Your hotel’s annual budget takes into account a number of aspects. You need to calculate what your expenses are likely to be for the year and establish cost-cutting strategies so that your hotel is able to operate more efficiently. You also need to take into account your historical data, analyse demand behaviour, and identify market trends. Much of this is similar to hotel forecasting, which sometimes leaves hotel and revenue managers confused.
With this in mind, today we are going to explain what an annual budget is, and how it differs from your financial forecast. You will understand exactly what steps you need to follow in order to prepare an effective annual budget each year.
What is an annual budget?
One of the many important functions of revenue management is creating your annual budget. Most hotels will prepare their annual budget for the next year around November or December. This is usually a shared task, where revenue managers create a revenue budget, and hotel managers work on cost budgeting.
The annual budget serves a number of purposes. For one thing, it helps you predict what your hotel’s occupancy and RevPAR will be during the next year so that you can allocate costs and plan your internal operations accordingly. The more precise your budget is, the more efficiently your operations will run. A detailed annual budget will also help you plan the right levels of inventory and human resources so that you are prepared for high and low occupancy periods.
In terms of the annual budget report itself, the most commonly used accounting method, which should be the basis for all your budgeting processes, is USALI.
The acronym USALI stands for the Uniform System of Accounts for the Lodging Industry. Essentially, it is a specific accounting system that is used by all businesses working in the hospitality sector. The system includes a number of definitions relating to revenue so that hotels can conduct a comparative analysis between different operations and departments. This includes general room sales as well as the various types of ancillary revenue streams within a business.
Why you should adopt a total profitability approach with your annual budget
When you create your annual budget, it’s important to adopt a total profitability approach. This means working with all the departments within your hotel so that you include all ancillary revenues and costs in your annual budget.
For example, the individual departments within a hotel, such as housekeeping and catering, should all create their own budgets in line with their anticipated revenue and expenses. These budgets can then be consolidated into an overall hotel budget by your hotel’s financial staff. The general manager can then review this annual budget for the year and adjust where necessary.
Using a total profitability approach helps you avoid information silos so that you are clear on all costs that your hotel will incur the following year, including distribution costs and customer acquisition costs, for example. That way, there are no unexpected surprises that might take you over budget the following year.
Annual budget vs. forecasting: key differences
The processes of hotel forecasting and budgeting are both very similar in terms of the steps involved. Both require you to collect historical data, analyse the market, predict demand behaviour, and identify trends. However, there are some key differences between the two concepts that you need to be aware of.
Let’s take a look at these differences to help you understand the approach you need to adopt when you create your annual budget.
Purpose & objectives
The first key difference relates to the purpose and objectives of each process.
Your annual budget is a strategic plan that considers your financial position, cash flow, and goals. It helps you quantify the revenue you want to achieve in the next financial period. In contrast, your annual forecast is about predicting the results you expect to achieve in reality, based on your historical data. Although both processes work in line with each other, they both serve a very specific purpose.
Think of your annual budget as your roadmap that guides the direction that you want to take, and your forecast as a reflection of the direction you are actually taking. One is about establishing specific goals, and the other is about the reality of your progress towards achieving these goals. In other words, whether or not you are actually sticking to your annual budget.
Ultimately, your budget is your baseline, and your forecast determines which adjustments you need to make to your budget objectives the following year.
The other key difference between your annual budget and your forecasting reports relates to the timeline of each task.
Your annual budget is a document that you create at the end of each year in preparation for the next financial period. You can create a more long-term budget that anticipates your growth over the next 3 years if you prefer. At a minimum, your budget needs to be established on an annual basis.
Your forecasts, in contrast, are usually calculated more frequently. It is more of a short to medium-term form of reporting that should be conducted at least once every quarter. This helps you to keep track of your budget from one period to the next so that you can make adjustments whenever necessary and avoid situations where you might go over budget.
You should monitor the information you collect for your financial forecasts on an ongoing basis. This includes market data, consumer trends, demand fluctuations, and competitor rates. That way, you have access to all the metrics you need in real-time. So that you can make data-informed decisions when you create your annual budget each year. This will ensure you are able to clearly define the direction your business needs to take in order to secure revenue growth and build a profitable business model going forward.