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.
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 firstname.lastname@example.org Extended Bio...
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