rocks balancing on wooden boards reflecting the revenue risk when building hotel budget

By now, your hotel team has likely started the arduous process of building a 2022 budget. Your hotel’s executive team and department heads are preparing for  several rounds of presenting how all revenue streams will line up against annual expenses to produce the best possible net income.

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This budget has the potential to be the blueprint for your strategic action plan for the entire year, but how do you present and defend a thoughtful budget for a year unlike any other? There is a healthy range of revenue risk that lies somewhere in between a careful analysis of historical trends and market projection topped with a dash of optimism.

Over the last few weeks, our team has been in the throes of budgeting, and we have come up with some insights that could potentially help you as you assess and communicate the risk involved in your 2022 budget specific to rooms revenue. This article will review how we assessed that risk in the 2022 budget and what contingencies we considered.

2022 is a critical ramp-year following one of the most significant recessions the hotel industry has ever seen. Because of the current circumstances, your commercial leadership undoubtedly has a revenue target in mind. It is your responsibility to put together the best strategies to get as close to that number as possible with a thoughtful plan — and to call out any risks and contingencies that will prevent your hotel from being able to achieve that number. With that in mind, here are three things to consider when building the 2022 rooms revenue portion of your budget.

Building the Foundation

Factoring revenue ramp-up risk is highly dependent on your location and your hotel’s mix of business dependencies. Your team will need to be diligent in gathering historical day-by-day, month-by-month trends by market segment for 2019, 2020, 2021– and compare those trends to the latest market projections.

During our budget review, we found that, at a minimum, market projections should include the following metrics:

  • Submarket RevPAR performance as it relates to all submarkets. For example, a significant market like Charlotte will have “submarkets” like Downtown and Airport. Projections for how each submarket has historically performed (to the most recent quarter) relative to all Charlotte submarkets will provide confidence for understanding your hotel’s location outlook.
  • Historical Occupancy/ADR/RevPAR by price category for your market and submarket. Hotels typically fit into a pricing category based on their brand or independent hotel status. Access to the historical performance by pricing category will allow you to index your hotel’s performance similar to your STR Report but with a bigger picture worthy of budget guidance.
  • Submarket changes in supply activity for recent and future years. This information is typically combined with determining the impact of the local market and reopening events.
  • Operating performance metrics that are available at the national level for your hotel’s pricing category.
  • Source of Business changes for room nights and ADR including hotel website, property direct, voice, Global Distribution Systems, and Online Travel Agents.

Looking at next year, we are finding that expectations for business travel and meetings will maintain moderate growth for Q4 2021 and Q1 2022, with leisure demand providing the most confidence for recovery. In our process, we found it beneficial to build a budget as a percentage of 2019 to start accounting for day of week shifts, special events, and holiday impact. Additionally, we highlighted all product offers by market segment for 2019 to remind us of specific strategies for 2022 upside and contingency planning.

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