Evaluating hotel performance is not difficult if you remember a basic universal principle.
However, not following this basic principle may land you into financial analysis traps that many hotel managers fall into.
That will be disastrous.
I will share with you this simple universal principle including how to apply it in evaluating hotel performance to yield powerful results.
And in the process avoid you falling into the 3 financial analysis traps.
So, let us dive straight in.
This Blog Post will cover:
Evaluating Hotel Performance - The Financial Analysis Traps
Evaluating hotel performance is really not difficult.
That is, if you do not fall into traps which many hotel managers end up falling into.
A key ingredient of evaluating hotel performance is financial analysis.
Financial Analysis allows you to look at current Key Performance Indicators in a hotel PNL and determine what they are depicting.
In evaluating hotel performance using financial analysis, one critical factor to be considered is a trigger.
You learned about triggers in evaluating hotel performance in Part 2 of this 3 part series of blog posts.
Click below if you missed that post.
This is the third and concluding part of this 3 part blog post series.
And now back to triggers.
A trigger is something that may be the cause behind a particular phenomenon or a Key Performance Indicator (KPI) or both.
Triggers often take the form of Key Performance Indicators themselves.
Triggers have their origins in the relationships in a hotel PNL.
You learned about relationships in evaluating hotel performance in Part 1 of this 3 part series of blog posts.
Click below if you missed that post.
So, what are the 3 traps in evaluating hotel performance?
Before diving into that, it is important to understand what is the foundation of financial analysis.
Evaluating Hotel Performance - The Foundation of Financial Analysis
Let us get right into the basic universal principle that I talked about in evaluating hotel performance.
The basic principle underpinning all financial analysis (in fact non-financial analysis also for that matter!) is that of cause effect
Even If you do not have a financial background, you will easily master financial analysis if you just remember this basic principle - cause effect.
Cause Effect is all about what is causing something and what is being affected by something.
A related factor is a symptom.
So, you could say that cause, symptom and effect are the three pre-requisites to financial analysis.
It may seem obvious but it has a level of depth rarely understood and worse utilized.
In the previous section you came across an ingredient which is critical for financial analysis and therefore in cause effect.
That ingredient is Triggers.
As you saw earlier, triggers can often be the cause behind a particular phenomenon or KPI.
You must understand what is causing a particular number in your hotel Profit and Loss Statement.
Let us say, this is a Key Performance Indicator (KPI).
And what KPI is affected in a Hotel Profit and Loss Statement.
If you did both these, I can safely tell you that you have won 50% of the financial analysis challenge.
EXAMPLE
For example, Let us assume your hotel RevPAR KPI is showing a decrease in a month.
Or whatever period you are considering compared to a previous period or year.
You need to know what is causing it.
Is it
- Occupancy or
- Average rate or
- Both
Let us use a metaphor to describe this.
Assume your Profit and Loss Statement is an iceberg.
You know, the one that featured in the movie Titanic!
What is the relevance?
Well, an iceberg only shows up in a small way above the surface of the water.
The Iceberg part that is below the surface of the water is the major part.
The part that is hidden.
And the part that is actually holding the ice berg together.
In the same way, cause effect is a phenomenon not visible above the surface of the iceberg that is your hotel Profit and Loss Statement.
It needs to be unearthed in analysis.
Financial Analysis carried out without exploring cause effect is superficial and meaningless.
I will shortly prove to you how this is so.
The Secret Principle of Successful Financial Decision Making
Let us get into that basic, universal principle that I talked about with The Secret Principle of Successful Financial Decision Making.
Here let us focus on distilling what cause effect is and a few related factors from this video.
WATCH the below video on the Secret Principle of Successful Financial Decision Making.
The Cause Effect features majorly in the video.
Watch the video right to the end and surprise yourself.
Are you able to distinguish between the various elements of the cause effect phenomenon from the Funnel Principle video?
Do you know where cause resides using the Secret Principle in the video?
Evaluating Hotel Performance - The Effect Illusion
Did you watch video on The Secret Principle to Successful Financial Decision Making?
If you did, you would have discovered the first of the 3 Traps of Evaluating Hotel Performance.
And that is The Effect Illusion.
However, before that.
Were you able to identify where cause resides in the Funnel Principle video?
Cause resides in the hotel operation.
Getting to the root of any problem or situation confronting you in a hotel will require decision making.
And there are tons and tons of those for producing consistent business results,.
This decision making will involve searching out the reason why something is happening.
In other words, search out the the cause.
You may now ask a question.
If that is cause, what is effect?
More importantly, why is it critical to know intrinsically what effect is?
The Effect Illusion
Effect is a phenomenon or KPI which reflects the end result.
It may be called the outcome.
It is what you set out to achieve.
You will be surprised how often effect turns out to be what you did not expect.
And therein lies the challenge.
If you address the effect instead of the cause, your results are likely to be superficial and lacking depth.
So what does it mean to address effect?
The Profit and Loss Statement is most often depended upon by hotel managers to take decisions in the operation.
Depending upon the PNL is not a problem in itself.
It is when ONLY what is showing in the PNL is used to take decisions that decision making is significantly flawed.
Why is it flawed?
Because what the PNL is showing is ONLY the Effect!
Like the smaller part of the iceberg that you can see above the surface of water.
You cannot take decisions based on effect.
You need to go to the cause to do that.
That is when your decisions are sound and logical.
The cause in our iceberg metaphor is the major chunk which is under the surface of the water and which you cannot see.
However, before that, let us take a look at one more factor which confuses the issue.
It is something also often used by hotel managers to take decisions.
This is flawed too.
And that is the second of the 3 traps.
Let us see how.
Evaluating Hotel Performance - The Misleading Symptom (Trap 2)
You saw earlier why taking decisions just based on effect is flawed and a trap.
Your decisions need to have a strong foundation.
That foundation is the cause of the problem, not the effect.
You know that major chunk of the iceberg which is below the surface of the water and which you cannot see.
Yet another factor which confuses the issue is a symptom.
Why is it confusing?
Simply because, often a symptom is mistaken for a cause.
And decisions taken based on the symptom.
That is not only flawed but a trap that can lead to decisions causing expenses and losses.
If the PNL is the iceberg, a major chunk of it is hidden below the surface (including the cause!).
The symptom (apart from the effect) is however seen above the surface.
And what is seen above the surface (symptom and effect) is often thought to be good enough to take decisions.
However, the critical cause is hidden beneath the surface.
Your next question will be:
So, how do we identify a symptom in a PNL?
Variances - Just a Symptom
Well, in the context of the PNL, a symptom is the variance.
Yes, that variance which tells you how much less or more your actual results are compared to the budget, forecast and last year results.
Those variances you constantly look at in monthly PNLs.
And you can now understand what I was saying about hotel managers taking decisions based on symptoms - variances.
You may be doing it too!
But taking decisions based on just a symptom or the variance in the PNL is greatly flawed.
However, much before even decision making, in any financial analysis, variances should be scrutinized using only cause in the cause effect phenomenon.
If not, you will end up with deceptive results and worse take incorrect decisions based on that.
In that vein, let us first see how to identify cause.
Evaluating Hotel Performance - The Hidden Cause (Trap 3)
You saw in the earlier two topics, how effect and symptom are not the same as cause.
You learned that taking decisions based on what you see as an effect or symptom in a PNL is significantly flawed.
Well, how do we identify cause then is your question.
All in good time.
You will also discover how not to fall into the third of the 3 traps of Evaluating Hotel Performance - The Hidden Cause.
Remember the iceberg metaphor.
And the major chunk of the iceberg which is below the surface of the water.
Applying that metaphor, you identify cause in the hotel operation.
What does that mean actually you ask!
EXAMPLE
Assume you are looking at your monthly Rooms department PNL.
You notice that in the Rooms department for the current month, one expense line item Guest Room Supplies is showing a positive variance compared to last year.
Let us be reminded what a positive variance for an expense item means.
Actuals are lower than last year (in this case; it can be compared to budget or forecast too).
This principle works just the opposite for revenue line items.
Let us get back to our Guest Room Supplies example.
In other words, you saved money in Guest Room Supplies expenses for the current month.
Here are a couple of reasons / conclusions you arrive at based on the positive variance:
- Great! we have saved on expenses due to our cost cutting
- Guests used less of room amenities and so we saved
Do This
Use your notepad to write down (based on what you learned so far) at least 2 reasons why this approach is flawed.
Did you write your reasons down?
Do not read further until you have written that down.
Now, read on!
So, what this scenario shows is a typical one confronting hotel managers all the time.
And this is what they do often:
- They take a look at the Rooms department PNL
- Identify Guest Room Supplies expense line item
- Quickly go to what the expenses variance is showing for that line item.
- Their boss may be breathing down their neck about the overall rooms department results, although in this example, it is favorable.
- See the positive variance
- Celebrate (telling themselves the two reasons (or even more) shown above
- Then they move on to other expense line items
So, what is the flaw in this kind of reasoning based on what we have learned?
The Misconception
To begin with, the two reasons laid out are purely based on a symptom.
And that symptom is the positive variance for the Guest Room Supplies expense line item for the current month compared to the last year
As we saw earlier, a symptom is just that - what seems to be.
And the positive variance is such a symptom - what seems to be.
it is not verified yet.
What do I mean by verification?
Verification means, per the Cause Effect principle, going to the real reason why the positive variance happened.
And that cause can only be determined if you went back to check a host of things in the hotel operation:
- What items constituted the Guest Room Supplies expenses for the current month?
- This means going back to the original requisitions by the Housekeeping department for issuance of guest room amenities to the operation
- Since the Guest Room Supplies is a Variable expense, checking to see if the occupancy went up or down compared to the last year
All of these reasons are found only when you go back to the hotel operation and determine the real situation.
The real situation is also the cause - why Guest Room Supplies expense for the current month is below last year.
You may be wondering where the effect features in this scenario since we have discussed what the symptom and cause are.
Well, the effect is the PNL itself.
The results shown in the PNL are the effect and the symptom the variance of line items.
So, what is the moral of the story?
Do Not Assume! Verify!
That a PNL just shows you the effect overall and individual line items show you the symptom through variances.
Cause does not feature at all in the PNL.
This is why the PNL iceberg metaphor shows cause as being beneath the surface.
That beneath the surface is the hotel operation.
So there you are, the basic universal principle in evaluating hotel performance - cause effect symptom principle (The Secret Principle to Successful Financial Decision Making).
And how to avoid the 3 traps through understanding the cause effect symptom principle.
Action Steps You Can Take Right Now
For your easy reference, here are the steps you can take right now to apply the above principle from this blog post.
STEP 1:
Look at Profit and Loss Statement in a Big Picture Overview basis first - it is the effect or result.
STEP 2:
Use Variances as Symptoms which just indicate something - they are not the cause.
STEP 3:
Go back to the hotel operation to find out what is actually causing the variance.
STEP 4:
Use that cause as the reason for whatever decisions you need to take.
STEP 5:
As a principle, always take decisions based on the cause effect symptom principle with cause in the center.
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