Beyond Budgets: Three Smarter Ways to Control Hotel Performance
10 September 2024
Every year, hotels spend enormous time creating the annual budget, going back and forth between departmental managers and ownership until everyone is satisfied with the numbers. But here's the question: why invest so much time in a process that we know will be outdated within months of the new fiscal year? It's a perplexing cycle—hours of effort spent crafting detailed financial plans based on assumptions that, more often than not, will prove inaccurate due to unforeseen changes like fluctuations in demand, economic shifts, or market disruptions.
Traditional budgeting has long been the standard for financial control in the hotel industry, but these budgets become irrelevant far too quickly. Hotels find themselves attempting to navigate business decisions based on outdated projections, which limits their ability to adapt and react to real-time conditions. So why continue pouring resources into something that often becomes worthless so soon after it's created?
While budgets may have been essential for management and ownership in the past, there are far more effective tools available today that provide flexibility, adaptability, and better financial outcomes. In this post, we'll explore three alternatives—Rolling Forecasts, Beyond Budgeting, and Continuous Improvement—that allow hotels to stay agile, make smarter decisions, and drive better results in a constantly changing environment.
1. Rolling Forecasts: Adapting to Real-Time Changes
Revenue is the primary driver of hotel profitability, and getting the forecast right is critical to maximizing profits. Since market conditions can change rapidly and it is difficult to predict more than a few months ahead, accurate revenue forecasting is essential. Forecasts guide revenue expectations and are the foundation for effective resource planning, including labor scheduling, purchasing, and other operational decisions. A hotel that accurately forecasts its revenue can adjust its resource allocation accordingly, ensuring that labor costs, purchasing, and operational expenses are aligned with actual demand. This ability to adapt resource planning to revenue is what ultimately drives higher profits.
This is where rolling forecasts come into play.
What is a Rolling Forecast?
A rolling forecast is a dynamic financial planning tool that allows hotels to continuously update their 12-month estimates based on actual data and current market conditions. Unlike static budgets, which are set once a year and quickly become outdated, rolling forecasts are updated monthly, allowing hotels to react to changes. This flexibility makes rolling forecasts far more effective in adapting to unpredictable shifts in the market, guest demand, or competitive landscape.
Why Traditional Budgets Fall Short
The fundamental issue with traditional budgets is that they are based on assumptions made months in advance. While they can serve as a helpful starting point, fixed budgets often become irrelevant when the market takes unexpected turns. For example, a hotel might forecast strong performance in the first quarter, but sudden economic changes or shifts in demand could make those targets unattainable. In such cases, the budget no longer serves as a reliable guide for decision-making, leaving hotel managers scrambling to respond to current conditions.
The real problem lies in the mismatch between revenue and cost budgets. The result is lower profitability when the revenue budget falls short, but costs are still managed according to the original budget. If the hotel continues to spend on labor, purchasing, and operations as planned—without adjusting to the reduced revenue—the profit margins shrink significantly. However, if hotels use a rolling forecast to update revenue expectations continuously, they can adapt resource planning, such as labor scheduling and operational costs, to align with the revised forecast. This enables hotels to minimize the decrease in profits by proactively managing expenses in line with actual demand. By driving resource allocation based on real-time forecasts, hotels can better protect their profitability, even when revenue falls short of initial projections.
How Rolling Forecasts Solve This
Hotels can use rolling forecasts to adjust revenue projections and operational expenses in real-time. This ongoing process allows hotels to adapt quickly to demand, changing booking patterns, and market trends. Instead of being tied to outdated projections, rolling forecasts give hotels the proactive decision-making power to adjust room rates, marketing strategies, or operational expenses in response to market conditions.
For example, suppose the forecast shows that demand will fall short of budget expectations. In that case, the hotel can take corrective action, such as reducing labor costs, adjusting marketing spend, or launching promotional offers to drive more bookings. This enables management to manage expenses and optimize revenue in line with the current forecast, ultimately leading to improved profitability.
Best Practices for Implementing Rolling Forecasts
To get the most out of rolling forecasts, hotels should follow several best practices:
- Update forecasts monthly: Regularly incorporate actual results and adjust projections for the next 12 months to maintain an accurate view of future revenue and expenses.
- Involve department heads in the forecasting process: Ensure that department managers—such as those overseeing F&B, housekeeping, and events—are actively involved in updating forecasts to ensure operational accuracy and realistic expectations.
- Use real-time data: Real-time data gives hotel management a clear picture of current performance and allows for more accurate adjustments in the future.
By incorporating these practices, hotels can move away from the limitations of static budgeting and adopt a more flexible, real-time approach to managing financial performance. This method allows for constant adjustments based on actual conditions, making it far superior to the traditional budget process. Rolling forecasts offer the flexibility to react quickly to market changes, ensuring that resources are allocated effectively and costs are controlled in line with actual revenue. Given these apparent advantages, it's surprising that more hotels haven't already adopted this approach. In an industry where demand fluctuates and external factors are hard to predict, relying on outdated budgets seems counterproductive. Rolling forecasts offer a more accurate and responsive financial planning tool and provide a clear path to maximizing profitability, regardless of market conditions.
2. Beyond Budgeting: A Flexible Framework for Modern Hotels
Rather than relying on fixed budgets that assume consistent conditions, hotels can implement flexible standards for operations. For example, instead of setting a static budget in housekeeping, hotels should establish benchmarks like cleaning costs per room or the time required to clean a room. As the number of occupied rooms fluctuates, the housekeeping hours and related expenses adjust accordingly. This ensures that costs align with actual demand rather than being based on static revenue projections. Similarly, many hotels already use Customer Acquisition Cost (CAC) and labor costs as a percentage of revenue to control spending. By focusing on these relative measurements rather than fixed budget targets, hotels can better manage costs in real-time and ensure operational efficiency.
What is Beyond Budgeting?
Beyond Budgeting is a management approach that replaces rigid annual budgets with more adaptive and decentralized control methods. This framework moves away from fixed targets and encourages continuous planning and performance benchmarking based on real-time conditions. Rather than sticking to an annual budget that quickly becomes outdated, Beyond Budgeting allows businesses to measure performance against relative benchmarks, such as competitor performance or market fluctuations, offering more relevant and context-driven insights. The key to Beyond Budgeting is empowering decentralized decision-making, allowing managers closer to day-to-day operations to adapt their strategies based on what's happening in real-time.
Why Traditional Budgets are Rigid
One of traditional budgets' main flaws is that they lock businesses into fixed financial targets, regardless of how market conditions evolve. This rigidity often leads to short-term, reactionary decisions to meet budget targets, sometimes at the cost of long-term health. For instance, a hotel might overspend on marketing toward the end of the fiscal year to hit revenue goals. Still, this overspending could erode profit margins or sacrifice guest satisfaction due to overworked teams or reduced service quality.
Another major limitation occurs when market opportunities arise that require flexibility. For example, if a hotel sees a chance to capture more demand by running a strategic marketing campaign to improve profits, the opportunity could be missed if the marketing department has already exhausted its pre-set budget for campaigns. In this scenario, the fixed budget is a barrier to optimizing revenue. The hotel must stick to an outdated plan rather than invest in initiatives that align with real-time market opportunities. The rigidity of traditional budgets can prevent hotels from adapting to these changes and maximizing profitability when opportunities present themselves.
How Beyond Budgeting Offers More Flexibility
Beyond Budgeting provides hotels with a much more flexible framework. Instead of relying on fixed targets, it encourages using relative benchmarks, such as competitor performance or shifting market conditions, to measure success. This approach allows hotels to focus on meaningful, context-driven performance metrics. For instance, rather than simply aiming for a fixed revenue goal, hotels can evaluate their performance based on how well they adapt to market demand compared to their competitors.
Moreover, decentralized decision-making is a core feature of Beyond Budgeting. This means that instead of waiting for corporate directives, department managers are empowered to adjust their strategies as they see fit. For example, if occupancy rates unexpectedly drop, a housekeeping manager can immediately adjust labor scheduling to reduce costs in line with actual demand without waiting for approval from upper management. This allows hotels to stay agile and responsive, improving their ability to optimize costs and performance in real-time.
Best Practices for Adopting Beyond Budgeting
Hotels looking to implement Beyond Budgeting should follow a few fundamental principles:
- Use relative performance benchmarks: Measure success against market conditions or competitor performance rather than fixed financial targets. This provides more context and allows for a clearer understanding of how well the hotel adapts to real-world situations.
- Implement continuous planning: Move away from an annual budget cycle and adopt a model of ongoing, real-time planning that adjusts to changes in demand, guest behavior, and operational realities.
- Empower department heads: Decentralize decision-making by giving department managers the authority to adjust staffing, operational expenses, or strategies based on actual performance metrics, such as occupancy rates or guest satisfaction. This ensures that decisions are made quickly and efficiently, in alignment with current business needs.
By adopting these principles, hotels can break free from the constraints of traditional budgets and operate with greater flexibility and control, leading to more sustainable, long-term success.
3. Continuous Improvement (Kaizen): Small Changes, Big Impact
Improving efficiency and profitability doesn't always come from significant, sweeping changes. The small, incremental improvements often make the most important difference over time. Continuous Improvement, or Kaizen, is a management philosophy that focuses on making ongoing, small changes to optimize processes, reduce inefficiencies, and ultimately boost operational performance. Instead of being constrained by rigid financial targets, Kaizen empowers hotel teams to constantly evaluate and refine their daily operations.
What is Continuous Improvement (Kaizen)?
Continuous improvement is rooted in the idea that success comes from a series of small, incremental changes rather than drastic overhauls. In practice, this means encouraging everyone in the organization—from the front desk to housekeeping and F&B—to regularly look for ways to improve their tasks, make processes more efficient, and eliminate waste. This method shifts the focus away from merely meeting fixed financial targets, as with traditional budgeting, to a culture of continuous optimization. The result is a more agile operation that can improve service delivery and profitability over time.
Why Traditional Budgets Hinder Innovation
Traditional budgets can unintentionally stifle innovation. When hotel teams are focused solely on meeting the financial targets set out in the budget, they may overlook opportunities for real improvement. For instance, if a department concentrates only on staying within its budgeted cost percentages, it might miss creative ways to reduce labor costs or improve guest services. This fixation on budget adherence limits the ability to experiment with new ideas, streamline operations, or make necessary adjustments that could lead to long-term savings and enhanced guest experiences.
A typical example can be found in departments like housekeeping or F&B. If the focus is only on hitting budget targets, managers may miss chances to optimize scheduling, implement better workflows, or introduce new processes that enhance efficiency without compromising service quality. Traditional budgeting can hinder finding these improvements, as teams are too focused on adhering to static numbers rather than thinking creatively about enhancing operations.
How Continuous Improvement Transforms Operations
Continuous improvement transforms hotel operations by fostering a culture of constant evaluation and refinement. Every team member, from front desk staff to management, is encouraged to identify small inefficiencies in their daily tasks and suggest ways to improve them. Over time, these incremental changes can accumulate into significant improvements in overall efficiency, cost savings, and guest satisfaction.
For example, a front desk team might identify that a particular step in the check-in process is unnecessarily time-consuming, causing longer wait times for guests. By suggesting a small change, such as a different software feature or a process tweak, the team can streamline check-ins, reduce wait times, and enhance the guest experience. Similarly, housekeeping staff might notice that certain cleaning routines can be optimized, reducing the time spent per room and lowering labor costs while maintaining quality.
These small, constant improvements lead to cumulative results—from reducing waste in the supply chain to improving staff productivity, guest satisfaction, and operational profitability.
Best Practices for Implementing Continuous Improvement
To successfully adopt the Kaizen philosophy in your hotel, you need to create a culture that encourages every employee to contribute to the process of continual optimization. Here are some critical steps:
- Create a culture of idea-sharing and empowerment: Foster an environment where all employees feel empowered to suggest improvements. Regularly involve staff in discussions about enhancing processes and providing them with the tools and support to implement changes.
- Regularly review department's operations: Continuously evaluate the performance of each department—housekeeping, F&B, front desk, etc.—and actively look for inefficiencies or bottlenecks. These reviews should focus on cost control and improving workflow and service delivery.
- Use guest feedback and operational data: Incorporate feedback and operational metrics (e.g., turnaround times, resource utilization, service complaints) to guide the improvement process. These insights can help focus efforts on areas that will most impact the guest experience and profitability.
By embedding Continuous Improvement into the hotel’s culture, you’ll enhance daily operations and build a more adaptable, innovative team that constantly seeks to improve and optimize processes. Over time, this ongoing refinement leads to higher efficiency and more satisfied guests, driving long-term profitability without being bound by the limitations of a static budget.
Conclusion: Moving Beyond the Budget
Traditional budgets have long been the cornerstone of financial control in hotels, but they often become outdated and too rigid to meet the challenge of today’s dynamic business environment. Hotels face constant shifts in market demand, economic conditions, and guest expectations, often making a fixed budget framework ineffective. By adopting alternative tools like Rolling Forecasts, Beyond Budgeting, and Continuous Improvement, hotels can drive better financial outcomes and stay flexible and adaptive. These methods allow hotels to respond to real-time changes, optimize resource planning, and remain competitive in a fast-evolving marketplaceyou'reou're ready to move beyond the traditional budget and embrace more adaptive, results-driven management practices, start introducing one of these alternatives in hotel'stel's financial planning toIt's It’s time to break free from outdated systems and take control of hotel'stel's future with more dynamic, practical approaches.