Consideration of risk in the implementation of probabilistic prognostications of hotel revenues and expenses

Abstract

Purpose

The purpose of this paper is to be the first empirical article to provide necessary standard deviation inputs for adoption in probabilistic prognostications of hotel revenues and expenses, i.e. prognostications that consider risk. Commonly accepted methodologies to develop hotel financial projections resulting in point estimates of upcoming performance have been perceived as egregiously insufficient because they do not consider risk in lodging investments. Previous research has recommended the use of probabilistic methodologies to address this concern, and it has been recommended that analysts use Monte Carlo simulation. This methodology requires the estimation of standard deviations of specific, future hotel revenue and expense items, and this paper provides such inputs based on a large sample of actual, recent data.

Design/methodology/approach

This study provides actual standard deviations using a sample of recent hotel profit and loss (P&L) statements for over 3,000 hotels (Over 19,000 P&L statements) to provide analysts with empirically-supported standard deviations that may be applied to Uniform System of Accounts for the Lodging Industry (USALI) hotel revenues and expenses in hotel financial (revenue and expense) prognostications.

Findings

Findings are presented for standard deviations based on typical line items as defined in the USALI, and these findings may be used by practitioners as inputs for hotel financial projections. Findings also include that hotel revenue items generally have higher standard deviations than expense items. Findings are presented in detail in the manuscript, including overall findings, as well as findings based on hotel class.

Practical implications

Rather than practitioners adopting standard deviations of hotel revenue and expense line items based on guesswork or judgment, which is the current “state of the art” in hotel financial projections, this paper provides practitioners with actual standard deviations which may be adopted in probabilistic prognostications of hotel revenues and expenses.

Originality/value

This paper may be the first to provide practitioners with actual standard deviations, based on typical USALI line items, for adoption in probabilistic prognostications of hotel revenues and expenses.

Citation

O'Neill, J., Bloom, B. and Tang, K. (2023), "Consideration of risk in the implementation of probabilistic prognostications of hotel revenues and expenses", Journal of Hospitality and Tourism Insights, Vol. 6 No. 5, pp. 2400-2415. https://doi.org/10.1108/JHTI-05-2022-0172