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Revenue: The Art of Budgeting
Roan van Marrewijk, Head of Revenue Department at IFHG.

Revenue: The art of budgeting

A spot-on budget helps your hotel business perform optimally and stay ahead of the competition. But how do you create a solid budget, as part of revenue management? Roan van Marrewijk, Head of Revenue Department at IFHG, reviews the basic elements of the budgeting process and shares his experiences and tips.

Revenue management ensures optimisation of revenue from hotel room sales. IFHG creates daily pricing policies for clients using data analysis, pricing strategies, distribution channels and marketing to improve profitability. Revenue management and budgeting are logically linked in this regard. "Budgeting helps set and meet annual targets in terms of revenue and costs, taking into account expected demand and supply. Hotels that focus well on budgeting perform better than those that do not," Van Marrewijk knows.

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"Budgeting remains a question of expectations, feelings and strategy, where a human perspective is indispensable."

Basic understanding

When drafting, the chamber budget is the starting point. In most cases, this forms the bulk of the turnover. "The room budget consists of four components: occupancy rate, number of overnight stays, average room rate and room turnover per month. Other outlets, such as restaurant(s), bar and reception, depend on the room budget. The more rooms booked, the higher the budget for these departments can be. Pay attention to the scheduling of holidays and events as these can increase occupancy and room rates. For example, hotels in Rotterdam may deploy higher room rates during the North Sea Jazz festival because of exponentially higher demand. If the hotel is in a tourist area, take into account the crowds during the warmer months. If there are many events already booked at the hotel, factor them into the budget."

Forecasts

After this insight has been created, forecasts can be made. For a stable base, a good method is to take a three-year period as a reference, at least if you have this data available. "From a comparison of past years, you can easily see where growth or contraction has taken place. In this way, you could properly assess whether it is feasible to maintain or improve results. Of course, the budget is determined by weighing up direct and indirect factors."

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For stable forecasts, a good method is to take a three-year period as a reference.

These steps form the core of the budgeting process. Those who have gone through this and clearly mapped out the budget are ready to work out the pricing for next year. 

Frequently asked questions

Of course, there is much more to say about budgeting. That is why Roan van Marrewijk below answers questions that are frequently asked around the budgeting process.

What is the best way to budget?

"For smaller city hotels, a monthly total budget is sufficient. For larger hotels or hotels with a lot of income from meetings and events, a more detailed budget is needed. That means estimating expected occupancy, room rates, F&B turnover and other revenues for each segment."

How far ahead should you budget?

"Some hotels make an annual budget, others a multi-year plan. But how realistic is that in a strongly supply and demand-driven market? We recommend not planning too far ahead but adjusting expectations regularly. A useful method is to immediately make a forecast for the same month next year at each month-end. Then in September you already have an outline of the next nine months next year and only have to work out the fourth quarter and fine-tune the other months. That way, you distribute the workload and create a more accurate budget."

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IFGH's experts are happy to discuss how to set up a solid budgeting process.

When is it better to let a professional make the budget?

"A good rule of thumb: if you lose overview and control of the financial part yourself. Those who do not know how much money is coming in and going out, and where it is going, risk making mistakes or missing opportunities. It is wise to make a budget plan and review it regularly. If you are unable or unwilling to do this yourself, it is best to hire an expert."

Can you also leave budgeting to technology?

"Automation systems and technology can make the budgeting process more efficient and effective by using historical data for analysis and comparisons between different segments, seasons, holidays, events, and so on. For example, how much more revenue does a Saturday in Maastricht with an André Rieu concert generate than a Saturday without? Accounting systems help by making the costs transparent and being able to work with the data.Yet, in the end, budgeting remains human work and as such a task of the revenue manager. A system will never tell you what the target should be but it can help.  

Budgeting remains a matter of expectations, feelings and strategy, where a human perspective is indispensable."

What is the impact of a hotel upgrade?

"We often get this question. After all, renovating a hotel is a big investment with a lot of impact on the budget. Which months are revenue-wise the most suitable to renovate? How does a hotel generate more revenue with an upgrade? In other words, if 40,000 euros per room is invested, what room rates can be charged? It is not possible to give 100% guarantees, it remains a matter of estimation. But we use market knowledge and our experience with other hotels. By comparing portfolios - without sharing figures, of course - we make a weighted estimate of what is feasible in terms of occupancy and turnover."  

Rules of thumb for a solid budget

  • Start on time. Budgeting is a complex process that requires time and attention. Divide it into smaller steps and plan enough time for each step.
  • Base the budget on facts and figures, not on wishes or guesses. A budget should be challenging, but also realistic. You want to motivate the team to do their best, not frustrate them with impossible targets.
  • Look at market expectations. What do customers, suppliers, banks and others expect from the coming year? Align the budget with market demand and supply.
  • A no go is to base the budget on a simple formula, such as 3-5% more than last year. Consider the hotel's specific situation, look at what is going on in the market, analyse data and take events and seasons into account. This creates a substantiated and realistic budget that can be used to monitor progress, evaluate results and make adjustments.
  • The budget is not a law but a target. You cannot foresee everything that will happen in a year's time. Keep forecasting with current information and adjust the budget as necessary. Be flexible and alert to changes.

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