Forecasting and budgeting are important, interrelated, and complex processes for all businesses. Forecasting and budgeting in hospitality, specifically, can prove particularly complicated, thanks to volatile demand, seasonal income swings, and department-level complexity.

The difficulty of hotel forecasting and budgeting can be eased by having a proper budgeting framework and forecasting cadence. It is also important to consider investing in software and tools to help your organization set and track a budget, gleaning information about your properties that will guide your business strategy for years to come, despite the volatility of the hotel industry. 

Keep reading to learn how to budget and forecast in a way that will be a boon to your business, not a mere formality or time suck.

What is Budgeting?

Budgeting is the process of planning a company’s revenue and expense figures for a specific period of time. This involves identifying cash flows and allocating resources required for company spending. The process of building an annual budget typically takes three to six months to complete.

How To Create a Hotel Budgeting Framework

To build a hotel budget framework, break out revenue and expense into a few different groups:

Revenue Budgeting 

Under revenue budgeting, the main categories to consider are revenue from rooms, food and beverage, and any ancillary revenue. Revenue from rooms is the foundation of any hotel budget. Food and beverage revenue should include restaurant covers multiplied by average check, banquet/catering bills, and bar, in-room dining, and grab-and-go. Ancillary revenue includes any revenue generated from amenities such as a spa, golf course, parking, valet, laundry, retail, etc. This revenue is captured either per-occupied-room (POR), or as a separate demand forecast.

Expense Budgeting

Labor is the largest and most manageable cost line. Building this part of a budgeting framework consists of breaking down fixed labor and variable labor and segmenting by department (F&B, engineering, administration, sales, etc.). After breaking these down, layer in benefit rates, overtime assumptions, and seasonal hiring costs. Additionally, CPOR and labor cost percentage should be used as KPIs.

Utilities should be a semi-variable cost, with base load and variable component tied to occupancy and food and beverage volume. Utilities should be budgeted by type, and any rate increases from utility providers and efficiency initiatives should be factored in. Keep in mind that FF&E reserves are a capital protection mechanism, not a discretionary spend. Other things to note are:

• Industry standard is 4-5% of gross revenues accrued annually into a reserve fund
• Franchise/brand agreements and management contracts often mandate a minimum
• FF&E draws should be tied to an asset management plan with a rolling 5-year replacement schedule
• Utilities should be budgeted separately from operating expenses

Capital Planning

Capital planning sits above the operating budget but must be calculated in tandem. Building the capital budget starts with a property condition assessment (PCA) prioritized by urgency impact. Next, layer in the brand/franchise PIP deadlines with hard timelines and evaluate ROI projects using IRR, payback period, and RevPAR impact. It is important to establish approval thresholds, track actuals vs budget on a monthly basis with variance explanations, and build a rolling 5-10 year capital plan beyond the annual budget cycle.

What is Forecasting?

Forecasting is the process of analyzing past trends to help predict future business results based on a company’s current up-to-date actuals. This typically focuses on major expenses and revenue line items done over a compressed time frame and is performed regularly after financial statements are released.

How to Create a Forecasting Cadence

Whereas a budget is a roadmap for how money is flowing into and out of your business, a forecasting cadence is a living financial plan composed of multiple parts. The annual overall budget sets the target for the year, and re-forecasts throughout the year keep this plan realistic, while variance reviews drive accountability within your business.

First up in a forecasting cadence is the creation of a 12-month operating and capital plan. This will set the performance contract between management and ownership, as well as establish incentive thresholds, drive staffing plans, purchasing contracts, and capital commitments. This budget is the baseline against which everything else is measured; without it, variance reporting has no reference point.

Quarterly re-forecasting is a rolling update performed to the full-year financial outlook that is completed at the end of a quarter. Regular re-forecasting is essential to enable proactive business decisions, trigger communication with ownership early, reduce surprises at the end of the fiscal year, and feed capital planning.

The last element of a forecasting cadence is monthly variance reviews, which are line-by-line comparisons of actual results vs. the budget that are completed within 10-15 business days of month-end close. These reviews are important because they create accountability at the department level, allow operational issues to surface early, feed into the next re-forecast, and protect the ownership relationship by providing consistent, transparent monthly reporting.

Common Budgeting Mistakes in Hospitality

There are plenty of mistakes that can and will be made when budgeting for something as complicated as the hospitality industry. Some of the most common include building a budget from the top line only, rather than considering the real demand drivers and building from the bottom-up. Treating the budget as a static resource once it has been approved is also a mistake, as your forecasting cadence should inform and update the budget as the year goes on. 

Additionally, ignoring departmental variances is a mistake, as there are bound to be differences in the revenue and cash flow of various aspects of running a hotel property. Adapting to support and embrace those rather than using a one-size-fits-all approach is the best way to play it. 

The single most important thing to remember when budgeting and forecasting is that each component of your plan must consider the future alongside the history of your portfolio and properties. The monthly variance should explain what has happened alongside providing the data that will update the outlook for the next 60-90 days. The quarterly forecast should recalibrate the year as well as identifying the specific steps that need to be taken to close gaps or capture upside. If both past and present are not considered, your budget and forecasting are not working hard enough for you.

AI and Hotel Budgeting and Forecasting

The best way to ensure past metrics are brought efficiently into the future of your business is with artificial intelligence. Forecasting tools and software use historical patterns, booking pace data, and market signals to improve accuracy beyond mere manual spreadsheet projects. 

Automated and AI-powered hotel accounting software such as M3’s Accounting Core can be a crucial heavy-hitter when it comes to proper budgeting and forecasting that isn’t a heavy lift for your financial team. M3’s accounting core software can be used for a self-managed budgeting and forecasting solution, whereas M3’s accounting services take hotel accounting out of house, providing a smooth, outsourced budget preparation process that lifts the stress off your team and brings the data to you without your team lifting a finger.

Reach out to us today if you’re looking for a way to improve and optimize your budgeting and forecasting with automation and hotel-specific software.

FAQs

Why is budgeting and forecasting critical for hotel profitability?

Hotel budgeting and forecasting is the best way to turn information and data into actionables. It allows a business to take the numbers and metrics of previous quarters and years and use them to build a plan that iteratively improves profitability and efficiency year over year.

How often should hotels re-forecast their financial plans?

Re-forecasting should happen about once a quarter.

How does AI improve hotel budgeting accuracy?

AI improves the accuracy of hotel budgeting by taking the data from past quarters and years and using an algorithm to make learned predictions on future budget rules and categories using the paradigms of years past.