This year’s budgets require experience. It goes far beyond college class Budget 101, which teaches the why behind budgeting. It circumvents Budget 201, guiding us to follow previous years’ trends to determine what will happen next year. It trumps Budget 301, which leads us to how to budget after a significant event, looking back in history to find the last time an event like a recession occurred. It is fair to say we all but skipped Budget 401 as we searched for normal in the previous three years. Welcome to Budget 501; get ready to do your homework.
As we start our revenue budgeting for 2023, we are devoid of the typical foundation with which to create next year’s financial projections. We do not have:
- Traditional previous year’s performance to review and make assumptions on year-over-year performance based on non-repeat groups, recurring special events, and group pace.
- Meaningful forecasts from our trusted sources. Thus far, we are hearing that we can expect a RevPAR increase of 5.6% in 2023. However, when digging deeper into the chain scales, the variance to the average is enormous, with STR suggesting a 12.2% increase for Upper Upscale (UU) hotels. Where is UU getting an additional 6.6% of growth? It has been proposed that group and business travel (BT) segments are returning; however, how are we acknowledging the departure of the premium-rated leisure segment?
Let’s face it; we continue to search for normal to compare the following year against; however, it simply does not exist. We have never performed so heavily in one segment and devoid of another as in leisure and corporate, respectively. We are not having to determine financials based on our own industry’s performance but considering the change in how the world works.
- Work/Life balance is at the forefront, still.
- Employees are working remotely, still.
- Technology continues to evolve, still.
All these and more are factors to consider when doing budgets in 2023. It is simply not enough to look at 2019 when the search for work/life balance was not a concern of the employer as it is today, and everyone reported to an office, and technology was a choice, not a mandate.
So now let’s budget 2023…
- Group is “back”! Back from where? Based on what we have already explored, it is fair to say that it will not likely look like any previous year. To believe so would suggest that we are going “back” to the normal we used to know; at this point, we know better.
- BT is “back”! Back from where? What year is the look-a-like we should reference in building our 2023 budget for this segment? We have yet to see the reaction from our RFP process by businesses receiving their first rate increases in three years. Their reception will determine our production.
This year’s budget will likely bring to light everything we have questioned about budgets for years before. Why are we doing them? Whom do they serve? How can we be expected to create a budget four months before the current year ends and expect it to be accurate? We need dynamic budgets that allow us to build future financials as we realize the actuals and trends in the current period; however, these are formally known as forecasts.
Let’s stop for a Public Service Announcement: If we are to continue the arduous task of budgeting for the sake of the financial requirement of banks and investors, then give us the courtesy of the final number needed so we can start with the end in mind; this would save us months of work!
This year be prepared to get granular, be ready to get analytical; this will require some science; Welcome to Budget 501, the Revenue Budgets!
To create budgets that have a chance at accuracy, you have to do the science in reviewing individual segment performance and realigning based on current trends for those segments and determining growth and decline per segment based on what we see trending now and what we are being told will happen in the future. (Whew, that is a mouthful!)
- As we have seen leisure business decline this Summer, what is the variance to pre-pandemic Summer? Has it dropped back to the previous Summer performance? Based on the continuation of the newfound Bleisure segment, it is safe to assume that this season’s performance will fall in between last year’s high and pre-pandemic lows. Use that example of defining a season’s variance as a benchmark when determining what to expect for future seasons. (Remember Q1’s Omicron, Q2’s return of graduations, Q3’s hottest summer on record, and early return of school, oh yeah, and the airline industry woes.)
- As we hear that group pace is up and returning, what is the variance to the pre-pandemic pace? What is the value of your funnel now versus then? What is your current group conversion based on the ever-changing booking window? Determine next year’s group performance only after evaluating these factors to get as close to an educated guess as possible and then create the strategies to produce the results.
- As we are predicting the return of BT, are we considering how businesses will receive the first rate increase after three years of “rollover”? How are we writing the contracts based on the rate offered per volume of business if we have to take their “word for it”? What accounts have we already secured versus previous years? It will be more critical than ever that we are executing the contracts beyond a handshake 18 months in advance and collecting attrition and adjusting rates based on actualized performance within the year.
- Most importantly, what calculations are you using to determine the variance in the premium ADRs we have received in the past two years with the return of lower-rated group and BT business?
As Commercial Strategists, we must think beyond our top line and consider the variance to profitability with minimal increases in ADR budgeted and higher occupancies. Welcome to Budget 502, the Expense Budgets!
- Staffing continues to be one of the most significant challenges for every business. As we change the way we operate to overcome staffing shortages, how does this change our labor expense? Reconsider the org chart of every department to create a staffing model that depicts today’s organization.
- Technology continues to evolve, and with widespread adoption comes additional expense. Platform upgrades, interfaces between programs, and new software to solve a work environment that has changed in location, productivity, and security will cost more. While reviewing the previous year’s system expense, consider the new landscapes and tech requirements stalled during the pandemic that is now fast-forwarding compliance.
- Last but certainly not least is the cost of inflation. As we have experienced this year, everything costs more; salaries, cost of goods, cost of travel, and as we have realized it, we have had to make changes independently to solve for the time being. How are you planning for the increase in these expenses next year to avoid the individual increases we have had to actualize this year that ultimately negatively affect profitability?
The bottom line is despite our disdain for the budget process; it is here to stay for now. Take on the challenge fervently as a learning experience in trend analysis and segment performance strategy. In everything we do, we should create value where it is not otherwise obvious to respect our time and intelligence. Do the hard work of creating a 2023 budget that will challenge you and your team to define and defend your assumptions and create goals that inspire. Reach outside of your comfort zone to find the enrichment that will make you better for the future of budgeting, even when it becomes a history lesson. :)
Getting on with it — Lori Kiel
Originally published at https://www.linkedin.com.