A Guide to Hotel Financial Planning for US SMBs in 2024

To achieve sustainability and accessibility in the hotel industry, small and medium-sized hotels must plan their finances accordingly. The financial landscape for hotel loans has evolved recently in response to higher interest rates. This shift has led to a focus on cash flow management and the need for flexible loan terms.

A Guide to Hotel Financial Planning for US SMBs in 2024

Economic pressures are prompting lenders and developers to emphasise maintaining liquidity and financial flexibility. We are also witnessing—and will continue to see—the importance of financial forecasting, revenue management (including the adoption of dynamic pricing and tracking metrics such as Revenue per Available Room), sustainability, and financing options (including the strategic use of Commercial Property Assessed Clean Energy (CPACE) financing), alongside technological advancements in data analytics and automation. This guide provides an in-depth look at essential strategies for hotel financial planning, with a focus on understanding markup to optimise pricing and profitability. We will use authoritative sources and data to support our arguments, ensuring a robust and comprehensive approach.

Understanding Hotel Financial Planning

Hotel financial planning involves creating a detailed roadmap that accounts for strategies, financial goals, and the actions required to attain profitability and sustainable growth. Some key components are outlined below:

Budgeting and Forecasting

The modern hotel industry has learned to gather as much data as possible about prevailing conditions. This helps them plan budgets and forecast events. The goal is to allocate resources efficiently, set financial objectives, and provide a roadmap to achieve them. Hotels must account for external factors such as:

• Location: Hotels thrive or struggle based on their visibility and ability to attract visitors, which is highly dependent on location. 
• Market patterns: People’s behaviours change over time, and hotels may need to adjust their strategies to cope with quieter periods. For example, luxury hotels may face greater challenges during recessions.    
• Macroeconomic factors: Variables such as unemployment rates, GDP, exchange rates, and global events (like the COVID-19 pandemic) can significantly impact financial performance and demand.

With these considerations in mind, hotels can benefit from leveraging historical data to predict future needs and build resilience.

Revenue Management

Revenue management involves optimising rates and occupancy to maximise how much revenue can be earned per room. The goal is to sell the right rooms to the right customers at the right time for an optimal price. The best way to achieve this is by analysing market demand, competitor prices, guest behaviour, and related metrics. Some methods hotels use to manage revenue include:

• Dynamic pricing: This strategy allows hotels to adjust room rates in real-time based on demand, seasonality, and market conditions.  
• Revenue management software: Automating pricing decisions based on data helps hotels ensure they maximise revenue with fewer errors.    
• Demand forecasting: Hotels can analyse historical data to identify patterns that can be used to predict future demand for rooms and other services.    
• Inventory management: Hotels can manage room availability by ensuring each sales channel has the right amount of access, avoiding missed opportunities.   
• Segmentation: Using data, hotels can segment their market based on customer characteristics and offer services tailored to these specific needs in a more personalised way.

Hotels are increasingly leveraging AI and advanced analytics to refine their strategies and improve forecasting accuracy. This includes offering personalised pricing based on consumer preferences and incorporating the cost of sustainability into pricing strategies.

Cost Control

For cost control, we delve into analysing, monitoring, and managing expenses to ensure that financial resources are utilised effectively. The goal is to balance expenses with the desired levels of quality and guest satisfaction. The process breaks down as follows:

• Identifying expenses: Start by considering the unchanging or fixed costs, including property tax, salaries, rent, etc., alongside variable costs (food, utilities, beverages, guest supplies, etc.) to create a database of everything you are expected to pay for, allowing you to gain an overview of your financial health and expectations.
• Benchmarking: Next, measure yourself against industry standards and similar properties to identify areas where costs may be higher than they should be. This is typically the first step in optimising resource allocation and usage.
• Expense analysis: Hotels also need to regularly analyse their expenses to identify patterns and outliers. This includes reviewing financial statements, conducting variance analyses, cost-benefit analyses, and others to determine the effectiveness of spending.
• Implementing cost-saving measures: Based on the analysis, hotels can implement a combination of cost-saving measures that effectively address each identified issue by tackling the problem at its core. This may involve switching to clean energy, bulk purchasing, outsourcing services such as middleware, optimising staff schedules, and so on.

After implementation, it is essential for hotels to monitor their programmes to assess the impact of the changes and adjust as necessary.

Understanding Markup in Hotel Pricing

To survive in the hotel industry, operators must understand markup. This term refers to the practice of adding a percentage or fixed amount to the base cost of a hotel room to determine the final selling price. It is a critical strategy for covering costs and achieving profitability.

Markup is applied to cover costs, generate profits, position an establishment in the market (luxury, mid-range, or budget), and control value perception in a way that aligns with the quality and experience offered. Markup is often implemented in various ways, including:

• Cost-plus Markup    
• Dynamic Pricing    
• Seasonal Pricing    
• Segmented Pricing    
• Length of Stay Markup    
• Day of the Week Markup    
• Package Deal Markup

As you can see, there are many ways to enhance customer satisfaction and increase revenues. It is also worthwhile to analyse your competitors within the market to ensure your markup is competitive while covering costs and generating profit.

Strategies for Effective Hotel Financial Planning

To achieve sustainable financial success, hotels must implement a range of strategies tailored to their specific needs to address financial management challenges. This includes:

• Create detailed budgets: Develop comprehensive budgets that account for all aspects, closely monitoring categories such as food, room revenue, sales, event hosting, ancillary services, etc. Regularly compare actual performance against the budget, identify variances, and investigate the reasons behind them to make adjustments and stay on track.
• Track demand trends: Demand changes over time, and your ability to predict when this occurs and meet the needs promptly depends on your capacity to analyse past data on occupancy, revenue per room, and other vital metrics. You can also stay informed about local events, holidays, economic shifts, and other factors that affect hotel demand to gain a well-rounded view of the market.
• Optimise revenue management: As mentioned, optimising your operations is an excellent way to enhance hotel financial planning. Strategies such as dynamic pricing, revenue management technology, segmentation, and other marketing techniques can help meet demand where it arises.
• Diversify revenue streams: Enhance your restaurant and bar offerings to attract not only hotel guests but also local customers. This could involve planning themed nights, happy hours, special events, etc. Invest in facilities that can host weddings or conferences to attract more bookings. You may also consider partnering with local businesses to offer exclusive deals to guests, such as collaborating with tour operators, spas, and entertainment venues to provide additional value to your visitors.
• Scenario planning: It is important for a hotel to understand what worst-case, best-case, and most likely scenarios may look like based on all the data they possess and can project. This is a valuable method to comprehend financial scenarios, how they evolve, and how to respond to unforeseen challenges before they materialise. It is also an effective means of identifying risks and developing contingency plans, including creating reserve funds, obtaining the right kind of insurance, and diversifying revenue streams.
• Build resilience: Maintaining a reserve fund is crucial for handling unexpected expenses or downturns. This ensures your hotel can withstand financial challenges and continue operations, even during difficult times. An inability to weather such challenges can sometimes signify the beginning of the end for a business that might have thrived with more preparation.

 A Real-World Example

Learning from real-world examples can provide valuable insights into successful financial planning strategies. Kempinski Hotels, facilitated by Infor EPM, faced challenges in its financial planning and forecasting processes across its global operations, which were exacerbated during the pandemic years. The management team aimed to improve accuracy, enhance real-time decision-making, streamline budgeting, and more. The hotel operator was able to standardise reporting on a global scale at a time when these objectives were more critical than ever. They identified changing company goals during a global downturn, developing a way to empower individual locations by allowing all users access to comprehensive and up-to-date data. This gave the hotel chain greater flexibility and agility to adapt to shifting plans and assumptions. Consequently, the hotel can continue to chart a path to success in a new era.

How Hotels Can Build Resilience With Financial Planning

The true insight lies in understanding that financial success depends on strategic foresight and the flexibility to adapt. Through a thoughtful and data-driven process, hotels can implement strategies to optimise their expenses and align staffing needs with budgetary planning. Autonomy will continue to influence hospitality operations and can be harnessed to empower teams to succeed.

The goal is not merely to survive the year but also to foster resilience through budget planning to capitalise on opportunities and navigate challenges! (Images by Ingo Jakubke from Pixabay and Manuel Moreno on Unsplash)

Share this:

ABOUTME

We overland. We eat plants and fungi. We live outside as much as possible. We are all connected. A female travel blogger overlanding and writing about ecotourism, ethical and sustainable travel, socially conscious travel and housesitting. An online travel magazine since 2015.