Mr. Heller

Finance & Investment

Best Practices in Hotel Financial Management

By Jed Heller, President, The Providence Group

Sound financial management is at the core of any successful business. Of course, having a product or service in high demand, priced attractively for the target market, and delivered in an efficient, customer centric manner doesn't hurt either. But, even with all of the right market demographics, there is no guarantee of success. Rather, I believe you will find that the most successful hotels, like any other business, rely on fundamental financial management principles to enable them to manage their property profitably.

By following basic accounting principles, hotel owners and managers have the information they need to identify trends before they can have a negative impact on the business. They can reduce expenses, readily accommodate anticipated peak business times, and scale back operations during slow periods. Rather than relying on intuition and reacting to events, successful owners have the financial facts they need on a daily basis to proactively make the right decisions at the right time.

Staying on top of the hotel financials also provides an accurate measurement of management performance in every operational area and gives owners a mechanism to see where they stand against the competition.

The keys to financial success include an annual budget, detailed financial tracking model, ongoing audits, and reporting structure that keep profit and loss information at the manager's fingertips. Financial success is also driven by accountability, making employees and managers responsible for achieving financial goals in their respective functional area. Owners must have in place the personnel capable of dissecting the financial information and acting on it in a timely and proficient manner. Without this information, it is quite possible to have an area of deficient performance that goes unrecognized and creates a drain on profits.

Create an Annual Budget

The annual budget provides the complete financial picture of the property and contains the information needed to measure financial status at any time during the year. Based on past performance and goals for the current year, the budget captures projected expenses and anticipated revenue over a 12 month period. The budget covers every operational area: administration, property expenses, taxes, energy costs, capital equipment, telecommunications, maintenance, supplies, utilities, payroll and marketing. The budget also projects revenue based on expected occupancy and rates and estimates sales quotas for each sales person. Once figures are collected and documented, the budget will tell the story as to whether financial goals can be reached and where and how adjustments can be made to achieve profitability goals.

Build an Operational Tracking Model

With budget in hand, managers need to build a mechanism to easily capture and track expenses and revenue. The financial model can be as simple as a basic spreadsheet that incorporates worksheets covering every area of operations. More sophisticated worksheets will itemize costs in greater detail. For instance, the payroll worksheet will track the hours and rate of supervisors, front desk, night audits, bell service, housekeeping, room attendants, laundry attendants, sales and marketing, and all other executive and support staff. A property maintenance worksheet tracks engineering and maintenance payroll as well as other related expenses from landscaping materials to furniture and fixtures. The energy worksheet tracks monthly expenses for utilities, water and sewer. The revenue worksheet tracks room sales and daily rates. This comprehensive financial model gives managers a complete picture of expenditures and revenue, profit and loss, and financial success.

Compare Actuals Against the Budget

The next part of the financial model is to track spending in each operational area against the budget. Managers now have the information they need to identify areas where they are exceeding expectations or have inconsistencies and areas of concern. Essentially, they have an in-depth understanding of the property's financial status at any point in time. For example, food expenditures may be inconsistent with occupancy rates over a given time frame. Revenue may not be consistent with room bookings. Housekeeping schedules may not be consistent with occupancy rates. All of these issues can have a negative effect on profitability. It is also important to track each sales person's success vs. their quota. Trends can be traced week to week, month to month, and year to year.

Create and Use Reports

From the budget and operations worksheets, standard reports can be created to give managers a high level overview of each area of operations on a daily basis. Well organized reports will tell the whole story and give managers the tools they need to optimize business operations. They can quickly spot daily irregularities, identify short term trends, and anticipate potential long term issues. Reports also provide the tools to determine whether profitability goals will be achieved. In most cases, managers can create their own specific reports customized to their property and goals. In other cases, it may be wise for owners to contract an accounting firm to create the reports. In either case, managers must be appropriately trained to understand use the reports to their advantage.

Accountability

Management needs to be held accountable for financial results, from occupancy, average room rate, rev par, and inventory control to operating expenses. Standard accounting policies, systems, procedures and checks and balances need to be in place in all functional areas. Mini audits should be implemented quarterly and any deviations in the profit and loss statement or daily financial reports need to be reconciled as quickly as possible. With sound accounting and financial systems, each manager will have the tools they need to achieve their financial objectives. New hires should be indoctrinated into this financial culture and training programs put into place where necessary. Every employee should share the values of management.

Adjust to External Variables

With a sound financial management system in place, managers will be able to readily make adjustments to changing market conditions and other external variables outside of their control. For example, rising fuel costs may have a dramatic impact on both operating expenses and revenue, and thus, profitability. With well organized cost and expense worksheets, proactive managers can address this issue and identify areas where expenses can be reduced to account for the rising fuel costs. Or, perhaps, managers can put into place creative marketing programs that might alleviate negative market conditions.

Leverage Accurate Financials for Successful Negotiations

It is always important for owners to know the true value of their property. With sound financials, owners can have their property accurately appraised and gain a true understanding of where they stand in the market at any point in time. Key financial information is readily available to enable the owner to explore refinancing opportunities or act upon an opportunity to sell the property. Thus, owners are able to make decisions from a position of strength, giving them the insight and maneuverability for successful negotiations.

Use the Financial Formula to Succeed

Implementation of fundamental accounting principles can make every property a top performer. Every dollar can be accounted for, potential issues identified, and adjustments made quickly and efficiently. Sound business decisions can be made based on financial facts rather than relying on intuition, or worse yet, guesswork. Hiring a property manager with accounting experience, providing training where necessary, or engaging an accounting firm can make the difference between profit and loss with any property.

Jed C. Heller is CEO of The Providence Group LLC, which provides management services to hotels and timeshare resorts. Heller has managed all phases of three start-up ventures, two as the operating partner. He was the president of Goodmanagement, vice-president of The March Company Inc., and president of Premier Hotel Corp., He began his career with Winegardner and Hammons in Cincinnati, Ohio. Heller serves on the editorial board of Hotelexecutive.com and the Resort Management Committee of the American Resort Development Association. Mr. Heller can be contacted at 781-582-8785 or jcheller@providencegrp.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

SEPTEMBER: Hotel Group Meetings: There is Good News

Kevin   Fliess

When hotel technology is mentioned, planners often think of audio-visual and Wi-Fi coverage in meeting and guest rooms. Those things, however, comprise only the tip of the tech iceberg; as hoteliers know, the real technology accomplishments begin way before attendee arrival. For the business of putting heads in beds – and groups in meeting rooms – the industry increasingly relies on technology that is itself evolving. In only a few short years, for example, data storage has evolved from proprietary servers (something you can spill coffee on) to virtual “cloud-based” technology, which allows for exponentially more data. READ MORE

Kevin Iwamoto

Ask any hotel executive what their top goals are and they will unanimously say driving more revenue from group meetings, selling more room nights, and increasing market share. Hotels can’t just keep hiring sales headcount in order to increase market share, generate more leads, and respond to eRFPs. Additionally, the coverage they would need to expand market share is cost prohibitive and daunting at best—especially overseas in Asia-Pacific, Latin America, Europe, the Middle East, and Africa. READ MORE

Claire Repass

There is no stopping the sharing economy train, and the route that conductors like AirBnb are navigating cut directly across the existing revenue paths laid by hotels. It’s no longer an option to ignore the presence of the sharing economy, nor is it wise to fight against it. Managing the horizon of this rapidly changing marketplace, however, is where hotels will find their greatest strength. By tailoring the consumer and corporate travel sectors with a personalized service strategy, and looking across the tracks at AirBnB’s best practices, your hotel can both compete and flourish in light of the sharing economy. READ MORE

Michael C. Sturman

Technology forms a bridge between the complementary goals of tradeshow exhibitors and attendees. A survey of more than 2,500 tradeshow participants finds that exhibitors are focused on building client lists and showing new products, while attendees visit the show primarily for educational purposes. Tradeshow venues are increasingly seeking the technology “sweet spot” that connects the two groups despite their contrasting agendas. READ MORE

Coming Up In The October Online Hotel Business Review


Feature Focus
Revenue Management: Optimizing Income Streams Across All Avenues
The role of Revenue Managers, within their profession and the organizations they serve, continues to evolve. A significant portion of the change is driven by technological innovation which, given its magnitude in today’s markets, also redefines their standing on the hotel team. Revenue Managers are moving away from being exclusively spreadsheet-centric and finding better ways to share their data. This shift also requires them to engage more directly with their sales, marketing, and operations departments. Part of this development is due to a reassessment of their metrics for success. Revenue was previously the sole factor by which success was determined but now there is a greater emphasis on price optimization, profitability and flow through. Managers are combining sales, marketing and revenue management, and then adopting a data approach to optimize their income streams across all avenues. This metric evaluates performance in all revenue streams and then calculates the gross operating profit per available room. Hotels are now measuring everything a guest does - and spends money on - from the time he books until the moment he checks out. In addition, Revenue Managers will soon be able to shift their focus from room availability to the guest and his ability to pay. A future revenue management system might take into account things like weather forecasts, the recent online activity of the guest, the guest profile and persona, time of booking, the mode of travel and the fare paid. It might also calculate all the previous stays for this guest, and how much was spent on their room and in the hotel. All of this will be compared to millions of other potential future reservations to determine a unique room and rate for a specific individual guest. The October issue of the Hotel Business Review will address all these developments and document how some hotels are executing their revenue management strategies.