As budget season approaches, you may be starting to sift through spreadsheets and dive into databases as you prepare for the year ahead, but at Global Asset Solutions we like to take the time to sit back and consider the past year – if not the past few years – before thinking about what we would like to achieve, and what we think is possible to achieve in the year ahead.
Experience is key to success, particularly in the luxury segment. Hotels are affected by multiple factors out of their control, including local events, extremes of weather, trends, tastes and where different holidays fall at different times of the year. Being able to contextualise your budget is at the core of creating realistic output with a high chance of success.
When taking guidance from the past year, it is important to set aside all the one-off events which took place in the current year and identify the one-off events in the budgeted year, then do a waterfall analysis to identify whether all the one-off events are isolated. This will give you a clear view of the actual revenue increase and how realistic it is. Do the same with the one-off costs.
The luxury sector has additional factors at play. Luxury properties, which have more elaborate operations than other segments, require a deeper level of understanding. There may be multiple F&B outlets, gyms, spa facilities, different experiences on offer, even temporary, or pop-up outlets.
Relationships are the next thing to consider when you are creating your budget for the year ahead. The hotel is a complicated stack, with many different players involved in its operation. In addition to the owner you are likely to have a brand and an operating company and within that there could be additional brands – connected to the restaurant or spa, for example – and all these parties will have targets and aspirations not only for the year ahead, but potentially for the next decade or beyond.
When considering the owner, you must take into account their plans for the hotel. Are they about to sell it? Are they thinking about renovating it? Might they rebrand it? Are they looking for other properties to build into a platform? Knowing the position of the hotel in an investment strategy will help to inform the decisions you take around it in the coming year.
An experienced asset manager will negotiate all of these relationships and try to get the best result for every party – or at least negotiate between the different parties to bring them around to a shared viewpoint. Only then can the hotel move forwards and focus on being as profitable as possible in the year ahead.
Once all parties have been aligned and the context of the year ahead has been agreed, the budgeting process can begin, but remember that all parties will take a different view of their role in the budget.
Owners and asset managers will push for more difficult but attainable goals. The operator, however, is likely to defend their initial projections to make achieving their goals more attainable, ensuring that they meet their HMA performance requirements. This is another area in which the in-depth knowledge of the asset manager will come into play.
Budgets are also used as a base for executive bonuses so should be achievable if they are to be used as an incentive. However, especially after the 2008 crisis, many operators have detached the annual bonus from the GOP achievement to keep their senior staff motivated and enable them to pay partially the bonus. The asset manager should think of the staff satisfaction related to the bonus payment when setting up the budget without ignoring the ‘ ‘owner’s interests.
Once incomings and outgoings are all accounted for, read carefully the business plan prepared by the hotel. It should include the targets set per department/outlet and the necessary actions to achieve the objectives. Evaluating whether the plan can reach the company’s goals would be best. Also, consider any uplifts in the competition and new entrances (new hotels) in the market that will impact your performance. Don’t forget to ask for the RGI budget too as well as a budget per room type. It will help you to better identify the ADR opportunities.
The next step should be to check your GOP and explain any variances versus the 10-year plan presented to the owner, then identify areas for improvement in the cost structure. You should calculate how much additional revenue you received through the rate increase, how much through the one-off events etc. Compare your GOP with the latest five-year plan presented by the operator. You need to check his consistency and accuracy in his previsions.
Then check your flow through. ADR increase should give an additional 80%-85% profit, while the occupancy increase should give some 70%-75% more. Finally, reconcile the latest full year’s payroll with the budgeted one. Ask for all details and ensure they are well justified.
Prepare your cash flow for the next year and prepare the Capex requests and make sure their ROI has been included in the budget.
Identify clear goals for the next period and make sure they are SMART This means that they must be: Specific, Measurable, Achievable, Relevant and Time-bound. Defining these parameters as they pertain to your goal helps ensure that your objectives are attainable within a certain time frame.
Once the asset manager has thoroughly reviewed and analysed the proposed budget, they will discuss it with the hotel management team. If the first budget is rejected, which is often the case, the operator will make the changes according to the points discussed during the initial meeting.
Once approved, ‘ ‘it’s time for the work to begin: making the budget real.
For more information on how to be prepared for the Budget Season, you can read our three-part Budgeting Series here.
