How Hotel Owners, Operators, Investors and Asset Managers Benefit from a Digital Solution
Internal decision makers and those external to a hotel or chain, like lenders, investors and asset managers, require up-to-date, reliable financial information.
At the same time, there is a lot more data being generated, both internally and externally.
The challenge is how to structure the data and transform it into information that is useful for managers. The problem is that many hotels, especially independent properties and smaller chains, are unable to present financial performance and forecasting data in a useful format. For many establishments, financial reporting is limited to calculating what is owed to the tax authorities.
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The hotel business has become increasingly complex. This means the need for timely and well-structured financial reports and planning documents.
For these reasons, hotel financial managers apply Responsibility Accounting, “the name given to that aspect of the managerial process dealing with the reporting of information to facilitate control of operations and evaluation of performance.” (Dominiak & Louderback, Managerial Accounting, 1991.)
Responsibility accounting needs an accounting system that reports financial data which are controllable by individual managers. This provides both an objective means for evaluating managers and information about where a hotel’s profits (or losses) are being generated.
The preferred reporting system used in the hotel sector is the USALI¹, which reports revenues and expenses by operating department.
Operating expenses are assigned directly to the revenues they generate, allowing departmental managers to be evaluated on the basis of the departmental margins they control.
Undistributed operating expenses such as: administrative and general, marketing, IT, human resources and utility costs, are reported separately and charged as overall expenses of the hotel; as are non-operating expenses such as: management fees, rent, property tax, insurance and depreciation and amortisation.
The use of such a standardized accounting system allows for easy comparisons between hotel properties, as well as over time. But hotels must still present financial accounting statements to owners and shareholders, and tax accounting statements to the fiscal authorities.
In order to handle these three requirements, an over-arching reporting system is needed that can handle and structure the data in an efficient and timely manner.
1 Disclaimer: Hospitality Financial and Technology Professionals (HFTP®) is the official entity which owns the copyright to the USALI. The copyright was previously owned by the Hotel Association of New York City. Revisions to the USALI are overseen by the Financial Management Committee (FMC) of the American Hotel & Lodging Association (AHLA), a majority of which are also HFTP members. Fairmas and Horwath HTL only use the term “USALI” to refer to the existing industry standard as one example of several, possible, company-specific P&L account frameworks.
Budgeting combined with forecasting is essential
A budget is a long-range forecast of what levels of revenue and profit can be reached in the coming year or for longer periods.
A budget should represent a reasonably achievable objective that serves to motivate managers and employees.
It is also important that the budgeting process be terminated in a timely fashion. All too often, budgets are only finalised well after the beginning of the current fiscal year.
Budgets are a crucial input for determining the allocation of resources in a hotel, not only financial resources, but also staffing requirements and remuneration packages.
The follow-up to the budgeting process is forecasting. The budget can be updated to create a forecast, to reflect ongoing developments that may affect year-end results.
Ideally, a hotel’s management should have access to a rolling 12-month forecast which is updated every month or, at the very least, each quarter.
Evaluating the impact of future changes and developments in the hotel business goes beyond exercises such as merely testing the sensitivity of rooms department margins to a change in ADR. This analysis requires a detailed understanding of revenue and cost drivers and how they will impact profitability, given changes in key assumptions. Below are some case examples of situations which require a detailed analysis of the future impact on a hotel or chain’s profitability.
1. Should F&B be outsourced?
A very basic question: Do you know what is the breakdown in operating income between your rooms division and F&B? Or what about the average check in your restaurant? Such information could be useful in deciding how much floor space to allocate to your F&B operation or how to structure your menu. In addition, what has been the recent trend in your F&B operating margin?
The answers to these questions could contribute to more fundamental decisions with long-run implications such as: Should I outsource my F&B operations to an external chef or management company and simply collect a leasing revenue on the restaurant?
However, valid answers to such questions need to be evaluated with appropriate KPIs (key performance indicators) based on accurate data inputs.
2. How about outsourcing housekeeping service?
In most hotels, housekeeping staff are full or part-time employees of the hotel, and therefore represent a fixed cost. Hoteliers have an interest to render their cost base as variable as possible in case there is a sharp downturn in demand, as experienced during the recent pandemic.
Hoteliers, particularly those in cities, generally have the option of outsourcing their room cleaning staff to a temp agency which will provide the exact number of people needed on any given day, thus allowing them to adjust the cost to the daily level of rooms revenue.
1. Portfolio expansion via management contracts
Let us take the case of an independent hotel owner/operator looking to expand its portfolio via management contracts.
Problem: How does the operator and third- party owners monitor KPIs across different properties under the same management?
Solution: Efficient and effective financial systems and business planning tools, and the ability to view multiple operations from a corporate perspective.
2. Managing a recently acquired portfolio of hotel assets
When a hotel group grows rapidly, financial control and forward-looking business planning often take a back seat to management’s focus on acquisitions and expansion. The monitoring and forecasting of operations are often neglected, due to lack of optimized processes and adequate systems (or having to work with too many).
Without proper management control and measurement, rapid growth can increase business risk, potentially resulting in “too much too soon” – a frequent explanation for business failure or sub-optimal performance.
Problem: There is no time to consolidate information from various data gathering systems like PMS and accounting systems, but reliable financial reports are still needed to manage the business.
Solution: A flexible reporting software that can integrate and standardize data from disparate systems.
3. An asset manager dealing with a multi-brand portfolio
The role of the asset manager has grown in importance in recent years with the entry into the sector of financial investors who often lack hotel expertise. Asset managers are distanced from on-site operations and need proper comparative analysis across the portfolio in order ensure that they are making ‘apples-to-apples’ comparisons.
Part of the solution is to implement USALI in a consistent manner across all properties and measure performance using KPIs that are based on accurate underlying data. However, this may not be enough. Some hotels may structure their USALI reporting differently from others.
Problem: There may differences in the way costs are allocated between revenue-generating departments and undistributed operating expenses.
Solution: A system is needed which can align the data in a comparable fashion across a portfolio.
Fairmas software as the solution
Accounting and financial planning can be considered as a necessary evil, since they generate no direct revenue. Therefore, hotels have an interest in finding a solution that minimizes the time and resources devoted to this activity, while at the same time allows them to produce financial reports that are relevant and useful for decision making.
To fulfill the requirements, Fairmas created and continuously develops their cloud-native hospitality financial business intelligence software. The flexible, digital solution standardizes and consolidates data from disparate systems and present them in useful, comparable data.
The use of Fairmas software accelerates the process of creating crucial financial and reporting documents and guarantees the accuracy of data which is transferred digitally, thus eliminating the risk of human error. Staff are freed up to spend more time on analysis and less time inputting data.
Horwath HTL and the Fairmas Solution
In order to enable their hotelier clientele to produce timely management reports efficiently, Philip Bacon, Senior Director at Horwath HTL Spain, believes Fairmas offers excellent solutions. “I would recommend Fairmas to any of our hotel clients to help streamline their financial reporting and planning processes. Horwath HTL offers support to hotel clients in dealing with the change management challenges that may arise.”
Horwath HTL, the oldest and largest global hotel and tourism consultancy, is part of the Crowe Global network, a top-10 accounting and financial services network consisting of more than 200 independent accounting and advisory services firms in over 120 countries around the world. Crowe Global member firms are known for their local knowledge, expertise and experience balanced by an international reputation for the highest quality in audit, tax, advisory and risk services. They share a commitment to impeccable quality service, highly integrated service delivery processes and a standard set of core values.