A flexible budget for a hotel's changing occupancy
Why a fixed budget misleads a hotel whose occupancy swings, and how splitting fixed from variable costs gives a flexed budget worth comparing.
By Achekam · · 5 min read · For Hospitality businesses in South Africa, Nigeria, Kenya
In peak season the corridors are full and the laundry runs all night. In the quiet months half the rooms stay dark. A budget written at the start of the year as one figure per cost per month cannot cope with that swing. In a busy month every guest-related line runs over and the variance report reads like a list of failures; in a slow month everything comes in under, and the same report praises managers for savings they never made.
The problem is not the managers. It is a budget that assumed one level of activity. ACCA explains that a fixed budget looks at only one activity level, while a flexible budget summarises revenues and costs across a range of activity levels. For a hotel, that range is occupancy.
Fixed budgets break when occupancy moves
Picture the housekeeping budget. It was set on the occupancy the owner expected for the month. The month turned out busier, more rooms were cleaned, more linen was washed, more amenities went out, and the cost came in above budget. Was that overspending? Almost certainly not. The hotel spent more because it sold more.
Now picture the reverse: a quiet month where housekeeping came in under budget. Was that good management? Possibly, but the fixed budget cannot tell you, because it never asked what housekeeping should cost at the occupancy you actually had.
Splitting each cost into fixed and variable
ACCA explains that flexible budgeting depends on separating fixed and variable costs, expressed as total cost = fixed cost + (variable cost per unit x activity level). In a hotel, the natural unit is the occupied room-night; for the restaurant, it may be covers served.
Sort your cost lines into three groups:
- Variable with occupancy: guest amenities, laundry, cleaning materials, breakfast food cost, booking-site commission and card charges.
- Fixed for the month: rent or bond repayments, insurance, salaried staff, security contracts, licences and depreciation.
- Mixed: electricity, water and casual wages, which have a base that runs whatever happens plus a part that rises with guests.
The mixed lines need splitting before they can be flexed. Looking at past months of cost against occupancy is the usual way; separating fixed and variable costs with the high-low method shows one simple technique.
Building the budget across occupancy levels
At the start of the year, prepare the flexible budget with several columns rather than one: a low-occupancy month, the expected month and a high-occupancy month. Fixed rows carry the same figure in every column. Variable rows grow with the room-nights in each column. Mixed rows carry their fixed part plus their variable part.
The exercise is useful even before the year starts. It shows the owner what a bad month really costs, which is the starting point for planning cash for the low season.
The flexed budget at the occupancy you actually had
ACCA distinguishes the flexible budget, prepared at the start of a period across a range of activity levels, from the flexed budget, prepared at the end of the period at the actual activity level to show what results should have been. It notes that actual results can then be compared with flexed results to calculate a variance for each revenue and cost.
A worked example in words. The month closes with more occupied room-nights than the expected column assumed. For laundry, the flexed budget is the fixed part plus the laundry cost per occupied room-night multiplied by the actual room-nights. If actual laundry is above that flexed figure, the overspend is real and worth a question: a price increase, re-washes, or linen going missing. If actual laundry sits at or below it, the higher bill was simply the cost of more guests.
The comparison now separates two things the fixed budget mixed together. The gap between the original budget and the flexed budget is explained by occupancy. The gap between the flexed budget and actual is what management controlled.
Budgets and actuals in Achekam
In Achekam a business can set a budget per account and period and compare it with actual figures from its ledger. A practical way to run a flexible budget with it:
- Enter the expected-occupancy column as the budget for each account and month.
- At month end, take the actual room-nights from your reservations records. The ledger holds money, not occupancy.
- Work out the flexed figure for each variable and mixed account.
- Compare actuals with both the original budget and the flexed budget.
The actual figures come from the books. The management accounts show the income statement for the chosen period beside the period before, and export as PDF or CSV, which makes it easy to lay the flexed figures alongside in a worksheet. The trial balance gives each account for a period if you want to check a single line. Note that the year-to-date preset starts on 1 January, so set the dates yourself if your financial year starts in another month.
Some owners prefer to leave the original budget untouched and keep the flexed figures in the worksheet. That keeps the record of what was planned at the start of the year intact.
Where indirect costs make it hard
ACCA notes that flexible budgeting can be hard to apply where indirect costs are high, because their fixed and variable elements are difficult to separate. In a hotel those are maintenance, management salaries, marketing and much of the energy bill.
Don't force them. Treat costs you cannot split honestly as fixed, and review them on their own against the original budget. A flexed figure built on a guessed split looks precise and explains nothing.
ACCA's technical article on flexible budgeting works through fixed, flexible and flexed budgets with examples. A practice owner facing the same question will find building an annual budget for a practice a useful companion.
Start small. Pick the handful of costs that obviously move with guests, flex those next month, and leave the rest fixed until you have the history to split them.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
