Do you think Hotel Forecasting really produces business results?

Let me use a metaphor here.

Consider yourself an archer with a bow and arrow.

How would you asses your success with the bow and arrow tools?

Number of times you hit bulls eye out of ten tries?

How close you were to hitting bulls eye?

And so on.

In your hotel’s case, bulls eye may not be possible all the time.

However, your planning process must produce more than acceptable business results.

Right?

So, does your hotel forecasting achieve that?

I will lay out 5 tips which are basics that will help your hotel forecast better to achieve your business results

Not just achieve once, but consistently.

More importantly not missing revenue targets.

You would want that right?

Let’s dive in.

This Blog Post will cover:

Does Hotel Forecasting Really Produce Business Results?

A hotel like any other business undertaking needs to know whether it is successful.

Success is commonly measured by business results.

Business results may mean revenue, profit, occupancy, average rate, etc.

One of the critical tools to achieve business results is to anticipate factors that contribute to that.

In other words, the planning process.

Hotels commonly use budgeting and forecasting as planning tools.

Let us quickly understand the difference between budgeting and forecasting.

You could say that budgets and forecasts are identical in some ways and different in some others.

But a caveat here.

Both Budgets and Forecasts deal with estimates and are based on assumptions.

That itself should give room for exercising care.

Forecasts are subsets of budgets.

In other words, a smaller form of a budget.

With some key differences as well.

A budget is for longer periods, normally a year.

In comparison, a forecast is mostly on a monthly basis.

Critically, forecasts are adjustments made to a budget.

These adjustments are made as each month of actual performance is completed and recorded.

Hotel Managers often do not realize this important element of forecasts.

Your Current Month Performance affects your forecast for the future!

But it will not affect your budget.

Budgets are static.

Forecasts are dynamic.

Understanding this goes a long way to producing consistent business results.

And avoid frustration.

Having known this difference, it is time to talk about the 5 tips.

Tip 1 - Get Your Forecasting Process in Order

A tool is only as good as how it is used.

The sharpest knife is useless if it is not utilized appropriately.

And so is a hotel forecast.

The forecasting process is anchored by three critical performance indicators:

1. Annual Budget
2. Actual Performance
3. Planned Business Volume

The starting point for a hotel forecast is an annual budget.

You could say that a hotel forecast operates within the framework of a budget.

It is not restricted by the budget in any way though.

Although the budgeting process is an annual one, it has its monthly building blocks.

Meaning monthly revenue, expenses and profit are set within the year budget.

We saw earlier that forecasts are dynamic.

How so?

Because, they are affected by actual performance.

For example, actual room revenue for a month may be much lower than the budget.

This will affect the forecast for future months.

Meaning, revenue projections in the forecast may have to be scaled down.

It is thus crucial to have an effective, monthly process in place.

This monthly process will adjust forecast amounts based on actual performance.

The third and an integral part of the forecasting process is business volume.

In a hotel’s case, occupancy is the most common business volume.

The annual budget will lay out the planned occupancy levels for each month of the year.

Revenue and expenses which vary based on the occupancy in a month are planned as well.

So, a forecast will use business volume often to adjust revenue and expenses:

• compared to the annual budget and
• based on the latest actual results.

It is a monthly cycle that is repeated.

The cycle largely determines effectiveness of producing business results.

Tip 2 - Know Your Business Results Triggers Well

One of the most difficult decisions to take in the hotel operation is relating to months when business volume dips.

It is when your occupancies come down sharply that some typical problems surface.

Business volume is represented by hotel occupancy.

It can be called the occupancy trigger.

Occupancy is one of the triggers that contributes to hotel revenue.

Peak occupancy will bring with it problems associated with a high volume operation.

This is for example, equipment breaking down (to be replaced or repaired quickly) and employees getting stressed out.

It will boil down to good planning and scheduling for varying levels of occupancy.

On the other hand, price is another factor that contributes to business results.

Price is represented by average daily rate in the hotel industry.

It can be called the average daily rate trigger.

Between occupancy and average daily rate triggers, they contribute to hotel room revenue.

Using forecasting to adjust budgets for actual performance is the road to better business results.

Are you paying attention to this?

In this process, occupancy and average daily rate play key roles.

When these two performance indicators are combined, a powerful new measure emerges.

That Key Performance Indicator is called RevPAR.

Forecasting RevPAR performance accurately is central to boosting business results.

Tip 3 - Understand Your Seasonal Business Volumes Inside Out

In the earlier section, we briefly talked about business volumes or occupancy.

The hotel is a seasonal industry.

There can be months of different business volumes in the same year.

A common classification is standard, lean and peak months.

There is no set definition of what is standard, lean or a peak month.

However, approximately, a peak month could be upwards of 75% occupancy.

A lean month on the other hand could be in the 40% level.

Standard months are between peak and lean months.

Why is this important to understand in hotel forecasting?

This is simply because a peak month of occupancy for the most part will mean peak revenue as well.

On the other hand, a lean occupancy month will show lean business results.

Lean business results can mean:

• Low revenue
• Low profitability or
• both

So, getting a hang of which parts of the year are peak and lean months is paramount.

It will literally determine the level of your business results.

Tip 4 - Realize Stages of Hotel Forecasting in a Year

Which part of the year are you presently at?

This is crucial in determining

• what is past and
• what can be influenced for the future.

What do I mean by that?

Let me explain.

Let us use a simple timeline.

This timeline is about how forecasts are influenced by which part of the year you are in.

Example

Say you are forecasting for the month of March (Forecast prepared in the first week of April).

Your Forecast will involve:

• 9 months of future projection and
• 3 months of actual performance

Assume that for the first 3 months of the year (January to March):

• you are behind in actual revenue and
• profit compared to forecast.

This means that Year-To-Date, your revenues and profit are showing a negative variance.

This also means that your 9 month forecast (April to December) must include something crucial.

What you ask?

Well, a strategy to make up for the shortfall in revenue and profit in the first three months.

Let us look at another scenario.

Assume you are forecasting for the months of January to September in October.

This means that your forecast will include 9 months of actual and 3 months of forecast (October to December).

This does not give you too much room for any adjustments you may wish to make.

I am talking about shortfalls in revenue and profit year-to-date.

So, what is the moral of the story?

The moral is:

Be conscious of the period of the year you are in.

Tip 5 - Focus on Your Unit Cost Forecasts for Best Business Results

Let us visit a concept that as a hotel manager you come across daily but often ignore.

The concept of expense behavior and categories.

One categorization is about whether expenses are considered in accumulation as Total Costs.

Or when they are calculated per unit of business volume or Unit Costs.

It is important to note that Unit Costs are normally calculated only for Variable Expenses.

With the above background, let us now see why unit costs will feature so heavily in your forecasting and decision making.

You know that Fixed Expenses are those that do not move with business volume.

So, basically, a good chunk of decision making is related to Variable Expenses in the hotel operation.

However, there is an issue to tackle.

Variable Expenses keep moving with changes in business volume which is mainly represented by:

• occupancy and
• covers served

in the Rooms and Food & Beverage departments respectively.

Moreover, there is one more quirk to Variable Expenses.

They do not all move the same way.

Some are proportionate to the business volume and others are not.

That makes it difficult to have a measure that can be used as a benchmark for expense management.

Enter Unit Costs.

Unit Costs allow you to determine how much you are spending per unit of business volume.

Or per unit of occupied room night or covers served.

This is a powerful measure.

Since Variable Expenses as a total may not be useful considering how much they move with business volume, unit costs are the answer.

This is also the reason why unit costs are central in forecasting.

Remember, forecasts are estimates.

They thus need a stable measure that will represent the differing business volumes.

Remember our discussion on peak, lean and standard months.

How do you carry out forecasting in your hotel?

Are you harnessing the power of the 5 tips.

Comment below.

This article was first published by the author for www.4Hoteliers.com and is reproduced here with their permission.

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