Hotel Budgeting Basics Beginners Struggle With – Revenue KPIs

Are you underutilizing Revenue KPIs in your budgeting process?

As a result, are you losing opportunities for revenue generation?

It is important that you bring in Key Performance Indicators of revenue in your budgeting process.

That may mean the difference between:

• consistently achieving revenue targets or
• falling behind budgets.

It may seem obvious that the budgeting exercise should include KPIs related to revenue.

However, the question is: are you using the right revenue KPIs?

I will lay out a case for bringing in the appropriate KPIs for optimizing hotel revenue.

In the process, we will see:

• what revenue KPIs are,
• how to track them,
• is revenue growth a good KPI and so on.

Take a look at the infographic below on hotel budgeting and forecasting.

Click to watch the video on hotel budgeting and forecasting

This Chapter 2 of the Ultimate Guide on Hotel Budgeting and Forecasting will cover:

Budgeting for the Top Line - Revenue KPIs

In Part 1 of this Ultimate Guide on Hotel Budgeting and Forecasting, you learned that the hotel budgeting process can be considered the guardrails of the profit and loss statement.

Well, continuing that analogy, the first critical area to attack is revenue budgeting.

More specifically the use of revenue KPIs.

What are revenue KPIs you want to know?

Hang on, I am going to do just that.

In any hotel revenue budgeting process, knowing which KPIs to focus on is crucial.

This is applicable really to any kind of budgeting process and not just for revenue.

So, it might actually surprise you to know that the first revenue KPI to focus on is not revenue itself.

What, you look totally baffled.

Hold it, I will clarify.

What I mean is, in any budgeting process, it is important to zero in on the source of revenue first.

In other words, asking yourself: what is the source of hotel revenue?

That source in the case of hotels is capacity.

Capacity can thus be considered the first revenue KPI in the budgeting process.

Why is Capacity as a Revenue KPI so critical?

Say, you are talking about revenue generation, profit retention and so on.

It is important to understand that all this is totally not possible unless you have the tool to produce revenue.

In other words, you need an asset first and foremost.

This asset is foundational in the budgeting process.

In the case of a hotel, that asset is, and more specifically for the Rooms department the guest room.

We also know that total number of units of guest rooms is collectively known as Rooms Available.

Rooms Available represents the highest number of guest rooms a hotel can sell at any point of time.

Your revenue budget must initially address rooms available.

Or, as we saw earlier, Rooms Available is the Capacity.

It is your first Revenue KPI.

Revenue KPIs for the Rooms Department

Why is Capacity or Rooms Available critical for budgeting?

• First, owners and stakeholders have poured millions of dollars as investment in the hotel project with an objective of earning a reasonable return on investment.
  • Reasonable return on investment depends mainly on revenue earning potential of the hotel.
  • This potential is squarely dependent on how many guest rooms a hotel has.
  • Your budget must thus relate to the guest rooms available
• Second, the number of rooms available or capacity will be a huge factor in the market share that the hotel will want to command.
  • So, linked to capacity, market share is yet another critical revenue KPI to be budgeted
  • The higher the number of guest rooms available, the better the possibility of a greater market share (with some exceptions seen later).
  • In the hospitality industry, market share is a huge revenue KPI that determines positioning of the hotel among other things.
• Third, a hotel is categorized as small, medium, large sized based on number of rooms available,

In the hotel industry, Rooms Available are also known as Total Units.

On the one hand Rooms Available determines capacity.

On the other, those guest rooms will be further categorized into different room types.

Any hotel revenue budget must thus reference the total rooms available for each room type.

These will become the building blocks of hotel revenue.

Each guest room type budgeted will:

• cater to a target audience
• will have amenities tailored to that as well as
• be priced accordingly.

Rooms Available as a revenue KPI is also used for measuring other KPIs like:

• customer patronage,
• spending,
• number of employees in the hotel etc.

The Star Revenue Source

Hotels depend on Rooms department to deliver anywhere from 70% to 85% of hotel revenue in a year.

Therefore, the rooms revenue budget is a big chunk of the total hotel revenue.

Let us now look at the Rooms Department Statement of Paradise Hotel.

Notice a few things about the above table.

It shows the Room Revenue according to Market Segments.

Market Segments - Building Blocks of Room Revenue KPIs

Market Segments are one of the most powerful concepts in a hospitality industry revenue generation discussion.

Market Segments are actually the target audience or also known as customer segments for room revenue for a hotel.

Before getting at room revenue, the budget process must nail down the market segments that will contribute to it.

Notice the two big categories of market segments:

• Individual and
• Group Market Segments.

These are further building blocks in the budgeting process.

Notice also that revenue contributed by the Individual Market Segment to Total Room Revenue is 74% ($682,930/$927,985).

This, of course means that the Group Segment contributed the balance 26% since there is no Other Room Revenue.

This suggests that Paradise Hotel is pre-dominantly a hotel catering to the individual market segment.

Knowing this is crucial to the revenue budgeting process.

Paradise Hotel could actually be called a business hotel.

This is because more than 40% of its room revenue comes from the Negotiated market segment which mainly consists of corporate business.

One of the critical concepts to understand in a revenue discussion is what contributes to that revenue.

How will you budget for room revenue using market segments?

Well, we now arrive at two paramount revenue KPIs that need to be budgeted.

These are the revenue KPIs of:

• business volume or occupancy and
• price or average daily rate

that contribute to hotel room revenue.

In a room revenue budget scenario, market segments we see in above table get their revenue through:

• occupancy and
• average daily rates for those market segments.

These ultimately roll into the hotel wide occupancy and average daily rates.

The Competitive Set

Competitive Set is one of the most critical first steps in understanding and influencing market share.

However, its real power is a deeper scrutiny of its building blocks (so to speak).

These building blocks are what we just saw as market segments.

Knowing your target audience is central to a successful revenue generation budgeting strategy.

If you were to classify your target audience into distinctive segments or profiles, you would get market segments.

Market Segments emphasize the diversity of your target audience.

Thus market segments play a huge part in the budgeting process of hotel room revenue.

It is a good strategy to have diversity in your target audience without spreading yourself too thin.

If you remember, you looked at some categories like: 

• individual and group, 
• business and leisure.

Why do I call market segments the building blocks of market share?

This is simply because market share mostly is a reflection of revenue achievement.

And revenue is not achieved simply from one category of your target audience.

It is earned from multiple market segments which represent your target audience.

Take a look at the Market Segments of the Paradise Hotel showing room revenue contribution.

In an earlier section, we had seen the Individual market segment of the Paradise Hotel.

And how it dominated the revenue achievement compared to the Group market segment.

We had also observed that it looked like Paradise Hotel had Individual as its major market segment.

We said it was more of a business based hotel than a leisure one.

Notice how Negotiated market segment for current month accounts for 68% of Individual segment.

We saw that the majority sub segments in this Negotiated segment are Corporates.

This confirms our observation that Paradise Hotel is more geared for business or corporate segments.

Notice how the smaller Group market segment includes Tour Operator as a major sub segment.

Tour Operators are considered as part of the Wholesale channel of distribution.

They are often used by business based hotels (like the Paradise Hotel) to augment their business.

This they do by raising occupancy through use of volume based tour groups.

On the one hand, room rates for these tour groups are much lower than the hotel average daily rates.

On the other, they boost the occupancy and contribute to the overall bottom line.

All of these factors play a significant part in the budgeting process of hotel revenue.

How are Room Revenue KPIs by Market Segments arrived at, you may ask?

Take a look at the below monthly break up of room revenue budget by market segments.

Notice how each market segment room revenue budget is based on the below formula:

FORMULA

Budget Room Revenue (for each market segment) = Budget Occupancy (in room nights) X Budget Average Daily Rate.

Let us now turn our attention to the other major revenue KPI - of the food and beverage department.

Revenue KPIs for the Food and Beverage Department

The Sidekick Revenue Source

Consider the Rooms department as the hero of hotel revenue contribution.

Then, certainly the Food & Beverage department is the sidekick.

Food & Beverage is the second biggest revenue contributor after Rooms department in a hotel.

As such, the food and beverage department is closely involved in the budgeting process of the hotel.

When it comes to categories, the most common categorization of the Food & Beverage department is as:

• restaurant outlets and
• catering operations.

Restaurant Outlets are the venues where certain types of cuisine are served.

These could be throughout the day or at particular times depending upon the type of restaurant they are.

Catering department is also known as the Banquet operation.

This is the department which has function rooms as its primary revenue generating source.

Catering operation is considered the most profitable one within the Food & Beverage department.

However, the Food & Beverage department is unlike any other department of a hotel.

This is due to the sheer variety in the types of restaurants it may have within it.

The budgeting process will need to cover all of these types.

First, the Food & Beverage Revenue consists of two different but related type of revenue:

• Food Revenue and
• Beverage Revenue.

A menu item served in a restaurant consists of both food and beverage most times.

However, these two revenue sources are different in a few ways

• First, a menu item pre-dominantly is focused on the food item with beverage as accompaniment almost always.
• Second, Food Revenue tends to be between 2 to 4 times higher than Beverage Revenue.
• In other words, Food Revenue can often be 75% of Total Food & Beverage Revenue.
•  Beverage contributes the balance 25%
• Third, Food & Beverage revenue can be looked at from three points of view:
  • menu items,
  • meal periods and
  • market segments.

Menu items are the food dishes that are served in the restaurant.

Meal Periods are different categories of menu items that can be served at different times of the day.

The most popular times are during:

• breakfast,
• lunch and
• dinner.

See how, in the case of Paradise Hotel, the Food & Beverage Revenue is contributed.

It is separate for food revenue and beverage revenue over the three most common meal periods.

Market Segments (like in Rooms department) are applicable only to the Catering department.

The Catering department we saw earlier is part of the Food & Beverage Department.

Finally, Food & Beverage Revenue is contributed (similar to occupancy and average daily rate contributing to the Room Revenue) by:

• business volume (covers served) and
• price (average food & beverage check).

Covers Served (refer to Paradise Hotel Statement above) are like occupancy in Rooms representing business volume.

Average Food & Beverage Check (refer to Paradise Hotel Statement above) is like Average Daily Rate in Rooms representing price.

Budgets are created separately for Covers Served and Average Food Check.

These when multiplied will result in the Budgeted Food and Beverage Revenue.

Meal Periods - Building Blocks of Food and Beverage Revenue KPIs

Bread and Butter of Restaurant Revenue

Market segments are at the heart of hotel room revenue generation and budgeting process.

Similarly, meal periods play a role in food and beverage revenue generation and budgeting process.

Meal Periods are: 

• combination of different items or categories of a menu 
• that contribute to food and beverage revenue.

Meal Periods may have the following combinations:

• Breakfast, Lunch and Dinner
• Supper, Afternoon Tea, Snack
• Buffet and A la Carte
• Food and Beverage
• Individual and Group (normally only to the Catering or Banquet operation)

Meal Period Analysis

The most important meal periods in a hotel whether city or resort are:

• breakfast,
• lunch and
• dinner.

Budgets will thus need to be created for each meal period for food and beverage revenue individually.

Why is it critical to analyze and budget for these meal periods?

Before we address this, let us take look at a factor which is closely linked to meal period analysis.

This is the revenue KPI of Table Turnover Ratio.

There are two paths to hotel food and beverage revenue budgeting.

The first one is Table Turnover Ratio.

The second path is meal period analysis.

We can say that the optimum path to restaurant revenue growth is a combination of both these factors.

But what then is meal period analysis?

It is a study of data and information on what contribution each meal session in a hotel or resort’s restaurant outlets is making.

This depends first on the type of outlet.

Meal period analysis requires:

• accurate identification of specific meal sessions 
• that are applicable to each of a hotel or resort’s restaurant outlets.

Generically, the standard meal periods for a city hotel are:

• breakfast,
• lunch,
• snack,
• dinner and
• supper

although this is more applicable to an All Day Dining Restaurant type (also called a Coffee Shop).

How do these actually contribute to the restaurant revenue budgeting process?

As we saw earlier in the post, food and beverage revenue contribution is made by two key elements:

• covers served (number of guests) and
• average food & beverage check

These are also known as the quantity (or volume) and price contributions.

The formula used in a budget is:

FORMULA

Budget Food & Beverage Revenue = Budget Covers Served X Budget Average Food & Beverage Check

When the above formula is applied for each meal period, they become building blocks of revenue estimate or budget.

However, this revenue estimate is on one major assumption.

That each guest or cover is based on a table turnover ratio of one (1.0).

Table Turnover is simply the number of times a single table turns over (is served) in one meal period.

Say, we assume different table turnover ratios for different restaurant types and meal periods.

In that case, we need to multiply the earlier revenue estimate with this ratio to arrive at the final revenue estimate or budget.

For example, taking the earlier formula further:

Budget Food & Beverage Revenue = Budget Covers Served X Budget Table Turnover Ratio X Budget Average Food & Beverage Check

An alternate way of calculating restaurant revenue is:

Food & Beverage Revenue = Restaurant Seating Capacity X Table Turnover Ratio X Average Food & Beverage Check.

Take a look at the Meal Periods in the Paradise Hotel Taste Buds Restaurant.

You can confirm the Food & Beverage Revenue formula using numbers in the Paradise Hotel Statement.

For example:

• Seating Capacity is 120,
• Table Turnover Ratio for Breakfast is 1.3 for the month of January 2019.
• Thus the covers served for the month calculation is:

Covers Served(4,836) = Restaurant Seating Capacity (120) X Table Turnover Ratio  for Breakfast (1.3) X Number of days in January 2019 (31).

The Covers Served budget when multiplied by the Budget Average Food & Beverage Check will result in the Food & Beverage Revenue Budget for Breakfast Meal Period.

Say, you do not multiply by the number of the days in the month.

Then, the covers served become the Daily Covers Served.

Food & Beverage restaurant outlets use this information:

• to compare with budgets and forecasts 
• apart from running their daily restaurant operation.

For example, the Kitchen prepares food based on the expected covers served for a meal period.

This is why table turnover ratio and meal periods in tandem are such powerful elements of budgeting or forecasting restaurant revenue.

So, there you are, an overview of the hotel budgeting basics with focus on revenue and its Key Performance Indicators.

Recap of Budget Revenue KPIs

Rooms Department

• Rooms Available
• Market Segments
• Market Share
• Occupancy
• Average Daily Rate

Food & Beverage Department

• Seats Available
• Meal Periods
• Covers Served
• Average Check
• Table Turnover Ratio

Next Post - Chapter 3

In Chapter 3 of this Ultimate Guide on Hotel Budgeting and Forecasting, we will take an overview of how expenses are budgeted for.

Over to you.

How do you carry out budgeting at your hotel?

Do you pay attention first and foremost to the hotel revenue KPI in your budgeting?

Leave your comments below as I will be keen on knowing your thoughts on this.

Other Chapters of Ultimate Guide on Hotel Budgeting and Forecasting