The budget planning period is a critical time for all businesses, and the hotel industry is no exception. For hotels, budgeting provides a big-picture view of potential risks and helps to identify opportunities. It also gives hotels a sense of the financial health of the overall organization and serves as a road map for the future.
Hotel budgets are critical to plan and maintain, particularly because hotels are sensitive to economic factors, changes in demand, holiday and vacation periods and more. Properly planning for these considerations — while also identifying trends and areas of opportunity — is key to maintaining and improving the financial health and operational efficiency of a hotel organization and ensuring the best experience for guests. And there’s a lot at stake: The hotel and resort industry is expected to reach a market size of $1.2 trillion this year, according to global data company Statista.
Budget planning involves a number of steps, including reviewing the hotel’s prior financial performance, assessing expenses, identifying areas of cost-cutting, using data to create financial forecasts, setting goals and ultimately generating budgets that serve as a guideline for the upcoming year.
This guide covers the most important information hotels need to consider when creating their budgets, including types of budgets, factors influencing hotel budgets, steps to take to create budgets and how to identify and avoid common pitfalls.
What Is a Hotel Budget?
Hotel budgets are strategic financial plans detailing how money will be generated and spent to achieve goals during a period of time, typically a fiscal year. These budgets help hotel management deliver results, operate efficiently and make informed decisions.
- Hotel budgets help determine how to allocate funds and resources in order to achieve goals in the upcoming year.
- Hotel management should consider a variety of budgeting techniques based on their individual needs.
- Several factors play an important role in determining the next year’s hotel budgets, including seasonality, market trends, economic factors and local competition.
- Technology, such as customer relationship management (CRM) systems and planning and budgeting software, can help hotels effectively create and manage the budgeting process.
Hotel Budgeting Explained
Hotels use budget planning to determine the funds and resources they need to achieve the goals they set for the upcoming year. This process typically involves hotel managers, finance leaders and other hotel executives from marketing, sales, human resources and front of house, and serves as a road map for what the next year may look like in terms of financial performance.
Budgeting is important for many reasons, not the least of which is the inherent competitiveness of the hotel industry. Hotels need an accurate guide to ensure that their financial results align with their business objectives and that teams are prepared to reach these goals. Creating hotel budgets requires looking closely at a variety of factors, including operating costs, revenue forecasts and expense forecasts, to accurately plan for the future. Those factors and more are considered part of the hotel budgeting process.
Why Do Hotels Create Budgets?
Hotels create budgets for a number of reasons. Budgets help the business stay organized and manage day-to-day operations in order to deliver the intended financial results, and they serve as a guideline for employees to understand the direction in which the organization is moving and how to get there. Hotel budgets also function as a portal for executives into how the hotel is being managed. If the budgeting process is slow and arduous, for example, it’s a clear indication that the business needs better organization; but if the process is organized and streamlined, it’s likely that the hotel’s operations are well-managed.
The Uniform System of Accounts for the Lodging Industry (USALI)
The Uniform System of Accounts for the Lodging Industry (USALI) is a standardized financial reporting framework designed by the Hospitality Financial and Technology Professionals organization to create more consistency in assessing a hotel’s financial performance. Hotels use USALI to structure their budgets, control costs, benchmark performance against industry standards and maintain financial transparency, all of which are vital for effective financial management in the hospitality industry. USALI offers a number of advantages to hotels, including:
- Pinpointing where a hotel is performing well and where improvements are needed.
- Comparing financial results among individual properties.
- Accounting for and reporting uniformity.
- Improving accountability for hotel departments.
Additionally, USALI’s standardized reporting format supports transparent financial reporting, crucial for maintaining investor and lender relations, and incorporates industry best practices to ensure that hotels apply proven financial management approaches to their budgets. This ultimately leads to more accurate financial planning and improved performance.
Types of Budgets in the Hotel Industry
Hotels use a variety of budgets to address different parts of the business, align with particular goals and provide a comprehensive financial framework. Each budget serves a particular purpose and helps hotel management allocate resources, monitor corporate performance and make informed budget decisions. Here are the six most commonly used hotel budgets:
A consolidated budget combines and summarizes all the individual departmental budgets within a hotel or resort into a single, overarching budget for the entire property. This consolidated budget provides a holistic view of a hotel’s financial performance and is an important tool for financial planning, monitoring performance and making informed decisions to ensure the hotel’s financial health and profitability.
A department budget analyzes fixed and variable expenses of a particular hotel department, such as marketing, sales, finance and operations. These budgets are created for every department across the business and include all expenses, such as maintenance and employee wages.
This type of budget includes everyday operating expenses that a hotel incurs across the business in order to keep running smoothly. These expenses include food and beverage costs, utilities, housekeeping supplies and staff salaries.
Cash-flow budgets — also known as cash budgets or cash forecasts — help hotels plan and manage their cash inflows and outflows over a period of time. Cash inflows include sales revenue, loans and investments, while outflows include wages, rent, taxes and other operational costs.
Capital budgets are designed to account for large investments or projects that are expected to generate value for a long period of time. An example of this may include technology enhancements or equipment upgrades.
This type of budget is a financial plan that outlines the allocation of resources and funds specifically for marketing and promotional activities to attract guests, increase bookings and enhance the hotel’s brand visibility for the upcoming year. This budget is a vital component of a hotel’s overall financial planning as it helps to ensure that marketing efforts are adequately funded, monitored and aligned with the hotel’s strategic objectives.
Key Factors Influencing Hotel Budgets
Several factors play a key role in determining hotel budgets, from the impact that seasonal fluctuations have on staffing to the ways in which market trends and the economy affect revenue. Not taking the following factors into account can lead to inaccurate budgeting, operational inefficiencies and missed opportunities.
Forecasting hotel revenue is one method used to determine the property’s future demand and revenue performance. By analyzing historical and current data, revenue predictions enable a hotel to project future outcomes and prepare for unforeseen events or disruptions.
Cost predictions help hotels plan for their expenses, which include the cost of labor, supplies and maintenance, among others. In turn, cost predictions help hotels budget to ensure that management allocates resources appropriately.
Hotels experience fluctuations based on factors like seasons, holidays and local events. Budgets must take these variations into account in order to adjust staffing, marketing efforts and pricing accordingly.
Market Trends and Economic Climate
Market trends — understanding the patterns, shifts and changes in consumer behavior — and the economic climate both influence hotel budgets. These shifts can impact consumer trends, either positively or negatively, and must be accounted for when budget planning.
Competition and Industry Benchmarks
Factors such as the number of hotels in a given area can impact revenue projections, while industry benchmarks, including occupancy rate, average daily rate and revenue per available room, can provide hotels with a reference point for comparison with the competition.
How to Create a Hotel Budget
Creating hotel budgets is a critical and fundamental management practice that enables effective planning, resource allocation and decision-making. A variety of steps and considerations are necessary in the budget-creation process, including gathering the appropriate and relevant data, forecasting and making necessary adjustments along the way. Here are the key steps hotels should take into consideration when creating budgets.
Determine operational costs.
For many hotels, operational costs make up a large portion of budgets. These expenses include staff salaries and benefits across various departments, including front desk, housekeeping, food and beverage, maintenance and management; supplies, such as office supplies, food and beverage, cleaning products and in-room amenities; utilities, such as electricity, gas, sewage and heating; marketing campaigns and website maintenance; and any other expenses related to the daily operation of the property and the delivery of hospitality services.
Creating a hotel budget requires historical data on operating costs, which helps to identify trends and generate an estimate based on past years. Other necessary data includes production data, which can be segmented by rate plan, room type, source and guest profile. This data is typically found in a company’s project management system, accounting software or business intelligence solution.
Predicting revenue based on historical data and market trends provides a solid foundation for revenue projections. By analyzing past performance and current market conditions, hotels can base their budgets on data and generate more realistic revenue forecasting.
Estimate future demand.
To estimate future demand, it’s important to understand seasonal and market-specific trends. These include holidays, vacation periods and any local events that may be scheduled. Hotels will need to plan for high-demand periods with more staff, while fewer staff members may be necessary for slower periods.
Calculate occupancy rate.
The occupancy rate is the percentage of occupied rooms at a hotel at a given time. This is one of the most important indicators of success for hotels. This number is calculated by dividing the total number of rooms occupied by the total number of rooms available, then multiplying the result by 100 to create a percentage. For example:
[185 occupied rooms / 200 total room = 0.925] x 100 = 92.5% occupancy rate
In 2022, the occupancy rate of the hotel industry in the United States reached 63%, showing growth over the previous two years, which had been impacted by the COVID-19 pandemic, according to Statista.
Plan for capital expenditures.
Capital expenditures — costs associated with major purchases, renovations, new equipment or property expansions — must be included in every hotel budget. These costs typically focus on physical property and are planned with a long-term view of the impact the improvements will have on the hotel and with the expectation that the investment will be sufficient for longer than one year.
Plan for the unexpected.
To be prepared for the unknown, it’s important to create budgets that make room for contingency plans in the event of unforeseen costs or unanticipated fluctuations in demand. These expenses might include hotel repairs or revenue shortfalls from unexpected occupancy dips.
Adjust as needed.
It’s important for hotels to continually monitor their expenses to stay on top of budgets and make adjustments as necessary. This allows hotel management to maintain better control over financial operations, prevent overspending and identify unexpected costs before they become problematic.
Hotels should determine what goals they want to achieve in the upcoming year and consider how budgeting could help reach those goals. Identifying and planning for specific goals ensures that financial resources will be allocated in a way that supports the hotel’s objectives and serves as a benchmark for evaluating the success and impact of budget decisions.
13 Hotel Budgeting Tips
As hotels begin their budget planning process for the upcoming year, here are 13 key considerations to help ensure successful outcomes.
- Use historical data to track seasonality and trends. Using data from past years is essential for understanding seasonality and trends. Once hotel management has identified and analyzed the trends that affect their budget — such as busy periods and slower times — they can incorporate this data into future budgets to better plan for their needs.
- Compare year-to-date hotel revenue. Hotels should determine how much revenue they generated over the past year and compare it with the revenue brought in during the same period in years prior. This data may reveal trends in market segment performance, negotiated account pickup (an agreement between a hotel and a group of customers for a specific number of rooms) or other unexpected findings.
- Assess year-over-year profit. By reviewing their profit-and-loss statements, hotels can better assess how their property is performing based on average revenue gains and losses. This will help them ascertain whether the hotel has experienced growth or loss or has plateaued.
- Track changes in labor productivity and performance. Tracking various employee metrics, such as hours worked, salaries and employee satisfaction, is key to assessing and planning for necessary changes in labor in the upcoming year and the resulting budget requirements. This data may point to the need for additional staff during certain periods or fewer during other times.
- Create a staff guide. An annual staff guide that includes the job descriptions and salaries of those employed by the hotel is helpful to improve productivity while accounting for optimal staffing needs. In addition to the fixed positions and their salaries, this staff guide should include a formula to calculate the hotel’s variable positions, such as wages for hourly or non-salaried staff.
- Use technology to reduce labor expenses. Updating the hotel’s technology infrastructure can be a critical step to optimize operations. Technologies such as digital hotel kiosks, applications that support mobile check-in and digital room keys not only improve operations behind the scenes, but they also improve the guest experience.
- Account for repairs, renovations and maintenance. It’s important to always budget for unforeseen expenses, particularly if the hotel is subject to more extreme weather patterns. This might include budgeting for roof repairs, hotel room renovations and minor maintenance projects that could pop up throughout the year.
- Analyze group backlog. Group reservations — in which a block of rooms is reserved together for the same booking period, such as for a wedding or a conference — can be an opportunity to boost revenue for hotels. Hotel managers should examine how many groups are designated as tentative, the length of time they’ve been tentative and whether a backlog of group reservations exists. This can help hotels budget more effectively by adjusting rates and identifying peak periods for staffing purposes.
- Adjust for inflation. To account for increases in the cost of goods and services, hotels must account for inflation in the upcoming year and adjust budgets accordingly. This will help hotels better understand and plan for operational costs, cost projections and purchasing power.
- Reference competitive data from STR. STR is a hotel analytics company that provides a benchmarking tool to compare a hotel’s performance with a group of competing hotels. This report uses a variety of key performance indicators and metrics to compare one hotel’s performance with another and can be used to benchmark performance, review competitors’ performance, make strategic decisions and monitor the effectiveness of a hotel’s business strategies over time.
- Create a demand calendar. A demand calendar uses data to predict and map expenses throughout the year. If a hotel receives more customers during the summer, for example, these peak days or weeks will be marked as such in the demand calendar. This enables managers to better plan by scheduling additional staff or ensuring that enough food is available.
- Account for incentives. Many hotels have a management incentive plan or annual bonus plan based on certain metrics tied to the success and profitability of the hotel. These metrics might include guest and employee satisfaction scores, productivity measures and health and safety scores. Budgets should include potential payouts of these incentives.
- Use budgeting tools. Budgeting tools, often part of enterprise resource management (ERP) solutions, are a necessary investment for hotels in order to ensure that they remain profitable and competitive. Not only do these tools help to make accurate projections based on hotel data, but many also help hotels better understand their finances, plan for future expenses, identify areas of potential savings and efficiently allocate resources.
Hotel Budgeting Pitfalls and How to Avoid Them
As hotels plan their budgets, they may encounter pitfalls. Avoiding them is key to ensuring that budgeting — and the subsequent year — run smoothly. Here are some common pitfalls and how to avoid them.
Overly Optimistic Projections
While it may be tempting to aim high in financial projections, overly optimistic budgets create expectations that are often difficult to meet, which can result in disappointment. Hotels also risk spending too much money or allocating resources incorrectly if revenue targets are too high, both of which can result in cash-flow challenges.
To ensure that projections are as accurate as possible, hotels should ascertain that the data they’re using to develop these projections is current and complete. It’s also important to analyze past performance and current market conditions and properly estimate future demand to develop the most realistic projections.
Failure to Account for Seasonality
Failing to account for holidays, peak seasons, local events and slow periods can have a significant impact. A hotel may be understaffed with insufficient food and beverage, for example, resulting in a suboptimal guest experience. Conversely, failure to account for slower periods can result in unnecessary expenditures, such as funding excessive staff. Hotels should consult historical data for these periods in order to understand seasonality and trends and to plan and budget accordingly.
Unexpected Costs and No Emergency Fund
Neglecting to budget for an emergency fund can negatively impact a hotel should an unexpected event occur. A lack of an emergency fund can make hotels more susceptible to continuity challenges, financial shock and poor customer experience. In the event of a flood, for example, a lack of access to necessary funds for cleanup can impact guest reservations and cash flow.
Budgeting for an emergency fund is essential for hotels to ensure financial health, positive customer experience and operational efficiency. These expenses might include hotel repairs in the wake of a disaster or covering revenue shortfalls from unexpected dips in occupancy.
Failure to Regularly Review and Adjust Budgets
Budgets should not be set in stone; hotels should regularly review them and adjust as necessary. Failing to do so can result in inaccurate financial predictions and budget shortfalls. Should additional expenses — or opportunities — arise, failing to adjust for them in the budget can have negative consequences.
Monitoring the hotel’s expenses and cash flow and regularly making adjustments are important steps in creating and maintaining a hotel’s budget. This helps managers better control their financial operations, prevent overspending and identify unexpected costs before they become problematic.
Hotel Budget Trends for the Future
Hotel budget trends are influenced by various factors, including changes in consumer preferences, advances in technology and shifts in the broader economy. Several emerging trends are likely to shape hotel budgets in the years to come.
Sustainability is a growing concern for both travelers and hotel operators. Hotels are increasingly investing in eco-friendly practices and infrastructure to reduce their environmental footprint. This includes energy-efficient lighting and HVAC systems, water-saving technologies, waste reduction measures and the use of renewable energy sources. Hotel budgets will likely allocate funds for implementing and maintaining these sustainable initiatives going forward. Additionally, hotels may invest in eco-certifications and marketing efforts to attract eco-conscious travelers.
The integration of technology into hotel operations is an ongoing trend. In 2021, the smart hospitality market reached approximately $19 billion worldwide, according to Statista. Hotels are adopting innovative solutions, such as contactless check-in/check-out, mobile room keys and smart room controls. These technologies improve efficiency and enhance the guest experience. As technology evolves, hotels will need to continue to budget for initial technology investments, ongoing maintenance and cybersecurity measures to protect guest data. Additionally, hotels should earmark funds for planning and budgeting software, often part of ERP solutions, as well as customer relationship management (CRM) systems to personalize guest interactions and drive revenue.
Health and Safety Measures
The COVID-19 pandemic has accelerated the prioritization of health and safety in the hospitality industry. Hotel budgets will continue to include funds for enhanced cleaning protocols, personal protective equipment, sanitization technologies and employee training on health and safety measures. These expenses will remain essential to instill confidence in travelers and meet evolving regulatory requirements.
Hotel Budgeting Tools and Software
Hotel budgeting tools and software are essential for efficient financial planning and management in the hospitality industry. The following types of tools help hoteliers streamline budget creation, track expenses and analyze financial performance.
Digital Marketing and Automation Tools
Hotels can leverage a variety of digital marketing and automation tools to streamline their budgeting processes and improve the efficiency of their marketing efforts. These tools help hotels allocate resources effectively, track marketing expenses and analyze the return on investment (ROI) of their marketing campaigns. Examples are marketing automation platforms, budget planning and tracking software and CRM systems.
Customer-first technologies that can support the hotel budgeting process include solutions like guest feedback and review platforms. These tools provide real-time customer insights to help hotels understand what guests enjoyed or what they think needs improvement. This feedback is important for hotels to make informed budgeting decisions that align with their commitment to delivering an exceptional guest experience.
All Your Hotel Budgeting Data in One Place
NetSuite Planning and Budgeting helps hotels automate the planning and budgeting process. These tools enable hotels to quickly and easily produce budgets and forecasts, model scenarios and generate reports within one scalable solution. NetSuite Planning and Budgeting provides one environment for stakeholders to collaborate, eliminating the need for email trails and spreadsheets, and helps hotels accelerate budgeting and forecasting processes with predictive features. With less time spent on manual consolidation, troubleshooting, reporting and data loading, finance staff can focus less on data entry and formula maintenance and more on strategic analysis activities that have a greater impact on the company’s financial position.
The right budgeting technology is key to creating effective hotel budgets. As organizations look toward budgeting season, it’s important to understand the full scope of the budgeting process — why it’s important, the different types of budgets and the factors that influence it. By doing so, hotels will have a comprehensive view of the potential risks and opportunities they may encounter, as well as a road map for the year ahead. With this information, hotels can better ensure financial health and reach their goals.
Hotel Budgeting FAQs
How do you budget for a hotel?
Budgeting for a hotel requires a number of steps. These include determining operational costs, gathering historical data on operating costs, forecasting revenue, estimating future demand, calculating occupancy rate, forecasting expenses, planning for capital expenditures and the unexpected, adjusting as necessary and identifying the goals the hotel wants to achieve in the upcoming year.
What are the three types of budgets most commonly used in the hotel industry?
Three of the most common types of budgets used in the hotel industry are consolidated budget, which combines all the individual departmental budgets within a hotel or resort into a single, overarching budget for the entire property; operational budget, which includes everyday expenses that a hotel incurs across the business in order to keep running smoothly; and capital budget, which is designed to account for large investments or projects that are expected to generate value for a long period of time.
Does every hotel need a budget?
Yes, every hotel needs a budget, regardless of size. A hotel’s budget comprises much more than its expenses; hotels need to have planning in place to maximize results and reach goals. A hotel budget is a critical resource to help the organization stay organized and align their teams to deliver financial results.
Does a hotel budget have to be adjusted throughout the year?
Hotel budgets should not be set in stone; hotels should regularly review them and make adjustments as necessary.
Who is responsible for budgeting in a hotel?
Many stakeholders are involved in the budget planning process, including executives in marketing, sales and human resources, as well as front of house, hotel managers, the finance team and revenue managers.
Why is budgeting important in hotels?
Budgeting is important to ensure that hotels’ financial results are aligned with their business objectives and that teams are prepared to reach these goals.