The budget process is broken
The budget process is broken
05 SEPTEMBER 2017 7:16 AM

Here’s a look at the good, the bad and the utterly awful practices that keep owners and their asset managers working overtime from late August to early December.

Editor’s note: This is the first column in a two-part series addressing the annual budgeting process. Part one focuses on the inherent flaws in the annual budgeting process that are common practice today, and offers suggestions on a how it might be changed to achieve more meaningful output and alignment of interests.

Let’s be honest, the budget process for a substantial portion of the hotel industry is broken. I can deliver chapter and verse on this topic, but to understand the core of the problem, you need only consider the following factors.

1. While budgets may appear to be bottom-up efforts starting at the property level, they are all too often based on top-down directives from corporate. With big management companies (independent and branded alike), these directives are typically portfolio-based, broad-brush pronouncements rather than individualized to address property and market-specific circumstances. Well-researched and thoughtful corporate “guidance” is valuable, but monolithic corporate goals and directives should not trump single-asset-based issues and strategies.

2. There is far too little zero-based and forward-based thinking in the budgeting process. Last year’s budget or actual performance (the typical baselines) are often a poor foundation on which to base decisions for what should occur in the future. This issue is exacerbated if there are flaws in the baseline numbers, as problems compound year after year. Owners of a newly acquired or newly opened asset should take particular note; your first budget approval process could set the stage for years to come.

3. Entities that own and/or asset manage large portfolios of similar hotels generally have rich comparative data to guide their analysis of budgets and actual performance. However, those with a single hotel and those with small and/or disparate hotel portfolios are at a distinct disadvantage, as they will not likely have the data to support their analysis/arguments.

4. Far too often, budgets drive business and marketing plans when, in fact, it should be the other way around. Business plans have devolved into brand promotional documents with schedules of tactical initiatives. Strategic business plans specific to a particular asset are a rare find in the absence of a knowledgeable and active owner and/or asset manager.

5. Most operators start the budget process in August. By the end of September, the numbers are in the oven, and by the end of October, they are baked—a numerical fortress prepared for a battle with owners. Consequently, by the start of the applicable year, operating budgets are already three to four months old; and when it comes to forecasting, age is the enemy of accuracy.

6. Fixed budgets that are prepared months in advance of the upcoming year are a poor management tool for anything but limited-service hotels in steady-state markets (if there is such a thing as a steady-state market). The industry needs to migrate to variable or flexible budgets. The data and technology exist; it is only the will that is lacking.

7. Operator budget motives are often at cross purposes with the type of planning that would be in a hotel owner’s best interest. For instance, operator performance clauses in management contracts are often based on budget attainment, and local management team bonuses are based on meeting or exceeding the approved annual budget. If, for example, revenue attainment falls well below the budget and GOP targets are met, is that “soft” budgeting or brilliant cost control on the part of management?

How it should work
To be a truly effective management tool, budgeting should start with a business strategy and plan from which revenues can be projected and costs estimated. The process will be iterative, since not every idea will be supportable given limited human and financial resources. Effective budgeting takes past experience into account but requires more open-minded thinking. And because revenues and the components thereof cannot be accurately predicted, fixed budgets should go the way of the cassette tape recorder, and the industry should shift to the more useful and sophisticated flexible budget.

If the process does not strictly adhere to a flexible budget approach, at the very least, budgets should be developed under three separate cases: expected case, better/best case, and worse/worst case. Doing so would enable expense extrapolation to fit actual conditions. This is not ideal, but it would at least shed light on the derivation of “flow through” projections used by most operators today.

Two other tools would be helpful
1. Multiple-year budgeting (one-year budget with a two-year pro forma) would serve to better align operators with investment objectives by forcing a longer-term perspective and strategy.

2. A periodic break-even analysis generated under an assumed deep recessionary scenario will help everyone understand the true fixed-cost structure of a hotel and provide some basis for understanding/justifying increases in staffing at various levels of utilization.

If operators and owners must create a budget for management contract purposes, fine. Submit, argue, agree and then put it on the shelf until the end of the year when it’s time to measure against the performance test. If the goal, however, is to create an effective tool for managing the business, a whole different process is needed. If such change is implemented, it could go a long way toward operating on a more strategic basis and aligning with ownership goals.

The CHMWarnick team has put together some more specific thoughts, in preparation for the 2018 budget season, available by clicking here

Richard Warnick is Managing Director and Co-Chairman of CHMWarnick, the leading provider of hotel asset management and owner advisory services. The company asset manages a client portfolio of over 65 hotels, 28,000 rooms and $15 billion in hospitality real estate. CHMWarnick’s owner advisory services cover virtually every aspect of hospitality investment including ground up development and repositioning. The company is currently providing development advisory services for client hotel and resort projects valued at over $3 billion. For more information, visit our website at and follow us on Twitter @CHMWarnick.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

1 Comment

  • Dean Minett September 5, 2017 4:29 PM Reply

    A challenging article for most owners and operators I would think Richard! I would be interested to know the results where you have managed to convince both parties to implement your last two suggestions. Cheers

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