ITB 2023 Special Reporting
Taking A Zero-based Budgeting Approach to 2022
By Robert Mandelbaum
Monday, 29th November 2021

As hotels start the budgeting process, one of the first steps to take is projecting out your hotel’s occupancy and average daily rate for the year ahead.

These can and often are guided by third-party market forecasts, such as those produced by CBRE. We have found that up to 80% of a hotel’s performance is influenced by the market in which they operate. So clearly this is a good place to start.

However, in these challenging times, how can you forecast based on historical reports?

You can analyze history and look at the historical relationship between your hotel’s performance and that of the overall market. Look at how your occupancy and ADR patterns have followed overall market trends. From this, you can calculate what your occupancy penetration has been based on the market.

Further, you can see if your hotel is typically above or below the overall market. Pay special attention to major swings in market performance, such as 2020 and 2021. This historical analysis provides you with a good starting point for projecting 2022 performance.

But what about the other 20% of your performance?

This is subject to property-level decisions. You know what changes you are making at your hotel. This might be changes in marketing tactics or changes to facilities and services. Consider what impact this will have on your future occupancy and ADR penetration. You may make a change that will increase occupancy, but at the expense of ADR.

What else is unique about budgeting for 2022?

Historically, hotels would look at their P&L for the year previous and simply add 2-3% to estimate their expenses for the next year. You can't do that for 2022 because of the severe market conditions.

In 2020, we learned that fixed expenses aren't fixed. All that we learned in the classrooms about our fixed, variable, and breakeven analysis went out the window with the textbook last year.

This year you need to take a closer look at your business and establish what your hotel is going to be in 2022. If you took everything out of your hotel and put it in the parking lot, what would you put back in, in terms of facilities, services, amenities, and staffing?

  • Is your restaurant going to be open?
  • Are you still offering complimentary breakfast?
  • What are your housekeeping requirements?

And consider what new revenue-generating streams you might add:

  • Are you going to start renting rooms by the hour for office use?
  • What other ancillary services might you add or start charging for?

For chain-affiliated properties, these decisions are dependent on brand standards for items such as housekeeping, complimentary breakfast service, and automated guest check-in. Without a clear understanding of how the hotel will operate, it is a challenge to accurately estimate your operating expenses for the year.

The hotel stay is going to be a different product in 2022 from 2019 and you must budget accordingly. You need to take a ground-up approach and consider what your new operation is going to incur in terms of expenses.

Like everything in the hotel industry since March of 2020, historical practices need to be put aside in favor of creative solutions. Anecdotal discussions with our clients indicate a “start from scratch” zero-based budgeting approach is the favored process for 2022.

Robert Mandelbaum is Director of Research Information Services at CBRE. CBRE provides quarterly economic forecasts of performance for the U.S. lodging industry, as well as P&L benchmarking services. For more information: pip.cbrehotels.com.

This blog is an extract from our latest Special Report, Strategy Before Forecast: Open Up Your Revenue. Discover revenue strategy top tips from industry leaders from CBRE, ProfitSword, EY, Accenture, and more, as you plan for 2022 and beyond.

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