Pinnacle Advisory Group


The Nation's Leading Full Service Hospitality Consulting Firm.

Budget Review 2010 by: Tracy Cooper Ramos

By Tracy Cooper Ramos

There is an old adage, “Past behavior is the best predictor of future performance”. With economic instabilities and fluctuating markets there are tools and strategies to be employed that more reasonably consider what will happen in an upcoming year. With the budget season upon us, this article explores an asset manager’s role in the budgeting process and provides specific questions an asset manager might ask during the process.

Whether an owner has official approval rights over the budget or not, an asset manager has a responsibility to review and comment on a property’s budget in any given year. The annual budget often sets the measurement of success in any given period. With serious consideration and thorough review, the annual budget can be an excellent tool to guide the asset manager and the onsite property management. Without this analysis and review, the budget is nothing but a placeholder.

So what should an asset manager look for when reviewing the annual budget? A review of the hotel’s financial plan, its marketing plan and annual capital plan should be done in concert with one another.

Marketing Plan Review
The marketing plan is a key factor in achieving the property’s financial goals and shoul. be used as a tool.
Key questions to review the marketing plan include:

1. Does the marketing strategy for the hotel as a whole make sense given the factors affecting the local market today?2. Does the marketing plan set forth specific goals for targeted roomnights in each major segment?3. What kinds of advertising and direct marketing efforts are set to achieve the goals set out in the financial plan?4. How does the current booking pace compare to prior years? Generally, rooms are being booked within a shorter time frame, so based on the number of rooms currently on the books, is it reasonable to consider additional pick up as compared to what’s been shown in the past?

5. Are there contracted rooms on the books that will not require any additional sales efforts? Is this factored into each period’s budgeted ADR with appropriate consideration for yield management techiniques?

Both external and internal factors will affect a hotel’s financial performance in the upcoming year. National forecasters like STR and PKF can give some insight into what the nation’s lodging market will look like in 2010. This can provide some baseline for where to begin but it cannot tell the whole picture. The marketing plan should outline what’s going on in the region and immediate area.

Key questions that the marketing plan should address in the region and local market include:

  • What supply changes are on the horizon? While new development in most markets has slowed considerably in recent years, changes to existing competitive supply, including renovations of existing space, or guestroom or meeting space additions may affect how your hotel will be able to compete in its market.
  • How are local major demand generators doing? Check websites for press releases on what companies are saying publicly about their growth and stability.
  • What planned projects are on the horizon for in the immediate area? City planning and zoning and regional economic development offices can provide some insight into how the area’s economy may be growing
  • How is the local airport traffic growing? Decreases in passenger rates of decline may signal an end to a downward spiral. More travelers mean more heads in beds somewhere.

Capital Plan Review

A detailed capital plan review is a subject for another article, but for the purposes of reviewing capital for the upcoming year, consideration should be given to how the timing of planned capital projects will affect a property’s ability to penetrate in the market. Obvious factors, such as scheduling guestroom renovations during slow periods are easy to spot, but consideration should also be given to how smaller projects, like parking lot restriping, can affect the sales efforts of a hotel during a site visit.

In addition, If guestroom renovations are planned, the amount of time rooms are out of order should be considered in the budget.

Financial Plan

Together with the marketing plan and the capital plan, management prepares a financial budget for the upcoming year. Big picture key statistics to review include RevPAR, total revenue and GOP growth. Calculating the ‘flow through’ of this growth is key, as well. That is, how much additional revenue is translated to additional profit in the upcoming year? This will provide a basis for expense review.

A market based comparative analysis and a variance analysis should be performed on each major line item. The proposed budget should be compared to industry metrics such as Smith Travel’s HOST Report or PKF’s Benchmarker Report. In addition, the property’s budget should be compared to previous years’ performance.

Management can prepare a budget in one of two ways: a ‘zero-based’ budget, which employs a build up model for all anticipated expenses in the upcoming year, or a ‘year over year growth’ budget, which assumes a simple increase in the prior year’s expenses and then makes adjustments for non-repeated expenses.

A detailed line item review of expenses is warranted during budget review. A comparative analysis on the detailed expenses and discussion of each major expense is a good place to start. Understanding higher than inflationary shifts in a property’s detailed expenses can help provide insight into the management’s strategy for the hotel and can allow for a healthy discourse of what can be expected in an upcoming year. The goal of the asset manager is not to simply critique the manager during the budget review, but instead to assure that the the manager’s vision for the upcoming year remains consistent with the owner’s short and long term goals for the asset.

Tracy Cooper Ramos is a contractor consultant with Pinnacle Advisory Group, who specializes in asset management. In addition to her work with Pinnacle, Ms. Ramos also instructs the Hotel Real Estate Investments and Asset Management for