601 Union Street, Suite 4200
Seattle, WA 98101
Phone: 206.388.0980
Seattle, WA 98101
Phone: 206.388.0980
News
NEWS RELEASE
(206) 388-0980
(206) 388-0980
Article: The Cure for the 2010 Hotel Budget - from the Hotel Owner’s Perspective
12/4/2009
12/4/2009
If you are an Owner, or Owner Representative, you probably have one, or more, thick budget books on your desk, waiting for your approval. (Why is it that there seems to be an inverse relationship between profitability and the thickness of the books?) The proposed budget no doubt paints a bleak picture for 2010 and is weighing heavily on your mind.
NOW is the time to dig deeper and negotiate with the management company and operations team. We are all suffering from the same economic plague that spread more quickly and virulently than the H1N1 virus. Like the virus those of us with older financing will be less affected than most those who financed/re-financed in the last three years. Although there is no immunization for our economic plague, the following lists the key steps and discussion points that you can use to minimize the effects of this malaise and prepare your property for the recovery. (Unfortunately bed rest, aspirin and lots of liquids, even strong ones, won’t be an effective cure.)
1. Put numbers to the Action Plan. The Action Plan should be an integral part of the Budget/Business Plan for 2010. Each Action Plan task should be ranked based on the cash flow that they should generate, and prioritized accordingly. Typically the top 20% of the actions should create 80% of the savings.
2. Scrutinize and minimize Fixed Costs. During these challenging times all costs should have some variability. Minimize the accrual and expensing over time games. You need to know the cash flow. If one par of sheets needs to be purchased in July, budget the expense for July. Reduce the Food and beverage inventories to 25% of monthly Food Cost and the beverage inventory to the equivalent of one month’s Beverage Cost. (In some styles of operations these could be lower.)
Energy costs should be directly variable expenses, and controlled as such.
3. Minimize Operating Supply inventories if you typically have a bed linen par of 3.5 and budgeted occupancy for 2010 is 55%, you can either reduce the Laundry operating hours, or the linen pars. (You will need to budget for increasing the pars again once occupancy increases.)
4. Taking care with Payroll costs. Reduce hours, not people. It is tempting to cut staff, but look at the investment that you are throwing away. You will still need to staff for the peak periods and it makes more sense to have the staff still available rather than pay overtime.
5. Value Corporate Standards, focus on the standards that do not affect the guests directly and work with the brand to reduce the expenses of brand requirements such as computer system upgrades, monthly administrative reports, etc..
6. Justify and verify the accounting for “Allocations” such as reservations and group marketing expenses. These allocated expenses are estimated at the beginning of the year and allocated to each property. Ask your management company how much they were able to save this year, when the rebates will be issued and the proposed allocation reductions for 2010.
7. Discuss temporary fee reductions in reservation, management, marketing, purchasing and any other group services. These fee reductions should be written and formalized with the assistance of legal counsel to avoid any unintended long-term consequences.
8. Negotiate Corporate Office expenses and how these can be minimized. Possible savings could be from reducing corporate sponsored meetings and reduced number of corporate visitations.
9. Request assistance with reducing Insurance expenses by pooling with other properties with similar, or better experience ratings.
10. Property Tax Assessments have been reduced in many jurisdictions. Make sure to check your latest assessment as these savings go directly to the bottom line.
11. Request a five-year plan as the future should be brighter and will help you better plan cash flow.
12. Request a monthly Cash Flow Forecast and Return on
Invested Capital calculations for every CAPEX project. Safety issues have priority but all other projects should be prioritized based on most immediate return on capital. If you don’t need to spend it, keep it in the bank.
Please note that each property has its own unique challenges. The short list above only highlights the generic opportunities that can have the greatest impact. The value created by your Asset Manager or Owner’s Representative lies in maximizing the benefits of your property’s unique opportunities.
The mantra for 2010 however should be that “Cash in King, and the best cure.”
Alphy L. Johnson is the COO of the Hotel Management Services Group of Candela Hotels, providing Asset Management services to full-service and luxury hotels. Alphy has been certified as a LEED® Accredited Professional, Six-Sigma Green Belt, Certified Hotel Administrator, and has been a successful Hotel Executive for over 30 years.
NOW is the time to dig deeper and negotiate with the management company and operations team. We are all suffering from the same economic plague that spread more quickly and virulently than the H1N1 virus. Like the virus those of us with older financing will be less affected than most those who financed/re-financed in the last three years. Although there is no immunization for our economic plague, the following lists the key steps and discussion points that you can use to minimize the effects of this malaise and prepare your property for the recovery. (Unfortunately bed rest, aspirin and lots of liquids, even strong ones, won’t be an effective cure.)
1. Put numbers to the Action Plan. The Action Plan should be an integral part of the Budget/Business Plan for 2010. Each Action Plan task should be ranked based on the cash flow that they should generate, and prioritized accordingly. Typically the top 20% of the actions should create 80% of the savings.
2. Scrutinize and minimize Fixed Costs. During these challenging times all costs should have some variability. Minimize the accrual and expensing over time games. You need to know the cash flow. If one par of sheets needs to be purchased in July, budget the expense for July. Reduce the Food and beverage inventories to 25% of monthly Food Cost and the beverage inventory to the equivalent of one month’s Beverage Cost. (In some styles of operations these could be lower.)
Energy costs should be directly variable expenses, and controlled as such.
3. Minimize Operating Supply inventories if you typically have a bed linen par of 3.5 and budgeted occupancy for 2010 is 55%, you can either reduce the Laundry operating hours, or the linen pars. (You will need to budget for increasing the pars again once occupancy increases.)
4. Taking care with Payroll costs. Reduce hours, not people. It is tempting to cut staff, but look at the investment that you are throwing away. You will still need to staff for the peak periods and it makes more sense to have the staff still available rather than pay overtime.
5. Value Corporate Standards, focus on the standards that do not affect the guests directly and work with the brand to reduce the expenses of brand requirements such as computer system upgrades, monthly administrative reports, etc..
6. Justify and verify the accounting for “Allocations” such as reservations and group marketing expenses. These allocated expenses are estimated at the beginning of the year and allocated to each property. Ask your management company how much they were able to save this year, when the rebates will be issued and the proposed allocation reductions for 2010.
7. Discuss temporary fee reductions in reservation, management, marketing, purchasing and any other group services. These fee reductions should be written and formalized with the assistance of legal counsel to avoid any unintended long-term consequences.
8. Negotiate Corporate Office expenses and how these can be minimized. Possible savings could be from reducing corporate sponsored meetings and reduced number of corporate visitations.
9. Request assistance with reducing Insurance expenses by pooling with other properties with similar, or better experience ratings.
10. Property Tax Assessments have been reduced in many jurisdictions. Make sure to check your latest assessment as these savings go directly to the bottom line.
11. Request a five-year plan as the future should be brighter and will help you better plan cash flow.
12. Request a monthly Cash Flow Forecast and Return on
Invested Capital calculations for every CAPEX project. Safety issues have priority but all other projects should be prioritized based on most immediate return on capital. If you don’t need to spend it, keep it in the bank.
Please note that each property has its own unique challenges. The short list above only highlights the generic opportunities that can have the greatest impact. The value created by your Asset Manager or Owner’s Representative lies in maximizing the benefits of your property’s unique opportunities.
The mantra for 2010 however should be that “Cash in King, and the best cure.”
Alphy L. Johnson is the COO of the Hotel Management Services Group of Candela Hotels, providing Asset Management services to full-service and luxury hotels. Alphy has been certified as a LEED® Accredited Professional, Six-Sigma Green Belt, Certified Hotel Administrator, and has been a successful Hotel Executive for over 30 years.