The Budgeting Process: Close, But No Cigar
 
Charts: 1997 Budget vs. Actual Performance
Market Performance
Dollars Per Occupied Room
Selected Operating Expenses
 
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  Estimating expenses by simply increasing current levels by an estimated degree of inflation has now been replaced by an in-depth study of the variable nature of each individual cost item.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.
 

 
* * *
 
For additional information contact 
Robert Mandelbaum at the firm:
email [email protected]
PKF Consulting
3391 Peachtree Road
Suite 420
Atlanta, GA  30326
phone  (404) 842-1150
fax  (404) 842-1165
 
 

Back to PKF Special Articles and Reports Index
Back to PKF Trends 1998 First Quarter Results
Back to PKF Trends / 1997 Year End Results
Back to PKF 1997 Third Quarter Results
Back to PKF 1997 Second Quarter Results
Back to Annual Forecast for the Hotel Industry / United States Cities / Projections 1997 - 1998
Back to PKF Trends / 1996 Year End Results
Back to Hotel Online Ideas and Trends
Search Hotel Online


Home| Welcome!| Hospitality News| Classifieds|
Catalogs & Pricing| Viewpoint Forum| Ideas/Trends
Use Hotel Online Search Tool
Please contact Hotel.Online with your coments and suggestions.