By David Lund
That’s right, your eyes and the headline are not fooling you. I learned an incredibly valuable lesson from a client in a backwards kind of way and now I want to share it with you. It is a simple way to create something valuable and powerful even in a completely down market like were in now. Use this story to show your teams what they are leaving on table in the way of profits and asset value if they are not always looking for the upside in their hotel.
Here is my story. I had just finished a half-day hospitality financial leadership workshop for a client, one of a series of six that they had contracted me to do. The General Manager got up and thanked me and asked the audience, about 35 managers and leaders from two different hotels, to give me feedback. I got some great comments and a couple of good suggestions.
“I want to thank all of you and before we go I want to make an agreement with all of you, would all of you like to make an agreement with me?” she asked.
She then put her hand up, like she wanted to ask a question in a classroom. Like a well-oiled machine all 35 hands went up. This was kind of spooky.
Then she said, “Thank you, I want to pay for David’s fee today so what I want to ask all of you to do is find at least $250 in savings in your department next month.
“I want you to be able to absolutely identify the savings,” she continued, “and I want you to tell Paul, our Director of Finance, where you found your savings. I am also asking that each of you reflect the savings in your forecast next month.
“Will all of you agree to do that?” she asked as she once again put up her hand and every hand in the audience went up again!
What just happened here? In the matter of a couple of minutes she got every manager to “agree” to find a minimum of $250 in savings in their department.
The first and perhaps the most powerful part of her management style was the request for an agreement. Look closely as she did not tell her managers what she expected; she did not give them a directive. She asked to make an agreement. That is an amazingly powerful distinction. What is the $250 to each of those managers? Where will they find it?
The answer: Everywhere we look.
You know just as well as I do that there are literally a million ways to waste money in the hotel business and the opposite is just as true. There are a million ways to save money. What are you helping your team focus on? The $250 dollars is a few hours of labor, a case of supplies that do not get wasted, a smaller chafing dish on the buffet after 9 a.m. for the bacon, the lights turned out after 6 p.m. in the office. We could fill the following 100 pages with ideas on how each one of us could save our $250. It is what you focus on that gets results.
The next thing that happened was nothing short of astonishing. Almost like magic. She thanked her team for the agreement and then said, “One last thing before we go, would all of you agree to find the $250 every month this year and reflect it in your next forecast?”
She once again put her hand up and in turn every hand in the audience went up as well.
I was flabbergasted, dumbfounded and in awe. It took me a little while to see what just happened. To comprehend the results of her $250 in savings, I did a calculation on the flight home.
I was thinking about what had gone down and here is what I came up with:
35 managers x $250 = $8,750 in savings
Those were savings to GOP in the next month that each manager would find and communicate to the Director of Finance and most importantly, execute. Not too shabby and more than my fee that day.
Remember she asked if they could find it every month. It is a fact, if you can find it next month and do the same the following month the savings compound.
$8,750 x 12 = $105,000
That is $105k in GOP in the next year. By the way, that is a lot more than they paid me.
At this point I needed my phone, the calculator on my phone to be more precise. I wanted to see what $105k in GOP savings means to the value of the business.
Now, do not stop reading after you see the following two words, CAP RATE. I will explain this financing concept if you do not know what it is. It is super straight forward and a very useful gizmo for your tool box.
CAP RATES are established as the result of a commercial real estate transaction. It is the net income for one year divided by the sale price. Right now, cap rates in North America are low. The lower the cap rate the higher the purchase price becomes relative to the net income.
Let’s use an example to demonstrate this:
The hotel across the street just sold for $125,000,000. Its annual net income at the time of the sale was $10,000,000. We divide 125/10 = .08
In this example we would say the CAP RATE was an 8. We purposely drop the decimals.
Now, there is one more step to see how powerful this tool is:
We take the answer to our question .08 and we divide it into 1. (1/.08 = 12.5) What this means is the value of the business is 12.5 times the next income.
Now that we know the multiplier we can use it to see what impact our savings have on the value of the business. Our $250 in savings times 12 months times 35 managers will give us an increased net income of $105,000. We now multiply those savings by 12.5 and what we see is ASTONISHING!
$105,000 x 12.5 = $1,312,500
That is the impact on the value of the business from finding $250. It is a fact that an increased profit of $105k drives the business value – the sale price – by more than $1 million.
If you did not already know this little secret, it is why your owners are after you every month for every dollar you can find in profit. It is because of the multiplier. The same inverse relationship applies when you spend money and profits go down. The multiplier is used and $105k in decreased profits results in the asset value dropping by $1.3 million.
That is enough finance for now.
Back to the 35 managers and what they actually found. Most of them found a lot more than $250. Ideas are like fashion. Things catch on. Competition is healthy and managers and leaders are watching each other.
Make a big deal out of an idea that improves your bottom line. I have seen single ideas produce $30k in annual savings. I have seen leaders come up with innovative and ground-breaking ideas that mark their careers. Your leaders ride ideas like rocket ships. Remember we get results based on what we focus our attention on.
Focus your management team on what they can do and what they can create financially. Give them the tools to understand how the car drives and let them loose.
