Budgeting is essential for any business, but none more so than for hotels. Financial activity forecasting is crucial to give you a big-picture view of the expenses, risks, and profit opportunities coming up for the coming year.
We understand that budgeting for your hotel is not an easy task. Guest blogger Lidia Staron shares with you some tips to make the process easier.
Use driver-based calculations
This approach prioritizes the primary elements of your hotel that influence its financial performance instead of listing down specific items as expenses. Doing so will give your budget more adaptability. Using a straight input method in your budgeting will require constant reviews and edits whenever the values change, after all.
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One common misconception about business budgeting is that it’s a financial process solely focused on expenses. The truth is, that’s only the tip of your budgeting iceberg. In fact, we recommend prioritizing revenue forecasting. At the very least, you want to make sure that your projected operating cash flow will generate sufficient profit to keep your establishment afloat until the next budgeting season.
Each element of your business operations has a distinct ratio of spending and value. Take for instance your service hours and occupied rooms. Suppose one housekeeper spends 30 minutes per occupied room for a particular service property. How much will that length of service translate into spending? More importantly, how much will it impact your guest satisfaction score?
Now, determine how your potential costs and profit per room will change if you adjust the service time to shorten or lengthen it. The goal is to find a balanced ratio that will minimize expenses, service time, and still meet an excellent guest satisfaction level. This ratio will become your standard. The best thing about developing standards is that they can serve as data-based formulas, later on, to help determine each element’s ideal levels to factor them into your budgeting plan.
For instance, how much labor will you need to meet your established standards? How much spending is required to pay for your employees’ hours?
Use operational factors to determine the value of the budget
As you might have concluded in the previous point already, there are various operational factors that you need to consider when determining your budget values. Service hours and guest satisfaction levels are but two of them.
Weather and upcoming annual events are other factors that you might want to consider as well. For instance, a resort located in a tropical country expecting an upcoming rainy season must prepare for a possible decrease in occupied rooms during the monsoons. Meanwhile, you can expect an increase in occupied rooms during the festivities that your locality celebrates annually.
There is certainly a wide range of values and formulas that go into your financial forecasting and budgeting. To make matters worse, you will sometimes be required to perform the calculations on your own. For instance, how do you calculate RevPAR?
Quick side note: RevPAR, which stands for revenue per available room, is one of the most important metrics that you need to determine in your budget. It refers to the profit potential of each available room when occupied.
However, you also need to keep in mind drivers or factors vary according to the establishment. Don’t overcomplicate things. Instead, focus on the elements that are the most relevant to you and take advantage of online tools to streamline your approach.
Review the monthly trends
There is much insight that can be gained from historical data. However, do not overlook recent trends as well. This works best when you’re trying to adjust your budget after unpredictable events. Improve your computations’ overall accuracy by looking into both past and recent trends in your forecasting.
Don’t know what to include in your financial analysis? Here are some items you should consider:
Year-Over-Year P&L variance
As mentioned, budgeting’s main objective is to give you the big picture of your potential financial performance in the upcoming year. One of the easiest ways to get an overview is determining your year-over-year profit and loss variance. This will give you an idea of how your establishment is performing annually based on your average revenue and loss. Is your business improving? Has it reached a plateau? Or are you actually experiencing a slow yet steady decrease without you noticing it?
Labor productivity performance
Another important item to calculate is labor productivity performance. How productive are your employees? Relate your calculations to their working hours, salary, job satisfaction levels, and guest satisfaction levels.
Knowing these data can give you an advantage when planning your next moves this upcoming year.
Fixed labor attrition
Finally, don’t forget to account for your labor attrition. Fixed labor attrition is the predictable rate that your employees leave your workforce (such as retirement and resignation rates). It can also include any plans for downsizing your employee pool in the future. Having this information ready helps in calculating labor costs and preparing for potential dips in future productivity.
Budgeting for your hotel or resort shouldn’t be a challenge. There are various tools that can help make the process more manageable and streamlined. What’s more important, though, is to determine the values or elements that you’re going to include in your financial reports. Choose only those that are relevant to you. You can just gradually develop your annual budget by adding more driving factors as you see fit to further refine your projections and planning. Good luck!
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