Mr. Miller

Revenue Management

The Link Between What You Earn and What You Keep

By Joshua Miller, Principal, Niche Advisors

Hospitality management is very challenging. You have to find a way to simultaneously offer fantastic service to your guests, grow and develop your team, and keep your facility looking great and functioning well. More importantly, you have to achieve all of these goals while generating profit for your ownership. Sometimes these efforts collide and difficult decisions need to be made. All seasoned managers understand this balance and get skilled at strategically utilizing their resources to get the job done. With a talented team and a lot of hard work, successful properties are able to generate profits while simultaneously meeting the needs of their guests, associates and facilities.

Imagine the shock when the hotel seems to have accomplished its goals, yet the financial performance is not where it should be. Most hoteliers' first instinct is to look at expenses and tighten the belt. Detailed reports of budget versus actual payroll are reviewed with each department accountable for any variances. Overtime is micro-managed. Large operating expenses are monitored closely if not deferred. While this effort may bring financial performance in line, it is often counterproductive to providing the service, employee development and facility upkeep mentioned above.

One area that is often overlooked is revenue control. "Controlling" revenue refers to implementing procedures designed to minimize loss which occurs from error and theft. Many management teams are surprised to find that the revenue earned by the hotel does not necessarily match what it keeps. In order to maintain complete revenue "capture," accountability procedures need to be incorporated into each daily operating process. When most hoteliers think of revenue control procedures, or worse yet, "internal audit" procedures, they conjure pictures of extra work, someone looking over their shoulder, paranoia, etc. Many line managers look at these processes as "annoying or too much work and hope that the accounting team will stay in their offices out of the way of what really needs to get done around here." Overcoming this attitude can be a challenge, yet we find over and over again that the more detail is put into monitoring the flow of revenue, the more makes it to the bottom line. Think back to budget season when you were struggling to find that extra half point your ownership was looking for and imagine if a little extra effort bumped your EBIDTA by 5% or more. Revenue control efforts always have a quick return on investment and with the right attitude from the operating team, can be implemented with no sacrifice to service.

Most discussions surrounding control procedures focus on theft prevention. In a hotel, there are many opportunities for fraudulent guests and employees. Preventing these activities is crucial, yet only part of the control process. We find that more money is lost in typical properties through error rather than theft. Mistakes in the posting process which go unchecked and having multiple people involved in income-generating transactions are the two biggest offenders. Let's consider some examples of error and theft control issues and how they can be resolved:

Rooms Division:

Error Scenarios: Most hotels have a nightly process by which rates are verified for accuracy. Depending on your PMS system, you may refer to this as the "bucket check," rate variance," "potential room revenue check," etc. This process is designed to prevent data entry mistakes (or fraudulent rate adjustments) which result in improper room rates. The inspection is usually completed by the evening front desk team and is often delegated to a front desk agent. Coincidentally, most front desk agent scheduling is done so that the newest associates work at night. We have seen numerous scenarios where the agent was not aware or did not understand wholesale or group rates that resulted in major losses. Therefore, we always recommend that this task be completed by your evening manager or supervisor.

Theft Scenarios: There are many ways to steal in the rooms division. This can include the boldest of moves by actually pocketing cash transactions at the front desk to many more subtle manners. Cash can be taken by rebating or comping charges without notifying the cash paying guest. One hotel we worked with gave their front desk team a $20 unquestioned allowance per guest to ensure satisfaction and an employee used this to pilfer over $30,000 over the course of two years. We have seen a team of reservations employees create a fake travel agency and book all transient reservations to that IATA number, thereby collecting the commission. If your property is a popular destination, many people have the ability to offer inappropriately comped, discounted or upgraded reservations to friends, family and associates. Most hotels have a daily review of adjustments, comps, and upgrades by senior level management. However, we often see this review get signed off without really looking at it. If you have theft issues, you will likely catch them if this process is taken seriously.

Food and Beverage:

Error Scenarios: There are just as many error risks in F&B as there are in rooms. In particular, banquet postings are often a large source of issues. If your captains are not following the BEOs carefully, or worse if there are agreements between clients and conference/catering managers that are not on a BEO, then this can often result in unposted revenue. Hotels which have their accounting team posting master account charges are open to even more risk as the people who worked the event don't have any say in what gets posted. If the client asked for anything additional at the last minute, the hotel is dependent on accurate communication in order for these charges to get posted. In addition to banquets, all restaurants and bars are open to cashiering errors as well.

Theft Scenarios: Because there are so many more cash transactions in F&B, theft is a major risk. Associates reuse tickets and receipts, order food without ringing it up, allow their friend and family or even big tippers to eat for free, etc. Bars are a particular danger. Bartenders have nearly full autonomy in their transactions and the only way to reconcile their activity is to take detailed product inventory on a daily basis. Without significant daily controls in place, the F&B division is at tremendous risk for theft.

Minor Operating Departments:

Because the hotel's minor operating departments are not a large part of the overall bottom line, these areas are often the most overlooked. As an example, many hotels have an income generating parking department. For a hotel that manages their own parking operation (rather than outsourcing it to a parking company), it is typical that that the hotel fails to charge anywhere from 10% to as much as 70% of guests who actually park a car. Imagine if we said the same about room revenue! In addition, cash transactions are rarely audited and as a result, theft is rampant. These same sorts of issues are similar with spa, phone, internet, resort fees, etc. Rental income is another area which needs control. Many outsourcing or lease agreements contain percentage rent or some kind of "kicker" fee which is based on performance. We reviewed an outsourcing agreement at one property where the vendor had failed to pay this "kicker" rent for several years to the tune of $100,000. We often see that the minor operating departments have larger potential for immediate gains because they are often given the least attention.

The biggest difficulty in implementing control procedures is balancing auditing manpower costs versus returns, and determining the greatest amount of control which does not hurt the operation. It does take staffing to ensure full accountability. Many hotels are on such a strict payroll budget that they have a hard time even getting to discuss the concept of adding addition auditing positions. It is imperative that this discussion be focused on ROI rather than just adding bodies. There is also the issue of so much control that it is impossible to assist customers. We realize that this cannot happen, but also suggest that this fear is more often false than not. In an answer to both concerns, many properties set up control practices that are never really enforced, thinking that this "implied" auditing will scare people into compliance. We strongly recommend against implied auditing it does nothing for error issues and just like an unmonitored security camera, it only takes one unchallenged experiment for the lack of oversight to be confirmed.

Take a look at some of these areas and see what you can identify as needing improvement. Talk to your controller about it or better yet, if your company has an internal audit team, ask for their help. Nothing helps an internal audit report like getting the advice of the auditors in advance... The great thing about capturing more of your earned revenue is that you are already paying for all of the expenses of it. Any extra revenue you find flows though completely to the bottom line. See what you can do to ensure that the revenue you have struggled to generate makes its way to your owner's pocket. We are sure you will be pleased with the results.

Joshua Miller is Principal and Managing Director of Niche Advisors, a consulting firm specializing in ancillary areas of the industry. Mr. Miller has completed hundreds of assignments for hotels and resorts of all brands, service levels, and market segments. Mr. Miller developed his acumen at Mirage Casino Resort, Hyatt Hotels and Destination Hotels. Mr. Miller was the Rooms Executive for the Hotel del Coronado where he increased parking revenue by 50% in an 18 month period without the benefit of new technology. Mr. Miller earned a BS from Cornell's School of Hotel Administration. Mr. Miller can be contacted at 619-254-4245 or joshua.miller@nicheadvisors.com Extended Bio...

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