Each season brings with it change and, depending on the time of year, the chance for renewal and growth. This is no less true for budget season, although for many in the hotel sector, it can also come with a sense of foreboding.
Budgeting is never easy, but the pandemic upended hotels’ balance sheets and the return of trading brought with it jagged costs and rates, only serving to increase the challenges faced in those critical three months of the year.
The normal process sees the budget for the following year prepared by the hotel team during the summer, and the corporate operation team then reviews it in September. If not outlined otherwise in the HMA, it should be submitted to the Owners and Asset Managers by October or early November at the latest. It is not an obligation, but we recommend that the Asset Managers verbally indicate their G.O.P. expectations for next year around July. It will allow the Executive Team to build a budget with the ownership’s goal in mind.
The hotel team then sends the proposed budget to the Owners and Asset Managers, and a meeting is organised with the Executive Team to present the budget, usually one to two weeks after it is received. The operator must allow enough time for the Asset Managers and Owners to review the budget in detail, as the Asset Manager will need to ask pertinent questions during the presentation.
The goal? To have the budget approved by the ownership group straight away.
This is all the more likely if the plan has been prepared thoroughly in advance so it can stand up to the rigour which the Owner is correct to demand. Once the Asset Manager receives the first draft of the budget, they will review and analyse it immediately, using their detailed knowledge of the property as well as the market.
It is certainly not always the case, but collaborative and professional hotel teams should provide information such as:
- Detailed P&L Variance Report – Budget, current year, and previous year (the current year will have the actual and the most accurate forecast)
- A waterfall report (we’ll analyse it more in the second part of this budget series)
- Sales & Marketing Plan
- An RGI budget (many Operators avoid this report, although it is important as it is one of the 2-3 performance test conditions)
- Labour, full-time equivalent (FTE) & headcount report (for each position, by month, with variance from previous years)
- Management and incentive fee forecast (detailed calculation)
- Detailed energy consumptions
- Cash flow statements and detailed forecast of owner expenses (e.g., 12-month interests’ details)
- And a list of proposed CapEx projects for the upcoming year.
When necessary, the Asset Manager can ask in advance to include separate marketing strategic plans specific for each F&B outlet, sale of Suite products, and/or the spa. Each plan should include S&M actions, deadline, cost and the ROI of each action and who is responsible for completing each action. In hotels with high turnover or low guest satisfaction, we also recommend that the HR department prepare an action plan to improve the situation with a productivity plan. Each of these plans should be discussed separately and followed up quarterly with the respective teams. These extras can also include other areas, e.g., ESG plan, guest satisfaction, health & safety plan… Such reports are necessary so that potential improvements to the hotel’s performance can be identified, but the additional work does not always go down well with the Executive Team; therefore, the Asset Managers should evaluate when to ask for these plans, i.e., during budget seasons or later during the year.
In the first budget review meeting, the operator will explain the marketing plan for next year and the CapEx projects. The operator might avoid going line-by-line and month-by-month to avoid too many questions. However, Asset Managers must be ready to fire pertinent questions and go into detail. In order to build trust with the hotel Executive Team, we recommend reaching out to the Director of Finance and/or the Director of Sales & Marketing a couple of days prior to the budget meeting. Tell them to be ready to answer certain key questions. This way, they will come to the meeting fully prepared and formulate more educated answers. There is no need to put them on the spot in front of the GM, their Regional VP or the Owner. Besides, these sorts of details help to build healthy relationships between Asset Managers and the Executive Team for the rest of the year.
These will be drawn from the Asset Manager’s experience with the property as well as their experience in the wider market. They will be aware of the performance of other hotels in the area because of their relationship with them, but also because of the research undertaken by groups such as HotStats and STR. The hotel should always review its budgeted top lines versus the expected compset expectations. This insight will extend to the different market segments, allowing them to consider whether new hotels coming into the area will allow for rates to go up or could serve to depress them. The Asset Manager should also research the potential impact of new demand generators in the market (e.g., new offices) or upcoming one-off large events (e.g., election year, Olympics).
The budget will be realistic about revenues, but also challenging. The job of the Asset Manager is to drive the performance of the hotel for all parties involved.
While all parties have the same goal, there will nonetheless be plenty of pushing and pulling on behalf of everyone involved, with a number of different internal issues in play. The brand sees the hotel in terms of its wider brand portfolio and might have plans for global changes to signage, beds, loyalty programme, and any one of the possible fee lines which it controls.
Often, the operators use budget review meetings to present amendments to their loyalty programs. Be careful here, as the hotel team and Asset Manager are so focused on budget during this period, these changes are often overlooked and may impact future profit. Therefore, we recommend postponing this discussion with the brands for Q1.
Regarding budget CapEx projects, the Executive Team should present a detailed wish list with estimated costs. It is crucial to understand future investments, especially the ones with high ROI potential, so that we can prioritise certain projects; however, it is important not to approve the list in advance. Also, ensure that those improvements are included in the budget as revenue enhancements and at the right time. Finally, each project should be approved during the year so there is time to have up-to-date quotes and adjust the investment to the current needs of the asset.
In turn, the Owner may have recently undertaken renovations and be unwilling to acquiesce to the brand’s demands. Likewise, as we saw throughout the pandemic, they could have yet to recover from the drop off in revenue or be facing costly repayments to emergency loans and be unwilling to make radical change to the property for a year, if not several. It is not as simple as looking at one property in isolation. For both the brand and the Owner, this could be one of many – possibly even in other asset classes.
It is equally important to consider where the property is in the ownership lifecycle. Is it a lifetime hold, or is the Owner pursuing a particular exit timetable? The budget will be critical in terms of the property’s value, giving essential detail to those who might acquire this operational asset.
This period is a good time to discuss with ownership the plans for the hotel. For example, if the Owner wishes to sell the property, the Asset Manager should further restrict expenses in the P&L, avoid engaging in CapEx expenses, and implement a forensic review of the hotel balance sheet (see previous article on how to prepare a hotel for sale).
As the saying goes: Change is the law of life. And those who look only to the past or present are certain to miss the future.
