The Importance of Revenue Forecasting - Math Problem Example

Even though the property has never been renovated any of the hotels in its rating category have any advantages over it and changing the décor on a regular basis can be a means of making the place continually attractive to its clients. The hotel is close to public transportation which means that its guests do not have to go very far or get lost in order to obtain transportation. Additionally, there is direct access from the street to its food and beverage facility which means that this aspect of the business will be more successful than its competitors. It is expected that the food and beverage aspect of the business will provide a similar level of revenue or probably more based on recent restaurant closures and the location of the facility. The hotel expects to have an above-fair market room share which means that its occupancy levels will be above the market average.

Revenue generation

This property has a number of avenues at its disposal to generate revenue. They include rooms, food and beverage, parking, laundry, telephone, entertainment, and room service. This information is highlighted in the appendix.

With an occupancy level of 60% and an ADR of $152, the property would be able to generate revenues from rooms of $705,580. This calculation takes into account rooms sold on weekdays (W/D) and weekends (W/E).  Information gathered indicates that during quarter 1 of the previous years, more leisure was demanded on weekends than on weekdays and so the rates were set higher on weekends than on weekdays. In the case of business, the rates were higher on weekdays since this is usually the time when certain types of businesses like banks and service operations carry out their major activities. Corporate rates were also higher on weekdays than on weekends and so the information on occupancy and the market mix was useful in this regard. The projections take into account the maximize occupancy strategy. The use of this strategy will draw guests from other properties to this one. Additionally, guests will get value for money and will return based on the distinctive characteristics of the property that sets it apart from the competition. 

The food and beverage facilities on the property should benefit tremendously from its proximity to public transportation and its access from the street. It has adequate space for the advertisement of the facilities. A guest survey that was done last year indicated that advertising was of great importance to all types of customers except tour groups. This would definitely help to boost not only the room revenue but food and beverage as well. Some restaurants recently closed their doors and this property stands to benefit from the lower number of restaurants in the area and the fact that none is scheduled to be built in the short term. Additionally, a number of corporate offices are opening in the area and this property stands tall with its distinct facilities which set it apart from its competitors. The property is expected to see approximately 700 additional persons for breakfast each day and this is considered very conservative, with approximately 8,000 for lunch and 6,000 for dinner. This projection is based on the foregoing information as well as information obtained from the food and beverage performance and price points. Dinner followed by lunch is expected to be the main revenue generator. In terms of beverages from the bar, there should be quite a bit of people coming in from outside. Revenue generation for this combined group is approximately $490,000.

A summary of the above revenue generation information along with revenue from miscellaneous sources is included in Table 1. The details on the various inputs and the resultant revenue figures can be found in Appendix 1. 

Revenue Summary

Revenue Description

$

Rooms

705,580

Food

417,470

Beverage

74,996

Other Income

41,861

Total

1,239,907

Table 1

The summary forecasts for revenue indicate that rooms will yield the highest income, followed by food and beverage. Other income is very small and consists of laundry and room service. The total revenue combined is a total of $1,239,907.

Financial performance

The property expects to earn a gross margin of 25% and a return on assets (ROA) of 10%. Table 2 shows the gross profit and net profit in dollar value which needs to be earned in order to achieve the goals of the hotel. The figures used as a basis for the calculations can be found in Appendix 2.

Ratios Expected

Ratio

Percentage

Formula

$

Gross Profit required

25%

Gross operating Profit (%)/Revenue

309977

Net Profit Required for Return on Assets

10%

10% of Total assets/12

267542

Table 2

Based on the total revenue projected for the month of January, gross operating profit should equal $309977 and a net profit of $267,542 is required to make this possible. The difference of $42,435 between gross operating profit and net profit by itself may not be able to pay certain expenses such as interest, salaries, and other administrative expenses in order to obtain a ROA of 10% achievable. However, if we take into consideration depreciation charges which will reduce property, furniture, fixtures, and equipment, and a reduction in accounts repayable days from 60 to 30, that goal may be achieved. 

Conclusion

The property has a lot of scopes to perform well. If managed properly the goals laid down by the organization can be achieved in an efficient and effective manner. Cost-cutting measures are going to be even more important if the performance measures are to be attained. When thinking about cutting or recruiting staff, both the short-term and long-term consequences need to be properly assessed and analyzed before any action is taken.