by: Patrick Quek - October, 1998
It�s September, and all across the nation hotel general managers are
siting down with their controllers and department heads to prepare their
budgets for 1999. By now, the marketing plan should have been developed
and all the top-line revenues estimated. The next step is to project
the operating costs that will be expended in order to run the operation
effectively and achieve the desired profit goals.
Over the years, hotel marketing plans and budgets have become much more
detailed, and the process to produce them more complicated. The competitive
analysis section of a hotel�s marketing plan from the 1970s probably included
a copy of the competitive hotels� brochures and rate sheets. Now,
a full-blown market penetration analysis by demand segment is required.
Estimating expenses by simply increasing current levels by an estimated
degree of inflation has now been replaced by an in-depth study of the variable
nature of each individual cost item.
As those of us in the consulting business know all too well, projecting
future performance is not an exact science. Certainly, technology
has allowed us to capture, track, and analyze historical performance statistics
in extreme detail. Computer models have proven to be effective aids
when correlating data and calculating future numbers based on a variety
of objective and subjective variables. But when all is said and done,
any estimate of future performance is by definition a guess.
Hind Sight
Before the 1998 / 1999 budgeting season comes to a close, we thought
we would take this opportunity to look back at the accuracy of the budgeted
projections made in 1996 for 1997. From our Trends in the Hotel Industry
database, we randomly selected approximately 200 financial statements from
hotels that provided us with both their actual and budgeted results.
Comparisons of actual versus budgeted performance were made on a percentage
of revenue, dollar per available room, and dollar per occupied room basis,
depending on the relative variability of the revenue or expense line item.
Short On Revenue
Looking towards 1997, most experts were expecting a year of stabilized
or declining occupancy, yet continued strong growth in room rates.
(From our vantage point, this is similar to the outlook for 1999.)
Following these projections, it appears that hotel managers were conservative
on their estimates of occupancy, but a little too aggressive on their ability
to raise room rates. Given the fact that hotels are more profitable
when revenue growth is driven primarily by rate growth, it was probably
easier to show owners a projection of greater profits on paper by estimating
strong growth in room rates.
In total, the hotel statements analyzed achieved occupancies 1.1 percent
greater than the budgeted number. However, average daily room rates
fell 2.7 percent short of their budgeted target, resulting in a 1.7 percent
miss of the estimated REVPAR.
Except for beverage revenue, it appears that hotel management also over-estimated
the amount of money guests would spend on food, telephone calls, and other
income sources. Despite accommodating more rooms then expected, the
hotels in the sample fell short of their total revenue projections by 1.4
percent because the dollar-per-occupied-room expenditures were off by 2.4
percent.
1997 Budget vs.
Actual Performance
Market Performance
|
1997 Actual
|
1997 Budget
|
Variance
|
All Hotels |
|
|
|
Occupancy |
68.1% |
67.4% |
1.1% |
ADR |
$72.48 |
$74.49 |
-2.7% |
RevPAR |
$49.38 |
$50.22 |
-1.7% |
Full Service |
|
|
|
Occupacy |
68.1% |
67.4% |
1.0% |
ADR |
$81.85 |
$84.03 |
2.6% |
RevPAR |
$55.71 |
$56.62 |
-1.6% |
Limited Service |
|
|
|
Occupancy |
68.3% |
67.5% |
1.2% |
ADR |
$50.34 |
$51.57 |
-2.4% |
RevPAR |
$34.38 |
$34.81 |
-1.2% |
1997 Budget vs.
Actual Performance
Selected Revenue Items
Dollars Per Occupied Room
|
1997 Actual
|
1997 Budget
|
Variance
|
Full - Service |
|
|
|
Food |
$27.92 |
$28.83 |
-3.2% |
Beverage |
$6.34 |
$6.28 |
1.0% |
Telephone |
$2.73 |
$3.02 |
-9.4% |
Total Revenue |
$124.97 |
$127.64 |
-2.1% |
Limited - Service |
|
|
|
Telephone |
$1.20 |
$1.27 |
-5.5% |
Total Revenue |
$53.69 |
$55.03 |
-2.4% |
A Little Long On Expenses
In almost every business, it becomes evident that management has more
control over expenses than revenues. Hotel revenues are dependent
upon several factors that are uncontrollable by management (economy, transportation
strikes, weather, etc�). On the other hand, management has much greater
control over the amount of money spent on such large expenditures as labor,
costs of goods sold, and other operating expenses.
When comparing actual versus budgeted hotel expenditures, it appears
that management is more astute at forecasting expenses as opposed to revenues.
Actually, given the increased control management has over expenses, they
have been astute in limiting expenses in order to stay within the bounds
of the budget.
Since they missed the mark on projected room rates, it is only natural
that the hotels we analyzed averaged a rooms department expense ratio 4.2
percent greater than the budgeted ratio. Food and beverage directors
fared somewhat better in their forecasts, missing their departmental expense
ratio by only 0.7 percent.
Given the greater degree of fixed costs as a component of total departmental
costs, management was most accurate in budgeting their undistributed expenditures.
Measured on a per-available-room basis, full-service hotel managers were
within 1.0 percentage point of accurately estimating their administrative
and general, marketing, franchise, property taxes, and insurance expenditures.
Limited-service managers showed less accuracy exceeding their budgeted
administrative and general expenses by 6.8 percent, however, underpaying
their property taxes and insurance payments by 3.8 percent.
Driven mainly by the underestimation of ADR, the budgeted operating
profit margin of 25.0 percent was missed by 0.6 percentage points.
On a dollar-per-available-room basis, operating profits were 1.4 percent
below expectations. While hotel managers may have missed their desired
mark, it should be noted that the average profit margin for all hotels
in our Trends survey did improve from 27.7 percent in 1996 to 29.3 percent
in 1997. Once again, this average profit margin was an all-time high.
While complete accuracy is certainly to be desired, a corollary benefit
of the budgeting process is that it forces management into a totally focused
study of the operation. Through the budgeting process, all revenue
sources and cost centers can be thoroughly examined each year in order
to set next year�s plans for marketing and operations, as well as to estimate
revenues and expenses.
At the end of the day, it is the execution of the marketing plan and
ability to adhere to the budget that makes good management, not the ability
to achieve accuracy in entering data into a computer model or read tea
leaves.
1997 Budget vs. Actual Performance
Selected Operating Expenses
|
1997 Actual
|
1997 Budget
|
Variance
|
All Hotels |
|
|
|
Rooms Expense (1) |
26.4% |
25.3% |
4.2% |
Food Expense (1) |
82.3% |
81.7% |
0.7% |
Administrative and General (2) |
$2,293 |
$2,274 |
0.8% |
Marketing and Franchise Costs (2) |
$2,299 |
$2,323 |
-1.1% |
Property Taxes and Insurance (2) |
$1,214 |
$1,220 |
-0.5% |
Operating Profit Margin (3) |
24.4% |
25.0% |
-2.4% |
Full - Service |
|
|
|
Rooms Expense (1) |
26.0% |
25.0% |
4.0% |
Administrative and General (2) |
$2,658 |
$2,664 |
-0.2% |
Marketing and Franchise Costs (2) |
$2,772 |
$2,800 |
-1.0% |
Property Taxes and Insurance (2) |
$1,461 |
$1,455 |
0.4% |
Operating Profit Margin (3) |
23.2% |
23.5% |
-1.3% |
Limited Service |
|
|
|
Rooms Expense (1) |
27.9% |
26.8% |
4.1% |
Administrative and General (2) |
$1,426 |
$1,335 |
6.8% |
Marketing and Franchise Costs (2) |
$1,178 |
$1,176 |
0.2% |
Property Taxes and Insurance (2) |
$630 |
$655 |
-3.8% |
Operating Profit Margin (3) |
31.2% |
33.1% |
-5.7% |
Patrick Quek is president and CEO of PKF Consulting, an international
hospitality consulting firm headquartered in San Francisco.
|