Keeping your hotel financially sound – also in times of crises
A crisis, such as this Corona pandemic can be a big blow for the hotel industry. Rooms are unoccupied and restaurants remain closed. Can you survive this? Many hotels can withstand about three months of this. At the most. Then there is no wiggle room left and you must consider laying off personnel or come to another financial agreement. Can it be done differently? Yes, sure! Analyse your numbers and build a buffer. But the kind of buffer that genuinely keeps your hotel financially healthy.
Read this blog and discover:
• the importance of truly looking beyond the usual annual budget
• the best way to build a good buffer
• optimal benchmark percentages per department
Annual budgets do not offer enough maneuvering space
In the hotel industry, it appears that good buffers are not a priority. Sure, reserves are made. That usually happens according to a standard work method. Every manager or controller presents his financial statistics. Compare the turnover with the previous year, attach a budget to it and receive a star if you make it. Yes, that is possible. But that is mostly a short-term vision. It does not allow for sufficient space to manoeuvre in times that you truly need a buffer.
That is why it is important to look at your results with fresh eyes. Construct a solid base that leaves room for future investments and where you work simultaneously on your resistivity.
Building a buffer takes time
What is the resistivity (or buffer)? This number indicates how long a company can withstand the loss of revenue without having to adjust fixed costs. Research has shown that the fixed costs often are more than 50% of the revenue. A quick calculation shows that if you have a yearly profit of 10%, it will take five years to gather that money. So, not exactly a short-term vision!
But there has never been anything like this crisis, right?
The Corona crisis brings to light that many companies do not have their financial buffer in order. This is apparent from the huge run on federal regulations such as the NOW, TVL, and deferrals. Many hotels also lack the funds to be able to absorb the financial blow on their own. “This crisis is so enormous and so unpredictable, no company can be prepared for that, right?” is a statement often heard. That is correct. The impact is enormous. But our economy is driven by globalization. Things that are beyond your control affect your business too. Remember 9/11, the Sars-epidemic, the banking crisis. That is why good resistivity is crucial.
Why don’t hotels look further ahead? And there is nothing but a year’s worth of budgeting? It is common to invest available funds into a new project right away. If one hotel does well, then the next one soon follows. While such a second hotel needs time too for steady results. Also, the result turns out to be simply too low to do investments and to build resistivity.
Time for action!
Hotels start their budgeting period usually during the summer months. That leaves plenty of time to come up with a good budget for the next year. My thesis: look beyond next year. Work towards a bigger goal and build a structural buffer. Next year’s budget becomes a part of the road that leads to that.
A good buffer: where to start?
Analyze the trends of the past five to ten years. You do this in combination with benchmarks from the available hotel business. It becomes simple by comparing the Hotel Income Statements of the past years, side by side. For the first analysis, you look at the CPIs (Critical Performance Indicators) below. These will give you a total impression of the status of the company.
Which revenue percentages are needed? How high may your costs be? I will clarify this for you! With these numbers in the back of your mind, you can pick up diverging points.
• Average room price
The average price of a room should have increased over the past year with a minimum of the price indexation. That is how you stay in line with the wage indexation and the price increases of suppliers. And this way, you hold on to the profit margin. If the profit margin is too low, a higher average price per room can be a solution.
• Occupancy percentage
Healthy exploitation (on an annual basis) requires a minimum occupancy of the hotel of 60%. When the occupancy is lower, you can look for alternatives in the surplus capacity and increase your revenue with that. For instance, during the Corona crisis, hotel rooms were offered as flexible office spaces.
• Total revenue
When the occupancy remains the same, an increase in revenue will be expected, which is equal to the price indexation.
• Payroll (and % compared to the revenue)
If the occupancy remains the same an increase in payroll will be expected which is equal to the price indexation.
The total percentage is strongly dependent on the share of Food & Beverage of the revenue. This will be anywhere from 30 to 50%. Payroll is one of the two largest influenceable costs in the hotel business. You can make the difference by the correct daily management (productivity, revenue per hour worked)! In the long run, it is important to wield a suitable compensation based on collective labor agreements and function profiles. Too high costs for your staff make the difference below the bottom line.
• Food & Beverage
A healthy cost price is between 25 and 30% of the revenue. With a correct pre-calculation, you can determine the correct retail price. During post-calculation (especially the Food part), you check the quantities and the purchase price. Food & Beverage purchasing costs are the second-largest influenceable costs in the hotel business, after Payroll. Daily reporting helps to achieve a good score. The amount (portions, waste) is the most important managing factor. For the long term, the pricing with suppliers and the sales are important.
• Departmental Profit
The department result of the Rooms Division must be a minimum of 70% of the revenue.
That is the percentage after deduction of the salary costs and management costs such as linens, guest supplies, and commissions.
The departmental result of Food & Beverage must be a minimum of 25% and preferably be closer to 40% of the revenue. If the personnel costs are 30% and purchase is 25% of the revenue, then a result of 40% is doable.
At the Minor Operating Departments, there must be at least some profit. If not, then the pricing is not correct. This concerns additional revenue such as bike rental. For larger hotels with facilities such as a Spa or Golf, naturally, a larger profit percentage applies of minimally 10 to 20%.
• Undistributed Expenses/Overhead
Costs for General Expenses, Sales & Marketing, Energy and Property & Maintenance must be between 15 and 20% of the total revenue. In that case, there is good profitability. If the percentage is too high, it is usually caused by too much management in the hotel, or the cost for management is too high.
• Gross operating result (GOP percentage)
This is an important CPI for chain managers. For hotels in large cities, this percentage is about 50%, because of the high prices for the rooms. Hotels in the region usually book a result of around 25%.
Earnings Before Interest, Taxes, Depreciation, and Amortization. Owners attach much value to this percentage/number (positive or negative). With a positive EBITDA, the hotel will basically yield a profit. For this, it is not taken into account if the exploitation has been financed. So, with the EBITDA result, the interest, repayment, and income and corporation taxes are paid.
With the fast calculation at the beginning of this blog, it takes five years to reserve 50% of the fixed costs of the revenue. Then also, every hotel has a need to invest.
- The investment need can be worked out in a multiple-year plan for the first ten years.
- The investment need and the resistivity form the basis for the result to be achieved.
And these are the follow-up steps!
In future blogs, yes, I will help you during your journey, I will highlight the departments one at a time. I will then further zoom in on the details. That offers sufficient insight and handles to improve your own hotel result. Because every step that you take on the detail level will yield a better result in the end.
Analyzing and improving does not end with determining the annual budget. It is an ongoing business. Anchor this work method into the business structure and you will see it will yield a lot more. It already starts with the daily productivity and impact reports. Periodically you will check other points, such as linen cost per room or credit card costs. The software of Statler BI is a handy tool; it bundles all the data that you need.
The dot on the horizon is an optimal Profit and Loss Account. You cannot overturn the revenue and cost structure in six months. However, it must be possible to implement a few step-by-step adjustments.
I would say: start today! Analyse, redirect, and make sure there is good reporting. I will take you on this journey via my blogs. Do you have questions, or would you like to get into a discussion? By all means, contact me!
Stefan van Heerwaarden
Owner Statler BI and ReVPAR Horeca Advies (Catering Advice)
Strategic solutions based on data. That means looking beyond numbers. A sharp analysis leads to the practical management of your hotel. The result? Better profit margins, satisfied owners, motivated personnel, and happy guests.