Budget - the word that makes the world go round! And for good reasons. The simple truth of life is that we all need money to do anything - personal or business. In the hospitality industry, cash is everything. Hotel budgeting is essential to manage expenses and increasing profitability.
Hoteliers need to incur various costs to run a hotel. There are various expenses related to food and beverage, hotel staff, toiletries, bedding, towels, sanitary items, hotel maintenance, cleaning equipment and so forth. Hotel budgeting is the only way to manage all these costs efficiently.
Here, we will guide hoteliers on how to do hotel budgeting, and the various strategies to achieve those goals.
What Is A Hotel Budget?
Hotel Budget is a spending plan for hotels. It lists down all the major costs that will be incurred by the hotels, along with the revenue that they will gain. It also takes into account past data as well. In short, it estimates how much money the hotel will make, and how much money will it spend.
A Budget makes a comprehensive list of all the hotel expenses and revenue and in the end, calculates whether the hotel will be in surplus i.e more income than expenses, or in deficit i.e more expenses than income. Ideally, hotels need to be in a budget surplus if they want to keep their business afloat. It is only then the company will earn profit.
A budget is usually calculated on an annual basis. Hotel budgeting involves calculating the various costs that will be incurred in the financial year, and the projected revenue as well. It is a form of forecasting.
Major Hotel Expenses
Before we discuss how to do hotel budgeting, we will need to discuss the major hotel expenses in detail. Hotel expenses can be divided into 2 types - Fixed costs and variable costs.
Fixed costs are those that have to be incurred by the business irrespective of any revenue gained. On the other hand, variable costs are those that depend on the output of the product or service produced by the establishment.
Keeping this in mind, let us discuss the various costs, which are major factors in hotel budgeting.
Fixed Costs
The first type of cost are fixed costs. These are called so because it is constant and incurred irrespective of the level of output. Even if the hotel has low occupancy, or worse, no occupancy, the hotelier will still have to incur these expenses to continue running the business.
These costs are incurred to start the business as well, even before you get your first business. They constitute a major chunk of hotel budgeting.
Some examples of fixed costs are:
Human Resource Costs
Rent And Property Related Costs
Hotel Management Costs
Hotel Technology Costs
Contract Services Costs
It doesn’t mean that the fixed costs don’t change. It means that these costs do not depend on the level of output or occupancy. They are predictable and you can exactly know how much they can increase or decrease.
Variable Costs
On the other hand, variable costs are those that fluctuate based on the level of output. Here it refers to the number of guests staying at the property. Higher the hotel occupancy, the higher the variable costs. Generally, variable costs are manageable, if higher occupancy leads to more revenue. Some of the variable costs include:
Utilities like water and electricity
Food and Beverage costs
Hotel marketing costs
OTA commissions costs
Linen and Laundry Expenses
Expenses on toiletries and sanitary items
Employees who are paid on an hourly basis
Variable costs are controllable, but they are unpredictable. Hotel budgeting needs to anticipate variable costs based on hotel occupancy.
Types Of Hotel Budgeting
Now that we have discussed the basics related to hotel budgeting and costs. Let us now discuss the various types of budgets a hotel formulates. These various types of budgets have different utilities and are important for the hotel business.
Consolidated Hotel Budgeting
In a consolidated budget, the income and expenses of the entire hotel are considered. It then calculates the costs, revenue and profit/loss of all hotel departments together. This gives an overall view of the hotel.
Department Based Budgeting
Here, every department is considered to be a separate entity. The budget is calculated by considering the fixed and variable costs incurred by that department. Departmental budgets are also an important aspect of hotel budgeting since hotels also have to focus on specific departments to optimize the overall cost efficiency of hotels.
Operating Budgeting
Operating Budgeting considers variable costs. These are known as operating costs because they are essential for operating the business. Expenses on food perishables, marketing costs, utility expenses etc, are considered while preparing an operational budget.
Capital Budgeting
This type of budget calculates the expenditure that will be incurred on capital expenditure. Capital expenditure is on undertaken to acquire fixed assets that will provide long-term growth and operational efficiency for hotels. For example, expenditure on vending machines, coffee machines, swimming pools, restaurant infrastructure etc., are the various types of capital expenditure.
Steps In Formulating A Hotel Budget
Now that we have discussed the various aspects of hotel budgeting, let us now discuss the steps to follow while formulating a budget.
Step 1 - Collect Data
One cannot prepare a budget or any report without adequate data. Without information on previous budgets and the expenses related to hotels, you will create a hotel budget that will do more harm than good.
Accurate and comprehensive data needs to be at your fingertips. However, the data is not important merely during budgeting. They are essential throughout the hotel business. Hotels need to have data on RevPAR, ADR, ALOS, and other important hotel key performance indicators. Only then a hotel can prepare an accurate budget.
Step 2 - Define Objectives
After collecting data regarding past performance and expenses, you can define attainable objectives for your hotel. Having an objective is essential because it is only then you can optimize your hotel performance to gain the revenue and profits you desire, along with a higher occupancy rate.
You can set various goals for your hotels - such as increasing star ratings, increasing customer engagement, or even increasing your followers on Instagram. The only way to define optimal goals is to know your past performance, and only with optimal goals in mind, you will be able to achieve business growth.
Step 3 - Estimate Operating Expenses
Operating expenses are also known as variable costs. Hotels can easily predict their fixed costs, however, estimating operating expenses requires forecasting. Operating costs are the day-to-day costs required to run a hotel business.
Operating expenses include raw materials, perishables, toiletries, repair costs, and other variable costs. To predict future variable costs, hoteliers need to go through all the previous year's data and then estimate the future operating expenses.
Step 4 - Demand Forecasting
Demand forecasting is essential for price management, yield management and revenue management as well. Demand forecasting involves predicting future demand for hotels. One can do this by using a demand calendar.
A demand calendar maps out the demand based on the time period. It looks like a regular calendar that provides data about the demand for various time periods. This way, you can allocate resources for days when the demand will be higher i.e the peak season.
Step 5 - Allocate Some Funds For Emergency
Last but not the least, you need to allocate some emergency funds for unforeseen expenses as well. As Covid-19 Pandemic demonstrated, anything can happen and the hospitality industry is among the most vulnerable to any emergency or shutdown.
That’s why hotels need to keep some emergency funds to tackle any unforeseeable situation. This way, hotels have a buffer as well.
With these steps, you will be able to prepare a hotel budget that will meet all your goals of revenue management, increase occupancy, and business growth. Read our blogs to know more about the hospitality industry.