Mr. Acosta

Revenue Management

Ten Tips for Hotel Owners and Operators to Survive the Recession

By Jose Acosta, COO, priZem Hospitality Solutions

Over the past year, hotel professionals have been inundated with various publications and Internet news articles about current market conditions and the effects of declining ADR, occupancy, RevPar, as well as an alarming rise in hotel foreclosures. Although nobody can predict exactly when the economy is going to rebound nor when hotel prices and occupancies will return to previously desired levels, it is probable that there will continue to be a decline in corporate executive retreats to luxury resorts, annual board meetings, corporate sales incentive trips, and annual holiday parties over the coming year.

Moreover, historically although all business cycles include the same pattern of recession followed by recovery; it will be difficult to predict the timing and strength of the recovery for the overall market. In fact, one can only wonder about the extent of recovery for specific markets such as luxury, as well as whether there will be a recovery at all for the condo-hotel market.

Having said that, it is important to pay attention to the items that will help maintain profitability by focusing on what I think are the top ten key recession survival best practices. These best practices do not necessarily appear in order of priority, and some of these practices will be more or less valuable to your hotel depending on its unique circumstances.

As you read these practices, please try to select the order that could affect your business and try to focus in the highest impact items.

1. Resist Reducing ADR

Currently we are seeing reductions in ADR in order to stay competitive in the market, but this is simply not the right approach. Instead, hotel companies should go back to basic management 101 as in the old days when hotel executives and managers watched the day-to-day rates, revenues and expenses, which resulted in accountability and ownership of each business unit within the hotel.

Furthermore, hoteliers should manage each hotel operation based on current business volume instead of managing to the market, which already has declined from the economic downturn. This would curb the incorrect desire to cut prices to gain market positioning - something which will hurt the business and the brand in the long term. Surely, with falling volume and a competitive environment, lowering daily rates is more likely to reduce revenue than increase it unless there is substantial uncontested volume increase to offset the revenue shortfall. Therefore, if it seems that discounting is imperative to stay alive, then it should be executed very carefully to preserve brand value and price opportunities when recovery does finally arrive. Consider here as an example that during the worst of times, both the airline and car rental companies have hardly lowered prices and if they do so, it is carefully done or offered as a promotion or other incentive.

2. Focus on Cash Flow rather than Paper Profits

Cash flow seems like a simple concept, but in fact, it is not. Many hotel executives and financial controllers do not fully understand how it works or how to forecast it. No company can survive for very long without generating positive cash flows – as the saying goes, “cash is king”.

Cash flow is defined as cash inflows minus cash outflows over a given period. Many hospitality operators and owners think of cash flow as revenues less expense and this is simply not the case. It is quite difficult to tell from an income statement or balance sheet just how a hotel’s cash is actually utilized or to determine the condition of the hotel’s current and future cash flows.

A profitable hotel does not necessarily have positive cash flow, and a hotel with positive cash flow may not necessarily be profitable. Cash flow is one of the most commonly used terms in business, yet it is generally not very well understood – even by financial professionals – as it can be rather confusing.

Many hotels and hotel companies find themselves in cash flow trouble because they usually have to spend money before they receive it in exchange for their services. Relying only on profit & loss statements creates an illusion and the income statement can only show how much cash a hotel will eventually create. Without a well-developed process for predicting future cash flows, a hotel or a hotel company will inevitably be in trouble.

In difficult times, cash flow is critical as sales may flatten or even fall while fixed costs remain static. If sales fall below the point where the company is able to produce a paper profit, it still may not be time to panic if the hotel or hotel company has strong and stable cash flow. If the hotel or hotel company cannot positively affect cash flow operations, it may be time to consider the alternatives – no matter how difficult they may seem. Hotel executives and financial operators need to get ahead of the curve in hard times and intimately understand their cash flows – something that will only help them operate better when things do turn.

3. Collect on Accounts Receivable

It is not unusual to see a hotel accounts receivables with an average collection period of 60 days or more. It may be okay to allow customers to pay in a leisurely fashion in normal times, but in tougher times, this simply means that hotels are extending credit interest free. Whenever customer payments get beyond one reporting period, financial managers should jump into the situation in order to protect cash flow. For example, one might consider collecting receivables on anticipated contractual revenues. That is, collect one hundred percent of anticipated revenue up front on a group such that upon completion of the event, the only surplus to collect will be additional items or other unexpected charges.

4. Manage Labor Force

Manage the labor force in ways that support business flow. For many years, labor cost has represented the single largest expense of any hotel – typically comprising 40 to 45 percent of total operating expenses. As such, labor warrants significant focus and analysis. However, a critical balance must exist between containing payroll costs and meeting customer expectations.

It is only through detailed analysis of labor costs on a daily basis that hotel managers are able to understand the specific needs and costs required to staff the departments optimally and in advance of payroll checks.

Hotel managers need to reduce labor costs through strategic reductions that will not sacrifice customer service, safety, or profitability. Drastic across the board labor reductions may appear to result in cost savings, but a detailed labor analysis is critical to ensure that the reductions will not cost you more in the end. Overall, daily labor analysis will highlight labor inefficiencies before it is too late. However, it is most important to understand how to analyze labor productivity.

5. Utilize Zero Based Budgeting (ZBB) and Analyze Variances

The hospitality industry’s traditional method of budgeting revenues and expenses has been the same for decades. Up to now, the most commonly used methods have been incremental budgeting and fixed or flexible budgeting.

As we try to manage hotel operations during these difficult economic times it is more useful to budget or forecast expenses utilizing a zero base process. The goal of preparing a zero base budget is to achieve an optimal allocation of resources that incremental and other budgeting methods are less likely to present.

Zero based budgeting starts by having managers identify and justify their areas of work in terms of business volumes. Zero-based budgeting derives from the idea that budgets are developed from a zero base; that is, at the beginning of the budget process where all budget accounts have a value of Zero. This is in sharp contrast to the incremental budgeting system where generally a new budget based on previous year's performance.

Now more than ever, hotels and hotel companies will need to improve their ability to predict future operations and resource requirements more quickly, enabling them to adjust their operating plans as needed to stay ahead during this financial crisis.

6. Develop a Strong Marketing Plan with Accountability

In the last several years, many hotel companies did not focus too much attention on their marketing plans. The economy was so strong and there were so many business opportunities that it almost seemed as if customers would reach out to you rather than the other way around. That is no longer the case today.

A good marketing plan is based on formal or informal customer research. Your customers and suppliers often have insightful information that may surprise you about your business and your core competencies.

No marketing plan is complete without assigning accountability; someone on the sales & marketing team should be giving weekly progress and status updates on the implementation of the marketing plan and how it compares to the actual performance of the business.

7. Focus on Product or Service Margins rather than Top Line Sales

During slow times, it may be tempting to take almost any business that comes to the door. However, taking any business in order to keep employees busy can be a mistake. If a hotel company takes on business with insufficient gross margins, it will result in operating losses, which are further compounded in tough times with slower customer collection times, which will result in cash flow shortages – as pointed out above.

To stay afloat in a recessionary period, companies absolutely must concentrate on repeat guest business, accurately know their costs and margins, and protect them vigilantly.

8. Know your Breakeven Point

A hotel company’s breakeven point is the point at which a product or service stops costing money to produce and sell and starts to generate a profit. A breakeven point shows at what sales volume both the variable and fixed costs of producing product or providing services will be recovered.

In difficult times, every hotel operator needs to understand what the breakeven point is because that is the floor level of sales. If sales fall below the breakeven point for an extended period of time, then this is simply considered bad business. As well, changes in the parameters such as if the breakeven sales volume changes, managers and owners must be able to act accordingly and make correct adjustments.

9. Negotiate Terms with Vendors and Suppliers

During a recession, it may become necessary to negotiate terms with vendors and suppliers in the event that it becomes difficult to pay in a timely manner. It may also be wise to send a short letter to your vendors explaining your situation and agreeing in advance on specific terms. On the other hand, if the hotel or company is in a stable cash flow position, then it may actually have extra bargaining power with the vendors for the simple reason that they too may be experiencing a cash crunch, and your ability to pay quickly is most valuable to them.

10. Focus on Lender and Investors Relations through Strong Communication

Investors and banks do not like surprises; so, regardless of whether your hotel or hotel company is thriving or suffering, now is the time to invest a few hours in keeping your investors and banker informed.

Make sure your hotel or company adheres to all loan covenants, and schedules periodic face-to-face meetings with banker and investors. Ensure your finance department is sending updated financials with detailed explanations of operating inefficiencies along with any action plans to the bank and investors each month.

Investors and banks have a vested interest and might even provide assistance – especially in light of the turmoil in the financial services industry. Work with your lender in a partnering rather than adversarial manner to ensure they understand the monthly operating results, any shortfalls, and any budget performance differences.

Finally, hotels and hotel companies should take advantage of this recession as an opportunity to focus on improving the structure and management of their operations and to expand market positions. Remember that it is possible in every downturn for some hotels and hotel companies actually to prosper and consequently emerge even stronger.

Jose Acosta has 20+ years of hands-on property and corporate level experience in operations, finance, accounting, asset management and investment. He has opened hotels, transitioned ownership, and overseeb renovations. He has stabilized hotels for owners, investors and management companies. Mr. Acosta has advised on budgets, condominium associations, and managed several development projects. He has served as COO of Prizem International, Corporate Controller for Tishman, Corporate Director of Finance for KSL Recreation and Regional Corporate Controller for GF Management. Mr. Acosta holds a BS from NYU. Mr. Acosta can be contacted at 646-213-0067 or jacosta@prizem.com Extended Bio...

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