How Hotel Asset Management Enhances Financial Position 

Would you not want to know how your hotel asset management has enhanced the financial position of your hotel?

After all, if the financial position is sound, your promotion prospects are good, you may get a good pay raise as well!

I will lay out a case in this blog post for how to enhance (yes, you read that right, enhance) financial position from assets and liabilities in a Balance Sheet by leveraging them in your hotel operation decisions.

This is Part 2 of the 3 Part blog post series on Hotel Balance Sheet. CLICK here for Part 1.

This blog post will cover:

How Profit improves financial position

As you are aware, the Profit and Loss Statement is about revenues, expenses and profit.

The simple principle to understand is this:

When a business earns profit [revenue less expenses], that profit gets added to the Capital.

Let us see how exactly that profit gets added to the Capital of the business.

When the business (hotel) earns revenues, it will get paid for that.

Thus revenue means cash inflow.

Similarly, when the business (hotel) incurs expenses it has to pay for those expenses.

So, expense means cash outflow.

Since revenues will (should) hopefully be higher than expenses, cash inflow will be higher than cash outflow, so profit is thus related to cash inflow (net of revenue inflow and expense outflow).

This is a key principle to understand.

Click below link for an in depth 7 Step process to understand how profit improves financial position by building up assets, capital and value.

The RevPAR Barometer

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

Notice, I said "clues."

It is not a full blown solution.

And those clues you will find in your hotel RevPAR!

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

Or you could say revenue per available capacity in the Rooms department.

Capacity represents the highest available rooms in the hotel on any day.

It is this capacity (available rooms) that RevPAR is using for its measurement.

But the RevPAR tells you only part of the story.

Further analysis is needed to dig out the power.

That 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.

This is known as a RevPAR Index.

It is an unmistakeable warning sign.

That your revenue earning capacity from the assets (available rooms) is hitting its peak.

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

In other words, upgrade the asset.

You may now be realizing where I am headed.

Click below link for a FREE Mini Course on How to Achieve Higher Profit from the same Revenue with RevPAR working its magic.

Assets and Capital Expenditure

Before any discussion on assets happens, it is important to clear the air on the concept of capital expenditure.

If you were to ask a hotel manager (other than an accounting or finance person) what they understood as capital expenditure, the response could shock you.

Not because they were wrong.

But because of the sheer number of different interpretations of that term.

Capital expenditure is an intriguing concept.

The use of the word capital in the term makes it confusing to put it mildly.

Particularly if you did not have an accounting or finance background.

You are already giving me that confused look.

The most simple way to explain capital expenditure is as follows:

Benefit

An expenditure the benefit of which will extend beyond one financial year.

You are not impressed!

How is that simple and how can that be an explanation you ask?

Bear with me.

I shall clear the storm clouds quickly.

Benefit is used in non-accounting language to refer to the life of an asset.

You are really baffled now!

I have not finished and I shall deliver.

So, for example:

Example

Say you purchased a Laser Printer for your Front Office department.

Is that capital expenditure?

You are nodding your head.

It is capital expenditure.

The fact is that an equipment like a printer is a common item of capital expenditure.

You may not have realized however that the laser printer is considered capital expenditure because of one accounting reason.

That the benefit or its life is more than one financial year.

There are however items which you purchase that may not have such a clear cut classification.

For example, when the kitchen buys sternos for their chafing dishes, they get used up in a meal period.

But since they are cans they “look like” pieces of equipment.

However, they principally are consumables.

Sternos are therefore revenue expenditure.

They belong in the Profit and Loss Statement.

So, remember that when the life of an item of equipment is beyond one financial year they are called capital expenditure.

They are known as Fixed Assets more commonly.

Capital expenditure is a much broader term than Fixed Assets though.

CLICK link below for a FREE Know Capital Expenditure Video Course for an in depth look at this critical concept.

Let us now visit the concept of asset potential that is critical for leveraging revenue earning capacity.

Role of Asset Management

Potential Vs Performance

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 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!

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.

Assets 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.

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 contributory.

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.

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

Upgrading Fixed Assets

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.

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.

In the next final Part 3 of this blog post series we will explore how hotel asset management works with food and beverage assets - a totally different kettle of fish.

In the next final Part 3 of this blog post series, we will also be looking at another major category of asset - a current asset.

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

Also current assets hold a secret that is more closely related to revenue which we will see in the final Part 3.

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 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

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.

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.

That brings us to the end of Part 2 of this 3 Part blog post series.

In Part 3 we will look at real life strategies that use specific financial ratios relating to short term (current) assets to improve financial position.

If you missed Part 1 of this 3 Part blog post series, click link below:

Your Key Takeaways

What is your opinion on enhancing financial position in a hotel balance sheet?

Do you think hotel asset management is an effective way to enhance asset potential.

Comment below on what you think.

I am keen on knowing what you think.

I will see you in the final Part 3 of the 3 blog post series.

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