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Hotel Financial Control – Improved Hotel P&L Structure Based on New Revenues and Costs
The hotel financial control function typically analyzes hotel activities through a standard P&L reclassification that identifies four main segments representing the hotel’s core business areas: rooms revenue, food and beverage, telephone and other income. Rooms and F&B are the main drivers of value, while other revenues can help contribute to the total. For each of the four divisions, Hotel Financial Control calculates the divisional profitability and then the consolidated divisional profitability of the hotel.
We then deduct undistributed expenses (administration and general, marketing, repairs and maintenance, energy costs, etc.) and we deduct fixed charges (equipment and other rents/leases, including real estate) to arrive at the hotel’s gross operating profit. and other taxes, building and other insurance etc.) to arrive at net operating income.
Key measures of size and performance in the hotel industry are known as occupancy rate, multiple occupancy factor, annual sleepers, GUR (number of sleepers per available bed), ARR (average room rate), revenue PAR (per available room), revenue POR. (per occupied room). A hotel’s main profitability measures are based on Gross Operating Income (GOI-Par and GOI-Por) and Net Operating Income (NOI-Par and NOI-Por). Hotel valuation multiples are often linked to RevPar, GopPar and NoiPar.
Great, but it’s time to make some changes. Although the hotel industry is subject to less change, there are two drivers that would suggest the hotel financial control to undergo some development in the above reclassification: internet based booking and new real estate financial structures. Let’s see how these drivers can make some improvements to hotel account viewing.
Hotel bookings include direct hotel bookings (via telephone or internet), “chain” label driven bookings and internet media bookings (via major internet booking media). Each of these channels requires different organizational structures, different contracts and different costs. This is not a simple sales and marketing choice with associated sales and marketing costs: the decision to stress Internet channels dramatically changes hotel operations and hotel P&L rather than changing traditional channels. We worked as a consultant with a hotel manager in a famous place in Italy. We decided that “chain” label driven bookings were too expensive and could be replaced by internet media bookings. As a result, the overall hotel occupancy rate increased without any decrease in the average room rate. Installation of the new system required a total investment of three months, peanuts compared to what the hotel was paying to put the famous label on the door. But we need the opportunity of a hotel financial control system to really monitor every cent of expenditure.
The point is: Is it correct that hotel financial control treats selling expenses as sunk costs, since these costs are not equally stressed across different revenue streams? In other words: we noticed that the sales channel imposes different sales costs on the room segment and the F&B segment. If so, we may decide to include a different effect of sales channel costs on the segment. P&L with greater accuracy.
A separate problem with the hotel financial control structure depends on new real estate ownership. Hotel real estate is increasingly owned by financial investors who care very little about the specifics of the hotel business and are very demanding: they need a stable financial flow, possibly high rewards based on the hotel’s performance, and they think long-term. Capital appreciation. The design and cost of the lease/rental agreement is not merely one of the fixed costs of the hotel, but an “expense”. Hotel financial control cannot simply include this in a single line in the P&L, but requires a much deeper analysis. We may want to include the lease/rental contingency in operating expenses so that our segment profit truly reflects the firm’s profit. In addition we would like to define the relevant lease/rental expenses in the appropriate P&L diagram.
Finally a few words on other issues: telephone revenue and SPA revenue.
Everyone who goes to the hotel has at least one mobile telephone and pretends to have full internet coverage: hotel telephones have limited income. Instead the wellness area is growing with SPA and fitness revenues: Hotel financial control often replaces the telephone department line with the SPA department line.
As a consultant in this industry, we are challenged by the need of clients to further improve hotel financial control so that it truly supports management in their decisions.
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