Hotel Forecast: How is it Related to a Budget?

How is a hotel forecast related to the budgeting process?

Do forecasts revise budget estimates?

What, you seem thrown off guard.

Why should a forecast revise a budget, you ask?

Hold it.

I am about to answer your question.

Your first thought must be: what is the connection between a hotel forecast and budget?

Great, that you asked this question is a wonderful start.

How?

Remember way back in Part 1 of this series, we learned that a hotel budget was an annual exercise.

And that hotel forecast was a monthly one.

So, you see, we are half way there already.

I will lay out a strong case including reason why as well as how hotel forecast, budget are connected.

Along the way, we will answer the following questions and more:

• What is forecasting in hotels?
• How do you calculate a hotel forecast?
• What are the steps in forecasting?
• What are the factors that affect a hotel forecast?

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

Let’s get into it.

Click to watch the video on hotel budgeting and forecasting.

This Chapter 6 of the Ultimate Guide on Hotel Budgeting and Forecasting will cover.

Is there a Need for a Hotel Forecast?

Your first inclination is to ask: why is a hotel forecast needed?

Is the budget not good enough?

Indeed, both are needed.

You can call it the best of both worlds.

If a hotel budget is a annual exercise and forecast monthly ones, one fact does emerge from that.

That there is a connection between the annual exercise (budget) and the monthly one (forecast).

And so, there is.

Think back to Part 1 of this series, we learned that a hotel budget is approved for the entire year.

However, the lesser obvious fact is that once approved, a hotel budget cannot be changed.

Owners approve budgets and then they are adopted.

The approval makes it a goal to be pursued for the year.

Hotel Forecast - Budget Connection

I can already see in your eyes huge objection to that.

So the approved hotel budget cannot be changed.

What happens to conditions that may be different from the budget assumptions?

Aha, I can see that you are steadfastly headed to the truth.

Yes, actual conditions will indeed be different from what the hotel budget assumes.

Occupancies may change, competition may become more and so on.

Not always and not in all aspects of a budget but different they will certainly be.

The reason is simple: hotel budgets are mere estimates.

And estimates are not the same as actuals.

Now, I can see raw rebellion in your eyes.

So, the hotel budget is approved and cannot be changed.

However, actuals (as in revenue, expenses and profit) are not the same as budget.

Is this a dead end?

No way out?

Gosh, no, there is of course a way out.

And the way out is through a hotel forecast!

What, you seem flabbergasted.

Bear with me.

I shall clarify right now.

What is the Hotel Forecast doing to the Budget?

So, let us back up a bit.

Remember the definition of a budget?

It is an annual exercise.

And the forecast?

It is a monthly exercise.

So, it kind of seems that a hotel forecast is a way to revise the budget.

A budget is an annual exercise.

Yet, it still has monthly budget numbers for revenue, expenses and profit.

In addition, a budget monthly figure cannot be changed.

However, no one (including the owners!) can stop you from revising a budget monthly figure.

Which we will not call budget since it cannot be changed.

And so, we will call it the forecast.

In other words, what a monthly hotel forecast is doing to the budget is to revise it.

There you go, we arrived at the answer.

I told you we will.

And an amazing solution to the “cannot change the budget” dead end.

But there are few things to watch out for in this revision process.

Why Hotel Forecast Revisions?

Let us begin with calling the process as the forecast revision.

The hotel forecast is revising the budget.

But how does that happen you ask puzzled?

All in good time.

First, recognize that you must determine why you have to change the budget.

More importantly, on what basis?

The answer is simple.

On the basis of monthly business results!

So, there is a 4 step process involved:

STEP 1

A budget approved for the year will have a monthly figure for revenue, expenses and profit.

These are the monthly targets for the hotel.

STEP 2

Ahead of the month beginning, you must determine whether the budget amount (for revenue, expenses and profit) needs revision.

Most times it will.

As we saw earlier, this may be because:

• occupancy may be different,
• a new hotel may have come into the market and so on.

STEP 3

So, a revised budget amount will be estimated.

Most times, this revised budget will be a change in business volume (occupancy, covers served).

This revised budget amount is known as the forecast.

You could call the forecast a refined version of the budget.

STEP 4

This cycle keeps happening each month.

However, a new element enters the cycle.

That happens when a month is completed.

When the Profit & Loss Statement is prepared for the month.

Did You Know about the Hotel Forecast Revision Cycle?

So, let’s use an example.

Take a look at the Paradise Hotel Rooms Revenue Statement below:

Say, the month of January is completed.

And a Profit and Loss Statement generated.

Now, you will arrive at a variance between budget and actual amount for January.

Let’s see what a full cycle is like.

Assume that the budget is approved (normally in December) for the next calendar year.

Simultaneously, a forecast is generated for each month of the budget year.

So, now each month will have three versions:

• Original Budget for month (unchanged)
• Forecast for the month (revised budget)
• Actual for the month (based on Profit and Loss Statement)

I am deliberately avoiding Last Year month figure to keep the narrative simple (this is a basics post).

Let us see how that works for:

• revenue
• expenses and
• profit

Revenue based Hotel Forecast Revisions

Hotel Revenue is budgeted based on 3 key ingredients:

1. Capacity
2. Business Volume and
3. Price

Capacity is the highest revenue that can be earned from an asset.

For example, rooms revenue is based on Guest Rooms Available for sale.

So, Rooms Available is the capacity for the rooms department.

Similarly, food & beverage revenue is based on Restaurant Seats Available for sale.

And Seats Available is the capacity for the food & beverage department.

Business Volume is the utilization of capacity.

In other words, how much of the capacity was utilized.

Occupancy % (Occupied Rooms or Sold Rooms) is the business volume for the rooms department.

Covers Served is the business volume for the food & beverage department.

In the hotel forecast cycle, it is the business volume that causes changes in the budget.

See a visual comparison below of how this happens

It is the business volume that forms the basis of a month forecast.

Finally, Price is the unit selling price for capacity available per day.

In other words, price is Average Daily Rate for guest rooms (Rooms department).

And price is Average Check for restaurant seats (Food & Beverage department).

Now, can you see how occupancy and average daily rate contribute to room revenue.

And how covers served and average check contribute to food & beverage revenue.

As a result, you will have 3 versions:

• Budget Occupancy, Average Daily Rate
• Forecast Occupancy, Average Daily Rate
• Actual Occupancy, Average Daily Rate

for the rooms department.

And similarly for the food & beverage department.

Now on to see how expenses get the forecast revision treatment.

Expense based Hotel Forecast Revision

Expense budgets go through revisions with a forecast just like revenue.

However, in the case of expenses, categorization plays an important role.

The two key categories are:

• Variable Expenses and
• Fixed Expenses

You saw how the hotel forecast revision happens to business volume for revenue.

Business volume being occupancy and covers served.

Similarly, when business volume changes, variable expenses dependent on that will also change.

Or in other words forecast revision takes place for expenses.

In all of the revisions that happen through forecasts, we should not miss one critical factor.

And that is the basis for the forecast correction itself.

Let’s see how.

How does a Profit & Loss Statement revise a Hotel Forecast?

So, you may be asking a question.

How does the forecast revision for revenue and expense happen?

In other words, what is the basis?

Great question.

For that, you will rely on the hotel profit and loss statement.

When a month is completed, accounting prepares the month’s financial statements.

More specifically the profit and loss statement.

So, in a way, the original budget for a month gets updated to a forecast.

In turn the forecast gives way to the actuals.

You could trace this progression as below:

Hotel Forecast Revision Flow

Original Budget for a month —--------> Budget is revised as a Forecast for that month —-------> Forecast is used until actual results replace it.

It is important to know that a revision of the budget does not happen just for one month.

Each month, every future month is relooked at and a forecast created.

Often the next three months get revised the most as a forecast.

And it is actuals that provide a path for succeeding month forecasts themselves to be corrected.

This is because even a forecast is an estimate while actuals are real transactions.

See below the same screenshot as earlier on how this cycle begins and ends.

This brings us to the end of this post on a hotel forecast.

Over to you.

How do you approach a forecast in your hotel?

Do you take into account the tips in this post for forecast revisions?

Did we miss anything major in this post?

Comment below, I will be keen on knowing your thoughts.

Next Chapter...

In the next chapter, we will see how another type of hotel budget is related to the operations budget we saw in this Ultimate Guide.

Other Chapters of Ultimate Guide on Hotel Budgeting and Forecasting

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