Checking in Twice: Finding Out If Your Budget is Naughty or Nice
Season’s greetings! As the year comes to a close, so does our industry’s budgeting season. While important, the budgeting season can sometimes be an arduous process, and we can get lost in the numbers in our attempt to complete the process. So, much like a certain jolly figure from the North Pole, we, too, should double-check our work. Here’s some key items to consider before taking a cheerful sleigh ride into the new year.
STR Index Goals
Ideally, when projecting your topline revenues for the new year, you have to consider how your property is projected to perform within the market. Is your property growing in share? Maybe it’s losing share temporarily due to a renovation. If so, do you have a plan in place to regain that share? Do the topline revenues imply a STR performance that is historically realistic for your property as it stands right now? These questions can become increasingly complex the further down the chimney we go, but they’re items that are critical to consider when developing a realistically achievable budget.
Brand Fees
While it may seem obvious, it’s wise to double-check that we have budgeted correctly for the fees we’ll incur from the efforts of our brand partners. It doesn’t hurt to reference your franchise agreements for royalty rates, marketing rates, and any other brand initiatives appropriate to your property. In that same vein, we should consider any guidance the brands have issued for the coming year so we’re prepared for those expenses ahead of time. When we fail to budget appropriately for these items, it has an adverse effect on projected cashflows, leaving us feeling like we received a lump of coal rather than it being an added value to the product we’re offering our guests.
Revenue to Expense Ratio
The last big picture item is examining the increase in expense occurring alongside the increase in revenues. As we increase in occupancy, so should our expenses accordingly. While visions of sugarplums dancing in our guest’s heads is complimentary, controllables such as guest supplies and operating supplies should increase year-over-year. Just ensure that from a per-occupied room basis (POR) we’re staying close to what we historically ran. Or, perhaps your property has run historically high compared to other like properties. In which case, this becomes more of a discussion of adjusting how we operate. Overall, we should look at our revenue generating departments, compare them to their expenses, and ensure that those expenses are either increasing at a reasonable rate or there is a logical reason that it would increase or decrease sharply over prior years.
I’m hoping that these items give us something to consider at the year and budget closes. If we can tick all these boxes, then we can “face unafraid, the plans we have made” and walk in a winter wonderland of our own. I can certainly dream by the fire to that. Happy Holidays!
By Tim Hayes, Vice President of Financial Analysis
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