Hotel Budgeting Basics Beginners Struggle With – Revenue KPIs - Hotel Financial Courses (2024)

Are you underutilizing Revenue KPIs in your budgeting process?

As a result, are you losing opportunities for revenue generation?

It is important that you bring in Key Performance Indicators of revenue in your budgeting process.

That may mean the difference between consistently achieving revenue targets or falling behind budgets.

It may seem obvious that the budgeting exercise should include KPIs related to revenue.

However, the question is: are you using the right revenue KPIs?

I will lay out a case for bringing in the appropriate KPIs for optimizing hotel revenue.

This Chapter 2 of the Ultimate Guide on Hotel Budgeting and Forecasting will cover:

• Budgeting for the Top Line - Revenue KPIs
• Revenue KPI for the Rooms Department
• Market Segments - Building Blocks of the Room Revenue KPI
• Revenue KPI for the Food and Beverage Department
• Meal Periods - Building Blocks of the Food and Beverage Revenue KPI
• Recap of Budget Revenue KPIs
  
• Chapter 3

Well, continuing that analogy, the first critical area to attack is revenue budgeting.

More specifically the use of revenue KPIs.

What are revenue KPIs you want to know?

Hang on, I am going to do just that.

In any hotel revenue budgeting process, knowing which KPIs to focus is crucial.

This is applicable really to any kind of budgeting process and not just for revenue.

So, it might actually surprise you to know that the first revenue KPI to focus on is not revenue itself.

What, you look totally baffled.

Hold it, I will clarify.

What I mean is, in any budgeting process, it is important to zero in on the source of revenue first.

In other words, asking yourself: what is the source of hotel revenue?

That source in the case of hotels is capacity.

Capacity can thus be considered the first revenue KPI in the budgeting process.

Say, you are talking about revenue generation, profit retention and so on.

It is important to understand that all this is totally not possible unless you have the tool to produce revenue.

In other words, you need an asset first and foremost.

This asset is foundational in the budgeting process.

In the case of a hotel, that asset is, and more specifically for the Rooms department the guest room.

Digging further, we know that the total number of units of guest rooms is collective known as Rooms Available.

Rooms Available represents the highest number of guest roomsthat a hotel cansellat any point of time.

Your revenue budget must initially address rooms available.

Or, as we saw earlier, Rooms Available is theCapacity.

It is your first Revenue KPI.

Why is Capacity or Rooms Available critical for budgeting?

• First, owners and stakeholders have poured millions of dollars as investment in the hotel project with an objective of earning a reasonable return on investment.
  • The reasonable return on investment will depend primarily on the revenue earning potential of the hotel.
  • That revenue earning potential is squarely dependent on how many guest rooms a hotel has.
  • Your budget must thus relate to the guest rooms available
• Second, the number of rooms available or capacity will be a huge factor in the market share that the hotel will want to command in the market.
  • So, closely linked to capacity, market share is yet another critical revenue KPI to be budgeted
  • The higher the number of guest rooms available, the better the possibility of a greater market share (with some exceptions seen later).
  • In the hospitality industry, market share is a huge revenue KPI that determines positioning of the hotel among other things.
• Third, based on the total number of rooms available, a hotel will categorized as small, medium or large sized.

In the hotel industry, Rooms Available are also known as Total Units.

While total Rooms Available determines capacity, those guest rooms will be further categorized into different room types.

Any hotel revenue budget must thus reference the total rooms available for each room type.

These will become the building blocks of hotel revenue.

Each guest room type budgeted will:

• cater to a target audience
• will have amenities tailored to that as well as
• be priced accordingly.

Rooms Available as a revenue KPI is also used for measuring other KPIs like:

• customer patronage,
• spending,
• number of employees in the hotel etc.

The Star Revenue Source

Hotels depend on the Rooms department to deliver anywhere from 70% to 85% of hotel revenuein ayear.

Therefore, the rooms revenue budget is a big chunk of the total hotel revenue.

Let us now look at the Rooms Department Statement of Paradise Hotel.

Paradise Hotel Rooms Department Revenue KPI

Noticea few things about the above table.

It shows the Room Revenue according toMarket Segments.

Market Segmentsare one of the most powerful concepts in a hospitality industry revenue generation discussion.

Market Segments are actually thetarget audienceor also known ascustomer segmentsfor room revenue for a hotel.

Before getting at room revenue, the budget process must nail down the market segments that will contribute to it.

Notice thetwo big categoriesof market segments:

• Individualand
• GroupMarket Segments.

These are further building blocks in the budgeting process.

Notice also that revenue contributed by the Individual Market Segment to Total Room Revenue is 74%($682,930/$927,985).

This, of course means that theGroupSegment contributed the balance26%since there is no Other Room Revenue.

This seems to suggest thatParadise Hotel is pre-dominantly a hotel catering to the individual market segment.

Knowing this is crucial to the revenue budgeting process.

Paradise Hotel could actually be called abusiness hotel.

This is becausemore than 40% of its room revenue comes from theNegotiatedmarket segment which mainly consists ofcorporatebusiness.

One of the most critical concepts to understand in any revenue discussion iswhat contributes to that revenue.

How will you budget for room revenue using market segments?

Well, we now arrive at two paramount revenue KPIs that need to be budgeted.

These are the revenue KPIs of:

• business volumeoroccupancyand
• priceoraverage daily rate

that contribute to hotel room revenue.

In a room revenue budget scenario, themarket segments we see in the above table get their revenue through:

• occupancyand
• average daily ratesfor those market segments.

These ultimately roll into the hotel wide occupancy and average daily rates.

The Competitive Set

The Competitive Set is one of the most critical first stepsin understanding and influencingmarket share.

However, its real power is adeeper scrutinyof itsbuilding blocks(so to speak).

These building blocks are what we just saw as market segments.

Knowing your target audienceis central to a successful revenue generation budgeting strategy.

In a manner of speaking, if you were toclassifyyourtarget audienceintodistinctive segments or profiles, you would getmarket segments.

Market Segments emphasize thediversityof yourtarget audience.

Thus market segments play a huge part in the budgeting process of hotel room revenue.

It is generally a good strategy to have diversity in your target audiencewithout spreading yourself too thin.

If you remember, you broadly looked at some categories likeindividualandgroup,businessandleisureand so on.

Why do I call market segments the building blocks of market share?

This is simply becausemarket sharemostly is a reflection ofrevenue achievement.

And revenue is not achieved simply from one category of your target audience.

It is earned frommultiple market segmentswhich represent yourtarget audience.

Paradise Hotel Rooms Department Revenue by Market Segments

Take a look at theMarket Segmentsof the Paradise Hotel showing room revenue contribution.

In an earlier section, we had seen how theIndividualmarket segment of the Paradise Hoteldominatedthe revenue achievement compared to theGroupmarket segment.

We had even observed that it looked like the Paradise Hotel seemed to haveIndividualas its major market segment.

We said it was more of abusinessbased hotel than aleisureone.

Notice how theNegotiatedmarket segment for the current month accounts for68%ofIndividualmarket segment.

We saw that the majority sub segments in this Negotiated segment areCorporates.

This confirms our observation that the Paradise Hotel is more geared for thebusinessorcorporatesegments.

Notice how thesmaller Groupmarket segment includesTour Operatoras amajorsub segment.

Tour Operatorsare considered as part of theWholesalechannel of distribution.

They are often used by business based hotels (like the Paradise Hotel) toaugment their business.

This they do by raising occupancythrough use ofvolume basedtour groups.

On the one hand, theroom ratesfor these tour groups aremuch lowerthan the hotel average daily rates.

On the other, theyboost the occupancyandcontribute to the overall bottom line.

All of these factors play a significant part in the budgeting process of hotel revenue.

How are Room Revenue KPIs by Market Segments arrived at, you may ask?

Take a look at the below monthly break up of room revenue budget by market segments.

Paradise Hotel Room Revenue Budget by Month

Notice how each market segment room revenue budget is based on the below formula:

Budget Room Revenue (for each market segment) = Budget Occupancy (in room nights) X Budget Average Daily Rate.

Let us now turn our attention to the other major revenue KPI - of the food and beverage department.

The Sidekick Revenue Source

If we consider the Rooms department as the hero of hotel revenue contribution, then certainly the Food & Beverage department is the sidekick.

The Food & Beverage department is thesecond biggestrevenue contributor after the Rooms department in a hotel.

As such, the food and beverage department is closely involved in the budgeting process of the hotel.

When it comes to categories, the most common categorization of the Food & Beverage department is as:

• restaurant outletsand
• cateringoperations.

Restaurant Outletsare the venues where certaintypes of cuisineare served.

These could be throughout the day or at particular times depending upon the type of restaurant they are.

Cateringdepartment is also known as theBanquetoperation.

This is the department which hasfunction roomsas its primary revenue generating source.

Catering operation is considered themost profitableone within the Food & Beverage department.

However, the Food & Beverage department is unlike any other department of a hotel.

This is due to thesheer varietyin the types of restaurants it may have within it.

The budgeting process will need to cover all of these types.

First, the Food & Beverage Revenue consists of two different but related type of revenue:

• FoodRevenue and
• Beverage Revenue.

Paradise Hotel Food and Beverage Revenue KPI

A menu item served in a restaurant consists of both food and beverage most times.

However, these two revenue sources aredifferent in a few ways

• First, amenu itempre-dominantly is focused on the food item with beverage as accompanimentalmost always.
• Second, Food Revenue tends to be anywhere between 2 to 4 times higher than Beverage Revenue.
• In other words, Food Revenue can often be 75% of Total Food & Beverage Revenue with Beverage contributing the balance 25%
• Third, Food & Beverage revenue can be looked at from three points of view:
  • menu items,
  • meal periods and
  • market segments.

Menu items are the food dishes that are served in the restaurant.

Meal Periods are the different categories of menu items that can be served at different times of the day.

The most popular times are during:

• breakfast,
• lunchand
• dinner.

See how, in the case of Paradise Hotel, the Food & Beverage Revenue is contributed.

It is separate for food revenue and beverage revenue over the three most common meal periods.

Market Segments (just like in the Rooms department) are normally applicable only to the Catering department.

The Catering department we saw earlier is part of the Food & Beverage Department.

Finally, the Food & Beverage Revenue is contributed (similar to occupancy and average daily rate contributing to the Room Revenue) by:

• business volume(covers served) and
• price(average food & beverage check).

Covers Served(refer to Paradise Hotel Statement above) are like occupancy in Rooms representingbusiness volume on the one hand.

On the other, Average Food & Beverage Check (refer to Paradise Hotel Statement above) is like Average Daily Rate in Rooms representing price.

Budgets are created separately for Covers Served and Average Food Check.

These when multiplied will result in the Budgeted Food and Beverage Revenue.

Meal Periods - Building Blocks of Food and Beverage Revenue KPIs

The Bread and Butter of Restaurant Revenue

As we saw earlier, market segmentsare at the heart of the hotel room revenue generation and budgeting process.

Similarly, meal periods play a role in the hotel food and beverage revenue generation and budgeting process.

Meal Periodsare combinationof differentitemsorcategoriesof amenuthat contribute to food and beverage revenue.

Meal Periods may have the followingcombinations:

• Breakfast, Lunch and Dinner
• Supper, Afternoon Tea, Snack
• Buffet and A la Carte
• Food and Beverage
• Individual and Group (normally only to the Catering or Banquet operation)

Meal Period Analysis

The most important meal periods in a hotel whether city or resort are:

• breakfast,
• lunchand
• dinner.

Budgets will thus need to be created for each or these meal periods for food and beverage revenue individually.

Whyis itcritical to analyzeand budget for thesemeal periods?

Before we address this, let us take look at a factor which isclosely linked to meal period analysis.

This is the revenue KPI ofTable Turnover Ratio.

There aretwo pathsto hotel food and beveragerevenue budgeting.

Thefirstone isTable Turnover Ratio.

Thesecondpath ismeal period analysis.

In fact, we can go as far to say that theoptimum pathto restaurant revenue growth is acombinationof both these factors.

But what then is meal period analysis?

It is astudyofdataandinformationon whatcontributioneachmeal sessionin a hotel or resort’s restaurant outletsis making.

This depends first on thetype of outlet.

Meal period analysis requiresaccurate identificationof specific mealsessionsthat are applicable to each of a hotel or resort’s restaurant outlets.

Generically, thestandardmeal periods for a city hotel are:

• breakfast,
• lunch,
• snack,
• dinner and
• supper

although this is more applicable to anAll Day Dining Restauranttype (also called aCoffee Shop).

Howdo theseactually contribute to the restaurant revenue budgeting process?

As we saw earlier in the post, food and beverage revenue contribution is made by two key elements:

• covers served(number of guests) and
• average food & beverage check

These are also known as thequantity(or volume) andpricecontributions.

The formula used in a budget is:

Budget Food & Beverage Revenue = Budget Covers Served X Budget Average Food & Beverage Check

When the above formula isapplied for each meal period, they become building blocks of revenue estimate or budget.

However, this revenue estimate is on one major assumption.

That each guest or cover is based on atable turnover ratio of one (1.0).

Table Turnover is simply the number of times a single table turns over (is served) in one meal period.

Say, we assume different table turnover ratios for different restaurant types and meal periods.

In that case, we need tomultiplythe earlier revenue estimate with this ratio to arrive at the final revenue estimate or budget.

Forexample, taking the earlier formula further:

Budget Food & Beverage Revenue = Budget Covers Served X Budget Table Turnover Ratio X Budget Average Food & Beverage Check

Analternateway of calculating restaurant revenue is:

Food & Beverage Revenue = Restaurant Seating Capacity X Table Turnover Ratio X Average Food & Beverage Check.

Paradise Hotel Taste Buds Restaurant Revenue KPI

Paradise Hotel Taste Buds Restaurant Statistics

Take a look at the Meal Periodsin the Paradise Hotel Taste Buds Restaurant.

You canconfirmthe Food & Beverage Revenue formula using the numbers in the Paradise Hotel Statement.

Forexample:

• Seating Capacity is 120,
• Table Turnover Ratio for Breakfast is 1.3 for the month of January 2019.
• Thus the covers served for the month calculation is:

Covers Served(4,836) = Restaurant Seating Capacity (120) X Table Turnover Ratio for Breakfast (1.3) X Number of days in January 2019 (31).

TheCovers Servedbudget when multiplied by theBudget Average Food & Beverage Checkwill result in the Food & Beverage Revenue Budget forBreakfastMeal Period.

Ifyou do not multiplyby the number of the days in the month, the covers served become theDaily Covers Served.

Food & Beverage restaurant outlets use this information tocomparewithbudgetsandforecastsapart fromrunningtheir daily restaurant operation.

Forexample, the Kitchen prepares food based on the expected covers served for a meal period.

This is whytable turnover ratioandmeal periodsintandemare such powerful elements ofbudgetingorforecastingrestaurant revenue.

So, there you are, an overview of the hotel budgeting basics with focus on revenue and its Key Performance Indicators.

Recap of Budget Revenue KPIs

Rooms Department

• Rooms Available
• Market Segments
• Market Share
• Occupancy
• Average Daily Rate

Food & Beverage Department

• Seats Available
• Meal Periods
• Covers Served
• Average Check
• Table Turnover Ratio

Chapter 3

In Chapter 3 of this Ultimate Guide on Hotel Budgeting and Forecasting, we will take an overview of how expenses are budgeted for.

Over to you.

How do you carry out budgeting at your hotel?

Do you pay attention first and foremost to the hotel revenue KPI in your budgeting?

Leave your comments below as I will be keen on knowing your thoughts on this.