An 8-step guide to hotel revenue forecasting

By analyzing past data, current bookings, market trends, and competitor performance, then factoring in variables such as customer behavior, revenue forecasting provides a comprehensive economic prediction of a hotel’s expected commercial activity, revenue, expenses, profits or losses - and therefore, insights into the hotel's future success.

When done well, hotel revenue management forecasting can inform a whole host of decisions a hotelier can make that’ll help to steer a profitable hotel business; a business that sees consistent growth year over year.

That’s the true advantage of hotel forecasting. It’s always forward-looking, presenting continuous opportunities to refine strategies and enhance progress.

Whether it’s day-to-day operations, revenue management strategy or longer-term strategic decisions, when you are working from a good forecast, you can be more agile, more proactive, and make more educated decisions that’ll help you reach KPIs and budget targets, and be better prepared for any future uncertainties.

Implementing different pricing strategies around rates, promotions, and packages without a solid forecast is asking for trouble; understanding future booking volumes - the main revenue source for a hotel - becomes guesswork without some form of guidance. You’re essentially flying blind.

More than simply informing your revenue during a particular period, forecasting will help you determine what decisions you need to take and when.

In high season or during low demand periods, if your forecast is correct, you will be able to see exactly where you need to place resources, adjust your staffing, implement marketing strategies, or tighten up on operational inefficiencies and cost management.

In this guide, we’ll walk you through a detailed, step-by-step process to help you forecast revenue effectively, turning your data into decisions that elevate your hotel’s revenue performance.

Step One: Define your forecasting timeline

The first step in revenue forecasting is to define your timeline clearly and precisely. Determine both the period you need to forecast for (e.g., a month, a quarter, or a year) and how far ahead you need to forecast based on your business needs and market conditions.

For example, forecasting for December is much more precise and actionable than vaguely forecasting "over the next few months." This clarity allows you to tap into historical data from previous Decembers, making your process more accurate. A clearly defined timeline ensures you're measuring against relevant, like-for-like past performance data, making your forecasts more focused and effective.

Best practices:

• Conduct regular forecasting: Monthly or quarterly updates keep your projections current and accurate.

• Adapt to market trends: Frequent updates help you swiftly adapt to market changes, maintaining a competitive edge.

Step Two: Collect relevant historical data

Accurate and relevant historical data serves as the foundation for your forecasts. It helps identify trends and patterns that inform future projections. By understanding past performance, you can better anticipate future demand.

Hoteliers rely heavily on historical data such as past occupancy rates, average daily rate (ADR), and revenue per available room (RevPAR).

Where to find the data:

• Property Management System (PMS): Most of your historical data can be sourced from your PMS, which tracks past bookings, occupancy levels, room rates, and more.

• Revenue Management System (RMS): If you use an RMS, it likely has detailed historical data and analytics.

• Business Intelligence solution: Sources data from all of your systems, quickly and efficiently.

Time period to collect data from:

Align the data collection period with your forecasting timeline. For example, if you’re forecasting for the upcoming summer, review last summer’s data.

Data you will want to collect:

• Past Occupancy Levels

• Average Daily Rate (ADR)

• Pace

• Average Length of Stay

• Cancellations

• Competitive benchmarking data

• Market segmentation

Organizing your data:

Ensure all your data is clearly labeled and easy to navigate. Use conventions that are clear and consistent. Consider specialized forecasting tools that can store, organize, and surface your data more efficiently than manual methods.

Best practices:

• Consistency: Ensure data is consistently recorded and maintained.

• Detail: Collect as much detail as possible for deeper insights. This will help you to understand your guest demographics better.

• Segment: Break data down into guest origin, distribution channels, market segments, room type segments, or rate codes to spot trends.

Step Three: Assess current bookings

With your historical data in place, the next crucial step in revenue forecasting is to assess your current bookings.

The data you have "on-the-books" is the most reliable set of information for creating an accurate forecast as these confirmed room reservations and scheduled business functions provide a concrete foundation for your revenue predictions.

Steps to assess current bookings:

Review all the booking details:

1. Examine each confirmed booking for the forecast period.

   Note key details such as room rate, length of stay, and any add-on services (e.g., breakfast, spa packages).

2. Categorize bookings.

   Group bookings by room type, booking channel (e.g., direct, OTA), and rate plan.

   Identify patterns and trends within these groups to understand how different segments are performing.

3. Update forecasts with current data

   Incorporate these confirmed bookings into your revenue forecasts.

   Adjust your projections to reflect the actual revenue already secured, providing a more accurate starting point.

Best practices:

1. Regular updates: Continuously update your records with new bookings.

2. Monitor patterns: Keep an eye out for booking trends and adjust forecasts accordingly.

3. Leverage technology: Use technology to automate the tracking and updating of bookings, minimizing manual errors and saving time.

Step Four: Consider variables that may impact your forecast

Next, you should take into consideration the variables that could impact future demand. Paying attention to general market trends, both within the hospitality industry and the broader economy helps to set the context in which your business is operating: understanding and anticipating these factors gives you more flexibility in your decision-making when there are fluctuations.

Market trends:

• Hospitality industry trends: Are you noticing a general increase or decline in hotel visitors in your region? These trends can signal shifts in future demand, such as an uptick in tourism indicating higher future occupancy rates.

• Economic conditions: Is the economy experiencing a downturn or an upturn? Economic conditions can heavily influence travel behavior, with downturns leading to decreased discretionary spending on travel and upturns potentially boosting travel activity.

Competitive landscape:

• New competitors: Has a new hotel or holiday home opened nearby? New competitors can dilute demand for your property, making it essential to monitor these developments closely.

• Competitor changes: Have local competitors recently undergone renovations, or opened up a state-of-the-art conference center? Such changes can significantly impact your demand, either negatively or positively, depending on the circumstances.

External factors:

• Events and attractions: New local attractions or special events can boost demand to your market, while construction or closures can decrease it.

• Weather patterns: Seasonal weather changes or forecasts of severe weather can influence booking patterns. A ski resort might see the length of its high season dictated by the snowfall it receives, for example.

Step Five: Estimate future profits and expenses

Profit and expense estimation

To accurately estimate future profits and expenses, start by analyzing the historical data you've collected. Break down revenue into different streams and use historical data to project future financial performance. Here’s how you can approach this:

1. Estimating future profits:

• Revenue streams: Break down your revenue into different streams such as room sales, food and beverage, events, and other services. For example, if room sales have consistently contributed to 70% of your total revenue, use this as a base to forecast future room sales.

• Historical data analysis: Look at past occupancy rates, average daily rates (ADR), and revenue per available room (RevPAR) to project future room revenue. If your ADR was $150 and your average occupancy rate was 80% last year, use these figures to project future revenue, adjusting for expected changes in demand.

• Trend analysis: Incorporate market trends, seasonality, and upcoming events into your forecast. If there’s an annual conference that boosts your bookings every summer, factor this into your revenue predictions.

2. Estimating future expenses:

• Fixed costs: Identify fixed costs such as salaries, utilities, insurance, and maintenance. These costs remain relatively constant regardless of occupancy levels.

• Variable costs: Estimate variable costs that fluctuate with occupancy, such as housekeeping, laundry, and food and beverage supplies. Use historical ratios to forecast these expenses. If variable costs are typically 30% of your revenue, for example, apply this percentage to your projected revenue.

• Capital expenditures: Plan for significant expenses like renovations or new equipment purchases. These should be factored into your long-term forecasts.

Best Practices:

• Regular reviews: Continuously review and update your estimates.

• Scenario planning: Prepare for different scenarios to make your forecast more robust.

Step Six: Forecast your hotel revenue

Now that you have estimated future profits and expenses, it’s time to use this information to forecast your hotel’s revenue. Combine your projected occupancy rates, average daily rates (ADR), and additional revenue streams into a comprehensive revenue projection.

Step-by-step process:

1. Determine projected occupancy rate and ADR: Use historical data, current bookings, and market trends to estimate your future occupancy rate and ADR.

2. Calculate room revenue: Multiply the projected occupied room nights by the ADR.

3. Add additional revenue streams: Include revenue from food and beverage, events, and other services.

4. Calculate total projected revenue: Combine room revenue and additional revenue streams to get the total forecasted revenue.

Step Seven: Use standard financial ratios to check your forecast

Once you have forecasted your hotel revenue, it’s essential to validate the accuracy and realism of your projections. Using these standard financial ratios provides a way to cross-check your forecasts and ensure they are grounded in reality.

Here are some ratios that you may want to consider:

Gross Operating Profit Per Available Room (GOPPAR):

• GOPPAR = Gross Operating Profit / Total Available Room Nights

• This ratio measures the hotel's overall profitability per available room, giving insight into operational efficiency.

Average Daily Rate (ADR):

• ADR = Total Room Revenue / Number of Rooms Sold

• ADR helps you understand the average income per paid occupied room, essential for pricing strategies.

Revenue Per Available Room (RevPAR):

• RevPAR = ADR × Occupancy Rate

• RevPAR combines occupancy and pricing strategies to reflect revenue per available room.

Total Revenue Per Available Room (TRevPAR)

• TRevPAR = Total Revenue / Number of Available Rooms

• TRevPAR measures total revenue (including all revenue streams) per available room.

Operating Profit Margin:

• Operating Profit Margin = Operating Profit / Total Revenue × 100

• This ratio indicates the percentage of revenue that remains after covering operating expenses.

1. Calculate each ratio:

   Use your forecasted data to calculate GOPPAR, ADR, RevPAR, TRevPAR, and Operating Profit Margin.

2. Compare with industry benchmarks:

   Compare your ratios with industry standards to check if your forecasts are realistic. For instance, if your RevPAR or TRevPAR is significantly higher than the industry average, reassess your assumptions.

3. Adjust forecasts accordingly:

   If discrepancies are found, adjust your forecasts to align more closely with realistic expectations.

Step Eight: Conduct a variance analysis

To iron out any discrepancies and ensure your forecasting efforts in the future are accurate, the next step is to conduct variance analysis in which you compare your forecast revenue and expenses with the actual figures.

Steps to conduct variance analysis:

1. Collect actual data: Gather actual revenue and expense data for the period you forecasted.

2. Compare forecasted vs. actual: Calculate the differences between your forecasted and actual figures.

3. Use the formula: Variance = Actual − Forecasted

   Categorize variances as favorable (better than expected) or unfavorable (worse than expected).

4. Analyze variances: Investigate the reasons behind significant variances. For instance, if there was a wide variance between forecast and actual, you might have to dig a little deeper into the causes.

5. Identify patterns and causes: Look for patterns in variances to understand recurring issues. Common causes might include seasonal fluctuations, economic changes, or inaccurate assumptions.

6. Implement changes: Use insights from the variance analysis to refine your forecasting models. Adjust your assumptions and models based on the identified causes of variances.

Improve financial forecasting accuracy with software

Forecasting your hotel’s revenue can be a complex and daunting process, especially when you are compiling and analyzing vast amounts of historical data. If done manually, you introduce the risk of errors and losing valuable time on fruitless data gathering.

However, with the right tools, fed with high-quality data, this process becomes significantly more manageable and you will be able to generate high-quality forecasts with ease. These tools automate data collection and provide real-time insights, allowing you to adjust pricing and distribution strategies dynamically.

Lighthouse Business Intelligence, the leading solution in the hospitality industry, not only consolidates your data but also slices and dices it for actionable insights so that you can measure your business performance against your forecast on the go.

Whether you need a quick glance at top performance metrics or an in-depth analysis of long-term trends, Lighthouse Business Intelligence makes it effortless.

Forecasting is only an effective tool if its insights lead to concrete actions. By leveraging such technology, you streamline decision-making, identify new revenue opportunities, and ensure your hotel’s performance stays on target to meet your revenue goals.

Discover how Lighthouse’s solutions can revolutionize revenue forecasting, ensuring accuracy and efficiency.