because of the many suppliers and costs needed to run a hotel.
Is budgeting critical in hotels?
An old tradition stipulates that budgeting is critical for any business, including hotel companies. A well-crafted budget is a financial roadmap that helps a company plan for the future, allocate resources, and make informed decisions.
Plan for the future
All hotel budgeting starts with revenue. As a hotelier, you must look into the future, at least into the next fiscal year, which often tends to be calendar years. The first question is: Will next year be much different than this year? The default answer is that the destination visitors needing overnight accommodation will be the same next year unless there are significant changes in the demand drivers, such as the number of events or structural changes, like a corporate headquarters move. The second question is: Will the hotel increase, keep, or decrease market share, in other words, capture more, the same, or less of the available market? The default answer is that the hotel will capture the same market share unless the hotel supply has changed (more or fewer rooms or competitors have renovated) or the hotel has substantially upgraded its facilities. For most hotels worldwide, next year will be the same as this year. If you have a revenue manager, the job is to make a realistic forecast for room revenue (occupancy and ADR) by copying the actuals from last year with a few calendar adjustments for events and holidays. The revenue manager would need less than a day for this.
Allocate resources
Do you plan any changes in how you manage the hotel? If not, allocate the same resources as last year. If you have plans to change the way you work, like becoming more productive by becoming more digitalized, you have to budget for these projects. Changes take time, so budget any changes as pure costs for next year. The results from these efforts will show up as profits the following year if the project is successful. Yes, inflation will increase costs, and the only way to offset these increases is by increasing the price of rooms and all products and services.
Financial roadmap
Now, you have the outline for a financial roadmap. You should now have a realistic plan based on reality rather than a dream. If you have a positive cash flow, you can think about the future and how to use the cash to improve the hotel’s position on the market to maximize revenue and profits for coming years. If you have a negative cash flow, you must find the problem before jumping to conclusions or actions. Do not scream and shout that your team has to produce better figures. That will lead to an unrealistic budget that will be off early next year.
Make informed decisions
To make informed decisions, you need data and information that can give valuable insights. Reaching the budget or your objectives will only be possible by systematically collecting, compiling, and analyzing the hotel’s performance.
