The Ultimate 10 Tools in a Hotel General Manager Business Toolkit

As an aspiring hotel general manager, are you building critical skill sets in your business toolkit?

The consequences of a poor set of tools in a business toolkit can be:

• Failed strategies,
• Targets missed and
• Loss of credibility

to understate the case.

Equipping yourself as an aspiring hotel general manager with the right business toolkit is therefore critical.

I will lay out The Ultimate 10 Tools in a Hotel General Manager Business Toolkit that will lead to successful strategies, targets achieved and a reputation of being results driven.

Sounds good?

Favorite the Infographic!

This blog post is about 3 critical areas in which hotel general managers must build their business toolkit:

• Performance Management
• Asset Management
• Results Management

This blog post will address the 3 areas covering 10 ultimate tools which are indispensable as follows:

1. Step by Step Analysis System
2. The Building Blocks of Revenue / The Building Blocks of Profit 
3. Role of Market Share 
4. Power of Forecasting Effectively
5. Resource Management 
6. Asset Utilization
7. Asset Upgrade
8. EBITDA
9. Financial Position
10. Return on Investment

PERFORMANCE MANAGEMENT

The first major category we will tackle in the Hotel General Manager Business Toolkit is not surprisingly Performance Management.

Performance Management is at the heart of running a business successfully.

However, that is easier said than done.

It involves a process.

Step by Step Analysis System

How do you think business results are achieved?

Business Results don't just happen.

They need a good deal of planning.

Beginning with powerful analysis.

Not just any analysis but a step by step system of analysis.

Do you have such a system set up in your business toolkit?

Are you often wondering why your targeted strategies do not produce results?

It is certainly not for want of effort.

You put in all the work.

Everything you did right.

So what happened.

Well, you may have done all that, but here is the thing.

Did you do the right things?

There is a difference between "doing things right" and "doing the right things."

The latter places emphasis on the WHY.

Why should you do that thing?

Not How should you do that thing.

You will eventually come to the How but not at the beginning.

In the beginning, when you are planning, strategizing, it is the WHY.

One of the most powerful parts of performance management is analysis.

It is the Why of performance management.

Analysis tells you why a certain performance requires a certain approach.

It is a step by step approach.

Do you have such a system?

Read through the attached Infographic carefully.

It takes you from observation and interpretation through decisions to finally results.

What you could call a complete step by step system and more.

And now on to the next tool in the business toolkit.

The Building Blocks of Revenue

A Performance Management system would not be of much use if you did not have strong building blocks to revenue.

Market Segments are building blocks of hotel room revenue.

Meal Periods are building blocks of hotel food and beverage revenue.

Do you know your market segments and meal periods well?

Market Segments in the rooms business emphasize the diversity of your target audience.

It is generally a good strategy to have diversity in your target audience without spreading yourself too thin.

Why do I call market segments the building blocks of revenue?

Revenue is not achieved simply from one category of your target audience.

It is earned from multiple market segments which represent your target audience.

For example:

• Individual
• Group
• Business
• Leisure

The specific type of market segments will be decided by the type of target audience your hotel has.

Market segments are at the heart of the hotel room revenue generation process.

Similarly, meal periods are the same to the hotel food and beverage revenue generation process.

Meal Periods are the combination of different items or categories of a menu that contribute to food and beverage revenue.

Meal Periods may have the following combinations:

• Breakfast, Lunch and Dinner
• Supper, Afternoon Tea, Snack
• Buffet and A la Carte
• Food and Beverage
• Individual and Group (normally only to the Catering or Banquet operation)

Best Sellers

In  the book publishing industry, there is one powerful business concept related to revenue generation.

This concept has now percolated to all other industries.

It has become integral to their business toolkit.

That is the concept of Best Sellers.

For example, knowing your Top 3 Market Segments and Top Meal Period etc.

What is the purpose of knowing your Top 3 or the Best?

Well, the purpose is to identify your Best Sellers.

Those market segments and meal periods which were raking in the highest revenue from all sources.

Which brings us to a critical question all hotel managers need to be asking themselves (not just the Revenue Manager or those in the Sales & Marketing department but every manager in the hotel!).

Do you know the Top 3 Market Segments of your hotel revenue achievement?

Have you reviewed the Top 3 market segments on a monthly basis?

Why Top 3?

What is the big deal, you ask.

Before telling you why let me ask another question.

The 80:20 Rule

Have you heard of the 80:20 Rule?

Why have I suddenly digressed to something you may not have heard of?

What is the connection with the Top 3 market segments?

Let me explain.

The 80:20 Rule is one of the most universally applicable doctrines or principles or phenomenon (whichever way you want to call it).

It is a rule which is all about priorities, effort and results.

The 80:20 Rule says that other things being equal, 20% of your effort produces 80% of results.

This boils down to the fact that among all the efforts that you put in, there is 20% which is actually producing 80% of your results.

It also means that the other 80% of effort is ending up producing only 20% of your results.

Can you see where I am going with this?

It means, you must focus all your energies on the 20% that is raking in the 80% results.

And spend less time on the 80% which is only eking out 20% of results.

Why is this rule universal?

Because it applies to organizations and any kind of phenomenon as much as it does personally.

Look at market segments of any hotel.

You will notice that among all the market segments that contribute to the total room revenue, there are some which are producing a big chunk of your room revenue.

Understanding your Top 3 Market Segments of Room Revenue allows you to use the 80:20 Rule to focus on those segments that are bringing in the majority of your room revenue.

Let us take this a notch deeper.

You should spend more time each month in reviews.

Reviewing the business volume (occupancy) and price (average daily rate) and RevPAR of these Top 3 Market Segments so that you can maximize your room revenue.

This also allows you not to spend wasteful time focusing on market segments which barely produce any room revenue.

Caution: this does not mean that those smaller segments are to be ignored!

It only means that you devote more time to the ones that are really boosting your room revenue.

Best Sellers also advance the 80:20 Rule philosophy.

This philosophy is to focus on 20% of effort which produces 80% of results.

Best Sellers are the 80% results in the 80:20 Rule.

If you think about it, you will come to the conclusion that this Best Sellers concept allows your hotel to utilize its scarce resources optimally.

Another reason the Best Sellers philosophy works so admirably is in the arena of strategy.

You look puzzled.

Let me clarify.

It is one thing to use Best Sellers to identify top revenue earners once.

And a totally a different thing to utilize it as a strategy.

I mean replicating that effort.

You spread the philosophy of identifying Best Sellers in all areas of your performance measurement process.

In fact, you use it as a strategy to target those best sellers in your revenue generation effort.

Then you can move it to your expense management effort.

And finally to your profitability boosting effort.

Do you see where I am going with this thought line?

Best Sellers can be used as a concept as successfully in expense management, profit retention and much more.

It is an entire paradigm.

You may now have a question.

How are Best Sellers determined for menu items in a restaurant?

Menu items are the smallest unit of revenue source in a restaurant.

To give you an idea how best sellers are determined for menu items, we need to dig into the powerful technique of menu engineering analysis.

Watch this video on menu engineering analysis.

I have used a flow chart metaphor to lay out how the best seller determination happens for restaurant menu items.

The Building Blocks of Profit

Thus far we have seen how broadly revenue is generated in a hotel and the building blocks.

In other words, what is the Top Line (revenue) for a hotel.

While generating revenue is a critical first step, the ultimate purpose of a business including a hotel is something else.

Owners and stakeholders pour millions into their hotel investment so that they get back something in return.

That something in return, is often called by various names, not the least of which is Return on Investment.

So, what is this Return on Investment that is so coveted?

Well, it goes by various names and different flavors.

However, the simplest name is what is known as Profit.

Profit, in basic terms can be called as Revenue minus Expenses.

In other words, Profit is What you Retain.

To continue that analogy, Revenue is What you Earn.

Expenses are What you Incur.

And Profit is What you Retain.

What you Retain has a measure of efficiency to it.

It tells you what you finally took away.

Or what is given back to owners and stakeholders.

Why do owners and stakeholders lay store so much by profit?

They do that because of this scenario.

Say, you have made a kill earning high revenue.

But if you did not manage your expenses well in earning that.

So, you could end up with a profit level much lower than what the revenue suggested.

That is not acceptable to owners.

This is the reason why What you Retain or Profit is such a big deal.

It is important to understand that this retention is not consistent across departments in a hotel.

The Rooms department could turn out a departmental profit of 85% while the Food & Beverage department could manage only around 35%.

Watch this video to know why this happens.

So, indeed it is a challenge to optimize retention or profit.

Let us briefly understand how many flavors a profit calculation can take.

Contribution Margin

In other words, what are the different types of profit calculations we can have and why they are important for the hotel business.

Two common forms of profit calculation are Departmental Profit and Contribution Margin.

Do you know how Contribution Margin is superior to Departmental Profit?

Let me address that now.

Contribution Margin deducts only Variable Expenses from revenue for its calculation.

Departmental Profit deducts Total Expenses (both Variable and Fixed) from revenue for its calculation.

How does that make Contribution Margin superior, you ask.

All in good time.

Let us use a restaurant example.

When a restaurant sales quantity (covers served) increases, it brings with it only Variable Expenses.

Fixed Expenses do not accompany it simply because they do not move with sales quantity movements.

In other words, incremental revenues because of increase in sales quantity only have Variable Expenses increasing.

Since, Contribution Margin deducts only Variable Expenses from revenue for its calculation, it is a reflection of how much profit is affected.

Are you are looking for a metric that tells you:

• How much bottom line is increasing or decreasing?
• With movements in sales quantity (occupancy or covers served).

Contribution Margin is then the way to go.

Departmental Profit, by deducting Total Expenses from revenue is not able to give you that one level deeper analysis.

Analysis into expense behavior of what is happening to profit when sales quantity is increasing or decreasing.

This is the reason why Contribution Margin is superior to Departmental Profit.

And now on to the third tool in the business toolkit closely related to revenue and profit.

Role of Market Share - Literally Your Share of the Pie

Ever played the see saw when you were young?

See saw is that fun, playful activity that allows you to go up and down in turns.

Well, supply and demand in the hospitality industry are something similar to the see saw.

Why is that?

Because the hospitality industry is a unique industry.

On the one hand it is a seasonal business.

But on the other, it is a business that lays store a lot on hotel performance based on what the competition is doing.

In other words, a hotel's performance is often measured in terms of how well it is doing in its market.

How is it positioning itself in the market it operates in?

Or how well it is able to carve out a share of the pie which is market share.

Market Share is one of the most powerful KPIs in the hospitality industry.

It begins with a concept called the Competitive Set.

What is a Competitive Set?

Every hotel of whatever type, size and location is essentially operating in a given market.

The market consists of all the hotels which are operating in that location and around.

However, it will be impossible to include all the hotels in a market share calculation.

So, the first thing to be determined is: who are the hotel's direct competitors?

Direct Competitors are those hotels which answer an important question:

Which hotels are competing for the same or similar type of customer?

Or which hotels can actually take away business from your hotel?

It is extremely important to get your Direct Competitors list right the first time.

Imagine if you did not have an accurate depiction of who can take away your business!

You will constantly be measuring yourself with hotels who may not be able to take away business from you.

It can hurt your business greatly over time and have a negative impact on your market share itself.

Having a professionally determined Competitive Set of Direct Competitors is a great advantage.

This is because it allows your hotel to differentiate yourself from your competition.

It may well determine not only how successful you will be but also how long you will be able to sustain and survive.

So, what does the Competitive Set contain?

The Competitive Set contains 4 to 5 hotels who your hotel has determined as your direct competitors.

That constitutes your market.

Every month, information on these hotels including your own will be shared.

Smith Travel Research Bureau (known commonly as STR) is a global company that compiles this monthly information and shares with its constituents for a fee.

The information that is shared normally takes the form of room revenue, occupancy, average daily rate and RevPAR.

Market Share can take the form of either a Revenue Index or using RevPAR or sometimes even just occupancy and average daily rate.

There is one market share related concept which is critical to understanding your hotel performance in the market place.

It is called Fair Share.

Fair Share broadly says that if you own 10% of the rooms available of the market you operate in (as in, within your competitive set), other things being equal, you should also earn 10% of revenue earned in the market.

Substituting supply for rooms available and demand for revenue earned, you could state it as follows:

If you own 10% of the supply of the market you operate in (as in, within your competitive set), other things being equal, you should also earn 10% of demand in the market.

So, now you have a powerful comparison about your own performance as far as market share goes.

Are you generating demand higher than what your supply suggests?

In other words, are you generating more revenue (demand and market share) that your rooms available (supply) suggests?

If yes, you are over penetrating the market and if not you are under penetrating the market.

Owners and stakeholders are concerned a great deal with whether your hotel is over or under penetrating the market.

This is also the reason why knowing your Top 3 Market Segments which contribute the majority of your room revenue is critical to over penetrating the market.

And now on to the fourth tool in the business toolkit.

The Power of Effective Forecasting

Revenue, profit and market share are not achieved by accident.

• First, they require a planned approach to determining who your target audience is.
• Then analysis is made of which market segments and meal periods represent that target audience.
• This is followed by targets set for each of those market segments and meal periods.

This will broadly be your revenue, profit and market share targets.

You are now ready to use a tool for this entire approach in analyzing your profit and loss statement.

That tool is forecasting.

A related concept is budgeting.

I consider these two as the same tool.

A budget is primarily an annual exercise which then gets translated to monthly forecasts.

A caveat here.

Budgets and Forecasts are like guard rails that protect.

But both deal with estimates and are based on assumptions.

That itself should give room for exercising care.

Here are some points relating to assumptions that will make your budgeting effective.

Budgeting and Assumptions

Budgeting is an iterative process.

It evolves over time.

• Assumptions are at the heart of good budgeting.
• Assumptions have to be realistic as a minimum.
• However, 100% accuracy is rarely looked for. After all, they are estimates.

It is important as a process though that actuals are measured against the budgets and in particular the assumptions that were used.

This allows you to measure how realistic your budget assumptions were.

Peter Drucker once said: "You cannot manage what you do not measure."

As far as possible, budget assumptions must be close to the source of the revenue or expense item.

Revenue assumptions are more structured than expenses broadly.

For example, room revenue assumptions have multiple contributing factors like occupancy, average daily rate and market segments which can be utilized to estimate revenue.

Expense assumptions also have to be close to the source of the expense item.

Among expenses, variable expenses have a powerful assumption basis which is using business volume - occupancy in Rooms and cover served in Food & beverage departments.

Assumptions for fixed expenses follow any contractual agreements signed or any other indication that can be relied upon to estimate the amount.

In all of this, probably the most important ally of accurate budgeting and forecasting is a hands on understanding of departmental statements.

The more hotel managers understand their Profit and Loss Statement, the better they will get at estimating revenue and expenses for budgets and forecasts.

Remember, the more accurate your forecasts are, the closer they will be to your actuals.

This will allow you to get a heads up number which will be confirmed later on when the PNL is released.

That wraps up our discussion about performance management.

A key part of the ultimate 10 tools in a hotel general manager business toolkit.

Let us now move to the second of the business toolkit category.

The category of asset management.

ASSET MANAGEMENT

Asset Management in the business toolkit 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.

Resources Management

Resource Management may take the form of managing different resources or assets.

For example, fixed and current assets.

We will cover fixed assets in the next section.

For now, let us look at the probably the most critical current asset in hotel business.

Your Cash Flow.

Cash flow is the life blood of business.

Without managing it no business can survive.

What is cash flow?

In simple terms, it is the inflow and outflow of cash in a business.

Inflow is related to generally the revenues and outflows to expenses.

A cash flow statement is often considered only the concern of the Financial Controller.

However, Hotel Managers are closely linked to it.

This is because they are the ones taking decisions in the operation on a day to day basis.

Decisions which commit cash outflows of the business.

It is critical that they understand how their actions are impacting cash flows of their hotel.

Balance Vs Flow

There is one concept that causes great confusion in the minds of operational managers.

It needs to be clarified first.

This is the difference between cash balances and cash flows.

Cash balances are physical quantities of cash available either on hand or in the bank at any time.

Illustration

For example, your hotel cash balance (known as Cash on Hand / at Bank in the Balance Sheet as of 31st March, 2021 was $145,000.

Cash flows on the other hand are not physical quantities of cash.

Rather they reflect the changes to the cash balances at two different points of time.

Illustration

For example, your hotel cash balance as of 1st March, 2021 was $86,000 and as of 31st March, 2021 was $145,000.

Cash flow in this example is $59,000, i.e., the difference between the opening cash balance as of 1st March and the closing cash balance as of 31st March.

A couple of important points to note from this example:

• Flow refers to movement of cash balance
• Movement of cash balance is between two periods
• Movement is positive (it can be negative too)

Let us now examine another important resource management based question.

Hotel operations managers are tasked with taking many financial decisions on a regular basis.

One important decision involves a choice of whether to keep a service in house or outsource it.

In this typical Make or Buy decision scenario, you need to take into consideration all factors and costs that impact it.

You will be required to gather information that will help you compare and then recommend whether to make or buy in the outsourcing scenario example.

So, the situation boils down to the question: When should you outsource?

How will you decide which way is better?

Before that, let us understand what the outsourcing concept itself entails.

Outsourcing

The hotel is a seasonal business.

It has its peaks and lean periods to contend with.

Given this scenario, hotel managements have to pull out all stops to keep that revenue graph edging upward if not entirely soaring year after year.

This would mean having laser focus on target markets including new ones that will deliver incremental revenues.

And never mind if last year included some abnormal event which delivered a chunk of revenue which is unlikely to be repeated this year.

Tough luck!

The Traditional Weary Ways

Hotel revenues traditionally are delivered by rooms and food and beverage departments.

Rooms tend to be between 65% to 80% of total revenues while food and beverage tends to be between 20% to 35%.

Other operated departments fill in the small gap in most cases up to a maximum of 5% of total revenues.

This entire sourcing year after year in the hope of sustained incremental revenues is getting to be a weary exercise.

A lot will depend upon whether the hotel is a branded one or an independent one.

The former will be able to call upon its brand muscle in delivering revenues each year.

But achieving consistently incremental revenues year after year is easier said than done.

What is the Outsourcing Magic?

One of the cures suggested for stalling revenue and profit line is outsourcing.

Industry experts tout this strategy as one which shakes up traditional underperforming approaches.

It delivers that magical elixir of sustainable revenue.

How so?

But before that what is Outsourcing?

The limited, not so valued approach of outsourcing is that of hiving off parts of business to a third party to manage.

This definition of outsourcing is rather weak.

Outsourcing has broken the shackles of these mostly ineffective strategies and paved the way for some out of the box thinking.

This lateral thinking method questions the very foundations on which outsourcing is based.

What does that mean?

One of the major and often radical thinking processes using the concept of outsourcing have been brought about by the role of asset management.

Asset management looks at how an asset is being utilized to deliver results rather than how a business is run.

So, the question now becomes whether the asset’s highest and best use (a cardinal principle in real estate which is critical in hospitality) is keeping the operation in-house or outsourcing it.

This is of course from the perspective of return on investment and that creates a paradigm shift in itself.

Typical Areas of Outsourcing

Having defined what outsourcing is all about, a logical point that comes up next is: what are typical areas in a hotel operation that are suitable for outsourcing?

Well, if asset management approach is applied, any area of a hotel can be considered suitable for outsourcing.

However, some areas are more suitable than others in the hotel operation.

One of the earliest movements from an in house run operation to being outsourced is the banquet operation.

A typical banquet operation gets it revenues from hosting events and earning through function room rentals (in recent times this has stopped).

More importantly it includes food and beverage revenues from the event.

Let us consider an asset management question raised related to outsourcing.

It would envisage considering every square footage of the banquet operation as real estate space to be rented out on a per square foot rate.

This is a change in the business model itself.

Other areas are like the security function which is not a revenue earning function and hence more flexible to the outsourcing strategy.

Even some restaurant spaces are being outsourced both from an external management perspective as well as renting of space approach.

And then of course, there are the Make or Buy decisions.

For example, a hotel could make its own bread, cakes and pastries using its bakery and pastry departments.

Does Outsourcing Achieve Anything?

There is a logical but almost tongue in cheek question that would often be asked.

Is outsourcing indeed the magic elixir that produced sustainable results, or it was all mere hype?

Well, outsourcing is indeed an effective strategy that can be applied.

What does it achieve?

To begin with, outsourcing blows away the long-standing myth that all areas of the operation are most effectively managed in-house.

Sourcing externally for a part of the operation to be managed brings with it some powerful elements:

• A professionally managed area by those who are experts in doing that,
• Avoidance of expensive payroll costs that come with employees, to name a few.

On top of this, stack an ability to set some goals for results as part of the outsourcing exercise.

You will begin then to understand how powerful this strategy can be.

As mentioned earlier, adopting an asset management approach to outsourcing raises it to a totally different level.

This is particularly because entirely new business models become possible if the area of the hotel operation is treated as an asset and managed accordingly.

The Tool is Good; Usage will Vary

Yes, the tool is good but it's effectiveness will depend upon how it is utilized.

Outsourcing is neither a one size fits all solution nor is it without its pitfalls.

For instance, outsourcing will not be effective where the culture of the organization or motivation of employees is critical.

As an example, it will not be effective to outsource the human resource function in a hotel.

This is because it needs to have a pulse on the culture of the place as well as how motivated employees are.

Having said that, the tool is indeed a useful one if customized to the situation.

If used indiscriminately and as a single solution for all the problems faced by the operation, it will certainly lead to failure of the strategy.

It is important to go beyond merely looking at hiving off management of operational areas to third parties.

The success of an outsourcing strategy will squarely depend upon how the goals of the strategy are set.

And how well there is sync between the problem and solution.

The way forward looks bright for outsourcing and other asset management strengthened strategies.

They are seeking to deliver the year on year growth that stakeholders seem to be obsessed about.

And now on to a topic which is at the heart of asset management - how do you utilize your assets.

Asset Utilization

An asset is only as good as the use it is put to.

So, the first step is to know the Capacity of an asset before it is utilized.

Rooms Available is the primary asset for the Rooms department revenue.

It is the capacity or the highest revenue earning level of the asset.

Let us learn about probably the most powerful Key Performance Indicator (KPI) for a hotel business - Revenue Per Available Room or RevPAR as it is cryptically known.

Some time back, one of my students, asked this question on Revenue Per Available Room:

Name the Top Key Performance Indicator (KPI) for hotels.

My response was instantaneous:

REVPAR or Revenue Per Available Room.

Student:

What about ADR? Why should RevPAR be preferred over ADR?

My response was this:

If you were an archer and granted a boon to choose strength (power) against distance, which would you choose? Which is best?

The best would be neither power nor distance individually but the two together.

The two are complementary to each other. The two enhance each other.

Business is no different.

If you were tasked with achieving a revenue target, you will need both quantity and price (power and distance comparably).

Just one of them is good but not good enough.

You need both.

This is why you would choose RevPAR over ADR.

Revenue Per Available Room explained

Hotel revenue is contributed by business volume and price.

Business Volume is represented by hotel occupancy. Price is represented by average daily rate.

Hotels calculate revenue in their Profit & Loss Statement using occupancy and average daily rate.

Let us go back to the question my student asked and my response:

Name the Top Key Performance Indicator (KPI) for hotels.

RevPAR or Revenue per Available Room.

Why did I say that?

Let me introduce you to the first and most powerful secret relating to RevPAR.

Remember what I said earlier about REVPAR using Rooms Available in its calculation.

What is the implication of that?

It means that REVPAR is using rooms capacity for its calculation.

Let me explain.

The calculation for revenue uses hotel occupancy and multiplies it with average daily rate.

Revenue is thus using business volume or occupancy or what can be called rooms actually sold.

In other words, revenue is what is earned at the current business volume or occupancy.

Average occupancy can be 40% or 90% in a month depending on seasonality.

So, revenue really does not tell us anything about what COULD HAVE BEEN EARNED!

How do you get to that then?

Enter RevPAR.

RevPAR shows you how much you earned for EVERY ROOM THAT IS AVAILABLE TO SELL not just how many rooms were actually sold

In a way, RevPAR RevPAR gives you an idea of the potential revenue that could have been earned.

This is a strategic index having a powerful impact on your profit.

That is why I said RevPAR is considered the Top Key Performance Indicator (KPI) in a hotel

Occupancy - ADR Contribution

RevPAR as a strategic KPI has the capability to tell you how much of the revenue earned is due to business volume and how much due to price.

What use is that you may ask?

Let me explain.

RevPAR CALCULATION

RevPAR = ADR x Occupancy %

This is a seemingly simple calculation but it has tremendous hidden power.

Remember our archer metaphor in the beginning of this post. Let us use that to rephrase.

If you were tasked with achieving a revenue target, you will need both quantity and price (power and distance comparably).

Just one of them is good but not good enough.

You need both.

This is why you would choose RevPAR over ADR.

As we saw earlier, Average Daily Rate only takes into account the price factor (just like occupancy only taking into account the business volume factor). These deal with single dimensions.

They also depict the situation as it is not AS IT COULD BE!

RevPAR is different though.

See how RevPAR uses both ADR (power) and Occupancy % (distance), to achieve the best combination.

By combining the business volume element (occupancy) with a price element (average daily rate) and using capacity (rooms available), RevPAR uses a composite metric which is strategic.

How so you may ask.

Let us see how.

RevPAR & Strategic Market Segmentation

Let us revisit the RevPAR calculation.

RevPAR = ADR x Occupancy %

So, now you know RevPAR uses both business volume as well as price.

What good will that do for your hotel’s revenue and profit?

Tons I will say.

What is strategic about it you may ask?

It may mean the difference between the highest revenue and profit you have ever achieved and just making do with revenue increase and that too not all the time.

How does that happen you ask?

Well, first, you now know the impact on revenue of business volume and price SEPARATELY!

This, without exaggerating, I might say is the Holy Grail of revenue and profit maximization strategies!

How?

RevPAR allows you to see the effect of occupancy and average daily rate separately on revenue.

By doing this, it arms you with a powerful tool you can use in your market segmentation.

Market segmentation is the segregation of revenue into distinct target markets.

Remember the categories we briefly looked at earlier like individual and group, business and leisure and so on.

But the real power is in identifying smaller, specific niches.

Earlier, you learned about the concept of RevPAR and how it is one of the most powerful KPIs for a hotel.

You also learned how it shows you critical information on  rooms capacity (asset) utilization.

An equivalent KPI in the restaurant space is RevPAS or Revenue Per Available Seat.

Revenue Per Available Seat allows you to measure how much of your restaurant asset - the seat is utilized.

Just like RevPAR, it uses capacity to show revenue generation rather than the business volume (covers served).

If asset capacity is critical, it is even more important that the asset is kept in prime condition.

And that is the topic of our next tool - how do you upgrade asset capacity.

Asset Upgrades

The Infrastructure for generating Revenues

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:

• capital expenditure (fixed assets - building) for example, guest rooms and
• revenue expenditure (current assets - inventories) for example, food and beverage

Out of the two sources above, revenue generation from capital expenditure is the major contributory. 

This is because the hotel business is a capital intensive business, meaning, it is heavily dependent on capital expenditure (fixed assets) to generate its majority revenues.

Renovation Expenditure

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.

Expenditure on renovation of capital nature is charged to 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

And now on to something more big picture than even assets.

Your hotel's long term survival index.

Financial Position

While the Profit and Loss Statement is the Performance Statement, the Balance Sheet is the Financial Position Statement.

The Balance Sheet shows the assets, liabilities and capital of your hotel. 

Let us look at some typical characteristics of a Balance Sheet.

We will begin with CAPITAL.

• Capital is what a business starts with.
• It is the Owner’s contribution.

Long before a business starts earning revenues, it has to spend money to set up the business, have an office, incur administrative expenses.

All this requires cash flow.

So, this is how the business starts - with the Owner contributing Capital in the form of cash.

With the cash the business can purchase assets and earn revenue.

Capital contribution by the Owner cannot be taken back by the Owner during the life time of the business.

In other words, the capital can be returned to the Owner only when the business closes down.

Index of Equity

Capital is an index of equity.

Equity means a risk interest or ownership right in property.

This simply means that Capital gives the Owner ownership right in the business.

In the case of business which is formed as a company or corporation, equity refers to the common stock issued by the company or corporation.

Enhanced by Reserves and Profits

When a business generates revenues, incurs expenses and earns a profit, that profit is added to the Capital of the Owner of the business.

Let us move on to Liabilities the second major category in the Balance Sheet.

LIABILITIES

What the business OWES

Liabilities are what the business owes to outside parties.

In other words, liabilities are claims that outside parties have on the business for goods delivered or services rendered.

When you incur expenditure for the business but DO NOT PAY FOR IT IMMEDIATELY, you are creating a liability for the business.

Simply put, it means you will have to pay later, normally 30 days later.

So, liabilities are expenses incurred but not YET paid for.

In a nutshell, you could say that expenses are incurred:- by immediately paying cash or- by creating a liability to pay for later.

Index of Risk

Because liabilities represent claims that outside parties have on the business for payment of their goods and services, they constitute risk for the business.

Liabilities are this an index of risk for the business.

When businesses incur expenditure by creating liabilities but are not able to pay them back, the business is at risk of being suit down.

Long and Short Term

Liabilities (What the business OWES) may be short term or long term.

Short term liabilities are those which are payable within a period of 12 months.

These are known as Current Liabilities.

So, long term liabilities are those that are payable after 12 months.

Illustration

Examples of short term or Current Liabilities are:

• Invoices payable to suppliers or vendors for goods delivered 
• or services rendered for operational expenditure.

Salaries and Wages (payroll) payable each month to employees are also considered Current Liabilities.

These are of course normally payable each calendar month or depending upon the pay period.

Examples of long term liabilities are Term loans payable to banks or financial institutions.

These are normally payable in 10 years or even longer than that.

Related to Cash Outflow

As explained earlier liabilities are related to cash outflow.

In other words, these are payable in cash and the business has to plan for and arrange that.

Let us finally look at that critical source of revenue generation - Assets.

ASSETS

What the Business Owns

If liabilities are what the business owes, assets are what the business owns.

Assets are used by the business to generate revenues.

Without assets, a business cannot generate revenues.

Index of Strength

Assets are an index of strength of a business.

This is because assets are used to generate revenues.

So, you could say that the capacity of a business to generate revenues will be based on type and extent of assets owned by it.

Long & Short Term

Like liabilities, assets can also be short term or long term.

Short term assets are those whose life is less than a period of 12 months.

These are known as Current Assets.

Long term assets are those whose life is more than a period of 12 months.

These are known as Fixed Assets.

Illustration

Examples of Current Assets are Inventories, Accounts Receivable, deposits paid on advance and so forth.

Inventories can be of food, beverage, operating equipment, general supplies, cleaning supplies, printing an stationery and so forth.

Examples of Fixed Assets are Property, Building, Plant and Machinery, Equipment and so forth.

Related to cash inflow

Since assets are used to generate revenues and revenues are related to cash inflows, assets are also related to cash inflows.

This applies to both current and fixed assets.

Cash inflow happens eon use of assets (like guest rooms earning room revenues).

Or by selling and consuming assets (current assets) like food and beverage inventories in restaurant outlets.

RESULTS MANAGEMENT

The third and final category in the business toolkit is Results Management.

Return on Investment 

Ever wondered what the hotel owner expects as return for their investment?

Well, EBITDA, GOP, Net Income are different flavors of profit which could represent bottom line.

EBITDA and Net Operating Income could represent different versions of a broad return on investment.

Technically, only Net Income fits the bill. 

Often investors take EBITDA which does not deduct Interest, fixed charges and taxes as their return on investment.

Real Estate consultants most often take Cash Flow as yet another flavor of return on investment.

Return on Asset and Equity are two major KPIs that actually directly refer to Return on Investment.

One is asset based and the other financing or equity based.

EBITDA / Return on Investment

One of the most misunderstood and misused term in financial concepts is bottom line.

Every body talks about it but most do not have a clue as to what it actually means.

It is fashionable to say my bottom line is great.

However, what is bottom line?

Bottom lineIn a loose way, bottom line refers to Profit which we saw earlier.

Profit generally means that expenses have been deducted from revenues to arrive at them.

However, what kind of revenues and expenses are included in that calculation of profits is most important.

It will give you clarity in what the bottom line means.

Illustration

For example, profit can be of the following types (not exhaustive):

• Gross Operating Profit
• EBITDA (Earnings before Interest, Tax, Depreciation, Amortization)
• Net Operating Income

How Efficient is Your Hotel Operation?

You are the General Manager of Paradise Hotel.

One fine morning, your Owner storms into your office and demands to know this:

How efficiently are you running your hotel operation?

Your reputation (and possibly your job!) is on the line.

What would you say?

Which hotel Key Performance Indicator (KPI) would you refer to in answering your Owner's question?

You would refer to Gross Operating Profit.

Often referred to as the Index of Efficiency of the hotel operation.

EBITDA

One of the owner favorites in hotel KPIs is EBITDA.

EBITDA is Earnings Before Interest, Tax, Depreciation and Amortization.

This is an owner favorite because owners would like to know what net operating profit has been achieved without brining in depreciation and interest and tax.

In a way, it tells them what they will take home before these fixed and other charges are deducted.

Net Income

The Net Operating Profit or Net Income as it is often known in short, is the last line in a Profit and Loss Statement.

This is the primary reason why it is referred to as the Bottom Line.

The Bottom Line or Net Income (we will refer to Net Operating Profit as Net Income from hereon) is:

• What is left after deducting all the expenses incurred during a particular period
• From all the revenue that is earned during that period.

The Net Income is what goes back to the Owners.

It can be called the Disposable Income for businesses.

Phew, that was a long one!

Your Key Takeaways

Do you think the business toolkit we discussed had all the tools required?

How many of the tools are in your business toolkit?

Related Posts

Skills Academy Courses

Sign Up for More Tips, Strategies and Secrets

Sign up below to the Peak Profit Newsletter for more tips, strategies and secrets to hotel performance analysis which will allow you to take successful decisions and exceed your targets consistently..