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HOTEL BUSINESS REVIEW

OCTOBER FOCUS: Revenue Management

 

Cash Flow: The Only Metric That Matters

By Kell Sloan General Manager, Fairfield Inn & Suites Moncton NB | September 2020

Early fall is typically a chance to mourn the passing of a laid back summer – speeding up the pace a little, experiencing the joys and unique challenges that amateur sports tournaments, College and professional sports leagues, and the shoulder season gift us with – before being dragged kicking and screaming into the desolation of Christmas and the onset of winter. After a summer marked with lockdowns, travel restrictions, a complete meltdown of hospitality and tourism industries worldwide, Fall promises little change from what has become the new normal.

Regardless of market tier, urban or rural, limited service or luxury, many of us have no business on the books for sports tournaments or conventions and face an immediate future of dramatically fewer corporate or transient guests. In many places, strict limits on groups and gatherings have decimated the wedding business. As novel coronavirus (COVID-19) cases continue to grow and the risk of a second wave continues, many hotels will continue to experience disrupted operations, higher operating costs or lost revenues and/or a combination of all.

Moving into winter, COVID-19 will continue to present huge financial and logistical challenges for guests, investors, managers, and operations teams alike.

Not all news is bad, there was a brief respite as after months of isolation guests felt either safe enough or frustrated enough to take the risk and escape somewhere, loading up their minivan or mounting their motorcycle to explore their local backroads. After a summer that wasn't, some markets experienced a brief, intense peak season that was gone as quickly as it came. Still, after a spring and early summer marked by canceled plans and empty rooms, it was a welcome challenge to switch gears and once again welcome guests.

I for one, am appreciative of the efforts that brands, independent properties, local governments and tourism destination organizations alike spent promoting heavily discounted rate categories. Their efforts to encouraging local travel provided a jump - start to an essentially dead industry. The question we all want to be answered is whether the recovery is sustainable.

Whether your property is coming out of an abbreviated peak season or just entering a high occupancy peak, as hospitality and revenue professionals our overriding concern should be about the long-term survivability of our property or portfolio. Realistically, many won't.

Winter is coming, as is budget season. Owners, shareholders, and managers will be making assessments of individual properties' ability to continue as a growing concern, or whether or not to it makes more financial sense to cease operations. Sorry, Tom Bodett, not every property will be able to leave their lights on - as there simply won't be enough business to go around.

The key to long-term survival will be cash flow – simply put the question is whether your hotel can generate enough cash to survive the next 6 - 12 months? Or until the next high occupancy cycle?

Given the unpredictability of the ongoing and evolving crisis, until we can reasonably assess the potential long-term impacts and resolve financial uncertainties, revenue managers, asset managers, and general managers should be focused solely on the survival of their hotel(s).

For now, cash flow is the only metric that matters.

Hotels are operations intensive. Even limited-service properties provide a staggering number of complimentary items and services that guests expect to receive; complimentary wireless internet, cable TV, bars of soap, bath amenities, Keurig or other in-room coffee, pools, bars, and restaurants to name a few. Each amenity not only positions the property in its market but the absence or addition of can have a dramatic effect on both guest satisfaction scores and our ability to compete for every dollar of revenue that is available in the market. Every service or amenity we provide or stop offering impacts our cash flow and bottom-line.

Operating cash flow is the equivalent of cash in and cash out. While not as exciting to look at as a Managers aka Flash Report or Daily business report, which show departmental revenues, a cash flow statement shows the net amount of cash being brought into and sent out of the operation. Positive cash flow pays for things like guest supplies, utilities, taxes, franchise fees, employee wages, and revenue management as a service. Negative cash flow disrupts a hotel's ability to remain functional, as, without sufficient cash on hand to meet short-term financial obligations, operations will cease. Nightly cash flow generated from the sale of rooms is the only way that a hotel can be successful.

Net operating income (NOI) or Net cash flow is a measure of profitability. In essence, it is the amount of cash flow a property generates after all expenses have been deducted or have been paid. With many hotels currently on the market and many more soon to be up for sale or spun off, Net operating income is an important measure in determining whether a property is a good investment and a good credit risk. For full-service hotels, net operating income includes rental income, parking and resort fees as well as laundry and vending among others.

Given the uncertainty of middle-term and long-term predictions surrounding an industry-wide or local market recovery, ensuring that a hotel generates enough cash flow to meet operating costs and ensure that the lights stay on and the doors stay open will be a monumental challenge for the remainder of 2020 and well into 2021.

An August 8, 2020 report by Trepp – a New York City-based data, analytics, and technology company – suggested that $20.6 billion in commercial mortgage-backed security loans, the ones which finance many hotels, were 30 days late on payments as of July 2020. So, it shouldn't come as a surprise to anyone that some operators and properties will be desperate enough to drop-rate and reposition themselves as the lowest-priced operator in the market.

This is not to say that dramatically cutting rates to steal market share will work for every hotel in every market.

Even in out of the way, remote markets, hotels - based on its location and physical attributes relative to its competitors - have a natural level of positioning in that market. As revenue managers, we occasionally run short-term shock rates and heavy discounts specifically to gain RevPAR penetration and bump Gross Operating Profit. While it's a reasonable assumption that a Fairmont won't undercut a Motel 6, anything goes for limited and select-service properties especially in markets that were already oversaturated pre - COVID.

Even in the era of COVID, it's doubtful that even a meteoric rate decrease - to temporarily or otherwise increase market share - will boost profitability or positively tweak Return on Investment when there is simply no demand. Keeping the doors open in the long-term until there is sufficient demand to drive both a rate and Revenue Per Available Room (RevPAR) recovery will hinge on the hotelier's ability to meet guest demands by providing clean rooms, hot water, internet/cable, some form of breakfast, while intensely managing financial operations.

Typically, we don't think of Revenue Managers as being part of the financial management of day-to-day operations. The primary job of a Revenue Manager is to maximize the value of our asset(s). Since a hotel's value is determined by cash flow, pre-COVID a good RM should have been extensively focused on driving revenues to the top line of the income statement. Revenue is all the money property makes nightly from the sale of its guest rooms and ancillary services before expenses are deducted.

Which brings us back to cash flow.

Price sensitivity among potential guests is far more nuanced than it was even nine months ago. Traditional demand-based revenue management strategies are constrained, at the moment, as demand is simply non-existent in many markets. Though the importance of demand forecasts should not be underestimated. Regardless of whether the "right business" is the highest paying guest, a long-term loyal guest or railroad crew business and construction crews.

Until recently, demand forecasts have been based on historical patterns and sometimes a Big Hairy Audacious Guess (BHAG) of future demand across a spectrum of market segments. COVID pretty much killed the historical pattern analysis, for now. And thanks to author Jim Collins of "Built to Last: Successful Habits of Visionary Companies", who invented the term, we are stuck holding onto our BHAG.

Increased revenues lead to improved cash flow, which has many flow-through benefits, not the least is greater day-to-day liquidity - which is money in the bank. Flow-through is used to determine what percentage of incremental revenue results in incremental profit. The Gold Standard of flow-through is typically 50%. However, this varies according to what is driving the revenue increase. If a revenue increase is rate driven – raising Average Daily Rate – the flow-through will be expected to be higher as there are few additional variable expenses - such as labor to clean rooms – needed to generate the additional revenue. Rate reductions to boost occupancy, often have the opposite effect on variable costs – such as labor to clean rooms, additional guest supplies, etc. – as these can increase astronomically.

Pricing structures need to be set with consideration to the individual property value proposition and current cash flow. In short, do not drop rate with more discounts or set more restrictions on cancellations.

To improve cash flow and the hotel's value growth, revenue managers need to lead the way by focusing on creating cash flow.

If they haven't already, many hotels will be adopting a "first come, first serve" approach to filling guest rooms. With this approach, revenue managers are cost center as a hotel that is welcoming guests at a price that does not positively contribute to RevPAR does not need a Revenue Manager.

It's not that demand forecasts aren't important, far from it. Demand forecasting will continue to be the very essence of a successful and open-for-business hotel. Forecasts should still be made by analyzing historical forecasts, scraping through a property's CRM or PMS, and predicting future demand across a range of market segments. Including ones that were previously ignored.

We all live in a hugely dynamic environment where demand will change daily. Even our most loyal guests will be influenced by competitor promotions and third-party distribution channels. There is no getting around that optimizing revenues will be tough. However, revenue management is more than just ensuring that rooms are priced at the right rate, at the right time, generating increased RevPAR, and leading to a higher flow-through of additional revenue to directly impact the bottom line.

Revenue Management is also about improving efficiency and operational performance across the entire hotel.

Unconstrained demand forecasting is an important tool in developing and building cash flow. Understanding the total demand for a particular date irrespective of your hotel's capacity – especially as a new normal takes shape – will help Revenue Managers calculate Last Room Values for particular dates and any possible length of stay restrictions that may apply. This doesn't have to apply to just the Superbowl or Stanley Cup, as every market has peak seasons, dead zones, and peak days of the week.

If a revenue manager can reasonably anticipate levels of demand daily, he/she can communicate with department managers to ensure that the optimal number of staff members are working at the right times. For example, maybe Tuesdays are now a peak day and between 4 pm and 8 pm the property experiences an average of 10 walk-ins and 50 arrivals. If in the time that it takes the sole front desk clerk to check-in an arrival, a walk-in impatiently leaves, the hotel loses both in revenues, cash flow, reputation, and potential future business.

As well as not having a clear picture of current and future demand from different segments, the seemingly daily changes in processes and promotions, coupled with different sales strategies, many hotels are unable to appropriately schedule staff to handle forecasted check-ins, check-outs, and room turnover. It's not that it's that hard to figure out, but because they don't have the time or resources to analyze the data. By utilizing information that is recorded and stored in most Property Management Systems, line managers can be informed of forecasted demand right down to peak check-in and check-out times.

In this case, scheduling a second front-desk attendant or Guest Service Manager during peak demand times will positively impact both cost optimization and increase guest satisfaction – the latter being a key driver of repeat business, word-of-mouth referrals, and future business. Real-time staffing for "spikes" in check-out times will allow housekeeping managers to rapidly adjust schedules so that five housekeepers are not doing two hours of make-work projects if check-outs are forecasted to be late on certain days. These same basic principles can be applied to ensuring that inventory levels are appropriate for forecasted and actual demand.

Optimized wage costs and demand appropriate inventory levels translate into cost savings which directly influence the hotel's cash flow and bottom line.

The opportunities for revenue managers to play active and vital roles in driving cash flow are not limited to just accurate on-demand scheduling. Both select service and full-service hotels can benefit from revenue managers skill in isolating and analyzing the profitability of each operational department to target cost opportunities such as:

  • Evaluating the hours of operation in food outlets and/or breakfast bars, analyzing the effect a compression of start and end times would have on the business volumes and Average Daily Rate.
  • Comparing Capital Expenditures and/or Operational Expenses on investment in interactive technologies that not only affects the guest experience but assist in reducing front-desk staffing by offering virtual check-in and email check out. Wouldn't it be nice to understand how this affect service levels and key drivers of ADR? And accurately gauge a payback?
  • Reviewing meeting room and banqueting profit model targets including variable costs as well as management and brand fees to establish pricing that creates profitable events?

There is no doubt that the hotel industry and individual hotels will be facing many difficult challenges over the next 6-12 months and potentially longer. It's a sure bet that a great many properties will struggle, others will close, while some will be successful. In unsure markets and unsure times, the objective of the revenue manager is not only to maximize RevPAR but to also help drive operational efficiencies. Ensuring that there is enough cash flow to meet operating costs and ensure that the doors remain open is the only metric that matters.

Service value is the foundation of a good pricing strategy and revenue managers have an important role in finding the balance between value and price to help hotels improve their competitive advantage, hold-on to and increase market share, and protect RevPAR.

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Any and all disputes or controversies of any kind, including but not limited to any performance, duty, obligation or liability arising under or related to this Agreement which are not first resolved informally, shall be determined by binding arbitration in San Francisco, California, in accordance with the rules of the American Arbitration Association. The final award in any such arbitration proceeding shall be subject to entry as a judgment by any court or competent jurisdiction, provided that such judgment does not conflict with the terms and provisions hereof. The jurisdiction of the arbiter (or arbiters) with respect to legal matters shall be limited only by the statutory and common law of the State of California and the United States.

Notwithstanding the foregoing, any and all disputes, which the parties cannot informally resolve, regarding the scope of issues or matter with the jurisdiction of the arbitrator, shall be resolved by a separate dispute resolution process whereby HotelExecutive, in its sole discretion shall elect the dispute to be resolved by either (1) a court of competent jurisdiction in the State of California or (2) a panel of three new arbitrators.

This Agreement shall be governed by and construed in accordance with the laws of the State of California notwithstanding any conflict of laws provisions. You and HotelExecutive agree that the venue for all legal disputes, controversies, actions of any kind arising under or related to this Agreement shall be San Francisco, California. You and HotelExecutive further agree that in case of any litigation regarding this Agreement, you irrevocably and unconditionally (i) consent to submit to the exclusive jurisdiction of the state and federal courts in the County of San Francisco, California for any litigation or dispute arising out of or relating to this Agreement, (ii) agree not to commence any litigation arising out of or relating to this Agreement except in the California Courts, (iii) agree not to plead or claim that such litigation brought therein has been brought in an inconvenient forum, and (iv) agree the California Courts represent the exclusive jurisdiction for all litigation relating to this Agreement.

11. MEMBERSHIP FEES

Hotel Business Review Subscriptions

If you choose to purchase a subscription, member subscription payments can be made in U.S. Dollars, as well as a variety of international currencies. Membership terms are Annual Recurring, and Monthly Recurring. The Annual Recurring subscription is an annual commitment and subscribers will be charged each consecutive billing cycle. Annual Recurring subscriptions can be cancelled after the first billing cycle and within 30-days of the billing date for a full refund. Monthly Recurring subscriptions are ongoing and subscribers will be charged each consecutive monthly billing cycle. Monthly Recurring subscriptions can be cancelled after the first month and within 7 days of the monthly billing cycle for a full refund.

12. PAYMENT AUTHORIZATION

Payment for the services provided to you in, at, through or in association with HotelExecutive may be made by automatic credit card, debit card, direct debit, bankwire or Paypal and other approved payment means offered in, at, through or in association with HotelExecutive, and you hereby authorize HotelExecutive and its agents to transact such payments on your behalf.

You hereby authorize HotelExecutive's Internet Payment Service Provider to charge your credit card to pay for your membership to HotelExecutive. You further authorize HotelExecutive's Internet Payment Service Provider to charge your credit card for any and all purchases of products, services in association with HotelExecutive. You agree to be personally liable for all charges incurred by you in association with your access or other use of any content provided by HotelExecutive or any third party in association with HotelExecutive. You acknowledge and agree that your liability for all such charges shall continue after termination of your access or any type of membership arrangement with HotelExecutive.

In the event that you have chosen to have your membership automatically rebilled, unless and until you notify HotelExecutive that you wish to cancel or terminate your membership to HotelExecutive, you hereby agree and authorize HotelExecutive's Internet Payment Service Provider to automatically renew your membership to HotelExecutive on a continuing basis and to charge your credit card (or other payment means you have selected) to pay for the ongoing cost of your membership. You hereby further authorize HotelExecutive's Internet Payment Service Provider to charge your credit card (or other approved payment means you have selected) for any and all purchases of products, services and entertainment provided to in, at, through or in association with HotelExecutive.

13. PRIVACY POLICY

The following is the Privacy Policy for HotelExecutive

We can be reached via telephone, email, or online at our contact page. When you visit our site we do not log any information regarding your domain or email address. Information Sharing: We do not share user information with any third parties other than via press release distribution as described below.

Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.

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