The hospitality industry is growing fast. As it becomes more and more competitive, hotel managers must do all they can to stay ahead of rivals. This means embracing technology, keeping up with rapidly changing industry trends, and engaging in best practices like hotel revenue forecasting.
When done right, hotel revenue forecasting is probably the most powerful tool available to hoteliers. That’s because it touches on just about every aspect of a successful hotel management strategy: demand forecasting, inventory optimization, pricing strategies, etc.
By acting on the insights gained from solid revenue forecasts, hoteliers ensure profitability and consistent growth. That being said – what is it, exactly?
What is Revenue Forecasting?
Revenue forecasting involves making detail-backed, highly-educated projections about how much revenue your hotel will earn during a specific future period. To do this, revenue teams look at historical data. They consider market trends, evaluate the competition, and imagine how customer behavior might change in response to specific situations.
But that’s just the basic level. Hotel revenue forecasting entails establishing a deep understanding of clientele, and carefully optimizing allocation of resources based on demand. It involves gaining clear insight into cash flow, and making decisions based not only on intuition and experience, but on solid data.
Why Should Hotels Forecast Revenue?
All of the above provides a roadmap for a hotel’s short- and long-term future. Hotel revenue forecasting is a critical component of hospitality cash flow management.
First, when you know what revenue will look like during a certain period, you’ll know when you should invest in expansion and when you should scale back costs. This information helps avoid common mistakes like overhiring or allocating too many resources to a marketing campaign at the wrong time.
Continuing with the marketing example, hotel revenue forecasting helps you know who to market to and how to market to them. It helps determine the right prices at the right times for the right customers in order to maximize capacity, even during down periods.
During any period, whether high or low volume, it tells you what your headcount needs will be and where staff are best allocated. It lets you know how much inventory you’ll require to keep waste as low as it can be and ensure customers are content.
So, in spite of its name, hotel revenue forecasting is not just about telling you how much liquidity you’ll have during a certain period. It’s more about telling you what actions you can (and should) take during and before that future period to maximize profitability.
Hotel Revenue Forecasting Benefits
- Plan out expenses
- Determine pricing strategies (optimize room rates and promotions)
- Allocate staff and inventory to meet expected demand
- Grow revenue in a sustainable fashion
Types of Hotel Revenue Forecasting
There are a few different areas of forecasting. These are: financial, operational, and revenue management
This is all about projecting employee allocation – for instance, what specific staffing needs would be during a high volume period. Reception would need more people to reduce queue times, and restaurants would need more cooks and waiters. Perhaps you’d need to increase housekeeping personnel or technical support staff as more reservations are made online.
Financial forecasting looks at both revenue and cash flow. Where revenue just considers money being earned, cash flow looks at both inflows and outflows to determine your net liquidity at a given time.
Seasonality is especially relevant here, as hotel cash flows can change dramatically depending on the time of year. When you know your cash flow will be much higher during certain periods (summer, for example), you can balance this cash flow against low cash flow during other periods of the year ( boost your seasonality reserves).
You also need to make sure you have enough liquidity to pay liabilities like mortgages or insurance costs when they come due. This is why cash flow forecasting is one of the most important aspects of revenue planning.
What is Revenue Management?
Revenue management is the third type of revenue forecasting. This is where you’d forecast demand – probably the most important thing you can do in the hotel industry! Forecasting demand not only gives you actionable advice – for instance, letting you know you’ll need more food or linens in the next two months – but helps you determine what your hotel’s future financial position will be based on booking volume.
The goal of hotel revenue management is to predict things like room occupancy or average daily rate, and make room for shortfalls.
Revenue Management in Action
Say some rooms have low demand even during a busy period. Revenue forecasting will help you advertise to the demographic that will rent it at the right price, thereby maximizing revenue. Since hotel rooms are a perishable asset, renting them out even at substantially lowered prices is better than not renting them at all – forecasting helps you find that price.
By projecting booking volume, revenue forecasting helps optimize pricing for rooms and services. It helps you determine which marketing strategies you should pursue, and which demographics you should advertize to. You’ll know what types of promotions to roll out, and when.
Types of Revenue Forecasting Models
In addition to these different areas of forecasting, there are some different types of forecasting models.
These are: pipeline revenue forecasting, backlog revenue forecasting, and bottom-up forecasting. Each predicts revenue in a different way.
Pipeline Revenue Forecasting
This method looks at opportunities in the sales pipeline and evaluates their likelihood of closing. It does this by evaluating sales forecasts in relation to historical data on sales, helping pinpoint the chance of moving from one stage in the pipeline to the next (conversion rate). Assign probability of conversion to each stage in the sales pipeline.
With this approach, revenue teams need to be careful not to overestimate the size of these opportunities or be overly optimistic about when they could close.
Backlog Revenue Forecasting Model
This model is based on contracts rather than revenue that’s actually been earned. Through considering the historical performance of your sales team, it helps determine how long it will take to earn that revenue.
Since it’s based on the backlog, it’s much less of an exercise in guessing as pipeline revenue forecasting.
There is a lot of room for uncertainty here, though, as any hotelier will know. Cancellation rates can be high – one study showed about 20% of hotel bookings made online were canceled.
Use the latest, industry-wide data, as well as your own historical data, to get an idea of what percentage of your backlog will convert.
Additionally, keep in mind this method won’t account for growth initiatives – it’s based entirely on historical data, making it the “safest” of the three methods but also the most likely to underestimate future revenue.
Bottom-up forecasting involves matching project execution times with cash inflows. So, it helps managers put those plans into motion when resources are optimal. For this reason you might also see it referred to as the “resource-driven” revenue forecasting model.
This method can be used to schedule out projects – both those in the pipeline and that are currently underway – and ensure they have the capacity to be completed (without taking unnecessarily high amounts of capacity).
Bottom-up forecasting is the most intense of the three methods, but it’s also the most holistic. To do it properly, hoteliers need access to advanced software.
Steps to Creating a Revenue Forecast
Before you start, pick the timeframe you’re forecasting for, then:
1. Gather Information
Say you want to revenue forecast for the period from late November to early March. You’d gather historical data related to occupancy rate, length of stay, and total revenue. You’d also want to look at expenses.
APIs that automatically deliver bank transaction information to a centralized platform are one of the best ways to ensure data accuracy and transparency.
2. Do On-The-Book Analysis
Analyze bookings that have already been made – this isn’t only relevant to backlog revenue forecasting but can help you build a clearer customer profile.
If you already have specific projects in the pipeline, like promotions, be sure to evaluate their effectiveness when and after they’re implemented.
You can also evaluate competitors, including their rates, booking volume, and so on, which can provide more insight into broader market trends.
3. Predict Inflows and Outflows
Based on that historical data and current predictions, estimate revenue for the period. Think about indirect costs and other expenses.
4. Do Variance Analysis
Finally, make sure you adjust your forecasts. Matching actuals to predictions is called variance analysis. If there are significant discrepancies, it’s important to determine the cause/causes as quickly as possible. Doing this will help improve your hotel revenue forecasting, providing more accurate direction for future business growth
A variance of around 5% should be your maximum – you want accuracy, but you also want to have some room to remain flexible in case your forecasts don’t turn out correct.
If you do have a high variance, there are a few possible mistakes commonly made in the hotel industry. For one, make sure your segmentation (the group you’re advertising to) is correct. Watch out for duplicate bookings, or cancellations and rebookings. Also, make sure room blocks are up-to-date.
How Trovata Can Help
Like most aspects of business, technology has made hotel revenue forecasting much easier. It not only easily gathers data but also evaluates it through new innovations like machine learning
Trovata focuses on using bank APIs to provide clear insight into cash flow. You can get real-time views across hotels.
When you know how much liquidity you have right now, and will have in the future, you can plan out everything from staffing, to marketing, to expansion needs.