Is Your Capital Budget Revenue Driven?

Consider the Hotel Capital Budget as the horse.

And the Operation Budget the cart.

Are you placing the cart before the horse?

What am I talking about?

Did you know that hotel operation budgeting is meaningless without first nailing down your capital budget?

Why is that you ask?

Well, if you did not tackle the source for revenue, how will you achieve that revenue?

You do not want to be in that situation.

I will share with you 3 secrets of revenue driven capital budgeting.

These are literally the foundational pillars for achieving revenue targets.

You would want that right?

Let us dive straight in.

This Chapter 7 of the Ultimate Guide on Hotel Budgeting and Forecasting will cover:

Why Should Strategic Hotel Capital Budgeting be Done First?

A hotel just like any other business needs effective planning.

Planning is the process of setting targets to be achieved for revenue, expenses and profit.

Planning is established by the process of budgeting and forecasting.

Remember the question: are you placing the cart before the horse?

What was I getting at with that metaphor?

Well, if revenue is the cart that needs to pulled, what is the role of the horse?

The horse is the one which ensures the cart reaches its destination.

Do you see where I am going with this?

The hotel asset is the horse which will deliver the revenue cart to its destination.

Why the cart before the horse question?

Well, in our metaphor, you cannot think of:

• achieving revenue (cart)
• without figuring out the asset (horse) which will deliver it.

Now you see why you should not place the cart before the horse.

But what has asset and revenue for to do with a capital budget?

Great question!

A capital budget is all about the acquisition of assets.

This is mostly long term - we will discuss long and short term, ahem, shortly to generate revenue.

You might have heard it being known as a Hotel Capital Expenditure Budget.

Capital Budget or Capital Expenditure Budget is something that in almost all cases requires the approval of the owners.

Not only that, a Capital Budget almost always has a ceiling limit for spending for a budget year.

And not surprisingly, a Capital Budget is stated as a percentage of Total Revenue or Gross Operating Revenue!

Why is that you ask?

Well, you need to know how much the horse is costing you compared to the cart it is pulling.

Often 2-3% of Total Revenue or Gross Operating Revenue is used for a Capital Budget for a particular year.

It goes without saying that hotel managements must be prudent.

In how they are utilizing (to be tackled in Secret #3 later in detail) this precious 2-3% Capital Budget.

The 3 Secrets of Revenue Driven Capital Budgeting

Good!

We have now established how critical it is to figure out our strategy for capital budgeting first.

In other words, how are we planning to achieve our revenue targets?

Is there some magical wand that needs to be waved?

Whether you wave a magical wand or not, you need to do one thing.

Know what your asset management strategy is.

So, what is asset management and why should you know about it?

Role of Asset Management in a Capital Budget

There is a compelling reason for understanding and leveraging assets.

That is to harness asset potential.

What your Owners are focused on is potential as opposed to performance.

It cannot get more compelling than this.

It is a facet of strategic asset management.

What I mean is that your hotel owners are obsessed about what your hotel can deliver with resources you have.

More than what it is delivering currently.

In other words potential versus performance!

Potential of course is represented by the assets.

Now, do you see how without knowing what you plan with your assets, you cannot achieve revenue targets!

That is why, as an example, your hotel owners lay store more on RevPAR than Average Daily Rate (ADR).

Why?

RevPAR deals with potential (capacity) while ADR deals with business volume.

Let us get back to our primary topic.

So, we will zero in on the 3 Secrets of Revenue Driven Capital Budgeting

1. Capital Budgeting Secret #1 - The Asset Management Approach
2. Capital Budgeting Secret #2 - The Asset Categories Syndrome
3. Capital Budgeting Secret #3 - The Asset Utilization Challenge

On now to the first secret.

Capital Budgeting Secret #1 - The Asset Management Approach

Let me reproduce the definition of capital budgeting again before we get into the first secret.

A capital budget is all about the acquisition of assets to generate revenue.

Major revenue generation in your hotel business occurs from the:

• purchase,
• installation and
• use of capital expenditure known as Fixed Assets.

Revenue generation happens in your hotel business from two sources:

• Fixed assets - building for example representing guest rooms and
• Current assets - inventories for example, of food and beverage items

Out of the two sources above, revenue generation from Fixed Assets is the major contributor.

This is because the hotel business is a capital expenditure intensive business.

Meaning, it is heavily dependent on fixed assets to generate its majority revenues.

In essence, the entire process of:

• planning for acquisition of assets
• to maximize revenue
• can be included in the asset management role.

Every year, before an operating budget is prepared it is important you prepare the Capital Expenditure Budget first.

Let me illustrate this.

Example

Say, you are planning to renovate your all day dining restaurant.

To give it a new theme.

You will plan for that in your Capital Expenditure Budget.

This will mostly be Long Term Assets or Fixed Assets including:

• restaurant seats,
• build out,
• kitchen equipment and so on.

You will decide on the type of restaurant you are planning and the level you will pitch it at.

In other words, whether it will be a:

• high end or premium buffet offering or 
• just a la carte menu and so on.

Say, you are putting up a premium lunch and dinner buffet.

Your pricing must also be in tandem with the:

• quality of the buffet offerings,
• operating equipment to be used (crockery, cutlery, etc.
• ambience etc.

All these will impact:

• first your Average Food and Beverage Check and 
• related to that the food and beverage revenue.

In other words, you cannot:

• budget for your food and beverage revenue (Operating Budget)
• before laying down what Capital Budgeting you are planning (changing restaurant theme etc.).

This is an asset management approach to planning and executing revenue generation strategies.

Without this foundational planning process, your achievement of revenue targets will become blurry.

And now on to the second of the secrets.

Capital Budgeting Secret #2 - The Asset Categories Syndrome

You have determined a broad asset management strategy for revenue generation in secret one.

You are ready for the next step - sources or categories of assets.

Revenue generation happens in your hotel business from two sources:

• Fixed assets - building, for example, representing guest rooms and
• Current assets - inventories, for example, of food and beverage items

It again goes back to your Capital Expenditure Budget.

Are you planning any major renovation in your guest rooms?

Guest Rooms are represented by the hotel building which is the fixed asset category in accounting.

If you are renovating your guest rooms, that may take up a big chunk of your Capital Expenditure Budget for the year.

The Other source of revenue generation is inventories for food and beverage.

These are considered Current Assets in accounting.

So, every Capital Expenditure Budget in a year will be a combination of these Fixed and Current Assets acquisition.

Ideally, the fixed asset will be a bigger chunk.

This is because it relates to Rooms department which has higher revenue generation potential.

All of this must go into planning you hotel capital budget.

Is there a way to measure how you are doing in the revenue Vs asset comparison?

You bet there is.

Let us briefly look at how that works.

We will look at an actual asset based financial ratio.

Fixed Assets Turnover Ratio

Your hotel owners look at a KPI called Fixed Assets Turnover Ratio.

This takes an overall measure of how much revenue you are earning from the fixed assets you currently have.

Another asset potential based KPI.

Another asset management priority

You get the picture.

You can compare this ratio to the previous year to determine whether you are making progress.

These are some reasons why hotel managers must acquaint themselves with the hotel Balance Sheet.

It will tell you more about leveraging revenue potential of your hotel assets.

You would want that, wouldn’t you?

And now on to capital budgeting secret 3.

Capital Budgeting Secret #3 - The Asset Utilization Challenge

Once you have acquired an asset, a new challenge presents itself.

How best will you utilize your asset?

As hotel assets grow older, their revenue generation capacity may diminish.

So, how can you improve the original potential of that asset?

Coming right up!

Capital Budget & Upgrading Fixed Assets

One way of improving asset potential for revenue generation is by upgrading the asset.

Planning a hotel renovation is one major way of upgrading the fixed asset.

It is a classic asset management scenario.

In a later ultimate guide, we will explore in depth how a renovation strategy can be executed to work with hotel fixed assets.

For the moment, we will have an overview.

So, what is the moral of the story?

Look at your hotel RevPAR versus the competition over the past five years or as many years that you have.

In other words, look at the RevPAR Index.

Do you see stalling RevPAR symptoms?

If so, you might consider upgrading your guest room asset.

It is of course easier said than done.

This is the reason why: 

• planning a hotel development and
• in particular capacity
• should have gone through careful analysis and
• RevPAR performance estimates.

Some immediate steps you can take is to see:

• if your Balance Sheet shows any additional land adjacent to the hotel
• hopefully owned by the hotel company.

If yes, you can explore constructing a new wing to increase guest room capacity.

Suffice to say here that merely looking at your hotel Profit and Loss Statement is not good enough.

All of this discussion is in the context of hotel room revenue.

Asset Renovation Expenditure in a Capital Budget

Renovations are carried out by hotels to ensure that fixed assets are always kept in a good condition.

In fact, renovations are often done:

• to upgrade a fixed asset and 
• increase its capacity to generate revenues.

Renovation expenditure is normally of capital as well as revenue nature.

The major portion is that of a capital nature.

The purpose of renovation expenditure (capital nature) is to increase the life of an existing fixed asset.

Renovation expenditure of capital nature is: 

• charged to Property & Equipment (Fixed Assets)
• in the Balance Sheet of your hotel.

Renovation expenditure is normally carried out in the following areas:

• Upgrading of hotel guest rooms (including carpet, wallpaper, furniture, linen and so forth)
• Upgrading of a food and beverage outlet
• Change of concept of a food and beverage outlet
• Upgrading of hotel facilities like health club, spa, business centre

So, there you go, 3 Secrets to Revenue Driven Capital Budgeting.

In the process, you give your Operating Budget also a big boost with appropriate assets that will deliver target revenue.

How do you deal with Capital Budgeting in your hotel?

Do you tackle Capital Budgeting first before Operating Budgets?

You can Take Some Action Steps Right Now.

Action Steps You Can Take Right Now

STEP 1

Go back to your Hotel Capital Budget for current year and review the assumptions that you made.

STEP 2

Identify Fixed Assets in your hotel capital budget. Have you considered a revenue target for those fixed assets?

STEP 3

Identify departments in your hotel capital budget. Do you know exact revenue type for those fixed assets?

STEP 4

Identify months in your capital budget purchase. Are you realistic about which month revenue will start?

STEP 5

Ask yourself whether as a hotel manager you are managing your hotel capital budget in a revenue driven manner.

Other Chapters of Ultimate Guide on Hotel Budgeting and Forecasting

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