Wednesday, January 31, 2018

Hotel owners to ring in a successful ROI

As the annual budgeting process ends, hotel owners are finalizing the review of their properties' business plans. 

The question for owners, therefore, is how to evaluate the budget. 


Should they approve or reject the numbers and the plans? What should they consider when making a decision?

A meaningful budgeting process aligns the owner’s and operator’s visions for the hotel. It ensures the operator has explored potential avenues to optimise returns and asset value for the hotel and is given the right benchmark for the forthcoming year. It also ensures that the owner’s funds are spent wisely to maximise performance. 

yet owners must look beyond the numbers in successfully negotiating the annual business plan.

Below is a checklist to aid in your review:

What’s the view

What is the current and future market environment? Take a thorough and realistic assessment of recent and upcoming changes in supply and demand, and the potential impact on the local hotel market.

Watch the pitch

Operators with proactive and forward sales and marketing plans outperform those that adopt a reactive approach.The operator should present comprehensive strategies supported by activity plans and targets for each target segment and channel in rooms and other key operating departments. The plan should also include the total production targets by the operator’s channels and branded programs.

Bottoms up

Never underestimate the power of a party: food and beverage (F&B) outlets and banquet are significant profit contributors, but they can also be a drain if not optimized.To help you determine whether an outlet is making or losing money, take a look at the revenue and covers per meal period of every outlet in the hotel for each month of the year. Other key metrics such as revenue per available seat, profit per square metre, covers per employee and utilisation of the meeting space can also be employed.

Mouse in the cheese

Minor operating departments such as spa, telephone, laundry and boutique gallery are often overlooked as they are insignificant enough in times of plenty. Yet during periods of low occupancy, they can bring down profits. They are the mouse in the hotel’s cheese. Owners should consider whether some of the operational functions (e.g. laundry or housekeeping) or underutilised spaces (e.g. retail space, spa) should be outsourced or converted to lower expenses to generate more profit for the hotel.

Managing the pocketbook

Several key expenses that have substantial impact on the operating profits include production (F&B), credit card commissions (admin), payroll (all) and energy costs.Owners should benchmark key expenses and employ ratios such as per occupied room, per cover and per available room to compare with historic results and with other similar hotels (where available).

Productive staff

Owners should request that operators include an estimation of labour hours and headcount (permanent or casual) for all departments for benchmarking. All outsourced or casual labour assumptions should be clearly stated. Revenue per labour hour is a useful metric in many areas, such as rooms cleaned per eight-hour shift or covers per service period for housekeeping and restaurant teams. Given the tight labour market in most hotel markets today, statistics and strategies to improve employee productivity and retention should be presented. The operator should also clearly state in its budget the planned annual salary raise and discretionary bonus assumptions.

Beauty pays

Maintaining the property is integral to keeping its value. An effective preventative maintenance program will prolong the life of the asset and lengthen the cycle between refurbishments of any hotel. Accordingly, owners must seek inclusion of a preventative maintenance plan (including expenses) within the annual maintenance plan and monitor its effectiveness on monthly basis. This will also mitigate the risk for early requests for capital expenditure over and above the furniture, fixtures and equipment (FF&E) reserve.

The big spend

Renovate, refurbish, upgrade. When should they be done? To what extent? Will they really add value?The capital budget should fit within the overall long-term strategic plan and vision for the asset. It should be prepared in light of the existing business opportunities, the long-term goals as well as the estimated life cycle of the asset. Evaluation of inclusions in the FF&E budget should not only depend on meeting the operator’s brand standards. It should also specify whether or not an investment will generate efficiencies, incremental cash flows and meet the required ROI criteria.

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