Vetting and re-vetting a budget requires nimbleness, creativity and collaboration—and the work carries over far after budget season ends.
Vetting the budget and reaching consensus is an effort that plays a crucial role in setting a property up for success the following year.
It requires review of the hotel’s prior performance, economic trends, tourism flows and market events and performance, to name a few. Numerous parties are involved, including hotel owners, operators and asset managers.
However, the hard work continues well after the budget is approved. Re-vetting assumptions and adjusting strategy based on diligent revenue management and unanticipated events and expenses is critical to ensure that a hotel achieves profitability.
Budget season spans from late summer through mid-December. Typically, the hotel’s management team will start the process by putting the initial, proposed budget together by reviewing prior years’ performance and factoring in growth rates. The team will also compile a day-by-day analysis of expected hotel performance, which includes factors such as the convention center calendar, city events and groups already on the books. Then, based on the top line, the team will budget for the rest of the line items, such as labor impact or changes in management. Of course, this is a simplified summary of the initial steps taken to assemble a budget.
We recommend challenging hotel teams to take a more ambitions approach to budgeting. Instead of using last year’s budget as the starting point, use a zero-base budget approach as a performance improvement initiative. Expenses must be justified for each new budget period based on demonstrable needs and costs.
Budgeting also requires an element of forecasting, and timing is everything when it comes to establishing the best possible budget. Budgets need final approval by mid-December, and I’ve seen many asset-management teams first see the proposed budget during the first two weeks of November. Budget planning may be time-consuming, but it is a critical part of a hotel’s success, and I’ve seen some of the biggest successes occur when the asset-management team gets involved sooner rather than later.
Reviewing top-line assumptions early in the process allows the asset-management team to best undestand the hotel’s revenue management, compile thoughtful questions and perform benchmarking exercises prior to meeting with the hotel management team for a presentation of the budget, candid review and constructive dialogue. The importance of strong benchmarking cannot be underestimated. Data sets including prior market performance, supply pipeline trends and local government policies—to name a few—are used and every scenario is explored. For example, our teams start the budget process in August with a day-by-day revenue-management analysis for the following year. By the end of this meeting, everyone is comfortable with the baseline of top-line assumptions.
Additionally, budget negotiations often go back and forth several times before gaining consensus. Determining assumptions six months before a budget will be officially put into place requires healthy debate and diligent vetting—the better informed the entire team is and the longer they’ve had to discuss, the more strategic the direction will be.
However, vetting the budget is only the first step. Now comes the ongoing re-vetting work.
Meeting budget expectations is the bare minimum goal. Over the course of the year, the hotel management and asset-management teams must look ahead to anticipate economic trends, policy updates and convention-center events to understand what adjustments may need to be made in order to meet or exceed budget.
Much of this comes down to revenue management and flow-through analysis. Whether the budget is overperforming or underperforming, review, assessment and adjustment is an ongoing practice.
If the hotel’s top line is performing better than what was budgeted, it is tempting to be less diligent to costs and potentially overspend—after all, the extra money is there! However, the team must anticipate unexpected events, monitor controllable expenses and closely watch the flow-through.
If there is excess cash at the top line, it should flow to the bottom line and asset managers should advise ownership on how much. If the top line is proving challenging to achieve, asset managers should take a defensive position and identify cost-saving measures.
The biggest cost-saving measure is labor, and it is also the most difficult to achieve. Labor cost-saving strategies may include implementing a labor-management system or making labor management a daily priority at every level throughout your organization. Properties must integrate proactive labor management practices into their culture at every level of the organization from corporate leadership to the front-line supervisor.
Additionally, reducing or postponing larger purchases such as new linens or furniture is another tactic that can help trim a budget.
Of course, there will always be unanticipated events. Weather can play a major role in affecting demand. For example, in a northern Midwest market, a cold weather spell resulted in a RevPAR decrease of nearly 25%. Crime is another event that is out of hotel team’s control, but unfortunately occurs. We believe ‘the best defense is a good offense.’ Teams must be nimble and ready to adapt with a plan ready to enact.
It is also important to monitor how dollars are being spent. The budget may remain the same, but the allocation is different. Let’s consider the sales and marketing budget: The cost of reservations is going up and there are more ways than ever to connect with current or potential guests. Whether you are investing in direct booking, mobile apps or loyalty programs, it is important to make sure you are mindful of the budget when employing new strategies.
Vetting and re-vetting a budget requires nimbleness, creativity and collaboration—and the work carries over far after budget season ends. By building a strong team atmosphere and engaging early, the most strategic budget can be put into place.
Andrea Grigg is Managing Director and head of Americas Asset Management for JLL Hotels & Hospitality.
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