Budgeting and Forecasting

Hotel Finance Course

A Comprehensive USALI-Compliant Guide

Module 6:

Budgeting and Forecasting

Planning and Predicting Hotel Financial Performance

Module 6: Budgeting and Forecasting

Welcome to Module 6! You've learned how to read financial statements, understand cost behavior, and measure performance with KPIs. Now we'll explore how to plan for the future through budgeting and forecasting---two of the most important financial management tools.

Budgets set expectations and provide targets. Forecasts predict outcomes and allow course corrections. Together, they transform hotel financial management from reactive to proactive. This module teaches you to build realistic budgets, create accurate forecasts, analyze variances, and use these tools to drive better decisions.

Learning Objectives

By the end of this module, you will be able to:

• Distinguish between budgets and forecasts

• Build an annual hotel operating budget

• Create monthly forecasts and reforecasts

• Conduct variance analysis to understand performance

• Use different budgeting approaches effectively

• Apply forecasting techniques for better accuracy

Budgets vs. Forecasts: Understanding the Difference

Many people use these terms interchangeably, but they serve different purposes:

The Annual Budget

Definition: A financial plan for the upcoming year that sets targets and allocates resources.

Key Characteristics:

• Created once per year (typically October-December for next calendar year)

• Establishes performance targets and expectations

• Sets spending authority and resource allocation

• Used for performance evaluation (actual vs. budget)

• Generally NOT changed mid-year (remains the baseline)

• Approved by ownership/board

Purpose: Planning, target-setting, performance measurement, resource allocation

Forecasts

Definition: A prediction of what WILL happen based on current trends and known factors.

Key Characteristics:

• Updated regularly (monthly, quarterly, or more frequently)

• Reflects current reality and expectations

• Used for decision-making and course correction

• More accurate than budget (incorporates latest information)

• Changes as circumstances change

• May not require formal approval

Purpose: Prediction, early warning, operational planning, cash flow management

CRITICAL DISTINCTION: Budget = 'What we PLAN to achieve.' Forecast = 'What we EXPECT to achieve.' Budget stays fixed. Forecast updates continuously. Both are essential but serve different functions.

Example:

January 1: Budget says 72% occupancy for March

February 15: Major convention cancels

- Budget still shows 72% (doesn't change)

- Forecast updates to 65% (reflects reality)

- Management uses forecast to cut expenses

- Performance still measured vs. budget (target)

The Annual Budget Process

Creating the annual budget is one of the most important management activities. It typically spans 2-3 months and involves the entire management team.

Budget Timeline

Typical schedule for calendar year budget:

• September: Ownership provides guidelines and targets

• October: Revenue team develops occupancy and rate assumptions

• November: Department heads build department budgets

• Early December: Finance consolidates, reviews, adjusts

• Mid-December: GM and CFO present to ownership

• Late December: Final approval and communication

Building a Budget: Step-by-Step Process

Step 1: Establish Revenue Budget

Start with revenue because it drives everything else. Revenue budgets require detailed analysis:

A. Analyze Historical Data

• Review last 3 years of monthly performance

• Identify seasonal patterns

• Understand anomalies (one-time events)

• Analyze segment mix (transient, group, contract)

B. Consider Market Conditions

• Economic outlook for your market

• Competitive supply changes (new hotels opening?)

• Demand generators (conventions, corporate activity)

• Industry forecasts (STR, brand projections)

C. Account for Property-Specific Factors

• Renovations planned (may impact rooms available)

• New amenities or services

• Changes in sales strategy or team

• Group bookings already on the books

D. Build Bottom-Up Detail

• Budget occupancy by segment by month

• Budget ADR by segment by month

• Calculate rooms revenue (rooms × ADR)

• Project F&B revenue based on capture ratios

• Estimate other operated department revenue

Revenue Budget Example - March:

Available rooms: 6,200 (200 rooms × 31 days)

Budgeted occupancy: 75%

Rooms sold: 4,650

Budgeted ADR: $155

Rooms revenue: $720,750

Step 2: Budget Department Expenses

Department heads build expense budgets for their areas. Three approaches are common:

Approach 1: Incremental Budgeting

Start with current year actuals, adjust for known changes.

Process:

1. Take current year expense

2. Add inflation (wages, supplies)

3. Adjust for volume changes

4. Add new initiatives

Incremental Example - Housekeeping:

2025 Actual Labor: $450,000

+ Wage increase (4%): $18,000

+ Volume adjustment (3% more rooms): $13,500

2026 Budget: $481,500

Pros: Quick, easy, uses known baseline

Cons: Perpetuates inefficiencies, doesn't challenge status quo

Approach 2: Zero-Based Budgeting

Build budget from scratch, justifying every dollar.

Process:

5. Ignore past spending

6. Identify required activities

7. Cost each activity from scratch

8. Justify necessity of each expense

Pros: Questions everything, eliminates waste, finds efficiencies

Cons: Time-consuming, requires significant management effort

Approach 3: Activity-Based Budgeting

Link expenses to specific activities and volumes.

Process:

9. Identify key activities (clean room, serve meal, process invoice)

10. Determine cost per activity

11. Multiply by projected volume

Activity-Based Example:

Activity: Clean one room

Cost: $12 labor + $6 supplies = $18

Projected rooms to clean: 24,000

Variable budget: $432,000

+ Fixed costs (supervisors): $96,000

Total budget: $528,000

Pros: Ties costs to drivers, enables what-if analysis, very accurate

Cons: Requires detailed cost data, more complex to build

BEST PRACTICE: Most hotels use incremental budgeting for speed, but incorporate zero-based thinking periodically (every 3-5 years) to reset baselines and eliminate accumulated inefficiencies.

Step 3: Budget Undistributed Expenses

Finance leads the budgeting of undistributed expenses (A&G, S&M, POM, Utilities) in collaboration with department heads.

Key Considerations:

• Administrative & General: Mostly fixed. Budget salaries, benefits, systems, professional fees. Target: 6-8% of revenue.

• Sales & Marketing: Mix of fixed (salaries) and variable (commissions, some advertising). Include brand fees if applicable. Target: 5-8% of revenue.

• POM: Include preventive maintenance plan, anticipated major repairs, landscaping contracts. Target: 4-6% of revenue.

• Utilities: Estimate based on rates, historical usage, and volume assumptions. Budget per occupied room. Target: 3-5% of revenue.

Step 4: Calculate GOP and Below-the-Line Items

After budgeting revenue and expenses, calculate profitability:

• GOP: Total Revenue - Department Expenses - Undistributed Expenses

• Management Fees: Per contract (typically 2-4% base + incentive)

• Fixed Charges: Property taxes, insurance, rent (if applicable)

• Depreciation: Per accounting policy

• Interest: Based on debt structure

Step 5: Review, Iterate, Finalize

First draft rarely meets ownership expectations. Typical iteration process:

12. Finance consolidates all department budgets

13. Calculate total property GOP and margins

14. Compare to ownership targets

15. If gap exists: Identify revenue opportunities or expense reductions

16. Revise and resubmit

17. Final approval

18. Communicate to all managers

Forecasting: Predicting Actual Performance

While budgets are created once annually, forecasts update regularly to reflect current reality and expectations.

Types of Forecasts

1. Rolling 30/60/90-Day Forecast

Short-term operational forecast, typically focused on rooms revenue.

Purpose: Labor scheduling, inventory ordering, daily operations

Frequency: Updated daily or weekly

Detail: Day-by-day occupancy and rate

2. Monthly Forecast

Full P&L forecast for the current month, updated mid-month.

Purpose: Understanding if month will meet budget, early warning system

Frequency: Mid-month update

Detail: Complete income statement

3. Quarterly Reforecast

Full-year forecast updated quarterly, replacing outdated budget assumptions.

Purpose: Realistic full-year expectation, cash planning, ownership communication

Frequency: Quarterly (after Q1, Q2, Q3 close)

Detail: Complete monthly P&L for remainder of year

IMPORTANT: Keep budget and forecast separate. Budget = Target. Forecast = Prediction. Don't 'rebud get' mid-year. Instead, track actual vs. budget (performance) AND actual vs. forecast (prediction accuracy).

Building Accurate Forecasts

Best Practices for Forecast Accuracy:

19. Use Actual MTD (Month-to-Date)

For current month forecasts, always start with actual results through yesterday. Only forecast the remaining days.

Example - March 15 Forecast:

Actual through March 14: $320,000

Forecast March 15-31: $395,000

Total March Forecast: $715,000

20. Incorporate On-the-Books Data

Your reservation system knows about reservations already booked. Use this data!

21. Apply Pick-Up Patterns

Historical data shows typical booking patterns (how many rooms book 30 days out, 14 days out, etc.). Apply these patterns to estimate additional bookings.

22. Consider Known Events

Citywide conventions, concerts, sports events, holidays---factor in all known demand generators or disruptors.

23. Adjust for Trends

If YTD performance is trending 5% above budget, consider whether this trend will continue.

24. Get Department Input

Revenue managers know booking pace. Department heads know expense timing. Incorporate their insights.

Variance Analysis: Understanding Performance

Variance analysis compares actual results to budget (or forecast) to understand WHY performance differed. This is one of the most valuable financial management activities.

Types of Variances

Favorable Variance (F): Actual results BETTER than budget

• Revenue higher than budget

• Expenses lower than budget

Unfavorable Variance (U): Actual results WORSE than budget

• Revenue lower than budget

• Expenses higher than budget

Sample Variance Analysis Report

---

Line Item Budget Actual Variance $ Variance % F/U

---

REVENUE

Rooms $720,750 $735,000 $14,250 2.0% F

F&B $195,000 $188,000 ($7,000) -3.6% U

Total Revenue $915,750 $923,000 $7,250 0.8% F

EXPENSES

Rooms Dept $108,113 $110,250 ($2,137) -2.0% U

F&B Dept $136,500 $143,800 ($7,300) -5.3% U

Labor (Total) $293,445 $305,195 ($11,750) -4.0% U

GOP $402,930 $398,450 ($4,480) -1.1% U

Analyzing the Variances

Looking at the variance report above, here's the story:

• Revenue: Slightly favorable overall (+$7,250). Rooms beat budget by 2%, but F&B missed by 3.6%. Need to investigate why F&B underperformed.

• Rooms Expenses: Unfavorable -$2,137. This is concerning because rooms revenue BEAT budget, so expenses should not have exceeded budget. Likely overtime or higher-than-expected OTA commissions.

• F&B Expenses: Significantly unfavorable -$7,300 (5.3%). Combined with lower F&B revenue, this is a serious problem. Both sides (revenue and expense) missed---investigate immediately.

• Labor: Unfavorable -$11,750 (4.0%). Labor exceeded budget despite revenue barely beating it. Poor flow-through indicates labor management issue.

• GOP: Missed budget by $4,480 despite revenue beat. Expenses grew faster than revenue---classic cost control problem.

ACTION REQUIRED: This variance analysis reveals specific problems: F&B performance (both revenue and costs), labor management across property, and cost control generally. Management should investigate F&B operations first, then review labor scheduling practices.

Module 6 Summary

Congratulations on completing Module 6! You now understand how to plan hotel financial performance through budgeting and predict outcomes through forecasting. These tools transform financial management from reactive to proactive.

Key Takeaways

25. Budgets and forecasts serve different purposes---budget sets targets and stays fixed, forecast predicts reality and updates continuously.

26. Budget building starts with revenue and works through departments systematically, requiring 2-3 months of effort.

27. Three budgeting approaches (incremental, zero-based, activity-based) each have strengths---choose based on your situation.

28. Forecasts should use actual data (MTD actuals, on-the-books reservations) plus pickup patterns and trends.

29. Variance analysis identifies problems by comparing actual to budget---favorable/unfavorable patterns reveal where to focus attention.

30. Update forecasts regularly---30/60/90-day for operations, monthly for current month, quarterly for full year.

Looking Ahead

You've now mastered the core components of hotel financial management---statements, metrics, cost behavior, and planning. The remaining modules dive deeper into specialized topics. Module 7 explores cash flow management---understanding how cash moves through your operation, why profit doesn't equal cash, and how to ensure you always have enough liquidity to operate smoothly.

--- END OF MODULE 6 ---

Continue to Module 7: Cash Flow Management