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It’s that time of year when most
operators guess, forecast or figure out
what 2002 will look like financially.
With the recent lower average daily rates
and occupancy growth, the industry must
look for other ways to maintain net operating
income.
To
some, the answer might be obvious: Reduce
operating costs. However, the reductions
or operational changes might not address
the right problems. A process or system
is needed that can highlight issues in
a real-time setting and help management
focus on what needs to be done to drive
performance throughout the year.
Such
a system is a tool that will make the
budgeting processes easier and more accurate
and can be used to assess operating performance
during the year more accurately. The tool,
flexible budgeting, has been available
for years but mostly has been used in
other non-service, manufacturing industries.
The
concept of flex (variable) budgeting is
simple. The profit and loss statement
is made up of fixed, discretionary, semi
variable and variable costs. All hotel
line item costs fit into one of these
definitions. The basis of flex budgeting
is that one does a zero based cost analysis,
builds a budget based on these parameters,
and then analyzes operating results based
on the original costs assumptions, with
total budgeted costs adjusted for actual
business serviced, not projected. An example
might help. (See box at bottom.)
As
costs decreased, there appears to be some
reaction to the drop in occupancy. The
problem is, based on this data; one doesn't’t
know how well the operation performed.
Adding the flex budget concept clarifies
this issue. The flex costs (budget cost
parameters multiplied by actual volume)
are $5,913 or an additional drop from
the actual of $362. Now the real performance
is known, and one can act upon this knowledge
with confidence.
Developing
the right cost parameters at the start
of the budget process improves performance
management and enables what-if scenarios
to be easily developed. It directs the
focus of the budgeting efforts to strategies
to drive top-line performance, as the
cost structure is established properly.
Top-line strategies can be based on resultant
profitability, not just what the market
will bear or what the
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competition might
be doing. Zero-based analysis is talked
about frequently but not used nearly enough.
And if it were properly used-and the hotel
industry is ideally suited for this type
of approach-organizations would not have
to develop rule-of-thumb parameters for
incremental flow-through of new dollars
or incremental reduction in NOI due to
a drop in top-line results.
Having
this information available at the end
of each financial period or during the
period enables an organization to address
the performance problems, celebrate the
successes and create strategies that create
greater asset value.
An
organization that embraces flexible budgeting
can be assured of crystal-clear analysis
of operating results, precise determination
of operational issues and the ability
to quickly put in place optimization strategies
in up, flat or down markets. This is a
textbook tool that the industry should
embrace wholeheartedly as it strives to
grow asset value and effectively motivate
operating teams. This process saves time
in evaluating performance issues and challenges.
It also produces operating results that
measurably are better than the present
fixed budget system widely employed by
the industry.
Example of Flex Budgeting
Assume cleaning supply costs in the rooms operation
for a month are made up of:
- Fixed = $1,750 and variable per occupied room = 65 cents
With these parameters, the fixed budget
and actual results are as follows:
Budget Actual Variance
- Occupied Rooms 7,350 6,405 (945)
- Cleaning Supplies $6,528 $6,275 ($253)
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