Today, navigating the budget planning process for the coming couple of years or so seems both daunting and unpredictable; but as the saying goes: “in the midst of every crisis lies great opportunity.” Indeed, there lies an opportunity to reflect and learn from FY2020, compelling us to command a different approach to hotel financial planning.
Evidently, the typical budgeting exercise is no longer fit for the task. Government imposed restrictions, volatility in the market, drops in occupancy, air traffic at a standstill and all other pandemic-related constraints make the uncertainty of budgeting a reality. Add to this the unknown timing of the vaccine and its subsequent recovery period. Hotels must account for substantial budgeting variables, proactivity and flexibility.
Although there’s very little education in how to budget in a crisis, the following points offer guidance on how to address these challenges in the budget preparation cycle.
1. Review and pressure-test the scenarios and decisions taken in 2020 as a crisis response. Assess the effectiveness and gaps of the crisis management plans that were implemented in 2020 in order to strengthen the response going forward.
2. Define the primary assumptions and identify key risks: When will the pandemic end? Will air travel restrictions increase or ease? Vaccine timing, recovery period starting date, whether consumer confidence will pick up and so forth need to be taken in account.
3. Adopt a commercial vision by focusing on domestic drivers of revenue, international tourism is still marked by uncertainty. Unlock the potential of the local market, and think of other untapped revenue-generating sources.
4. Exercise a more thorough budget baseline with all costs justified and Covid- 19-related expenses fully accounted for. Businesses will have to maintain cautious spending and be vigilant over cost and expenses. Labor is the largest single operating expense in a hotel, and it is therefore critical to continuously review the manning structure. There will be a need to address the three main components that affect labor costs: number of hours worked, compensation of employees and changes in how KPIs are determined. The aforementioned points require a heightened focus on the capability and productivity of the workforce.
5. Factor in Covid-19 budgeting implications, such as PPE kits, enhanced sanitation protocols, reduced percentage of long stayers’ room cleaning and more delivery options as opposed to restaurant dining, all of which require different staffing needs.
6.Prepare the budget to take account of the need for closer monitoring and control during the calendar year, factoring in the possibility of several adjustments and reforecasting, and building in contingency plans. Do not hang your hat on one set of budget numbers as these might become irrelevant very quickly.
7. Adapt a zero-based approach to determine what levels of spending are truly required. As opposed to incremental budgeting, where you factor in inflation and a growth rate percentage, a zero based approach will make you think about everything from scratch without looking at the past. Do I really need to do all of that entertaining and incur travel expenses? Can I shift this allocation to where it is more needed? Should I merge those departments and streamline expenses?
8. Another key consideration is liquidity — the increased need for cash conservation and better cash flow management as well as the increased involvement of lenders and creditors. If 2020 was difficult, 2021 — and possibly 2022 — will also present challenges. The hotel industry is still in the thick of it, and under such circumstances, a perfect budget may not be achievable; but a better budgeting process is definitely required. It will still be difficult to determine, however, if a budget is too aggressive or too conservative.