We’re well into budgeting season, and after a whirlwind two years of unfathomable closures and disruptions to hospitality, compiling and sticking to hotel budgets in 2020 and 2021 has been near impossible.
Financial management in this industry has hit new heights of difficulty when manoeuvring the inconsistency of travel rules, regional regulations, supplier shortages, the impact of Brexit and many more factors. Therefore, how has the approach to effective budgeting had to change?
RBH Hospitality Management’s Finance Director, Stuart Houston has shared five of his top financial tips for the management of hotel budgets in the current climate:
Set realistic assumptions
While we’re typically taught never to assume, there are certain assumptions based on historical data that we have to make when approaching a new budget. This is where budgeting conversations should start – what do we expect to be the narrative of the next year? The first conversation should not be initiated by a numeral revenue target without any basis of how to achieve it. The financial goals come once the assumptions are made. These can often include market growth levels, RGI target, increases in supply, and cost and wage inflation levels. It is imperative that these assumptions are reviewed periodically to ensure that they still hold true throughout the year. This is the best way to align performance with financial projections.
Scrutinise the revenue predictions
As overall costs and profit will be largely dependent on accurate revenue forecasts, it’s important that these are heavily scrutinised. Greater guidance is required from hotel owners on understanding every aspect of recent cashflow to advise the initial budget, and from then on should be revisited on a monthly basis as part of a rolling forecast process. This allows for inevitable change in the landscape to be factored in and to adapt accordingly. The 2019 budget is likely to be far more useful than 2020’s, though cost base is going to be significantly higher.
Understand which costs can be flexed to recover any shortfall in turnover
Some costs are fixed and can’t be influenced, e.g. business rates, insurance, cleaning a room after a stay etc. Others are discretionary in nature, and you can decide when and how they need to be implemented. These might include maintenance spend, replacing cutlery and other supplies, marketing or sales spend, recruitment and additional payroll spend. There tends to be a lot more flexibility to the timescale of these which, when carefully considered, can help recover in shortfall in turnover by reducing the cost.
Ensure engagement across the entire team
The budget should be influenced by every department to help determine costs in the first instance. Understanding the major challenges, struggles and opportunities, based on supplier relationships and consumer trends will form the basis of a constructive budget.
At RBH, this starts with the revenue manager for each property with input of the commercial functions (revenue management, sales and marketing) generating an expectation of rooms revenue and occupancy and rate. This is supplemented by cost guidance from area experts in facilities management, IT, legal, HR, sales, marketing, revenue, finance and procurement. The hotel general manager and HOD team then take these inputs and build a bottom-up budget of what they aspire to achieve over the coming year. This is then reviewed by the RBH divisional operations director and divisional financial controller who can add the oversight, review and comparison to other properties. The final budget is then pitched by the general manager and RBH ops team to the RBH managing director and finance director, prior to the last stage of owner presentation and feedback before this is finalised. This ensures a 360-degree understanding of the budget, and, more importantly, how to achieve it.
Identify any challenges early and build an action plan to deal with these
Don’t think a ‘Hail Mary’ will save the day and recover accumulated built up short falls. This rarely happens, so it is far more important to identify challenges very early through scenario setting and making sure an appropriate action plan is in place to deal with these. Although it’s best to consider various scenarios, I am a believer in just one budget. Then, if an assumption is made and it becomes clear over time that it’s unlikely to happen, the plan can be changed.