Every month the P&L puts actual next to budget, and the variance column shows the gap. It doesn't say why, and "why" is what an owner, asset manager or general manager needs. This guide sets out a hotel budget vs actual variance analysis method that gets from the number to the reason, using a fictional month.
Step 1: agree the sign convention
Variance = actual − budget, and variance % = variance ÷ budget. For revenue and profit, a positive variance is favorable. For expenses, a positive variance means you spent more, which is unfavorable. Either label each variance F or U, or show expenses so favorable is always positive. Pick one approach for the whole package.
Step 2: split rooms revenue into volume and rate
A rooms revenue variance is almost always a mix of two things: selling more or fewer rooms, and selling them at a different rate.
- Volume variance = (actual rooms − budget rooms) × budget ADR
- Rate variance = (actual ADR − budget ADR) × actual rooms
Fictional example. Sample Inn budgeted 900 rooms at $132.00 ($118,800). It sold 870 rooms at $135.00 ($117,450).
| Rooms revenue (fictional) | Amount |
|---|---|
| Budget | $118,800 |
| Volume variance | −$3,960 |
| Rate variance | $2,610 |
| Actual | $117,450 |
The total variance is −$1,350, but the split tells the real story. The hotel lost $3,960 on volume and won back $2,610 on rate. That raises different questions than the net figure. Did a group cancel? Did you hold rate on purpose? Split by segment for more detail.
Step 3: flex the expense budget
If you compare expenses with the original budget, you punish or flatter departments for volume they don't control. A flexed budget restates variable costs at actual volume.
Fictional example. Sample Inn's housekeeping and laundry budget is $9.00 per occupied room. The original budget was $8,100. Flexed to 870 rooms, it's $7,830. Actual spend was $8,010.
| Housekeeping and laundry (fictional) | Amount | Variance to actual |
|---|---|---|
| Original budget | $8,100 | −$90 (F) |
| Flexed budget | $7,830 | $180 (U) |
| Actual | $8,010 |
Against the original budget, the department looks $90 under. Against the flexed budget, it spent $180 more than the volume justified. Discuss the flexed view. Apply the same logic to the whole P&L and you get flow-through.
Step 4: decide what to explain
Set a threshold before the month closes, for example a dollar amount and a percentage, and explain every line that crosses either one. Small lines with large percentages need a look. So do large lines with small percentages. Agree the threshold with ownership so the commentary covers what they care about.
Step 5: classify and write the commentary
- Timing: the revenue or cost moved to another month. Expect it to reverse.
- One-off: it happened and won't repeat.
- Ongoing: it'll continue, so update the forecast.
Each comment should name the driver with a number and state the action. Fictional example: "Rooms revenue −$1,350 U: a 30-room group cancelled (−$3,960 volume), partly offset by ADR $3.00 above budget ($2,610 rate). Ongoing for Q1 group pace; the forecast is updated."
Step 6: feed the forecast
Ongoing variances should change the forecast for the rest of the year. If your variance analysis and your hotel forecast template tell different stories, one of them is wrong.