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Forecasting: A Very Important Management Tool

Forecasts are used to assist managers in the short-term operations of their businesses. More
than any other financial document, forecasts are the key management tool used to plan
the details of the daily operations for the next week. Like the operating budget, forecasts
look to the future and assist management in the detailed planning of operations for the
next week or month. They involve the shortest time period (daily and weekly) and are the
last financial document prepared in advance of actual daily operations. For example,
weekly revenue forecasts are used to develop weekly wage schedules as a business prepares
for the next week of operations.
The major inputs to a forecast are, first, the historical daily averages provided by Yield
Management or other demand tracking programs; second, the established budget; and
third, recent events that affect the current operating environment of the business. Yield
Management looks to the past and provides detailed information on daily room revenue
actual results. The operating budget is the formal annual financial plan for a business and
is prepared once a year. It is generally approved by December for the next year and does
not change. Forecasts are used to update the budget. Recent events and trends in the marketplace
need to be considered. The forecast is the management and financial tool that adjusts
the budget to reflect these changes. It is then used to plan the details of each day’s operations.
Forecasts can both increase or decrease budget numbers based on historical information,
recent market information, and current trends.
Forecasting takes the original budget, current market conditions, and trends, and combines
them with ratios and formulas to calculate revenues or labor hours that help plan
daily operations in detail for the next week. Forecasts for the next month or accounting
period will be more general in nature. Ratios identify the relationships between the two
components of revenues (rate and volume), the two components of wages (rate and labor
hours), and the important components of other operating expenses. Ratios and formulas are
used to calculate appropriate expense levels in relation to different revenue levels.
This article discusses revenue and wage forecasting—how they are prepared and how
they are used. The article builds on the information presented in the revenue management

[ by Max at 2-20-2009 02:12 edited ]
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Forecasting Fundamentals

Forecasts are the financial documents that update the operating budget. Whereas the operating
budget is a permanent financial plan for a year, the forecast is flexible and provides
a way to makes changes to the budget to reflect current trends and economic/market conditions.
Budgets are generally prepared in the fourth quarter of the current year for the
next year. The budget for the first quarter is current, being only a couple of months old.
However, the budgets for the third and fourth quarters are more than eight months old
and many changes may have occurred in the marketplace that would affect the budget
and the operations of a business. Forecasts are therefore valuable management tools used
to update the budget so that it reflects current business levels and conditions.
Forecasting is not an exact science, and forecasts are not expected to balance or tie into
other financial numbers. Forecasting involves using current information and combining
this information with established ratios and formulas to estimate or project future business
levels and operations. These ratios are based on existing relationships between revenues
and expenses. These ratios can be applied aggressively or conservatively depending
on the current management strategy.

Last Year, Budgets, and Forecasts

There is a logical progression for the preparation of financial documents used as management
tools in operating a business. Two aspects are involved. The first is historical in
nature, and the second is forward looking and looks to the future.
All financial documents used in the planning of business operations start with last
year’s actual financial performance. This is the historical aspect of financial planning.
These numbers are facts and are the results of actual business operations for previous
months or years. They become the foundation for preparing the operating and capital
expenditure budgets for the next year. If last year’s financial results are good, a business
will try to continue the strategies and plans that produced those successful financial
results. If last year’s financial results are not good, then a business will identify changes
and improvements that will produce the intended financial results. In both situations, the
annual budget will lay out the details for the next year’s operations including the expected
financial results. It is the first and most formal financial document that plans for the future.
Once the annual operating budget is prepared, the next step is to update the budget
by preparing forecasts that reflect any changes in the current market or economic conditions
and the current trends in volume and revenues. Forecasts plan for the future, are
short term in nature, and are intended to be flexible. They are the last planning document
and are prepared by using the latest and most current actual market trends and infor-
mation. The weekly revenue forecast and the weekly wage schedule are used to plan the
specifics of daily operations for the next week. When the week is completed, actual financial
results are compared to the forecast, the budget, and last year’s actual results. Major
variations are analyzed and financial critiques are prepared to explain the causes and
discuss solutions.
In review, the progression of financial documents used in planning business operations
begins with last year’s actual results that are used to prepare the annual operating budget.
The budget is then updated during the year by preparing forecasts, which update the
budget and provide management with the most current information to plan the next
week’s daily operations.

Types and Uses of Forecasts

Forecasting Relationships with Last Year and the Budget
As we have discussed throughout the book, the main uses of numbers and financial
reports are to measure financial performance and provide a management tool to use in
operating a business. The Profit and Loss (P&L) Statement is the main financial report
used to measure financial performance. The Balance Sheet and Statement of Cash Flows
also provide useful financial information for measuring financial performance. Forecasting
mainly involves financial activity that is included in the P&L. Therefore, the P&L will
be the focus of forecasting in this article. One exception is the importance to owners and
managers of forecasting the required cash flow to maintain daily operations. Cash flow
forecasting is generally performed by the accounting office.
The forecasting relationship with last year’s actual results and the budget for the
current year can be illustrated with the following time line:
1. Last year’s actual results will be shown by each week.
2. Management will determine what are realistic improvements or achievable growth
objectives for next year.
3. Management and accounting will prepare the formal operating budget, a detailed
financial plan by day, week, month, and year outlining the financial goals for the
next year.
4. The final operating budget will be approved for the next year containing specific
monthly or accounting period financial plans including dollar amounts, percentages,
and statistics. This budget is approved and distributed to all departments and
will be used for the entire year.
5. Before the beginning of a month or accounting period, the Accounting Office will
provide a weekly breakout of the budget for each department.
6. Each department will then review the budget for the next week. If there are no
meaningful changes, the department will use the weekly budget as its weekly forecast
and will plan the next week—day by day—according to the budget numbers.
7. If there are meaningful changes—either increases and decreases—the department
managers will update the budget by making changes that reflect more accurately
the current business environment. The changes that update the budget become the
weekly forecast.
This time line demonstrates the process that takes actual financial performance (last
year) and projects it into the future with a formal annual financial operating plan (the
budget). The last step is to review the budget, make any changes or updates (the forecast),
and use this information to plan the details for the next week’s operations. A forecast
column is rarely included in the monthly P&L. Forecasts are, however, included on internal
management reports that are generally reviewed daily and weekly. This includes
reviewing actual revenues and labor costs and comparing them to the forecast, the budget,
and last year. Any changes or differences are explained in variation reports called critiques.
The fact that weekly forecasts are not generally included in the monthly or accounting
period P&L does not mean they are not important. It means that they are used primarily
as an internal management tool to plan, operate, and analyze the daily and weekly operations.
In fact, operations managers spend more time with the weekly financial information
than with the P&L. This is because they use the forecasts daily in their operations,
critique the variations daily and weekly, and make any necessary changes that will
improve performance. Effectively using the weekly forecasts and other internal management
reports generally leads to better financial performance on the monthly or period P&L

Weekly, Monthly, Quarterly, and Long-Term Forecasts

The weekly forecast provides the plans and details of operations for each shift and day
of the week. Daily revenue reports and daily labor productivity reports are distributed the
following day. These are compared to the weekly forecast and provide operations management
with the detailed results of the previous day and week to date operating results.
This includes efforts to maximize revenues and efforts to minimize expenses day by day.
The shift or line managers have the direct responsibility to run their departments according
to the most recent forecasts. They, with their employees, make the numbers happen.
Therefore they spend a lot of time reviewing, analyzing, changing, and forecasting their
An essential part of the weekly forecast is the critique that analyzes last week’s results.
Companies have weekly forms that are useful for capturing the actual, forecast, budget,
and last year’s information. Recent technology developments provide a vast amount of
detailed information almost instantaneously for managers to use. The strongest operations
managers in any business will possess both operating skills and financial knowledge so
they can make the best use of the daily and weekly information. Weekly reports are primarily
internal management reports. They provide information that measures financial
performance, but their main use is as a management tool.
Monthly forecasts or accounting period reports are used equally as a management tool
and to measure financial performance. These are formal reports that are distributed inside
and outside the company to interested stakeholders. They provide the actual financial
results of operations and compare them to the budget and to last year. Rarely is the forecast
included on a formal P&L Statement. Critiques are also prepared for the formal P&L,
and operations managers and accounting managers use the weekly critiques to explain
the operations for the month. Operations managers are expected to prepare these critiques
and review them with their direct manager or, in the hospitality industry, with their
Executive Committee Member. Then the critiques are presented to and discussed with
the General Manager. The final step usually involves providing this information to the
regional or corporate office and to the appropriate owners.
Quarterly forecasts are primarily used to plan and project the financial performance
for the next one or two quarters. Senior management as well as owners are interested to
see and review what level of business can be expected in the near future. Whereas operations
managers, along with the accounting department, can prepare these longer-term
forecasts, they will not spend as much time on quarterly forecasts as they will on daily
and weekly forecasts.
The final forecasts are the long-term forecasts, which are not as detailed as weekly and
quarterly forecasts but are intended to give the general direction of expected business
operations in the future. These long-term forecasts are more general in nature and will
probably be prepared by the accounting office. They will include sales and profit projections
and average rate, occupancy, and REVPAR projections. Companies can include different
time periods in their long-term forecasts. Marriott looks at the next six accounting
periods. Four Seasons includes an end-of-year forecast that combines the current year-todate
actual performance with a forecast to the end of the year so that management will
always have an idea of how the end-of-year actual/forecast performance compares to
last year’s actual results and the current year’s budget. This is important to the owner in
planning for cash inflow or outflow.

Revenue, Wage, and Operating Expense Forecasts

Weekly forecasts focus on the most important financial elements of operating performance.
In the hospitality industry, this means focusing primarily on revenues and labor costs.
Maximizing revenues, as we have discussed in previous articles, involves analyzing
past performance and forecasting expected levels of performance in the future. Revenue
forecasts are critical to the success of any business because, in addition to forecasting
expected revenues, they are used to plan and schedule appropriate expense levels. Operations
managers need to plan changes in operating expenses to handle the forecasted business
levels. If a business does not forecast revenues for the next week or month, it is
managing out of the rearview mirror and can get caught in some difficult situations by
not seeing and adjusting to changes in the market and its business levels.
The key component of revenue forecasting is volume. Specifically, this is rooms sold for room
revenues, customers for restaurant revenues, and labor hours for wage schedules. How
many customers are projected to stay at the hotel or eat in the restaurant? Operations
managers need to schedule appropriate labor costs and order appropriate materials and
supplies to properly service the expected rooms sold or customer counts. This involves
volume levels and not average rates. For example, if a hotel is forecasting $50,000 more in
revenue for the week and it is all the result of higher average rates, the hotel will not have
any more guests in the hotel than the budget specifies. No changes need to be made to
wages or operating expenses. However, if the additional $50,000 is all the result of selling
more rooms, then operations managers will need to schedule more employees and purchase
more supplies and materials to provide expected products and services to their additional
Controlling labor costs is the next most important responsibility of operations managers
in all departments. In the hospitality industry, total hotel wage costs are generally
30% to 35% of sales and also produce another 10% to 15% in benefit costs. Because most
of the labor costs are in hourly wages, which are a variable expense, managers are
expected to schedule more or less wages based on the forecasted volume levels. Managers
must control their hourly wages to maintain productivities and profit margins. This means
sending employees home early on slow days as well as calling employees in on busier
days in response to short-term changes in business volumes. It also means changing work
schedules for the next few days if business has slowed down or picked up since the most
recent weekly forecast was made.
Wage costs are all about hourly wages. Changing labor hours to reflect business levels
is essential for managing and minimizing wage and benefit expenses. This also includes
controlling overtime, which is a very expensive use of labor. Management costs are
generally fixed and therefore are not subject to changes in business levels like hourly
wages are.
The last expense to control according to business levels is operating costs. This primarily
includes managing the food costs in the restaurant and banquet departments. These
are the largest expenses in the food and beverage departments and are also subject to the
changing business levels. It is important to manage food inventories because a high percentage
of food is subject to time and perishability. Other operating expenses—such as
cleaning supplies, guest supplies, china, glass, silver, and linen—cannot be controlled as
quickly as wage and food costs. However, they are not perishable and can be used over
many months and even over many years. To control these expenses, managers must pay
close attention to purchasing and receiving, invoicing, physical inventories, and interdepartmental
transfers. They will primarily use the monthly or accounting period budget to
control these expenses.
2-20-2009 02:32

The Gallery Golf Club opened the North Course in 1998 and was the first private club to
open in Tucson in over 30 years. Nestled against the foothills of the Tortolita Mountains,
it offers spectacular views to go along with spectacular golf. It got its name from over 100
gallery quality works of art in the Gallery’s dining room and lounge. In 2003, the Gallery
opened the South Course. Because it is a private golf club, the clubhouse includes member
locker rooms in addition to the golf pro shop and food and beverage operations. Memberships
also offer a significant source of revenues. Members generally own a home at the
Gallery but memberships are also sold to prospective Gallery home buyers.
How was the Gallery’s forecasting of revenues affected by the addition of the second
golf course? Would you prepare one daily revenue forecast or one for each golf course?
What is the impact the second golf course might have on memberships? Would you
maximize golf course revenues by focusing on higher greens fees (rate) or higher rounds
of play (volume)?

[ by Max at 2-20-2009 02:32 edited ]

10th Hole Gallery South Gallery Golf Club

10th Hole Gallery South
Gallery Golf Club
2-20-2009 02:35

Revenue Forecasting

The Importance of Room Revenue Forecasts
Room revenue forecasting is the starting point for maximizing all hotel revenues and minimizing
all hotel expenses. These are the two most important financial goals for any operations
manager. Identifying the causes of increases or decreases in actual business levels,
understanding financial ratios and formulas used in revenue forecasting, and preparing
accurate and useful forecasts are essential to the success of any department or business.
Room revenue forecasts are also used to prepare restaurant and banquet revenue forecasts.
To forecast revenues for the hotels restaurant, the restaurant manager will consider
the following details included in the room revenue forecast:
1. Total rooms sold or occupied for each day
2. Number of guests per room
3. Number of group rooms occupied
The manager will then look at the banquet weekly forecast to determine what percentage
or number of guests will be attending meal functions provided by banquets. This will
affect the number of guests available to dine in the restaurant.
To forecast banquet revenues, the banquet manager uses guaranteed customer counts
as well as the number of group rooms in the hotel. The revenue forecast includes the actual
number of rooms picked up by a group, and it tells the banquet manger if the meal function
will meet the number of customers guaranteed in the contract.
Several other revenue departments will forecast their revenues based on room sales.
These include the Gift Shop, Telephone, and Recreation departments, among others, which
will use a formula based on room revenue forecasts. For example, these departments can
use sales per occupied room to forecast their department sales. The Gift Shop will have a
historical average sales per occupied room. Managers will use this amount and multiply
it by the number of occupied rooms for the day or week to develop their forecasts.
Volume: The Key to Forecasting
We will emphasize one more time that all forecasting is based on volume or business
levels. Each revenue department applies a formula based on rooms sold or hotel guests
to calculate and forecast its department revenues. Examples of formulas used include the
1. Rooms Occupied * Average Sales per Room = Department Sales
2. Rooms Occupied * Average Guests per Room = Total Hotel Guests
3. Total Hotel Guests * Average Check per Guest = Department Sales
4. Total Hotel Guests - Banquet Guests * Average Check per Guest = Department
Any of these formulas can be used to calculate and forecast the revenue for a specific
department. Notice that these formulas require an expected volume level stated as total
rooms occupied or total guests. This volume number is then applied to an average room
rate, average guest check, average expenditure per room, or other formula to calculate a
department sales forecast. The next section provides more details and examples of how
rooms occupied and number of guests are used to prepare wage schedules and other cost
control plans and schedules.
Because of the nature of fixed costs they are generally not changed from the budgeted
amounts when included in forecasts. Variable costs are changed based on ratios that identify
the relationship between different expenses and the volume of revenues or sales.
The formula for room revenue is
Rate * Volume
Room revenue forecasting applies this formula with current actual information to
determine the next week’s forecast. Steps in the process of preparing weekly room revenue
forecasts begin with forecasting volume levels and then applying an average rate to
calculate or forecast total room revenues.
1. Historical averages are used to provide a starting point for forecasting. This can
be average rooms sold for each day of the week for room revenues and average
customers per day and meal period for restaurants.
2. Current trends and market conditions are then applied to these averages. If a hotel
has been busier than usual for the last several weeks, the revenue forecast prepared
will probably be higher than the historical averages. If a hotel has been slower
during the previous weeks, the historical numbers will be adjusted downward
when weekly forecasts are prepared. In each of these examples, the operations managers
will add or delete 5, 10, 20, or any other number of rooms from the historical
averages to reflect current demand and market conditions.
3. Often forecasts are prepared for each market segment and then added together to
get the total room revenue forecast. For example, transient rooms sold are forecasted
based on information from a yield management program, whereas group
rooms sold are forecasted based on group room blocks and the actual pickup of
rooms held in the room block.
4. The last step is determining an average rate to apply to each room sold or average
check to apply to each customer. Historical room rates and average checks are the
starting point, and then adjustments are made based on any room rate increases or
menu price increases. This process can also be done by market segment or meal
period. The more detailed the forecasting of rooms sold and average rates, the more
accurate the forecast should be. Forecasting total rooms sold for the week and using
one average rate for the week will give a very general forecast. Forecasting volumes
and average rates by market segment and meal period will result in more detail
and accuracy.

Wage Forecasting and Scheduling

Wage Forecasting Fundamentals
Managing and controlling wage costs are the biggest responsibility of hospitality
managers in maintaining productivities and profit margins. The reasons for this are as
1. Wages are the largest expense of each revenue department in hospitality operations.
The only exception is retail, where cost of goods sold is generally higher. Total wage
costs in a full-service hotel will be in the 30% to 35% range.
2. Hourly wages are variable, and therefore hourly wage schedules can be prepared
and adjusted based on the volume levels of current revenue forecasts.
3. Each wage dollar produces an associated benefit cost, generally in the 25% to 40%
range. Controlling wage expenses also results in controlling benefit expenses.
Managers in revenue departments spend a great deal of time reviewing revenue forecasts
and then preparing wage schedules that appropriately reflect volume levels. This is the
primary way that labor productivities and profit margins are maintained.
Labor Standards, Forecasting, and Ratios
Many ratios and forecasts can be used in preparing wage schedules that maintain expected
productivities. The primary methods used in a hotel relate to the rooms department and
food and beverage departments.
The Rooms Department
Total Labor Hours per Occupied Room =
Total Department Labor Hours / Total Occupied Rooms
Wage Cost per Occupied Room =
Total Department Wage Cost in Dollars / Total Occupied Rooms
Wage Cost Percentage =
Total Department Wage Cost in Dollars / Total Department Revenues
Housekeeper labor hours based on rooms cleaned per eight-hour shift, or numbers
of housekeeper room credits per shift.
Front desk clerk labor hours based on check-ins per eight-hour shift.
Front desk cashier labor hours based on check-outs per eight-hour shift.

Restaurant Departments

Total Labor Hours per Cover/Customer Count =
Total Department Labor Hours / Total Covers/Customer Counts
Wage Cost per Cover/Customer Count =
Total Department Wage Cost in Dollars / Total Department Revenue
Wage Cost Percentage =
Total Department Wage Cost in Dollars / Total Department Revenue
Server labor hours based on number of tables per shift or number of covers/customers
per shift.
These ratios are applied to the forecasted volumes that produce weekly revenue forecasts
for both the rooms department and all food and beverage departments.
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