Is the Annual Budget Process Still a Necessary Evil for Hotels? - By Kathrin Cockhill

For hotels, the annual budget process is like a high-stakes poker game in which the owners keep their cards close to their chest and the operators try to guess what cards they’re holding and if they’re bluffing. By the time everyone shows their hands and the year kicks in, the game has often changed significantly, and all bets are off.

Does it have to be this way? Today, more data than ever is available to enable operators to budget and forecast based on current conditions rather than rely on outdated projections. But will this serve the needs of owners?

For insights, HotStats reached out to hospitality leaders around the world. We asked them, “Is the annual budget process still a necessary evil for hotels?” Here is a condensed, edited roundup of their responses.

Ajay Singla, Senior Vice President Finance, Fairmont Hotels & Resorts

My personal opinion is we should be more guided by 12 to 18 months or two years of rolling forecasts based on what is happening in the market today rather than being influenced by a budget that was done in September, is valid until next December, and is based on what was happening in the market nine months ago.

That would be more productive. And I think ownership would also be more interested in a rolling forecast scenario. But we have an obligation in our management contracts. And ownership has many obligations from a hotel operations and financial ability point of view. They have loans, interest, debt service payments, etc. They need to know how much cashflow hotels will generate. So, we have to live with it.

The objective for us, the operator, is to harmonise what ownership expectations are and how we can achieve them while still meeting guest experience, product, and brand requirements. At the end of the day, we are brand operators, so we have to make sure that the brand promise is also delivered to the guests because that's what matters the most for us in terms of bringing the guest back again and again.

Elena Ladisova, Vice President, Brookfield Asset Management

Yes, I definitely do. I mean, what gets measured, gets done, and it sets a benchmark. That kind of logic hasn't really changed. It's true that there's a lot of volatility, and I think month by month forecasting becomes much more important than before. But budgets are still something where you can plan ahead and plan your cash flow at the early stage, and then obviously you adjust for the forecast. So, I think forecasting is gaining more importance over time.

Joe Pettigrew, Chief Commercial Officer, Starwood Hotel Asset Management

I think the budget process is still useful. Obviously, it has many uses for banks, lenders, and other investors for setting targets, goals, and bonuses, etc. But the most useful aspect is that it is the one time of the year that you all have full alignment on what your strategy is going to be for the next year.

So, assuming the macro environment is going to be X and our current market share is Y, what are we going to do differently next year in order to improve our market share? What cost initiatives will we implement to get to the NOI that we need to get to? The discussion around how we're going to do that is so useful and valuable … and the budget process is the most natural time and place to do it. So, I think the annual budget process is very valuable. I don't see it as a “necessary evil”.

Paul Nisbett, Chief Financial Officer, EMEA, Valor Hospitality Partners

Well, it's a necessary evil because every bank requires it. Investors require it.

Regardless of whether we like it or not, you need a stake in the ground for legal requirements and compliance. But I think most people will move to a rolling 12 months.

So, the fact is that all this is really a stake in the ground and a review process that has to happen for different stakeholders in the business. But actually, if you don’t use it and put it on the shelf and don't keep it live, you're not gaining anything. So, the rolling position becomes more important.

Amy Stevens, Group Director Revenue and Distribution, Rocco Forte Hotels

Absolutely, it is a necessary evil because you have to have parameters to measure or you will have no goal post and no idea of where you're going to be. The flipside is it is not a set-in-stone number. As an industry, we tend to treat it as such. But it's just a snapshot in time of what we knew then, what we thought was going to happen, and things that we could get data on. That could change. For example, who knew Russia was going to invade Ukraine? That completely upends the entire strategy, the numbers, and everything you came up with.

So, it is a necessary evil. But I do think as hoteliers we need to take a step back and remember that this is why we forecast. The budget is a point in time. With forecasting, it becomes more important to be proactive and to adjust to changing realities, particularly in a post-Covid environment.

Pete Sams, Chief Operating Officer, Davidson Hospitality Group

The budget process is a chance to step back and create a plan. That strategic plan is really more critical to me than the budget. It speaks to where we belong in the marketplace, how we are going to improve our standing, and how we are going to generate the results that we aspire to.

The budget is the financial support behind that plan. You enter the year and understand that you're going to update it every month and constantly reevaluate half of what you assumed may be incorrect, whatever that number may be.

How do we adjust on the fly? We focus on a rolling 12-month forecast at all times. So, we're always looking into the future, beyond just the calendar year, and that is a valuable exercise with our budget process.

In the end, budgeting is absolutely critical. It presents an opportunity to sit down with your respective ownership groups and truly articulate your understanding of the business, the plan, how you’re going to get there, and to make informed requests. Be mindful of the fact that it will be inaccurate to some extent, ideally for the better, but articulate how you're going to get there and then be prepared to adjust and adapt.

David Hart, Chief Executive Officer, RBH
From our point of view, it shouldn't be. We already run a monthly rolling forecast process, and we forecast 12 months out. Ultimately, when we come to the annual budget, we find that the lion's share of the work has been done. So it's not the one-off effort that it used to be.

In terms of whether it’s a necessary evil, investors and funders still require it … From my point of view, it shouldn't be, but it fundamentally is because there are so many stakeholders involved in the process. Until they all get over the line of not needing it, then it's going to be difficult to change the process. But for us it’s less onerous because of how we forecast.

Michael Grove, Chief Operating Officer, HotStats

I think the annual budget process is a good discipline. It’s basically a strategy meeting. You start with a half-year of actual data and use the forecast to project the rest of the year’s data. Then you build the budget on the back of that based on assumptions about what will happen over the rest of the year and throughout next year. Then you review performance monthly throughout the year. Some budgets aren’t signed off until January, after the year has already begun.

But things move so much from budget time to the actual year from the cashflow and operational perspective that it makes sense to have more regular review. The forecast has become automated based on run rates, which for me, misses the element in the budget process of revisiting the strategy and operational efficiencies. Maybe quarterly or half yearly reviews are the middle ground.

Owners have a different perspective, however. This is the necessary part. The budget is needed for financing, funding, and planning. The reality is, from an operational perspective, hotels need to update budgets more regularly. That’s why at HotStats we’re committed to providing benchmarking data on a monthly basis, allowing hotels to continually compare and improve their performance against the market.

Check out the first instalment in HotStats’ 2024 budget planning series. To learn more from these experts and others, see the video and audio recordings.

To discover how HotStats benchmarking data and market reports can help your budget process and boost your P&L follow the link.
https://www.hotstats.com/hotel-profit-benchmarking

Kathrin Cockhill is the Commercial Director, HotStats. Connect with Kathrin on LinkedIn.

About HotStats
HotStats provides monthly P&L benchmarking and market insight for the global hotel industry, collecting monthly detailed financial data from more than 8,500 hotels worldwide and over 100 different brands and independent hotels. HotStats provides more than 550 different KPIs covering all operating revenues, payroll, expenses, cost of sales and departmental and total hotel profitability.