Effective Hotel Budgeting: How to Make a Hotel Budget Plan That Works

As a hotel industry professional, you want your staff members happy, your guests satisfied, and your business profitable. But in the hotel business, things aren’t always that easy.

If your hotel budget isn’t properly managed, you run the risk of overspending and not making any money. Deloitte Consulting research suggests that overspending on a simple labor cost can consume up to 60% of your hotel budget. The same goes for every other expense category: food, marketing, and other operational costs.

Effective budget planning is essential for any business. A plan helps hotel managers make informed decisions, allocate resources effectively, and improve profitability. The hotel industry is highly competitive, and hotels must maximize revenue while minimizing costs to stay profitable.

In this article, we will discuss how to create an effective hotel budget plan.

Why is Hotel Budget Important?

Creating budgets is critical for hotels because it provides a clear roadmap for financial planning and decision-making. It helps managers:

  • Allocate Resources Effectively: In a good hotel budgeting plan, the manager can allocate the annual funding to the areas that will bring the highest return on investment.
  • Make Informed Decisions: How much money should you spend on hotel operations? What to prioritize? A carefully planned annual budget will allow you to answer these questions.
  • Improve Profitability: Proper planning and hotel budgeting can help take care of marketing expenses, variable expenses, and other expenses. A good hotel budget will help maximize profits.

What’s a Hotel Budget Season?

A hotel budget season is a period when hotels plan and prepare for the upcoming year. During budgeting season, a manager will review past financial performance, set goals for the coming year, and create a plan for the hotel budget. The budget season typically starts a few months before the end of the current fiscal year and ends before the start of the new year.

The budget season is crucial for hotels because it helps them plan for expected expenses and revenue. A plan created during the budget season helps hotels stay on track financially, avoid overspending, and maximize revenue.

What is Hotel Revenue Management?

Revenue management is an essential practice for hotels to optimize income and profitability. Most hotels implement revenue management to maximize occupancy rates without sacrificing room rates and other revenue sources.

Here are the four pillars of hotel revenue management:

  1. Dynamic Pricing

The practice of adjusting the hotel budget based on seasonality, demand, and competition is called dynamic pricing. It allows you to adjust your rates to match market conditions and optimize your hotel budget in real time. For instance, during peak season, you can increase the price of hotel rooms to reflect the high demand.

  1. Forecasting

Using historical data and major events to predict future demand and set the next year’s budget is called forecasting. Many hotels use forecasting to make informed decisions in inventory, staffing levels, and of course, pricing. Let’s say you notice a big event coming up and expect an influx of demand. You can use forecasting to ensure you are adequately prepared with the right resources to meet the demand.

  1. Channel Management

The optimization of distribution channels like travel agencies and direct bookings to maximize your hotel budget is called channel management. Managing the channels through which you are selling your hotel room inventory can help keep a balanced budget and maintain the correct price. For example, if you notice that direct bookings are making up more of your sales than expected, you could adjust prices on channels like third-party travel sites to increase demand.

  1. Inventory Management

Inventory management is the practice of managing inventory to ensure optimal pricing and availability. This includes monitoring room types, rates, and restrictions to maximize revenue. By implementing inventory management techniques, hotels can ensure that they are offering the right room types at the right rates to make additional revenue.

What Are Hotel Operating Expenses?

Hotel operating expenses are the costs associated with running a hotel, such as salaries, utilities, maintenance, and marketing. Operating expenses can be divided into two categories: fixed and variable costs.

  1. Fixed Costs: Fixed costs are expenses that remain the same regardless of occupancy or revenue, such as rent or property taxes.
  2. Variable Costs: Variable costs are expenses affected by occupancy or revenue, such as labor costs, utilities, or guest amenities.

To manage operating expenses effectively, hotels need to identify and categorize expenses correctly. The number of rooms sold, for instance, can be used to calculate the cost of energy and housekeeping. Hotels can also their expenses regularly to identify areas for improvement.

What’s the Average Revenue in the Hospitality Industry?

The average revenue in the hotel industry varies depending on the location, hotel type, and season. According to STR, the average daily rate (ADR) for US hotels in 2021 was $110.95, and the occupancy rate was 50.2%. The revenue per available room (RevPAR) was $55.72.

However, these numbers vary widely depending on factors such as location, hotel type, and season. For example, luxury hotels may have higher ADRs and RevPARs, while budget hotels may have lower rates but higher occupancy.

Internal and External Factors That Affect Hotel Budget

Several internal and external factors can affect a hotel’s budget plan, such as occupancy rates, competition, and economic conditions.

Occupancy Rates

Occupancy rates are a crucial factor in budget planning because they impact revenue, staffing, and inventory management. Hotels need to track occupancy rates to predict demand and adjust pricing and staffing levels accordingly.


Competition is another factor that can affect a hotel’s budget plan. Hotels need to stay competitive by offering attractive rates, amenities, and services. They also need to monitor competitors’ pricing and promotions to stay ahead of the competition.

Economic Conditions

Inflation, recession, and other conditions can also impact the hotel budgeting plan. Hotels need to adjust their pricing and expenses to stay profitable during challenging economic times.

Types of Budgets in the Hospitality Industry

Hotels use different types of budgets to manage their finances effectively. The most common types of budgets in the lodging industry include:

  1. Zero-Based Budgeting: Zero-based budgeting determines a hotel budget where managers start with a zero base and justify every expense for the upcoming year. This approach forces managers to evaluate each expense and prioritize spending based on its impact on the hotel’s bottom line.
  2. Incremental Budgeting: On the other hand, you have incremental budgeting. It’s a budgeting method where managers use the current hotel budget as a starting point and adjust it based on anticipated changes for the upcoming year. The approach assumes that past spending patterns will continue in the future.

Each budgeting method has its advantages and disadvantages. Zero-based budgeting can help hotels eliminate unnecessary expenses, while incremental budgeting can save time and resources by building on the previous year’s hotel budget.

Who Should Be Involved in the Budgeting Process?

Creating an effective hotel budget plan requires input from various stakeholders, including department heads, finance teams, and executive leadership. Each stakeholder brings a unique perspective and expertise to the budgeting process.

  • Department Heads: People like the director of sales or the director of operations can provide insight into their department’s spending needs and revenue projections.
  • Finance Teams: Finance teams can help create a realistic budget plan by analyzing financial data and identifying trends.
  • Executive Leadership: Executive leadership, such as the general manager or the owner, can provide strategic direction and approve the final budget plan.

To involve stakeholders effectively, hotels should schedule regular meetings and communicate clearly about the budgeting process and goals.

How to Create a Demand Calendar

A demand calendar is a tool that helps hoteliers predict demand for their hotel rooms and services. A demand calendar takes into account historical data, events, and seasonality to forecast future demand accurately.

To create a demand calendar, hotels should:

  • Gather Historical Data: Hotels should gather data on past occupancy rates, ADRs, and RevPARs to identify trends and patterns.
  • Consider Events and Seasonality: Hotels should consider upcoming events and seasonality, such as holidays or peak travel seasons when forecasting demand.
  • Use Forecasting Tools: Hotels can use forecasting tools, such as revenue management software, to predict demand accurately.

Creating a demand calendar helps hotels adjust their pricing and staffing levels based on expected demand, which can increase revenue and reduce expenses.

How to Track Staff Productivity and Performance

Managing labor costs is critical for hotels because labor costs are typically the largest operating expense. Tracking hotel team productivity and performance can help hotels optimize staffing levels and reduce labor costs.

To track staff productivity and performance, hotels should:

  • Set Performance Metrics: Hotels should set performance metrics, such as average occupancy per staff member or revenue per available room (RevPAR) per staff member, to measure staff productivity.
  • Use Time-Tracking Tools: To stay on budget, a hotel should track staff hours accurately. Tools like Quickbooks Time and Kronos Time will help you do this without draining your budget.
  • Analyze Staffing Levels: Hotels should analyze staffing levels regularly to ensure that they are optimizing staffing levels based on demand.

By tracking staff productivity and performance, hotels can reduce labor costs, improve efficiency, and increase profitability.

Create a Hospitality Budget Plan (In 7 Steps)

Creating a hospitality budget plan requires careful planning and analysis. Here are the steps to create an effective hospitality budget plan:

Step 1: Gather Data

Gathering hotel data is possibly the most important step in preparation efforts. Hotel operations data should be collected and segmented by different criteria. Guest profile, room type, and rate plan are just a few examples of data segments. Use the data to inform your budgeting decisions.

Step 2: Identify Revenue Streams

To analyze your current performance, talk to sales, marketing, and rooms department. Analyze how much revenue comes from food, beverage, and room sales. That will help you gather more insights, pull data, and identify your primary revenue streams. If you have a revenue manager, talk to them about the estimated revenue projections for each stream.

Step 3: Analyze Expenses

Many hotels take an expense budgeting approach to their financial budget. Analyze your expenses and compare them to the revenue streams and guest profile data you gathered earlier. See if any areas can be trimmed down to reduce costs. Also, look for ways to increase efficiency with labor costs by using, you need to analyze your fixed and variable costs.

Step 4: Determine Capital Expenditures

Next, you need to plan for capital expenditures. Renovations, equipment purchases, and other expenditures can heavily impact your budget, so you need to plan for them. A hotel should estimate these costs and prioritize them based on their impact on total revenue or guest satisfaction.

Step 5: Set Goals and Objectives

Do you want more customers? Better financial results? An increase in sales of food and beverage? Whatever your goal is, you need to put it in writing. Hotels should set goals and objectives for the forthcoming year based on their financial data, revenue streams, and expenses. Goals and objectives should be specific, measurable, and achievable.

Step 6: Allocate Resources

If you want to prepare your budget for the year ahead, you should start collecting data in early September. With goals in place, you can start allocating your budget. Prioritize spending on areas that will have the biggest impact on guest satisfaction and revenue.

Step 7: Review and Adjust

Ideally, your carefully planned budget will create more demand, decrease unsold rooms, and increase total revenue throughout the year. But your job isn’t done. If you want your hotel operations to remain at a high level, you need to review your budget plan regularly. More or less, revenue planning should be revisited and tweaked every 6 months or so.

Real-World Examples

Here are some real-world examples of effective hotel budget plans:

  • Marriott International: Marriott uses a zero-based budgeting approach, That means that Marriot managers start with a zero base and justify every expense. The approach helped Marriott reduce costs by millions of dollars in the last decade.
  • Hilton Worldwide: Hilton uses a data-driven approach to budget planning. Hilton uses revenue management tools and financial forecasting models to create a budget plan that is based on accurate data and analysis.
  • InterContinental Hotels Group (IHG): IHG uses a hybrid budgeting approach that combines elements of zero-based and incremental budgeting. This approach helps IHG prioritize spending based on the expected return on investment.

Stay on Top of Hotel Budgeting With an Operations Platform

As you know and can see from everything we covered, managing a hotel business can be a real headache. Tracking capital expenses. Making sure guests are taken care of. Taking care of staff. All things that require the owner and/or hotel manager to be constantly on top of budgeting.

It’s enough to make even the most organized hotelier feel like they’re juggling a million plates at once. That’s where HelloShift comes in. Our tool works as a property management system and will completely change the way you do business and take your hotel to the next level.

We believe that digital hotels are the future – and that innovative technology can save you time, money, and a whole lot of stress. HelloShift integrates three main pillars to streamline your operations:

And that’s not all – a cloud-based app, HelloShift allows guests to do everything from checking in on their mobile device to digitally signing hotel registration cards. So if you’re ready to take your hotel business to the next level, say hello to HelloShift.

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