Are You Optimizing Your Repairs and Maintenance Dollars?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | October 26, 2014
A spanking new hotel with glittering chandeliers, sparkling floors is a sight to behold. That is how a new hotel looks, possibly in the first three to five years of its existence with good upkeep. From the fifth year on and sometimes even earlier, the assets that form the foundation of the business begin to wear out. It is time to maintain the assets. Repairs and maintenance are one of most critical property operation and maintenance expenses that a hotel will have to provide for at this point. If a hotel's room or other product begins to look tired, it has a direct impact on revenues and profitability.
Maintaining Vs Increasing Life of Assets
Accounting principles dictate that when the life of an asset is maintained, the expenses relating to that will be considered expenses belonging to the Income Statement or Profit and Loss Statement. In short, this is expensed off. On the other hand, expenses, which increase the life of an asset or its productive capacity are considered expenditure that can be capitalized - meaning this can be treated as additions to Property and Equipment. Obviously if an asset is merely maintained, the resultant expenditure will hit the Income Statement - thereby reducing profits.
So, you could say that a long-term asset (called Property & Equipment or the more easily understood Fixed Asset) needs to be nurtured in its journey beginning with being a brand new asset through one that slowly undergoes wear and tear. This nurturing practice has come to be known in the hospitality industry as preventive maintenance. In other words, a conscious, focused strategy to incur expenditure preserving the life and capacity of the asset. This approach is particularly very meaningful for hotel assets like a chiller plant, boiler, water treatment, fire suppression equipment that undergo heavy usage day in day out.
The Warranty Honeymoon
When a new hotel opens with all its assets, each one of those assets (as long as they are categorized as Fixed Assets) come with a certificate commonly known as a warranty. The warranty is a certificate of guarantee issued by the Original Equipment Manufacturer (abbreviated in industry parlance as OEM) against any kind of material malfunction or breakdown. Warranty periods are varied depending upon the type of equipment, extent of use and so on. They generally range all the way from a minimum of one year to five or rarely ten years or more.