Since 2001, PKF Hospitality Research, LLC (PKF-HR) has assessed the accuracy of hotel budgets. Over the past 12 years, one trend has become very predictable. During times of industry prosperity, hotel budgets are extremely accurate.
During the depths of the 2001 and 2009 industry recessions, hotel managers underestimated their revenue levels by an average of 10.4 percent, while the profit deficits averaged 23.4 percent. Conversely, when market conditions were on the rise, the budget variance for revenues was a positive 1.2 percent on average, while profit goals were exceeded by 3.4 percent. For the purpose of this analysis, profits are defined as net operating income (NOI) before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.
This trend was demonstrated once again in 2012, a year generally considered to be strong for U.S. hoteliers. Comparing 2012 budgeted to actual performance, hotel managers missed their total revenue targets by just 1.3 percent. However, by controlling expenses, they were able to achieve profits within 0.1 percent of budgeted levels.
As general managers, controllers, and directors of sales prepare their budgets and marketing plans for 2014, we present the results of our most recent look at the budgeting accuracy of U.S. hotel operators. From PKF-HR's Trends® in the Hotel Industry database, we identified 560 operating statements that contained both actual and budgeted data for 2012. Using these statements, we compared the revenues and expenses projected for 2012 with what was actually earned and spent during the year.
Short on Top
After observing two years of strong growth in demand during 2010 and 2011, hotel managers assumed that they would be empowered to raise their room rates more aggressively in 2012. Accordingly, they budgeted for a strong 6.0 percent increase in average daily room rates (ADR) for the year. Unfortunately, ADR at the hotels in the study sample grew by just 4.1 percent in 2012.
Missing ADR growth by 1.9 percentage points is particularly frustrating given the fact that the subject hotels were able to accommodate more guests than anticipated. In 2012, occupied rooms for the sample grew by 2.5 percent, slightly greater than the budgeted increase of 2.4 percent.
The net result was a rooms revenue (RevPAR) shortfall of 1.8 percent. Concurrently, total hotel revenue was off budget by only 1.3 percent. This implies that the combined growth in revenue from food and beverage, other operated departments, and rentals and other income exceeded the budget.
Long On The Bottom
Facing a revenue deficit relative to budgeted expectations, hotel managers were forced to take corrective actions in order to achieve their profit objectives. During 2012, expenses at the properties in the study sample increased by 3.6 percent. This is 1.7 percentage points less than the budget expense growth rate of 5.3 percent.
Limiting expense growth to just 3.6 percent was a commendable achievement. With occupancy levels exceeding budget, operators did not have the opportunity to enjoy the benefit of cost reductions attributable to a reduced volume of business.
Fortunately for hotel operators, and their owners, the 3.6 percent growth in expense was sufficient to allow these properties to achieve their budgeted profit levels. In fact, on average, the hotels in our sample actually exceeded their 2012 budgeted NOI goals by 0.1 percent.
Managing To The Budget
According to the June 2014 edition of Hotel Horizons®, PKF-HR is forecasting hotel revenues to increase by 7.2 percent in 2014, along with a 15.4 percent gain in NOI. With such a positive market forecast, historical trends indicate that the odds are favorable for U.S. hotels to achieve their budgeted targets in 2014.
Budgeting is a very beneficial process for hotel managers. It requires a thorough examination of historical practices and performance, and then the thoughtful development of action plans and financial projections for the upcoming year.
Given all this time and effort, the fear is that managers become too focused on achieving budgeted results, and therefore they "manage to the budget." While accuracy is admirable, we hope that managing to the budget does not leave operators blind to any upside opportunities that may present themselves when market conditions are so favorable.
About Robert Mandelbaum and Viet Vo of PKF Hospitality Research
Robert Mandelbaum and Viet Vo work in the Atlanta office of PKF Hospitality Research, LLC (PKF-HR). PKF-HR offers hotel managers several tools and reports to assist them in the preparation of their 2014 budgets. For more information, please visit the PKF-HR website at www.pkfc.com/store, or call (855) 223-1200. This article was published in the September 2013 issue of Lodging.