Budgeting and Forecasting: 6 Tips to Fight Uncertainty in Hospitality

If you’re a hospitality business owner, financial uncertainty can be an absolute nightmare. Rising costs, in particular, have taken a huge toll on the UK hospitality industry in 2024.

A recent survey by UKHospitality reveals that “a quarter of hospitality businesses have no cash reserves and a further 29% have less than three months’ worth.” These are staggering numbers that show the profound uncertainty gripping the hospitality industry.

While you can’t magically lower VAT rates and energy costs, you can take action to protect your business’s financial health.

At Outmin we see many businesses relying on mere educated guesses instead of data-driven strategies. And that’s like driving your car with a blindfold on. The odds are against you…

In this article, we aim to explain the difference between a budget and a forecast and provide 5 proven budgeting and forecasting strategies to help you manage financial uncertainty.

Budget Vs Forecast in Hospitality: What Are the Differences?

First, let's clarify the differences between a budget and a forecast. Though they are often mentioned in the same breath and share the common goal of financial planning, these are two different tools. Let's have a look.

Budgeting

First up, Budgeting. Think of your budget like a master plan; a financial blueprint for the year. It’s about setting your goals and figuring out how you’re going to spend your hard-earned cash to hit those targets. Think of it as your money roadmap:

• Setting the scene: What do you want to achieve this year? More customers? Bigger profits?
• Allocating resources: How much will you spend to make these dreams a reality? Do you need to invest more in this area or cut costs in that one?
• Sticking to it: The discipline to follow your plan, even when the going gets tough.

With a solid budget, you’re not just spending; you’re investing every penny where it counts. But remember, it's pretty much impossible to follow a budget to a tee. Things change throughout the year, and flexibility is needed. (More on that later)

The typical budget includes three to six months of planning (if we’re talking about the annual budget) and detailed financial statements (income statements, balance sheets, bank statements, and cash flow statements).

Budgeting is essential, but many businesses struggle to understand their numbers. A McKinsey study report revealed that more than half (57%) of the executives surveyed were "dissatisfied with their level of visibility into general and administrative spending." The number one constraint was organisational complexity.

Those who were satisfied with the transparency of their budgets cited "advanced IT systems" and a "single source of truth" around costs.

Systems that use advanced accounting technology like AI and Machine Learning - such as Outmin - can process and organise data in a way that brings clarity and simplicity to budgeting. This empowers business owners to make better-informed decisions.

Forecasting

Now, let's move on to forecasting. Forecasting is all about estimating future revenues, expenses, and cash flow based on historical data and current trends.

Forecasting helps you anticipate potential challenges and opportunities, so you can adjust your plans accordingly. It’s more dynamic than a budget, but it provides valuable insights into potential outcomes.

You can use your forecast to re-examine your budget and see if you can stick to the plan.

So, to put it simply, a budget is a plan that outlines what a business expects to spend and earn over a specific period (usually a year), while a forecast is a prediction of future financial outcomes based on current data and trends.

6 Budgeting & Forecasting Strategies to Help You Navigate Financial Uncertainty

Now that the difference between a budget and a forecast is clear, let's have a look at some proven strategies that can help you thrive in this difficult financial climate.

1. Understand your revenue streams and analyse your costs

First, keep up with your numbers. Knowledge is power! Your financial records are a source of financial wisdom. This means understanding what is making you the most money and what is not.

Imagine you own a bakery. You may sell retail products, distribute wholesale goods, offer customisable orders online, and even offer catering services.

Each of these revenue streams requires meticulous attention to understand its contribution to your bakery's overall financial health.

Retail sales may bring in steady revenue, but then cost you excessively in ingredients, labour, and overhead expenses. Maximising profitability is more important than generating revenue.

Cost control and comprehension are really important. It’s not just the obvious spending on food procurement or utility bills. There's a whole gamut of hidden costs. Services like waste management, equipment repair, licensing and permits, employee turnover, and marketing promotions all significantly add up.

Take time to probe into these corners which can silently bleed resources!

And we get it: you’re already overwhelmed with admin work and manual tasks. Dealing with financial management or hiring a finance team can be a huge headache.

Traditional accounting professionals are also not always helpful. Using data-driven accounting solutions can give you clear insights into your financial performance on a weekly basis.

2. Keep your Budgeting and Forecasting Flexible

Not so surprisingly, accurately predicting business for an entire year is nearly impossible. Unexpected changes can happen at any time, so you should avoid rigid plans because they quickly become obsolete.

You need to factor in those changes in your current financial plans to avoid making (potentially costly!) financial decisions based on out-of-date data.

One strategy is using rolling forecasts. A McKinsey report revealed that the best predictor of satisfaction among the CFOs surveyed was whether they used a “rolling” forecast.

Unlike traditional annual budgeting, you can update a rolling forecast throughout the year, typically monthly or quarterly.

This makes you more adaptable to market changes and helps you make better-informed decisions based on timely data.

Another popular method is the so-called zero-based budgeting. According to Investopedia, "zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period."

The main advantage of ZBB is that it forces you to question every expense from scratch, like starting from a clean slate. This means you're not just rolling over last year's budget, but actually deciding if each expense is necessary and worth it.

Ultimately, it can help you reduce costs and grow your margins.

3. Perform Trend Analysis

Trend analysis involves looking at historical data to identify patterns that unlock better decisions in the future.

For example, your restaurant chain is planning an expansion. You can use historical sales data to project the revenue generated per table for each prospective location. Other variables, like local demographics and competitors, can refine your forecast.

Then there are market trends. Let’s say you own a catering company, and spot a rising preference for vegetarian meals in corporate sectors. Noticing this shift early enables you to anticipate higher veggie demand and adjust your inventory purchase.

Forward-looking financial advisory services can help you understand your business and its future direction.

For the hospitality sector, Outmin is the go-to option because we have a deep knowledge of the industry. More than just an accounting tool, we leverage data, advanced technology and human expertise to guide hospitality owners to future-proof their businesses.

4. Prepare for multiple scenarios

Performing a scenario analysis can be a really helpful resource. It includes considering best-case, worst-case, and most-likely scenarios so that you’re prepared for market fluctuations. Better safe than sorry, right?

By examining different potential outcomes, you can better prepare for whatever the universe throws at you.

One of the most effective multi-scenario analysis methods is the Monte Carlo Simulation. Yes, it is a bit complex, but it works.

Basically, it's a mathematical technique that predicts possible outcomes of an uncertain event, like how many customers will visit your restaurant each day, by testing out different scenarios and seeing which ones are most likely to happen.

Although it can be a time-consuming process, scenario analysis is a brilliant way to hedge risk and assess the impact of future events.

5. Involve your Team and Stakeholders

As you know, running a successful business isn't a one-person show; it's a team effort. And when it comes to budgeting and forecasting, getting everyone on board is crucial. Your team and stakeholders aren't just bystanders; they're valuable sources of insight, ideas, and feedback.

Imagine this: You're planning your restaurant's budget for the upcoming year. You could lock yourself in your office, crunch numbers in isolation, and emerge with a budget carved in stone. But where's the fun in that? Instead, why not gather your chefs, servers, and managers around the table and brainstorm together?

Who knows? Your head chef might have an innovative idea for a new menu item that could boost profits. Your servers might have valuable input on customer trends and preferences. And your managers might have insights into operational efficiencies that could save costs!

By involving your team and stakeholders in the budgeting and forecasting process, you not only use their collective wisdom but also promote a sense of ownership and accountability.

When everyone has a stake in the game, they're more likely to be invested in the success of the business.

6. Invest in Automation and Predictive Technology

Leveraging technology is one of the best ways to deal with uncertainty. An automated accounting solution like Outmin relies on artificial intelligence and expert insights to help hospitality businesses stay on top of their numbers, understand future trends, and budget accordingly.

Trust us, advanced technology is already saving numerous businesses thousands of pounds every year, and that’s a testament to the power of data. If you’re looking to take your budgeting and forecasting to a whole new level, this is the way to go.

You Can Thrive Through Financial Uncertainty

The financial storm has its challenges, but understanding the importance of budgeting and forecasting in hospitality can help you gain the competitive edge.

Keeping a close eye on costs, staying flexible, preparing for multiple scenarios, and leveraging technology can help you on the journey ahead.

Want to know how Outmin can successfully prepare you for the future? Let’s chat!