Budgets are a good planning tool for hoteliers. However, it is inappropriate to use them to measure a manager’s performance. It is intriguing then that so many people in the industry use them as targets to measure and reward performance. Pegging compensation and praise to budgets makes them even less reliable, as it gives everyone involved in the budgeting process strong incentives to sway the numbers to their own advantage.
Perhaps the best example of why budgets should not be used as performance benchmarks has occurred over the last three years. In 2009, nearly every hotel performed below its budget. This was not surprising; in 2008, nobody could predict the impact and extent of the financial crisis on the hotel industry. To have judged managers at the end of 2009 based on their failure to meet budget would have been unfair. Their performance should have been judged against the market. Even declining RevPAR should have been praiseworthy, if it meant a smaller decrease than for the rest of the market. By contrast, in 2010 budgets obviously reflected very conservative. It would have been equally unwise to praise operators based on their 2010 performance exceeding budget. The excess performance that the market produced for them was as much out of their control as the underperformance generated the previous year. Management performance, again, should have been judged against the market.
Management’s efficiency must be judged on first, its ability to generate an appropriate share of revenue within its competitive market; and second, its ability to convert that revenue into cash flow available to the owner. Both these factors are influenced greatly by overall market performance. There is a need then to separate results generated by the market and those generated by management. A buoyant market produces higher RevPAR and better profit margins for all properties, whether they are managed with mediocrity
In order to make meaningful comparisons between actual and budgeted results that focus on management’s—rather than the market’s—performance, I strongly recommend restating budgets as the year progresses in terms of the RevPAR that should have been achieved given an explicit or implied RevPAR penetration target. An implied target most times means assuming the same penetration index as the previous year. An explicit target involves asking your operator to state his/her budget occupancy and ADR projections in terms of penetration indexes. This encourages operators to focus on maintaining and/or increasing the competitive position of the hotel throughout the year, rather than on meeting an arbitrary budget number.
To restate a budget for actual market performance, follow