Best Practices in Hotel Financial Management

By Jed Heller, President, The Providence Group

Sound financial management is at the core of any successful business. Of course, having a product or
service in high demand, priced attractively for the target market, and delivered in an efficient, customer
centric manner doesn't hurt either. But, even with all of the right market demographics, there is no
guarantee of success. Rather, I believe you will find that the most successful hotels, like any other
business, rely on fundamental financial management principles to enable them to manage their property
profitably.
By following basic accounting principles, hotel owners and managers have the information they need to
identify trends before they can have a negative impact on the business. They can reduce expenses,
readily accommodate anticipated peak business times, and scale back operations during slow periods.
Rather than relying on intuition and reacting to events, successful owners have the financial facts they
need on a daily basis to proactively make the right decisions at the right time.
Staying on top of the hotel financials also provides an accurate measurement of management
performance in every operational area and gives owners a mechanism to see where they stand against
the competition.
The keys to financial success include an annual budget, detailed financial tracking model, ongoing audits,
and reporting structure that keep profit and loss information at the manager's fingertips. Financial success
is also driven by accountability, making employees and managers responsible for achieving financial
goals in their respective functional area. Owners must have in place the personnel capable of dissecting
the financial information and acting on it in a timely and proficient manner. Without this information, it is
quite possible to have an area of deficient performance that goes unrecognized and creates a drain on
profits.
Create an Annual Budget

The annual budget provides the complete financial picture of the property and contains the information
needed to measure financial status at any time during the year. Based on past performance and goals for
the current year, the budget captures projected expenses and anticipated revenue over a 12 month
period. The budget covers every operational area: administration, property expenses, taxes, energy
costs, capital equipment, telecommunications, maintenance, supplies, utilities, payroll and marketing. The
budget also projects revenue based on expected occupancy and rates and estimates sales quotas for
each sales person. Once figures are collected and documented, the budget will tell the story as to
whether financial goals can be reached and where and how adjustments can be made to achieve
profitability goals.
Build an Operational Tracking Model
With budget in hand, managers need to build a mechanism to easily capture and track expenses and
revenue. The financial model can be as simple as a basic spreadsheet that incorporates worksheets
covering every area of operations. More sophisticated worksheets will itemize costs in greater detail. For
instance, the payroll worksheet will track the hours and rate of supervisors, front desk, night audits, bell
service, housekeeping, room attendants, laundry attendants, sales and marketing, and all other executive
and support staff. A property maintenance worksheet tracks engineering and maintenance payroll as well
as other related expenses from landscaping materials to furniture and fixtures. The energy worksheet
tracks monthly expenses for utilities, water and sewer. The revenue worksheet tracks room sales and
daily rates. This comprehensive financial model gives managers a complete picture of expenditures and
revenue, profit and loss, and financial success.
Compare Actuals Against the Budget
The next part of the financial model is to track spending in each operational area against the budget.
Managers now have the information they need to identify areas where they are exceeding expectations or
have inconsistencies and areas of concern. Essentially, they have an in-depth understanding of the
property's financial status at any point in time. For example, food expenditures may be inconsistent with
occupancy rates over a given time frame. Revenue may not be consistent with room bookings.
Housekeeping schedules may not be consistent with occupancy rates. All of these issues can have a
negative effect on profitability. It is also important to track each sales person's success vs. their quota.
Trends can be traced week to week, month to month, and year to year.
Create and Use Reports
From the budget and operations worksheets, standard reports can be created to give managers a high
level overview of each area of operations on a daily basis. Well organized reports will tell the whole story
and give managers the tools they need to optimize business operations. They can quickly spot daily
irregularities, identify short term trends, and anticipate potential long term issues. Reports also provide
the tools to determine whether profitability goals will be achieved. In most cases, managers can create
their own specific reports customized to their property and goals. In other cases, it may be wise for
owners to contract an accounting firm to create the reports. In either case, managers must be
appropriately trained to understand use the reports to their advantage.
Accountability
Management needs to be held accountable for financial results, from occupancy, average room rate, rev
par, and inventory control to operating expenses. Standard accounting policies, systems, procedures and
checks and balances need to be in place in all functional areas. Mini audits should be implemented
quarterly and any deviations in the profit and loss statement or daily financial reports need to be
reconciled as quickly as possible. With sound accounting and financial systems, each manager will have
the tools they need to achieve their financial objectives. New hires should be indoctrinated into this
financial culture and training programs put into place where necessary. Every employee should share the
values of management.
Adjust to External Variables
With a sound financial management system in place, managers will be able to readily make adjustments
to changing market conditions and other external variables outside of their control. For example, rising
fuel costs may have a dramatic impact on both operating expenses and revenue, and thus, profitability.
With well organized cost and expense worksheets, proactive managers can address this issue and
identify areas where expenses can be reduced to account for the rising fuel costs. Or, perhaps, managers
can put into place creative marketing programs that might alleviate negative market conditions.
Leverage Accurate Financials for Successful Negotiations
It is always important for owners to know the true value of their property. With sound financials, owners
can have their property accurately appraised and gain a true understanding of where they stand in the
market at any point in time. Key financial information is readily available to enable the owner to explore
refinancing opportunities or act upon an opportunity to sell the property. Thus, owners are able to make
decisions from a position of strength, giving them the insight and maneuverability for successful
negotiations.
Use the Financial Formula to Succeed
Implementation of fundamental accounting principles can make every property a top performer. Every
dollar can be accounted for, potential issues identified, and adjustments made quickly and efficiently.
Sound business decisions can be made based on financial facts rather than relying on intuition, or worse
yet, guesswork. Hiring a property manager with accounting experience, providing training where
necessary, or engaging an accounting firm can make the difference between profit and loss with any
property.
Jed C. Heller is CEO of The Providence Group LLC, which provides management services to hotels and
timeshare resorts. Heller has managed all phases of three start-up ventures, two as the operating partner.
He was the president of Goodmanagement, vice-president of The March Company Inc., and president of
Premier Hotel Corp., He began his career with Winegardner and Hammons in Cincinnati, Ohio. Heller
serves on the editorial board of Hotelexecutive.com and the Resort Management Committee of the
American Resort Development Association. Mr. Heller can be contacted at 781-582-8785
orjcheller@providencegrp.com Extended Bio...
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