By David Lund
The simple and only answer is yes, you should. Without these tools you are flying in the dark and sooner rather than later you are going to run into a mountain. In my opinion if you are running your hotel business without this and you think that is okay then you are simply irresponsible. If you are thinking it is too complicated or only for the big kids, well, you are wrong again and this recap will be an eye opener for you.
This piece is about a client of mine and how we worked to develop these tools, and how they are helping him manage his business as proactively as possible during this crisis. As he recently called it, “something positive from this disaster,” and, “my new normal is a ‘boots on the ground’ plan for each month for each part of my business in detail – this is golden.”
We started our project in late 2019. The goal was to develop a 12-month budget for 2020. When I say 12-month it means the layout of the Excel file is in a month-by-month format totaling the year. The top-level report looks something like this:
This client has a 44-room hotel. The picture above is the first five months of 2020 with actual results for the first three months and the latest forecast for the balance of the year. This allows him to see where he is going and the ability to answer these questions:
- What will be the results for April, now that his emergency plan is in place?
- How much revenue is he forecasting in each month going forward?
- What are the corresponding costs leading us to see the “projected” profit or loss for the year?
Nice work! But how did we pull all of this together? Here is the Coles Notes step-by-step process we used:
1. We only had previous years’ financials in a full-year format to work with. Inside of this we had reports from the property management system of revenues, rate and occupancy by month. Essentially, they were using the cash basis for their financials and we needed to turn this around and use the accrual basis. This is the first thing to lay out in a 12-month format. Use historical revenues, rate and occupancy for the last three years. Same with any “other revenues” from whatever sources you might have.
2. We used the format that is the USALI. That is the “Uniform System of Accounts for the Lodging Industry.” You can buy the book and read it to see the way to construct this budget / forecast or you can talk to me.
3. I provided my client the “shell” with the tabs for each department including a separate one for room revenues. Here is the tab layout:
4. Once you have your history, you can determine the 2020 occupancy and rate by month. It looks like this:
5. Once you have the room revenues by month, lay out the payroll and expenses. The payroll is the easier part and – simply lay out the positions and wage rates and do what amounts to a schedule for each part of the operation based on the occupancy and operating parameters in each department. It is best to lay this detail out in a staffing guide, including productivity measures. You can read more about that here.
When you are done with the payroll section of the budget/forecast looks something like this:
6. Remember USALI tells us where things go, which positions and expenses get charged to what department? This is critical to determine departmental costs and profits on an ongoing basis so you can determine the impact of your decisions in a finite dollar projection. For your expenses this is where you need to dig a little into your accounts payable files for historical data on individual accounts and spend. We took a zero-based approach. You can read about how to do that here.This is what the expenses look like for the maintenance department in this hotel. Not so complicated once you lay it out in the correct format and having the detail to support the numbers is the key. Also, use cost per rooms occupied measurements in the rooms department.
7. Once we had the revenue, payroll and expenses for all areas by month we put it together in our shell and it told us the hotel story that was in front us. How much revenue and expenses are we projecting by month and what is the year-end total? Wow!
The real beauty is this. If you do not like the results you can dig into the details and make different operating decisions that impact the profits. Weigh these against the probable effect of your decisions on guests and staff. Now you have a tool that you can work with and update each month or even each week as things unfold. It is a crystal ball. As the year progresses this crystal ball gets clearer and clearer. This is your new normal and as this client said, “I will never run my business the old way again.”
It is not rocket science, but it works and next to being clairvoyant it’s the only way you can effectively manage your hotel finances.
If you want to discuss how I can help you do what this client and I did, give me a call or send me an email and we can discuss what that looks like.
