Renovation Cycles - Putting Money Back Into Your Asset
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | June 02, 2013
Is your asset producing the required bang for the buck?
Businesses thrive on a continuous source of Revenue streams. Revenues are the foundation for any performance measurement. If you don't have a top line, there is no bottom line to talk of either. If revenues are the foundation, then the assets that produce that foundation are even more critical to the success of the business. However, revenue streams come under strain over the years when the underlying assets get tired and wear out. Renovation programs are designed to upgrade these assets so that revenues can be sustained. It is a trade-off of a big chunk of investment now to earn revenues for the coming years. With competition fierce, it is no more a "nice to have" but mandatory for survival. Thus, renovations are part and parcel of a business' sustenance strategy.
The Asset Turnover Ratio
A key ratio that measures the relationship between revenues/profits and assets is the Asset Turnover ratio. This ratio measures how much dollar revenues/profits are earned for every dollar invested in assets. An Asset Turnover ratio measures the capacity utilization factor for a business. In hotel business parlance, the measure that is used is the RevPAR although it must be said that the RevPAR is rooms centric as in, it measures only rooms revenues. So, you could actually calculate an Asset Turnover ratio using the Gross Revenues for the entire hotel.
Asset Turnover ratio is ideally comparable over periods of time for a business. This allows the business to check whether for every dollar of asset invested whether the Turnover (revenues or sales) are falling. This is critical to make a comment about the continuous revenue streams that are the life blood of the business.
A falling Asset Turnover ratio may signal the need for a close look at the underlying asset. This is where renovation cycles come in. The expression "tired product" is often used for an asset, which is wearing out.