Hotel Budgeting - Guide on how to make a budget plan for hotel

You cannot put all eggs in one basket. Similarly, in a business, you have to allocate funds wisely to every project and team for balanced functioning.

Especially in a dynamic industry like hospitality, where your operations and campaigns change from time to time, hotel budgeting and forecasting are significant.

You get to prioritize what’s needed to be accomplished and plan it way ahead (like remodeling the hotel entrance or fixing a broken elevator).

This timely budget forecasting also helps you gather the finances required. So, you have enough time to pick a cost-effective solution.



With an annual hospitality budget, you have a reference to return to for overseeing and controlling everyday spending. Proper planning and execution of the budget can reduce business costs and increase the profit margin.



Hotel budgeting and forecasting are also important to know which areas need improvement. You don’t just study one department; you scrutinize every section to list down the budget items.

Besides, talking to employees from different levels will help you understand their everyday plights and how to fix them financially.

In a nutshell, business budget planning projects your revenue and aligns the expenses in line with it to make the most out of your budget while making profits.

You need people to maintain the property, take care of the bookings and accounting, cook food, and clean the place. A fair share of your budget goes to their salary, insurance, extra hours, and other benefits.

There are interns and seasonal and temp workers hired periodically when the workload gets heavy. Their hourly wages must be counted in too.



This category includes every fresh and processed product you buy on a monthly basis. It also consists of any other items you purchase, such as room items, licenses, common area benefits, etc.

This cost goes up and down and can be hard to predict. Look into the previous year’s pattern to determine the ballpark figure while making hotel budgeting and forecasting.



Many businesses in the hospitality industry rely on automated reservation and billing applications. They also invest in branded domain names and websites (along with plug-ins such as chatbots).

The monthly or annual subscription should be a part of your hospitality budget.



It’s a prerequisite to constantly modify and decorate the property to suit the occasion and customer’s liking. Other than small do-ups, some involve big investments like changing the furniture or redesigning the garden area.

These costs occupy a major share of the hospitality budget. 



If you rely on tour guides and agents for recommendations and bookings, their commission is a part of your expense structure.



This category includes the rent or lease amount, property taxes, and other bills you receive in relation to this.



Offline ads in newspapers, online ads, flyers, contest prizes, and other marketing materials and campaign costs.

This kind of budget forecasting is when the hotel manager presents a budget that consolidates every expense of the company without categorizing them.

They run reports of the projected net, total profits, and expenses of all functioning departments of the hotel. For preparing these spreadsheet reports, they consider terms like occupancy rate and average daily rate for both on and off-seasons.

They also collect market and competitor data to accurately prepare the hotel budget and forecasting.



Department budgets are where each operating department is considered a separate entity, and budgets are estimated based on fixed and variable expenses of that department.

Every department must include a detailed expenses list, including employee wages, maintenance and cleaning costs, and other expenses they can incur.



Capital budgets include huge investment items that continue to generate value for a long period of time. For example, a piece of furniture or a new espresso machine.

This type of budget forecasting is important for the hotel industry as they tend to invest in or upgrade equipment or machinery.



This set includes the everyday expenses that a hotel incurs to sustain the business, and unlike capital costs, these items are perishable.



There are budgets that are irrelevant to the revenue and profit generated, and their amount value will not be modified while carrying out the actual activity.





Flexible budgets are the opposite of the above one. Here the value of the budget is allowed to change depending on the other conditions.

Following are the two budgeting methods that have been used and proven successful in the hotel industry for budget forecasting.

1. Incremental budgeting

The incremental budgeting method is where they collect the revenue and expense data of the current year and conduct business budget planning for the next financial year.

They don’t use the same figures but adjust them based on the price changes and inflation percentage to propel the next year’s hotel budgeting and forecasting.

2. Activity-based budgeting

In this type of budget forecasting, goals and KPIs are set first by the hotel or property owners/managers. Then, a realistic budget will be projected based on the expenses that would be required to accomplish the determined objectives.

The majority of the businesses in the hospitality sector follow this method for their business budget planning.

Cloud-based budgeting applications aren’t new to the finance world. But they are overlooked on the assumption that they are expensive. Nevertheless, these tools are worth investing in for two reasons.

The first is that they make accurate projections based on the data you feed in. You don’t have to do the dirty work. Feed the numbers and let the tool work for you.

The second is that you can present the data in the way you want to.



Present flexible hotel budgeting and forecasting to compensate for variable and erratic revenue patterns of the hospitality industry.

Hotel industries are always on cliffhangers, not knowing whether they will face a loss or break even. In such situations, one cannot simply draw budgeting conclusions based on previous years’ data.

It takes more analytical and thorough introspection and technological tools to create a flexible budgeting plan that facilitates the ups and downs of the industry.

To thrive in a competitive backdrop, you must always be on your toes to adapt to new trends and push your serviceability limits. And the budget shouldn’t restrict that.

At the same time, use your data from the past tactfully to identify trends, pick-ups, patterns, and drops in bookings.



Labor costing, one of the expensive categories, should be paid more attention to.

Instead of laying off the laborers or paying them salaries lower than industry standards, inspect if they are productive and have everything they need to accomplish their everyday tasks.

Check their KPIs like number of hours worked, ratings obtained, job satisfaction, and others. Balance this to effortlessly pull off additional labor requirements during on-seasons.

Join hands with technology to make laborers’ tasks easier and less stressful. For instance, digital or AI-based helpdesk, hotel apps for customer service, etc. 



Let your budget have room for capital expenses like repairs, replacements, or upgrades. Check with managers of each department to know what can be improved.

Ask them to research the equipment's rental, leasing, or actual price and fit that into your hospitality budget.

Start with gathering numbers from every software or document your management uses for accounting purposes. This data should have your booking rate, revenue per available room, ADR, length of stay, and the average length of stay.

Also, collect the expenses data for the last one or two years and compare both sets of data to accurately make budget forecasting that supports your next year’s goals and plans.



This is the stage where you draw long-term goals to meet. Post collection of data, the management should derive the attainable mission, numbers, and KPIs to hit for the next fiscal year.

Drawing objectives is the way through which you can gauge your budgets, keeping in mind internal and external factors. It can be made in key points like the one here.

Increase room occupancy rate, reduce the customer response time or improve the customer rating from 3 to 4 stars. Every goal your management comes up with should be clear, feasible, time-bound, and quantifiable.

Team managers can be allowed to pitch in, object, or ask questions to further hone the statements and avoid conflicts later.



Operating expenses denote the day-to-day costs you need to run the hotel. You will run through your previous years’ expenses and then predict the value for the future based on current price ranges and your requirements.

These costs include labor costs, fuel and utility costs, maintenance, food and beverage, raw materials, repair costs, legal and other bills, marketing expenses, and other service costs.

Check your registry or profit and loss statement to find these figures. If you use any expense management application, you can access these expenses category-wise.

The company’s income statement, balance sheet, or bills can be useful as supportive documents. Compare the data with previous years to see if they have increased due to controllable or uncontrollable factors.

The role of cloud-based software in creating precise hotel budgeting and forecasting is remarkable as they show real-time, exact figures. This estimation step is important as it gives you an idea of what your budget forecasting is going to look like.

For better profit margins, your operating expenses should be low. But blindly trimming expenses and cutting costs will lead to instability in hotel management.

Your goal is to project the expenses to match the objectives you have just derived.



The demand calendar predicts and maps expenses with the period when they will be required. This will look like an actual calendar with few other data that denotes when you can expect more or less revenue.

Let’s say you receive more customers during the holiday season. Then these days will be marked in the demand calendar for the upcoming year. This step is also crucial as it helps in the smart allocation of resources.

Your hotel managers know when there is going to be a high demand. Hence, they can put more staff, prepare more food, clean more rooms, and so on.

Checking the previous booking data, your team should derive heavy and light reservation days. Identifying these statistics gives you an upper hand in advertising packages and deals on special days where they expect more customers.

A demand calendar can also favor setting or modifying prices based on visitors’ volume. Thus, you can plan your on and off-season prices accordingly.



Operating revenue denotes the income you will generate in the next financial year.

Since you have both demand calendar and operating expenses in place and know the price for each timeframe, you can draw operating revenue through that for the upcoming year.

The three major parameters that you use to decide the revenue is the occupancy of the room, ADR, and RevPAR (revenue per room).

ADR is the average revenue earned for a room per day and RevPAR is the hotel's overall revenue per available room (including unsold rooms).

There are formulas to estimate ADR and RevPAR. 

ADR = Revenue of a room/Number of sold rooms 

RevPAR = Total revenue/Total number of rooms

Revenue of a room - Price at which customer booked

Total revenue - Number of sold rooms * ADR (Revenue made by sold rooms)

RevPAR is the most preferred KPI factor used by Hoteliers to determine how profitable their day is. By figuring out RevPAR for each time period of the coming year, you can estimate the operating revenue as well as profitability.

Other than RevPAR, GOPAR is also a KPI term used generally as a part of revenue management. Though ADR tells each room's revenue, GOPAR includes the revenue from the restaurant, bar, parking, and other sources.

For this reason, you get to observe an extensive view of your financial health with GOPAR score. Here is how GOPAR is calculated.

GOPAR = Gross operating profit / Total number of rooms

Gross operating profit = Total revenue - (Operating expenses + undistributed expenses)

With GOPAR, You get to value both inflow and outflow of revenue and see if your hotel is really a profit-making asset. Identifying this can be a huge milestone in your business budget planning session.



A part of your budget should have room for reserves fund along with operating expenses. Any unexpected turn of events can invite unexpected expenses. Having reserves can give you a hand in sorting out the mess.

Otherwise, you will have to withdraw funds from your regular budget which can affect other operations till you put that money back.

Generally, businesses prefer to store reserve funds as liquid assets or cash stored in a savings account for easier and more prompt accessibility. Specifying reserves is the last part of your hotel budgeting and forecasting process.

So, every business sets aside some liquid cash or plans monthly storage as reserves while creating their hospitality budget. But the question is, how much money you should be putting aside? There is a formula to calculate that. 

Reserve funds mainly go for fixing unexpected repair or replacement costs of furniture or a piece of equipment. Hence you should know the value of your property and machinery used as well as the scope for substitutes.

Usually, replacement costs are higher than the original costs. So your reserve funds should be higher than that. Along with this, regular audits and maintenance must be conducted to ensure that everything is working properly and reduce the chances of a breakdown.

If you are running out of funds even after rationing needed reserves, then divert a part of your revenue to fill up when the funds hit the bottom level.