Long Term Assets - Are They Delivering Optimum Hotel Revenue?

Would you know if long term assets of your hotel are not delivering the highest revenue?

Did you realize that long term assets are also known as fixed assets in a hotel balance sheet?

Can you find out if your hotel asset utilization is healthy?

In the post pandemic era, asset under-utilization can have a disastrous effect on revenue generation.

Are you leveraging the right hotel asset management strategies?

I will lay out a strong case for leveraging long term assets of the hotel in revenue generation.

Along the way, I will share some steps you could take to enable this.

But first, we will understand what long term assets are.

This Chapter 4 of Ultimate Guide on Hotel Balance Sheet Basics will cover

Long Term Assets Examples

What are Long Term Assets anyway?

How are they different from Short Term Assets?

Let us see some long term asset examples.

Look at the long term assets of Paradise Hotel below:

The main category of long term assets shown above is Property and Equipment.

Property and Equipment are also commonly known as Fixed Assets.

Fixed Assets are assets whose life extends beyond a financial year.

These are different from Short Term or Current Assets whose life is within a financial year.

We learned about current assets in an earlier post.

Read Related Chapters of Ultimate Guide on Hotel Balance Sheet Basics at the end of this chapter.

Let's see the most common categories of long term assets in the above balance sheet.

Land

Land is an immovable asset.

It forms part of long term assets for almost every type of hotel and other businesses.

Buildings

Buildings are the next common category of long term assets.

These are most important for a hotel business.

Why is that you ask?

Well, because, a hotel's principal revenue comes from selling guest rooms.

Guest rooms are housed in the hotel building asset.

The building asset undergoes what is known as depreciation.

Depreciation is the wear and tear of an asset due to use.

Plant and Machinery

Plant and Machinery mainly refers to long term assets which are installed to the ground.

Examples are like the Boiler, Chiller, Laundry Flatwork Ironer etc.

Furniture and Equipment

A hotel has furniture in its guest rooms, function rooms, restaurants and so on.

Other than the above, furniture is also present in offices of the hotel.

Equipment is any kind of smaller movable long term asset.

Examples are office equipment, kitchen equipment etc.

Long Term Assets can be:

• revenue producing (like guest rooms) or 
• otherwise (office equipment).

It is the role of producing revenue that is critical in the life of a long term asset.

Let's see how. 

Long Term Assets and their importance

Long Term Asset management is an often ignored strategy that has 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 chapter will reveal to you resources that your hotel itself possesses.

And which you can leverage to address stalling revenue.

Typical Revenue Scenario with Long Term Assets

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 between 40% and say 50%

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

Long Term Assets and Stalling Revenue

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 General Manager of the hotel, 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.

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 query?

I am glad you asked.

Ignore This Critical Financial Statement At Your Own Peril

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 and Long Term Assets

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 channels of distribution from where you get 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.

In our current discussion, more specifically it is the long term assets.

You seem disappointed.

And you want to know why attention is not being paid to long term assets.

But let me clear the air.

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

Hotel managers only look at the Profit and Loss Statement.

And that does not show assets.

More importantly, it does not show long term assets.

You may be wondering why I am so obsessed with long term assets.

Well, let me get your attention.

Would it help if I tell you that long term assets produce upwards of 70% of a hotel revenue.

Aha, that did get your attention.

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

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

Balance Sheet - Home of Long Term 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 manager you actually saw your hotel Balance Sheet?

Now, I have really gotten your attention.

In short, operations managers mostly never see the Balance Sheet.

And that is why they have no idea about something critical. 

The dollar cost of their assets (among other things) in that financial statement!

Why is that important you ask?

Remember the upwards of 70% contributed by long term assets of a hotel?

Let us say you did not know the extent to which your hotel holds assets, specifically long term assets.

You would then not know of the resource that produces your revenue.

In effect, you have no idea of its potential too!

Is that not an alarming situation?

What is the Balance Sheet All About?

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.

Our current discussion is focused on long term assets.

So let us stick to that.

Long Term 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.

You took a look at Current Assets in an earlier chapter.

[If you missed that, click below for related chapters of Ultimate Guide on Hotel Balance Sheet Basics.

In this Chapter 4, we are focusing only on long term assets.

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

You saw earlier Property and Equipment of Paradise Hotel.

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.

Long Term Assets are part of that.

And you need the Balance Sheet for that.

Long Term Assets as Resources You Mostly Ignore

In a Balance Sheet, one of the primary sources of revenue generation are the Long Term Assets.

You saw them classified as Property & Equipment in the Balance Sheet [see below].

For example, in the case of Paradise Hotel, you can see Property & Equipment totals $1,108,000.

This includes the Hotel Building which houses the guest rooms among other things.

In other words, the:

• Rooms Available that you see in a hotel Profit and Loss Statement is
• actually a quantity representation of the long term asset that is the hotel building.

A long term 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 long term assets management.

What do I mean by saturation?

Saturation means:

• your long term 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 long term 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 long term assets is hitting its peak.

There is only one way out.

I mean, other than nominal increases in RevPAR due to price increases or even abnormal events.

You may now be realizing where I am headed.

Where I am headed is upgrading the long term asset.

Classic Long Term Asset Management Scenario

Planning a hotel renovation is almost all about this upgrading of the long term assets.

It is a classic long term asset management scenario.

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 stalling RevPAR symptoms?

You can take some immediate steps.

For example, you can 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.

Is there a way to quickly find out what the hotel long term asset revenue potential is, you ask?

Awesome question.

Yes there is and I will now tell you about that.

Quick Way to Gauge Hotel Long Term Asset Revenue Potential

Long Term Assets Turnover Ratio

Your hotel owners also look at a KPI called Long Term Assets Turnover Ratio.

Often also known as Fixed Assets Turnover Ratio.

This takes an overall measure of:

• how much revenue you are earning
• from the long term assets you currently have.

Another asset potential based KPI.

Another long term 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 what revenue potential there is in your hotel assets.

You would want that, wouldn’t you?

You can take some immediate action steps as laid out below.

How are you looking at your hotel revenue potential?

Are you paying attention to the long term assets of your hotel?

Comment below, I will be keen to know what you think.

Steps You Can Take Right Now

STEP 1

Go to your Hotel Financial Controller and ask him to show you the Balance Sheet for the hotel.

STEP 2

Identify Long Term Assets in your hotel balance sheet. They will be under Property and Equipment.

STEP 3

Notice how Land, Building, Furniture & Equipment are laid out. What Equipment does your hotel have?

STEP 4

How much are Long Term Assets for your hotel? Do you know the ratio to revenue for them?

STEP 5

Ask yourself whether as a hotel manager you are managing your long term assets effectively.

Other Chapters of Ultimate Guide on Hotel Balance Sheet Basics

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