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:

APRIL: Cultivating Guest Satisfaction and Retention

Simon Hudson

According to the Oxford Dictionary an apostle is a “vigorous and pioneering advocate or supporter of a particular policy, idea, or cause”. For hotels, creating apostles should be a priority. They are the most loyal customers and they are so satisfied that they want to convert others to share their experiences. But how do hotels create apostles? This article looks at how some hotels around the world are delivering not only superior products and services, but through customization and personalization are creating guests who would not dream of staying anywhere else. READ MORE

Edward Reagoso

In the hustle and bustle of being accountable for so many facets of the hotel business, a hotel general manager needs to do one thing to truly secure his or her future in our industry, that being “insuring your team members truly care about your guests stay.” Sounds simple enough, right? This is not rocket science and I mean no disrespect to anyone struggling with operations or sales issues that can often seem surmountable. We all have these problems at one time or another. There are resolutions to every issue we have. The resolution to any problem is really just a matter of applying a specific strategy that will minimize the issue or frankly, make it go away completely. How many times have you walked into a situation with a guest that was surprised and upset that a tiny issue was never dealt with by a front desk agent, housekeeper, waiter, maintenance person, or even a manager that worked for you? I have too, the important thing is that we learn from this and move forward. One must insure everyone on our team grasps the importance of caring and the application of certain techniques can solidify a culture. Getting everyone on your team to care about your guests really is the key. READ MORE

Rick Garlick Ph.D.

A primary objective of hotel operators is to keep their properties full of ‘heads in beds’ to capacity. While this goal is understandable, there is a risk hotels may market themselves indiscriminately and draw guests that are not a good match to their particular value proposition. While this meets a short term goal of wasting as little inventory as possible, there is a longer term risk that these guests may provide negative feedback about their stays, even though the hotel was being true to its own identity and branding. Indeed, the guest experience cannot be fairly evaluated apart from the expectations and preferences a person brings to the hotel from the time he or she books a room. Using a comparative restaurant example, a top steakhouse could never deliver a satisfying experience to a committed vegetarian, even if it provided the best cut of meat and the most attentive service. You have to like steak to positively evaluate the experience. READ MORE

Aaron  Housman

Things will go wrong. It’s inevitable in life and in business. And the sooner one gets to that conclusion the sooner he can get on with what comes next: preparing for the inevitable. In the hotel business that means following up with guests when the experience is substandard for any number of reasons, from guest service to property maintenance to the type of sheets on the bed. But there is a difference between just preparing for the inevitable and being well-prepared. Following up effectively with upset guests doesn’t happen accidentally. It is planned, trained tracked and executed every day. It is a way of life for best-in-class operations. READ MORE

Coming Up In The May Online Hotel Business Review


Feature Focus
Hotel Sustainable Development: Integrating Practices for the Environment and the Bottom Line
The term “sustainable development” was first coined in 1987. In a report entitled, “Our Common Future,” the Brundtland Commission defined sustainable development as follows: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This definition immediately caught on. In the business world, it is sometimes referred to as a triple bottom line – capturing the concept that investments are profitable, good for people and protective of the environment. Within the hotel industry, companies have taken an active role in committing themselves to addressing climate change and sustainability. Hotel operations have realized that environmentally sound practices not only help the environment, but can lead to cost reductions, business expansion, and profit growth as consumers increasingly seek environmentally sustainable products and services. In a recent survey by Deloitte, it was noted that 95% of respondents believe that the hotel industry should be undertaking “green” initiatives. Additionally, 38% of respondents said they made efforts to identify “green” hotels before traveling, and 40% said they would be willing to pay a premium for the privilege. These results suggest that consumers want and expect sustainability in their travel plans. In response to these trends, many hotel companies and on-line travel agencies have even begun offering their consumers an opportunity to purchase carbon offsets to reduce the environmental impact of their trips. The May issue of the Hotel Business Review will document how some leading hotels are integrating sustainability practices into their hotels and how their operations, consumers and the environment are profiting from them.