Planning key for prospective hoteliers looking to check into profitability
Owners want to maximise profits on their hospitality sector properties and one of the best ways to do that is to insist on a proper year-end review from the operator. Tasos Kousloglou spells out what owners should look for
The final quarter of the year is the time when most hotel operators submit their 2013 business plans and budgets to owners for review. The business plan ensures the operator has explored potential avenues and enhancements to optimise returns and asset value for the hotel in the forthcoming year. A thorough review of the sales and marketing and capital plans also ensures that owner's funds are spent wisely to maximise performance.
Owners seeking to leverage their investment into greater profitability will need to rely on a thorough annual budget review. The question for owners, therefore, is how to evaluate the business plan and budget. Below is a checklist to aid owners in their review:
WHAT'S THE VIEW?
Whether the hotel is new or a mature asset, owners must be provided with a thorough and realistic assessment of recent and upcoming changes in supply and demand and the potential impact on the local hotel market.
When occupancy is expected to drop or there are fast-rising expenses, operators should identify ways to control cost and defend profit margins.
WATCH THE PITCH
The business plan proposed by the operator should include comprehensive strategies supported by activity plans and goals for each target market segment and channel in rooms and other key operating departments. It should also include the total production targets by the operator's channels and branded programmes.
The marketing budget should provide the major strategies, plans and respective targets to optimise the budgeted marketing funds in support of the asset and brand strategies. The adoption of marketing ROI (return on investment) metrics can improve marketing effectiveness and optimisation of the available marketing dollars. Throwing money at marketing may not necessarily result in a higher profit, while an inadequate budget may compromise the ability to generate the desired revenues and incremental profits.
Owners should also review the sales and marketing expenses in profit and loss. Common accounting misappropriations include travel agents' commissions and food and beverage promotions.
Food and beverage outlets and banquet can be a significant profit contributor yet they can also be a drain. The annual business plan should detail revenue and covers per meal period of every outlet in the hotel, for each month of the year. It should provide the major events in the locality as well as the key demand generators and target markets for banquet. Key metrics such as revenue per available seat, profit per square metre, average seat turn, covers per employee, utilisation and yield of the meeting space can be employed.
Minor operating departments are often overlooked as they are insignificant enough in times of plenty. Yet during periods of low occupancy, these departments could become a drain on the hotel's resources, bringing down profits. Owners should consider whether some of the operational functions (eg laundry or housekeeping) or underutilised spaces (eg retail space, spa) should be outsourced or converted to lower expenses and generate more profit for the hotel.
MANAGING THE POCKETBOOK
There are several key expenses that have substantial impact on the operating profits. Owners should benchmark key expenses and employ ratios such as percentage of revenue, percentage of occupied rooms and percentage of available rooms to compare with historic results and, where available, with other similar hotels.
Energy is a serious overhead expense, typically in the range of six to 10% of total revenue determined by electricity, water and other energy sources, consumption and prices. Operators must be creative in achieving efficiencies targets.
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 _ rooms cleaned per eight-hour shift or covers per service period are good metrics 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 rises and discretionary bonus assumptions.
Maintaining the property is integral to keeping its value. An effective preventative maintenance programme 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 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 reserve.
THE BIG SPEND
The business plan generally presents a capital budget to cover capital investments such as renovation, refurbishment or upgrading that the operator may propose for different reasons, including the requirement for the hotel to meet the operator's brand standards. However, the owner should focus on the return on investment, assessing whether an investment will generate efficiencies, incremental cash flows and meet the required ROI criteria.
FOLLOWING THE PLAN
The annual business plan should be monitored along with the operating results for each monthly reporting period. The operator should be requested to report regularly on the causes of variations and present action plans to address key issues.
Performance monitoring should always consider market performance. Exceeding the budget while losing out in market positioning shows that the operator has a conservative benchmark in place.
Discipline and expertise are required during the annual business planning process for a hotel to generate superior returns and enhance market value. It also requires specialised knowledge that encompasses both hotel operations and investment experience. Unfortunately, it is rare to find hotel owners who have all of these qualities, and therefore it could be a good idea to seek help from a professional hotel consultant.
Tasos Kousloglou is senior vice-president for strategic advisory and asset management at Jones Lang LaSalle Hotels. For advice on hotel business planning, readers can contact him by email Tasos.Kousloglou@ap.jll.com, or visit www.joneslanglasallehotels.com.
About the author
Writer: Tasos Kousloglou