Budgeting for 2021: What Is the New Target?

Written by: Arlene Ramirez, MBA, CHAE, CHE, CHIA

“To be sure of hitting the target, shoot first, and call whatever you hit the target.”

Ashleigh Brilliant

Since March of this year, the hospitality industry has been trying to figure out its new financial target — the best approach to get back on track to positive results — but achieving this target is the least of all worries. Most operators today have come to the realization that the budgets and forecasts developed in 2019 for the year 2020 are but a memory of hospitality industry metrics and strategies must be retooled. Accepting this premise leads to the next question: how do we budget for 2021 ?

Where is the Wizard of Oz when you need him? Yet, even the wizard did not really foretell the future but used a common-sense approach to resolve the challenges being faced by Dorothy and her crew. Similarly, hotel operators need to take this approach for budgeting in 2021. Understand what the operation is experiencing now and spend time on new strategies and innovative ideas. Do not focus on past metrics or measurements because it is an entirely new ball game, and the new playbook is being created now by the hotel’s management team.

How do you even begin this process? Going back to sound basic principles is key. Every budget needs to start with a clear strategy; survival alone is not a strategy. Those that will succeed long after this situation has passed will be those who see opportunities, where others simply let the situation take over. Just to be clear: it will not be an easy path, but it is one worth taking.

Begin with revenue.

What should that strategy look like? Hotels traditionally focus on volume, high occupancy and a rate above that of their competitors or one that the market will bear. What happens when that faucet is shut off? Revenue strategy should focus on maximizing the rate as much as possible. But how? How do you generate demand from channels not traditionally a source of business for your property or your normal market segment?

The hotel’s leadership team needs to drive innovation, whether it is offering a local “stay-cation” experience with a marketing focus on guest safety and fulfillment, or finding non-traditional uses for the asset. Reopening universities may need additional dorm rooms to comply with social distancing regulations: have you reached out to them? You should have a pulse on what is happening in your market and other industries.

The short-term focus must be on rate, as social distancing practices create mandatory inventory reduction. Maximizing the rate is key for more flow-through and hopefully, some profit.

Next, look at expenses.

Cost of sales, which is mainly in food and beverage (F&B) operations, needs to be retooled. This offering may be critical to your property due to a lack of available options in the immediate area or necessary to command the rate that is being charged; taking a minimalist approach can help. Many guests want to maintain a healthy balance to boost their immune system, so perhaps innovative offerings can market to this need. 

It could also prove financially beneficial to seek partnerships with those who already have an infrastructure in place that can accommodate the hotel’s ebbs and flows during this volatile period. This approach can assist with payroll costs. Again, it is about brainstorming options and determining the drivers for what to offer and how it is offered — because at the end of the day, that is hospitality.

Starting in March 2020, hotels have seen a shift in cost structure to one that is more weighted towards variable cost. CBRE recently published an article entitled “COVID-19 Potential Lasting Impact on Fixed vs Variable Hotel Expense Ratios”. When the lock-downs ensued, some areas of the hotel shifted significantly towards a cost structure that is primarily variable cost focused. Now this shift has moved a little more towards fixed but still below pre-COVID levels. Can this be sustainable? Like it or not, the pandemic has created a question as to what labor levels are really necessary to provide service. As more travelers want less interactions, how do we take care of the guests?

More importantly, how are staffing metrics and productivity factors being affected? A housekeeper who would normally clean eight rooms per shift pre-COVID may now only clean five rooms per shift due to the distancing factors. What is acceptable based on the new top line that can be achieved? The housekeeping function may need to be re-thought altogether. What about other positions in the hotel? It may require a move away from specialized role, with expectations for future employees to be cross-trained and adaptable to various tasks outside of traditional roles. Functions may need to be further centralized in the undistributed operating departments such as sales and marketing, finance, human resources and purchasing. There is not a one-size-fits-all solution, but the questions still need to be posed. Many hotels are operating temporarily with new organizational structures — but such temporary measures could lead to permanent change.

Other operating costs will be impacted in different ways. New costs will take the place of traditional ones. Increases in safety and sanitation expenses will be offset by decreases in costs that are no longer required by current operating practices. Retooling these costs in the short term may have long-term effects.

As technology improves in the area of training, for example, users will find it is more convenient and comfortable to learn remotely; thereby reducing hotel training costs. Changes in the types of costs necessary to hotel operations will eventually bring back profitability margins to pre-COVID levels. Investigation into what is truly necessary and understanding the hotel’s cost structure is imperative. Assessments for services no longer provided due to COVID restrictions may also go away. Make sure to understand what is affected, as other costs like health insurance premiums, payroll taxes (especially unemployment due to increases in experience levels) may exceed historical levels and continue to do so in the next few years.

Discouraged? Confused? No need! Think of budgeting for 2021 as a new horizon where no one is certain of what the new year will bring. Those in financial leadership roles cannot allow the focus to be strictly on survival. While no one could have foretold this current situation, focusing on a strategy that can help reinvent your business and move hospitality forward is exciting. Bringing that environment to the 2021 budgeting sessions will be the key to maximizing revenues and ultimately profit.

“If the highest aim of a captain were to preserve his ship, he would keep it in port forever.”

Thomas Aquinas

Arlene Ramirez, MBA, CHAE, CHE, CHIA (@ArleneDRamirez) is an HFTP Global past president. She is principal at Ascend and ADR Hospitality Consulting, and she is on the faculty at the C.N. Hilton College, University of Houston. Ramirez is also a frequent speaker at HFTP Global events and author of numerous HFTP-supported industry reports.

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