Budgeting Strategies for Uncertain Times: What to Consider for 2021

Each year, Carpedia Hospitality works alongside our clients to ensure their forthcoming year’s budgets will drive performance for all stakeholders. However, as the hospitality industry continues to navigate a year full of unprecedented changes in the wake of COVID-19, the approaching budget season is more complicated than ever before. Leaders need to focus their attention in every direction, maintaining service standards and employee engagement while using maximum creativity to drive profitability. However, a thorough consideration of an operation’s operational processes with a focus on flexibility can position leaders for a strong 2021.

An Uncertain Outlook on Demand

Typical demand patterns that operators have come to rely on have been disrupted and peaks and valleys are being forecasted into 2021 as the pandemic continues to evolve. To react quickly and counter the negative impact that unstable demand patterns have on profitability, more agility and flexibility is being built into operating models. This will require careful analysis of existing processes across all operational and administrative positions to ensure that all areas of the operation are able to adapt to variability.

Strategic Revenue Goals

As operators strive to maintain strong room rates, average checks, or ticket prices through fluctuating demand patterns, increased focus on optimizing incremental revenue offerings will be a vital component in any topline strategy. Comprehensive review of operating hours, pricing, historical capture scenarios, and standard operating procedures surrounding sales opportunity will help leaders establish aggressive but realistic revenue expectations. This is a level of granularity that most organizations do not consider when building an annual budget, but precision will be key in maintaining profit margins in 2021.

Analyzing Supply Chain

The impact of the pandemic on the availability of ingredients and supplies, in addition to inconsistent lead times, has shed light on the need for careful review of the organization’s supply chain when budgeting cost of sales. Additionally, a strong strategy for inventory flexibility will need to be incorporated to appropriately serve shifting guest volumes and types of guests without risking waste. Again, this will likely require deeper analysis than many leaders are accustomed to conducting as part of the budget process, but fluctuating volumes and shifting guest profiles will necessitate a supply chain overhaul for properties in most markets.

Adding Variability to Fixed Cost

Volatile demand patterns have forced operators to examine their fixed cost base and add variability where possible to become more efficient and protect profit margins. Improved utilization of on-property labor and organizational redesign of central services roles are strategies that operators are using to lessen the fixed element of labor cost.  Many operators are also examining service levels and offerings to further alleviate margin pressure. The ability to add variability to fixed costs and manage variable costs with rigor is key to protecting profit margins and adapting to the new normal in 2021.

Thinking Outside the Box to Reduce Overhead

Forward-thinking hospitality leaders recognize that now, more than ever, a creative approach to managing overhead can make a world of difference in planning a successful 2021. Every overhead item should be re-evaluated to determine where administrative tasks can be streamlined, utilities can be shared, physical footprint can be consolidated, and services can be complexed. This can be a difficult undertaking in businesses that have been operating successfully for long periods of time, but this period of change calls for a transformational approach, which is often best accomplished with consultation from outside of the organization.

Volume-based Labor Standards

Projecting labor cost can be especially complicated for hospitality organizations that lack visibility into their minimum staffing levels and the impact of business volume on scheduling requirements. By establishing productivity metrics that are directly tied to the operational responsibilities of each role, leaders can easily plan for all possible demand scenarios. This is also an ideal time to review processes and procedures to ensure a streamlined model is built into all future planning to appreciate opportunities for cross-functional workspaces and cross-utilization of team members.

Successful Execution

In order to achieve the results embedded within a strong 2021 budget, operating managers will need to be provided tools and training to lead their departments to success. Greater visibility on a daily and weekly basis to performance through improved reporting and structured review will be invaluable. Businesses will also require a continuous improvement culture where department leaders remain adaptable and proactive. In many established organizations, this may be the most difficult task to execute effectively.

Conclusion

Budget season is a rare opportunity for operators to make significant changes that will not only help navigate through the crisis but will also have a substantial benefit on profitability once travel demand fully returns. Though the amount of analysis involved in building an optimal 2021 budget can seem daunting, clients that have enlisted our support in conducting their review can enter an uncertain year with confidence that they have left no stone unturned. If you believe your organization could use additional support through budget season, please contact us.