Hotel finances in four steps

There are many ways to assess and categorize the strengths and weaknesses of a hospitality business. Allow me to present a slightly different and holistic way of organizing how you approach the daunting task of where to allocate funds for the next cycle.

For one, we tend to drill down to the minutia of a venture. I am confident that any GM knows the intimate details of the variable cost of each amenity, the labor costs at the front desk or even the number of yards of drapery fabric required per room for an upcoming renovation. After all, it’s our business to know such detailed metrics, and we pride ourselves in this depth of expertise.

But a hotel is a complex piece of machinery — in fact, much more complex than we often appreciate. With so many different challenges at hand, I was looking for a way of categorizing these issues from a financial standpoint in an attempt to simplify our analysis. Hence, I’ve broken down these issues in terms of four somewhat overlapping sections. In my experience, a hotel typically faces a challenge in one or more of these categories, and priorities should be established accordingly.

1. Costs

When was the last time you conducted an independent audit of your entire cost structure? Hoteliers are experts in this category, ensuring that the purchasing manager is delivering the best combination of price, quality and availability. Costs go well beyond the domain of the purchasing manager, though, and must reflect the needs of every department.

Cost analysis includes other components such as staffing, finances, marketing, sales, amenities and maintenance. Each department’s expense requires careful analysis. Could suppliers be consolidated? Are newer technologies available that minimize labor or offer the same services at even better costs? One hotel I’ve worked with reviewed a long-standing contract for Internet-related services and was able to both enhance guest service and reduce its costs — a win-win!

2. Revenue

This pertains to building the top-line gross operating revenue, and a thorough examination in this regard ensures you don’t leave money on the table. Caution is required, of course, as all pricing decisions need to reflect the value that you provide to guests within a competitive context.

Does your revenue-management model test ways to heighten revenue, reviewing not just STR reports but also spreads on rooms and suites? How do you take advantage of local economics and seasonality? How do you transfer business from higher- to lower-commission segments? Should you consider a resort/hotel fee? Have you examined packages to ensure revenue is maximized while still delivering value to the guests? How do your F&B charges stack up relative to your competitive set? These are just a sample of questions in store on this front.

3. Margins

One might think that by fixing costs and revenues the margins do not need to be identified separately. This is not always the case. Sometimes the issue is itself the margins.

An example: in looking at a menu item, it may not be a cost issue (the product is well-sourced) or a revenue issue (the number of orders matches what’s required), but the margin might be insufficient to subsidize other necessary operating expenses. In this case, you might want to assess whether a simple price increase will fix the issue without deterring consumption, or if you would be better off replacing this menu item entirely.

4. Capital

Have you ever seen a hotel starved for capital? Revenue is solid while costs and margin are all effectively managed, but, for instance, the carpets are threadbare and the guestrooms look outdated. In this sense, the soft and hard goods are well past their “best before” date, and there doesn’t seem to be enough cash in reserve to gain momentum on any revitalization in the near future.

Capital challenges manifest themselves in many ways: delays in replacement normally associated with wear and tear; failure to upgrade Internet and technology systems to conform with today’s consumer requirements; HVAC systems that no longer effectively handle workloads; or failure to adopt LEED standards. Ultimately, owners who fail to invest adequate capital in their product will feel the result through lower guest-satisfaction scores and, when carried to the extreme, de-flagging.

There’s no easy solution to issues involving capital, and ultimately they rest with the owners and corporate managers as to whether a large monetary stimulus will not only ensure greater property longevity but also an increase in asset value.