Fixed Assets-3 Challenges You Ignore at your own peril

Are you ignoring these challenges of fixed assets management?

Fixed Assets management is an often ignored strategy with consequences.

Do you remember those numerous occasions when your hotel revenue was stalling? 

It was impacting your profitability badly. 

You may not have realized it but the solution is closer to you than you thought.

This blog post will reveal to you resources that your hotel itself possesses.

And which you can leverage to address stalling revenue.

What this post is all about

This post will cover the following points relating to hotel fixed assets management:

• Fixed Assets - Revenue Scenario
• Stalling revenue - a common challenge
• Challenge 1 - What Your Profit and Loss Statement is NOT! 
• What Your Balance Sheet is! 
• Fixed Assets as resources You Mostly Ignore
• Challenge 2 - Difference between asset and expense
• Challenge 3 - Potential Vs Performance 
• Why understanding the Balance Sheet is critical for a GM

Without further ado, let us dive right in.

Fixed Assets - Revenue Scenario

You are the General Manager of Paradise Hotel.

Your hotel revenue is stalling badly in what you consider is a lean month.

A lean month is when average occupancies are below 40%

You are trying out all strategies to push up occupancy levels.

Unfortunately, they do not seem to be working.

What do you do differently in this situation?

Have you come across Stephen Covey's Sharpening the Saw phenomenon in his iconic book "7 Habits of Highly Effective People.?"

If not, read on. 

You may well be surprised.

Stalling Revenue - a common challenge

If you are a hotel operations manager one of your top most priorities is hotel revenue performance.

The Top Line (as revenue is known often) is the first major hotel Key Performance Indicator.

Your boss, owner and all members of the hotel management team are obsessed about that.

With you as the General Manager of the hotel property, the buck stops at your door for revenue performance.

It is what your bosses who are often your hotel owners are demanding from you.

Often though, general managers get distanced (or consciously distance themselves) from monthly performance results.

They leave that to their deputies, the Resident or Hotel Managers of the property.

This is often a part of the delegation process itself.

However, keeping a pulse on revenue performance is critical for a hotel general manager.

Revenue is the foundation on which profitability is built.

Given this scenario, general managers may be throwing the kitchen sink at revenue generation strategies.

Don't get me wrong.

This is good.

The only problem is they may be ignoring something closer home than they have realized.

This is detrimental to their own success, to understate it!

Why is that you ask?

I am glad you asked.

Challenge 1 - What Your Profit and Loss Statement is NOT!

The Profit and Loss Statement is the performance statement.

It is indicative of the business results of a month.

It tells you how much revenue you earned among other things.

But it cannot throw light on something critical.

What is that, you ask?

That critical element is revenue potential.

The Profit and Loss Statement cannot tell you what the revenue potential is of the hotel.

It can only tell you what revenue is actually earned by the hotel.

So, what is the solution, you ask sarcastically?

I am getting to it.

Revenue Potential - an elusive KPI

That critical element which is revenue potential can only be known if you go to the revenue source.

More specifically, what is producing the revenue.

You are giving me that skeptical look.

Hang on, I am almost there.

The source of revenue is not what you may be thinking.

These are not the channels of distribution from where you get your market segments and generate revenue.

What I mean is the resource that is producing that revenue.

It is something most general managers (and actually all operations managers too) pay little attention to!

And that is the asset that produces the revenue.

You seem disappointed.

And you want to know why attention is not being paid to the asset.

But let me clear the air.

To begin with, I already gave one reason earlier, remember.

Hotel general managers only look at the Profit and Loss Statement.

And that does not show assets.

So, what is the solution, you ask quite exasperated.

Well, the only solution is to go to a financial statement which shows assets!

And that other financial statement is the Balance Sheet.

The Balance What, you say!

That is exactly the reaction most times when hotel operations managers including the general manager hear about the Balance Sheet.

Now, allow me to ask a question for a change.

When was the last time as a senior operations manager or a general manager, you actually saw your hotel Balance Sheet?

Now, I have gotten your attention.

In short, operations managers (including the general manager) mostly never see the Balance Sheet.

And that is why they have no idea what the dollar value of their assets (among other things) is in that financial statement.

Why is that important you ask?

Well, if you did not know the extent to which your hotel holds assets (the resource that produces your revenue), you have no idea of its potential too!

What Your Balance Sheet is! 

Aha! Can you see where I am going with this?

I am not advocating the Balance Sheet because I am an accountant by profession.

I am recommending because it gives you a perspective that a Profit and Loss Statement cannot. Ever!

And it is not meant to!

So, a Balance Sheet is not just a “good to have.”

It is a necessity!

So, how will a hotel general manager benefit from a look at the Balance Sheet?

To begin with, a Balance Sheet gives you the financial position of your hotel.

It tells you more than just assets.

It tells you about assets, liabilities, capital - all critical elements of your hotel business.

As a general manager and head of the hotel unit, would you not want to know about the critical elements of your hotel business?

You might say that is the job of the Financial Controller to know about the Balance Sheet.

I beg to disagree!

Fixed Assets are Central to Revenue Generation

As a hotel unit head, you need to know everything that is central to your hotel.

And I have and will continue to prove that assets are at the center of a hotel's business results.

In this blog post, we are focusing only on assets.

And also only a certain category of assets.

We will stick to that category of assets that has a strong link to revenue generation.

Look at Assets part of the Balance Sheet of Paradise Hotel below

Consider this.

You have only been dealing with the effect in a cause effect phenomenon.

A Profit and Loss Statement is just that - an effect that shows business results.

You need a tool which will allow you to see the potential for revenue generation.

Assets allow that.

And you need the Balance Sheet for that.

Let us see how.

Fixed Assets as Resources You Mostly Ignore

A fixed asset is an asset whose benefit will extend beyond a financial year.

In the case of the hotel building the benefit would extend from 30 to 40 years.

At some point of time in the life of a hotel, revenue generation strategies may get saturated.

You may thus be facing new challenges in your fixed assets management.

What do I mean by saturation?

Saturation means your fixed assets cannot produce substantially incremental (higher) revenue any more.

So, is there a way out, you ask skeptically?

Yes and No!

You look confused.

Let me clarify.

The RevPAR Barometer

Currently, your hotel Profit and Loss Statement has a Key Performance Indicator (KPI) that may provide clues to further revenue generation capacity.

Notice, I said "clues."

It is not a full blown solution.

And those clues you will find in your hotel RevPAR!

Notice how the RevPAR tells you the dollar revenue you are earning per available room.

Or you could say per available fixed asset in the Rooms department.

But the RevPAR tells you only part of the story.

The power of the RevPAR is to indicate say, that while the RevPAR of the market in which you operate has been growing, your hotel RevPAR has been stalling.

It is an unmistakeable warning sign.

That your revenue earning capacity from the relevant fixed assets is hitting its peak.

The only way out (other than nominal increases in RevPAR due to price increases or even abnormal events) is upgrading the fixed asset.

You may now be realizing where I am headed.

Classic Fixed Assets Management Scenario

Planning a hotel renovation is all about this upgrading of the fixed asset.

It is a classic fixed assets management scenario.

In a later blog post in the Peak Profit Newsletter, we will explore how a renovation strategy can work with hotel fixed assets.

So, what is the moral of the story?

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

Do you see that stalling RevPAR symptoms?

Some immediate steps you can take is to see if your Balance Sheet shows any additional land adjacent to the hotel.

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 is applicable to hotel room revenue.

In the next blog post in the Peak Profit Newsletter, we will explore how that works with food and beverage assets - a totally different kettle of fish.

Now let us move to something important that is related to fixed assets accounting.

No, we are not launching into an accounting class.

It is merely something related to fixed assets accounting and something you should know.

Challenge 2 - Difference between asset and expense

One of the critical pieces of simple fixed assets accounting information that a hotel general manager must understand is the difference between an asset and an an expense.

Do you know the difference between an asset and an expense?

Why is this such a big deal?

It is important to say here that all general managers and hotel operations managers understand expenses well.

All might not understand the behavior of fixed and variable expenses thoroughly but they broadly know their expenses.

Let us see why understanding the difference between an asset and expense is such a big deal.

The Benefit Criterion

The benefit of expenses incurred are consumed within a financial year.

The benefit of assets extends beyond the financial year.

Expenses belong to the Profit and Loss Statement.

Assets belong to the Balance Sheet.

Can you now see why, if you have been looking only at the Profit and Loss Statement, you probably are ignoring the assets totally (because they are in the Balance Sheet!).

If you take the above mentioned difference, it is critical that asset purchases are not treated as expenses and the other way round.

Of course, the Financial Controller and the Accounting department will ensure that!

But as a hotel operations including a general manager, do you know whether your purchase is going to extend beyond the year or not?

Well, this is important because it is linked to that benefit we talked about.

This phenomenon takes a radical turn when the asset you purchase is a revenue producing one.

That is the benefit we were talking about!

This is one of the functions of a Capital Expenditure budget.

It lays out which assets will be revenue producing and which not.

Obviously, your priority will be to focus on the revenue producing asset purchase.

See now how your stalling revenue may have an ally in house - your hotel fixed assets!

Challenge 3 - Potential Vs Performance 

However, there is a more compelling reason for understanding and leveraging assets in a hotel Balance Sheet.

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 fixed assets 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!

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

Why?

RevPAR deals with potential while ADR deals with business volume.

And not just RevPAR.

Fixed Assets Turnover Ratio

Your hotel owners also 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 fixed assets management priority

You get the picture.

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

It will tell you more about what revenue potential there is in your hotel assets.

You would want that, wouldn’t you?

In the next blog post, we will look at another major category of asset - a current asset. 

We will look at food and beverage department revenue potential using the current assets.

It is in the Balance Sheet which you will see is again holding something that a hotel general manager must know!

Also current assets hold something that is even more closely related to revenue which we will see in the next episode.

If you are an aspiring general manager, build The Ultimate 10 Tools in a Hotel General Manager Business Toolkit with the Mastering Hotel Finance Online Course.

Your Takeaways

Do you still think as a general manager it is okay to look just at the Profit and Loss Statement?

Ask your hotel Financial Controller to share the Balance Sheet with you.

Ask him about the Fixed Assets Turnover Ratio for your hotel.

Go on. Surprise him or her!

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