Hotel Financing In Four Practices
November 4, 2015 5:28am
By Larry Mogelonsky, MBA, P. Eng. (www.lma.ca)
There are many ways to assess and categorize the strengths and weaknesses of a hospitality business. Allow me to present a slightly different and holistic way of organizing how you approach the daunting task of where to allocate funds for the next cycle.
For one, we tend to drill down to the minutia of a venture. I am confident that any GM knows the intimate details of the variable cost of each amenity, the labor costs at the front desk or even the number of yards of drapery fabric required per room for an upcoming renovation. After all, it’s our business to know such detailed metrics, and we pride ourselves in this depth of expertise.
But a hotel is a complex piece of machinery – in fact, much more complex than we often appreciate. With so many different challenges at hand, I was looking for a way of categorizing these issues from a financial standpoint, in an attempt to simplify our analyses. Hence, I’ve broken down these issues in terms of four somewhat-overlapping sections. In my experience, a hotel typically faces a challenge in one or more of these categories, and priorities should be established accordingly.
1. Costs. When was the last time you conducted an independent audit of your entire cost structure? Hoteliers are experts in this category, ensuring that the purchasing manager is delivering the best combination of price, quality and availability. Costs go well beyond the domain of the purchasing manager, though, and must reflect the needs of every department.
Cost analysis includes other components such as staffing, finances, marketing, sales, amenities and maintenance. Each department’s expense requires careful analysis. Could suppliers be consolidated? Are newer technologies available that minimize labor, or offer the same services at even better costs? One hotel I’ve worked with reviewed a long-standing contract for Internet-related services and was able both enhance guest service while at the same time reducing their costs – a win-win!
2. Revenue. This pertains to building the top line gross operating revenue, and a thorough examination in this regard ensures that you don’t leave money on the table. Caution is required, of course, as all pricing decisions need to reflect the value that you provide to guests within a competitive context.
Does your revenue management model test ways to heighten revenue, reviewing not just STR reports, but spreads on rooms and suites? How do you take advantage of local economics and seasonality? How do you transfer business from higher to lower commission segments? Should you consider a resort/hotel fee? Have you examined packages to ensure that revenue is maximized, while still delivering value to the guests? How do your F&B charges stack up relative to your competitive set? These are just a sample of what’s in store on this front.
3. Margins. One might think that by fixing costs and revenues the margins do not need to be identified separately. This is not always the case. Sometimes the issue is itself the margins.
An example: in looking at a menu item, it may not be a cost issue (the product is well-sourced) or a revenue issue (the number of orders matches what’s required), but the margin might be insufficient to subsidize other necessary operating expenses. In this case, you might want to assess whether a simple price increase will fix the issue without deterring consumption, or if you would be better off replacing this menu item entirely.
4. Capital. Have you ever seen a hotel starved for capital? Revenue is solid while costs and margin are all effectively managed, but, for instance, the carpets are threadbare and the guestrooms look outdated. In this sense, the soft and hard goods are well past their ‘best before’ date and there doesn’t seem to be enough cash in reserve to gain momentum on any revitalization in the near future.
Capital challenges manifest themselves in many ways: delays in replacement normally associated with wear and tear; failure to upgrade internet and technology systems to conform with today’s consumer requirements; HVAC systems that no longer effectively handle workloads; or failure to adopt LEED standards. Ultimately, owners who fail to invest adequate capital in their product will feel the result through lower guest satisfaction scores and when carried to the extreme, de-flagging. There’s no easy solution to issues involving capital and ultimately they rest with the owners and corporate managers as to whether a large monetary stimulus will not only ensure greater property longevity but also an increase in asset value.
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Larry Mogelonsky (firstname.lastname@example.org) is the founder of LMA Communications Inc. (www.lma.ca), an award-winning, full service communications agency focused on the hospitality industry (est. 1991). Larry is also the developer of Inn at a Glance hospitality software. As a recognized expert in marketing services, his experience encompasses Four Seasons Hotels & Resorts and Preferred Hotels & Resorts, as well as numerous independent properties throughout North America, Europe and Asia. Larry is a registered professional engineer, and received his MBA from McMaster University. He's also a principal of Cayuga Hospitality Consultants, an associate of G7 Hospitality and a member Laguna Strategic Advisors. His work includes three books "Are You an Ostrich or a Llama?" (2012) and "Llamas Rule" (2013) and "Hotel Llama" (2014). You can reach Larry at email@example.com to discuss any hospitality business challenges or to review speaking engagements.
Contact: Larry Mogelonsky
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