HOTEL BUSINESS REVIEW
DECEMBER FOCUS: Hotel Law

Hotel Spa: Effective Budget and CapEx Preparation

By Kristi Dickinson General Manager, Canyon Ranch Woodside | December 2019

Investing time during budget season to plan the details of the approaching year will pay dividends in the ease of operating your business from a thoughtful strategy. Preparation should include more tools than just an operations budget. It is ideal to update your business plan, draft a marketing calendar and map out capital expenditures before making the budget. Lead with the "how" and the "why".

Business Plan

Begin by understanding the objectives of your ownership group or corporate office. For example, are you in a growth phase and planning to make significant investments in capital, service levels, and earning accolades? That will require higher labor and amenity costs or possible downtime while capital projects are underway. Is the goal to maximize short term profits and prepare for a sale? This will require more skill in revenue management and cost controls and less creativity in programming and culture leadership.

Next, review the effectiveness of the strategies from the current year's business plan. I prefer a simple "One-Page Business Plan" with 3-5 quarterly goals which contribute to 5 annual goals with a simple explanation of the strategy. It should also include a section of key performance indicators (KPIs) so you can measure the results. This simple format allows a quick glance at your plan to ensure you stay on track, rather than a 300-page volume that took hours to prepare and was likely set aside, never to be executed.

Research for updating your business plan should include national economic indicators such as consumer confidence, unemployment, and inflation. Ample time should be spent understanding changes in the local market, as new competition will attract both your guests and your employees. Determine how your product is different and make note for your marketing plan. The business plan should address opportunities and challenges. Outline collaborations necessary with the sales and marketing teams.

The Global Wellness Summit, Spa Business Handbook, American Spa, and Well + Good are great resources for trends reports. Although it is not advisable to chase every trend, these articles are amazing sources of inspiration as you develop your programming and special events.

Marketing Plan/Programming Guide

Again, review the effectiveness of the current year's initiatives. You are a savvy Spa Director, so you tracked these results on your marketing calendar!

Just as with the "One-Page Business Plan", don't over think this. Make a bullet list of new offerings, strategic partnerships, packages, etc. This is a great time to be consistent with menu engineering and analysis. Then plan it out on a marketing calendar which will include special events, social media storyboards, digital advertising, promotions, public relations ("media familiarization trips"), photo shoots, etc. It will be important to work closely with the marketing department to ensure your goals are aligned and funds are earmarked for these initiatives.

CapEx Plan

Strategic planning for capital expenditures must start with understanding ownership's investment objectives in order to ensure funds are focused in the correct area at the right time, and that value is created. You will want to understand the benefits, risks, and opportunity costs of each project. If the holding period of the property is known, that length will be the same as the timeframe of the CapEx budget.

Long term planning is very important in a spa, as both treatment rooms and support facilities (such as shower rooms and guest waiting areas) are required for growth. You will want to project how and when you will reach capacity.

Throughout the current year, track guest comment cards, online reviews, and anecdotal information on opportunities. Turnaway tracking and related reasons is also critical to understanding peak demand periods and displaced revenue.

There will always be certain non-discretionary capital expenditures such as HVAC systems, ADA compliance requirements, etc. Discretionary projects such as expanding treatment space or purchasing new fitness equipment should include a case for the impact on value of the asset. This might be a simple ROI analysis with solid profit or cost savings projections. The value will also be more challenging to quantify such as a public relations value, a unique feature to drive group business, etc. In this case, determine in advance how success will be measured and track it closely.

As CapEx funds are typically limited, it is advisable to obtain at least three bids, but be sure to check references before automatically choosing the lowest bid. The lowest bid might not actually be the lowest bid if the quality is poor and the lifecycle is shorter. It is also important to understand the impact of a capital project on the operation. Will a closure be required? If the spa is to stay open, will noise displace business? Plan and budget for this as much as possible.

Budget

The "How" and the "Why" now turn into the "What". The main components of the operating budget are revenue, cost of sales, labor, expenses, and profit.

Revenue

Consider the average of the previous three to five years when budgeting revenue. Examine spa treatments, fitness, retail, and membership separately. Within spa treatments, review any differences in trends between massage, skincare, nail, hair and wellness categories. It is critical to consider rate and number of services separately rather than just changes in overall revenue. Spas are limited by the number of treatments rooms and ability to hire and retain service providers.

Re-read Executive Summary notes from P&L statements from the current and previous years to refresh your memory on contributing factors of any variances. What was the cause? What was the result of the corrective action? Tracking turnaways due to limited facilities, injured therapists or competition for talent is advisable in understanding the future potential.

The best way to budget revenue is to project the number of services (based on historical trends and contributing factors) and multiply that by the expected average ticket, factoring in any planned pricing increases. Again, these should be broken down into categories such as massage, skincare, nails, etc. as clients tolerate larger year-over-year increases in massage and skincare versus nails and fitness.

What is the source of annual changes in revenue, rate or volume? Are the treatment rooms at capacity? Look at the Treatment Room Utilization Rate (TRU) and analyze peak times. According to American Spa, most spas operate at a 35-40% TRU. Many owners and general managers may look at a 40% TRU and think the spa has room to grow. TRU is much different than hotel occupancy. Early morning and late evening appointments are often very difficult to sell, and turnaways are common on weekends and peak times. These shoulder times cause much lower TRU averages. It is wiser to look at TRU at peak times to determine if your spa is missing opportunities and how much more room you have to grow revenue from volume. Another great reason to track turnaways and reasons.

I am a huge proponent of the Spa Director attending the corporate revenue yield meetings to learn more advanced revenue management strategies and understand what hotel business levels to expect (I.e. is the forecast showing a timeframe with high levels of group business not taking advantage of spa? This is the time to plan a locals' promotion to supplement the revenue stream.

Although monthly re-forecasting can be tedious, it is a key resource at budget time. This monthly exercise helps develop a firm grasp of your business, variances to budget and contributing factors.

Beyond averages, KPIs such as Capture Rate, Average Ticket, Client Mix, Retail-to-Service ratio, RevPATR, and RevPATH are tremendously useful when drafting a budget, as well as managing expectations of ownership, corporate office, etc.

After the initial projections of revenue, revisit the business plan to make adjustments based on your research (i.e. Will your guests tolerate a price increase this year? Can you hire the number of therapists you need, given new competition?). Adjust for any year-over-year variables, such as changes in spa groups contracted, festivals/major events, and natural disasters that benefited or were a detriment to business.

Finally, add in new revenue streams such as resort fee allocations, membership, wellness partners, leased spaces, etc. Be sure to track your methodology and any adjustments made along the way for easy recall when presenting the budget.

Cost of Sales and Operating Expenses

Strong inventory controls and markdown strategies, as well as regular review of product pricing should ensure your cost of sales as a percentage is consistent over time. If an offsite retail buyer is utilized, ensure your COS target is communicated and regular conversations occur regarding customer requests as you are the expert on your clientele.

Operating expenses as a percentage of revenue should also stay consistent over time. Be sure to connect with your vendors and inquire about planned increases. Pricing increases from skin and body care vendors will need to be factored in when setting new menu prices. If laundry is outsourced, be sure to contract the rate for the full year. The marketing plan you have prepared will provide the cost information necessary for the printing & stationary line. Review trade show and convention calendars for the months of events you plan to attend and plot out team trainings for an accurate monthly expense budget.

This is also a good time to meet with other departments such as Marketing to verify the dollars are allocated to support new initiatives and Human Resources to ensure incentive and recognition programs are adequately funded. It is critical to be aware of the state of spa equipment and estimate the maintenance labor necessary to maintain it as older equipment needs more care and parts than new equipment.

Labor

In a high staff-to-guest ratio department such as spa, labor costs will make or break the year. Be sure to conduct a wage survey with the local comp-set to ensure compensation remains competitive. Utilize a third-party firm when possible. Then look at the big picture across property to ensure all rates are in line. To encourage growth within the company, positions with similar skillsets and duties should have the same starting rate. For example, a hotel front desk agent and a spa receptionist pay rate should be on par with each other.

It is also important to stay abreast of any mandatory minimum wage increases or changes in labor laws. Check with Human Resources, your attorney, local industry associations, peers, etc. Make note of any organizational structural changes necessary with changes in revenue. Would you like to add any managers or supervisors? Have reporting structures changed? Is anything new being outsourced? Will any independent contractors now be considered employees?

Spas have both fixed (I.e. spa reception) and variable (I.e. therapist commissions) labor costs. It is important to tie service provider commissions to treatment numbers instead of simply applying a percentage increase over previous years. If your spa pays a commission as a percentage then your labor costs as a percentage would likely be similar YOY. If you pay a flat commission but plan to raise prices, the labor percentage may go down (all other things being equal).

Budget Versions

After the first budget draft, examine profitability against owner/corporate objectives and fine tune until that objective can be met or you have reached the point of what can be realistically achieved. Ideally your company uses a spreadsheet or similar program where you can make minor changes in rate, etc. to see the impact on overall profitability. Be sure to take note of your methodology and all the adjustments made so you can easily reference and return to earlier versions if necessary. The Rooms department will likely be making ongoing adjustments as well, so keep a close eye on those to ensure your projections stay connected to those fluctuations.

Presenting the Budget

Every company has a different format for budget presentations. If you are not working from a template, I suggest the following format:

Current Year KPIs - to include guest survey scores and accolades
Business Plan Review – discussion of strategies and lessons learned in current year
One-page Business Plan – brief overview of goals and strategies for future year
Marketing Initiatives
CapEx Needs:

- Budget

- Revenue

- Expenses

- Labor

- Profit

New KPI targets
Re-visit 5-10 Year Goals and Status Update

A Final Word

As leaders, we have a duty to teach and involve junior management in the financials, especially in the spa industry where soft skills tend to be more of the natural talent and hard skills need to be taught. When the team is involved, not only will you gain more buy-in, but they also understand the nuts and bolts necessary to follow the budget as the roadmap that it is.

Budget season is a great time for teaching these invaluable lifelong skills, but I also highly suggest monthly review of the profit and loss statement and general ledger as a team, so they begin to develop an understanding of the drivers and results of strategic actions. They will also learn how they can make an impact with their contributions and by motivating the line employees. Data analysis can seem boring until you realize it is the documentation of the fruits of your labor!

As the saying goes, "you get out what you put in", and budgeting preparation is no exception. Investing time and energy in a solid budget will ensure goals are met, incentives are earned, and your financial savvy is recognized as future opportunities arise.

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DECEMBER FOCUS: Hotel Law