Hotel KPIs-Why the Asset Manager Potential Focus Wins

Have you ever thought of the downsides to not focusing on potential?

Which hotel KPIs approach is superior - The Operator or The Asset Manager role?

How does focusing on potential actually deliver better revenue and profit?

I will lay out a strong case why most often potential eclipses performance.

More importantly, your hotel owners are more focused on potential rather performance.

This concluding Part 3 of a 3 Part blog post series will cover:

Potential Vs Performance

In Part 1 of this 3 Part Series, you saw how the Operator role primarily focuses on performance.

One could say that the Operator focus is on Performance Management.

The Other approach you also saw in Part 2 is the Asset Manager approach.

That focuses on potential of an asset and capacity.

In other words, on Asset Management.

If you missed Parts 1 and 2, click below to read them first.

Asset Management covers resource management, utilization and upgrading of assets.

It emphasizes the role of assets as resources that are primarily the source of revenue generation for the hotel business.

There is a compelling reason for understanding and leveraging assets in a hotel Balance Sheet.

That is to harness asset potential.

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

It cannot get more critical 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!

That is why 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 now look at an actual asset based financial ratio.

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 asset management priority

You get the picture.

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?

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

Asset Potential as Infrastructure for Generating Revenue

Major revenue generation in your hotel business occurs from the purchase, installation and use of capital expenditure known as Fixed Assets.

Want to know how capital expenditure differs from revenue expenditure?

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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.

For example, with most hotels, room revenue (representing the Fixed Assets potential) represents anywhere from 65% to 85% of total hotel revenue.

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

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

Let us see one of the most common methods adopted in the industry for upgrading of asset potential.

Upgrading Fixed Assets & its Potential.

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

It is a classic asset management scenario.

In a later blog post, 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.

You can take some immediate steps in this situation.

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.

A similar look at food and beverage department revenue potential uses current assets.

However, whether it is fixed or current asset, it is all residing in your hotel Balance Sheet.

It is the Balance Sheet that a hotel manager must be familiar with.

To focus on potential as opposed to performance.

Asset Renovation Expenditure

Remember our brief earlier look at renovations?

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 or potential 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

Capital Budgeting for Harnessing Asset Potential

The question now before us is how to leverage asset potential to enhance revenue generation?

it may boil down to the challenge of maximizing asset potential to generate increased revenue.

I can see you immediately giving me that quizzical look.

Clearly you want to know how to increase asset potential.

So, let us dive right in.

A discussion on asset potential cannot be had without understanding the process for that.

Is there such a process?

I am glad you asked the question.

Indeed there is.

Have you heard of the concept of Capital Budgeting?

This is different from Operation Budgeting.

Operation Budgeting deals with revenue, expenses and profit.

Capital Budgeting is different.

You could say though that it is related to Operation Budgeting.

So, what is Capital Budgeting?

Earlier we have established that the primary purpose of acquiring an asset is to generate revenue.

So, this process of acquiring the asset is what is known as Capital Budgeting.

However, it is important to note that it is not "all assets" we are talking about.

You are giving me that look again.

I will explain.

Potential and Long Term Assets

Capital Budgeting refers to long term assets.

Or what we have known as Fixed Assets or Capital Expenditure.

The Hotel Balance Sheet shows them as Property & Equipment.

What is the goal of Capital Budgeting?

The goal is to acquire assets which will generate revenue.

In other words, acquire Revenue Producing Assets.

This is where hotel owners become very focused.

Normally, they provide a budget amount often expressed as a % of Gross Revenue for acquiring fixed assets.

It is left to the hotel management to be prudent in their choice of what goes into a Capital Budget.

Ideally, the majority of the acquisitions of long term assets should be revenue producing.

There will be of course assets or equipment which will not generate revenue.

However, these should be kept to the relevant minimum.

So, as you can see, an effective strategy of asset management is when asset potential is enhanced.

To deliver increased revenue.

Now, can you see why potential is more overarching than performance.

It is not as if performance is not important.

Important it is.

However, performance that does not take into account potential is inadequate.

This is the reason taking an asset manager approach focusing on potential will reward owner investment in the long run.

Are you taking an asset manager approach in your operation?

What do you think about this approach?

Comment below as I will be keen on knowing what your thoughts are.

Steps You Can Take Right Now

STEP 1

Begin looking at your revenue potential rather than just revenue performance.

STEP 2

Go behind the scenes and discover the potential of each asset to deliver revenue.

STEP 3

What measures are you taking to upgrade your assets?

STEP 4

What is your Renovation strategy? 

STEP 5

Ask yourself whether you can harnessing Capital Budgeting to keep asset revenue potential at its best.

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