Revenue Manager, You Forget Your Forecasting Tools

By.  Ahmed Mahmoud 25th Nov 2009

Forecasting is the process of estimation in unknown situations. All successful revenue management strategies  are based on the ability to forecast demand accurately and control room availability and length of stay.

The ultimate goal of the forecasting process is to be able to anticipate future demand and plan ahead accordingly. Moreover when we are forecasting we do not want to just look at the next month, rather we should be able to anticipate the next coming few months as well in order to fully adjust operational strategies.

Improvement in forecast accuracy can facilitate management and financial strategies. For most hotels, rooms represent the majority of the revenues and the whole hotel is affected based on what happens with the rooms sales. So if accurate information about future demand for hotel rooms is not available, either overbooking or under booking will occur, and both are very costly to the business. And this what the hotel operation need as support from the revenue manager nowadays is to produce accurate forecasts of the real estate revenues thus the expenses needed. Hotels in all cases are offering the same rooms to different types of guests. While hotel managers would like to fill their hotels with highly profitable guests as much as possible, it is generally necessary to allow for less profitable guests in order to prevent rooms from remaining vacant. An important decision to be made is whether to accept a booking request and generate revenue now or to reject it in anticipation of a more profitable booking request in the future. Finding the right combination of guests in the hotel such that revenues are maximized is the core topic of revenue management.

Hotel investment opportunities cannot be properly evaluated without accurate forecasts of the revenues and expenses the property is expected to produce. For the next few months, so the forecasts of occupancy, average rates, cash flows and real estate value needed to support hotel investment and lending decisions. Remember with more accurate forecasting tools not only we can align resources to maximize revenue but also we can adjust expenses spending or saving based on revenue projection.

Still there is only one way to improve the accuracy of occupancy forecasting models are to consider human judgments. Forecasting scholars and researchers confirm that more accurate predictions can be obtained when quantitative models and expert judgments are combined. This is the case because human judgment supplies additional relevant information and it functions as an independent source.

This idea from forecasting is to review the past few months and maybe year’s performance to understand future trends, assess possible risks and opportunities. The idea will be a matter of replicate the past performance with either a plus or minus percentage of figurers or numbers with the usage of different sources of information to obtain correct data, then analyze this data to obtain knowledge in order to be a proactive revenue manager knowing the opportunities and the risk ahead.

As revenue manager a few forecasting tool you should consider which ties together all the essential elements required to prepare accurate forecast.

1. Budget

Although the management acting in the use of a budget as a tool of steering are very important. But it is highly recommended to have the employees trust thus they feel that the goals set are impossible to reach. The possible steering effects, that the budget is capable to create, then disappear.

In many hotels the budget processed with the help from managers without a discussion with the involved department whether it is reasonable or not. Although the budget usually based on last year outcome of sales performance and little consideration is taken to the department’s judgment during the operational year .,this is why budget will be always the base line and essential guide for your forecast having other department and managers involved in your decisions for the figures, hence revenue manager and upcoming budget process is essential for the forecast.

2. Historical Data

Historical data is past information about the hotel, and already part of the budget process where the ‘actual’ from previous years are used in analysis the past data where it is also used to help forecast the hotel future and as reference for the forecast ; for example, historical price, price/earnings ratio, revenues and revenue growth, earnings and earnings growth, occupancy, ADR, events and special events .

When looking to the historical data take into consideration the following

A. The accurate daily data of, no show, cancellation, walk in, early departure, extend stays …….. ETC, breaking it into revenue, occupancy, ADR and link it with your market segmentation and number of pax , then History will creates itself continually and it is important to do on-going analysis with the latest information available. While STLY (Same-Time-Last-Year for the same month, same day) is the most used and powerful analysis can help you in the forecasting.

B. Review any special events / circumstances that created ups / downs in last year, which are not applicable this year.

C. Data of the same day (date) last year (i.e. Dec 10, 2008/2009) remember the vary of the day for the same date Dec. 15 2008 was Monday while it is Tuesday in 2009, as well in some cases some dates and days will be fall in weekdays and weekends .

D. Data of the same day of the week (i.e. Monday/Saturday) of last year, depending on which day your week will start.

E. Data of a similar, but more recent period, depending of your business trend pick up.

F. Data of the similar special period (school holidays; bank holidays; national days etc.) as they can change over the years (Easter, Spring break, etc.)

3. Business On The Books (BOTB)

You can call it as well OTB on the books, where it is critical and initial to the forecast process and make a good base line to start your next month . This will includes and not limited to transient business and group in terms of definite /tentative/prospect bookings for the selected forecasting period. Breaking it to its segmentation level ‘On-The Books’ data includes and not limited to:

A. Long staying guest for more than three weeks at least and air crews, those create good base for what you have OTB.

B. The actual booking pace compared to the previous forecast. This will reveal the overall sentiment of the market. Is the trend pick up doing better than expected or worse, i.e. is the pace / the lead time weaker or stronger than expected while preparing the forecast the previous time, while comparing the previous and the current forecast, try to analysis why the pick up went to better or to drop in the trend, what happened internally or externally of your hotel effect in the pick up trend.

C. Review and discuses the tentative bookings especially the groups, which bookings are likely to be converted into definite, are any expected to wash, or cancel completely? After the wash dawn finalized you still can figure some percentage of the tentative booking that might be converted to be definite and add this figures to your expectation as it will be metalized

D. Review of tour operators and travel agents allotments or other ‘blocks’ are they filling up as anticipated? Call those how have allotments and ask them to release whatever they have OTB, as most of them release the reservation on the release time.

E. Reviews of the success of any special offers, packages or tactics by channel and segment that are employed for this period, are they living up to the expectations?

4. Exceptional Events

Exceptional events means
I. Any event that caused an increased / decreased occupancy or ADR for the day or period of days which was uncharacteristic for the season.
II. Public and religious holidays, especially the holidays those ‘move’ each year to different dates and days, i.e. Easter.
III. Groups; Large groups staying for an extended period City wide conventions, Flight cancellations, Large group cancellation due to political or other reason, war, etc. etc.

It is recommended that ‘Exceptional Events’ work sheet to be created and to be updated every day where details are still fresh in the mind and to be analyses by the month-end closing. This sheet should includes information of day, date, occ. %, ADR, RevPar , full explanation for each day why it was has high ADR or Occ., and the via versa.

As a revenue manager your Challenge will be always How to manage the complexity of groups, Customer Feedback, Pickup / Denials, Day of Week, Seasonality, Competition, price sensitivity by segment?

In summary, it is not unreasonable to expect that forecasts should effectively be ‘wrong’ most of the time. In this sense ‘wrong’ means the forecasts would rarely be instructive about the precise level of a statistic at some point in the future, thus forecasting will always contain elements of factual basis and judgment. We will never eliminate the judgment required. That is the reason we do not have a system or programming that can create a credible sales forecast. The balance between these two factors is the key to improving accuracy. The more the forecast is based on facts, the more accurate is it likely to be.

About  Ahmed Mahmoud

Ahmed Mahmoud has more than a decade of experience in the hospitality industry and business administration, Ahmed began his career early by holding a variety of management positions with such top hotel chains as Accor Hotels, Hyatt International and Starwood hotels. With decades of revenue management experience Ahmed founded the very dedicated site for revenue management news, articles,

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