Add value to a hotel by focusing on cash flow
 
Add value to a hotel by focusing on cash flow
10 MARCH 2017 8:08 AM

Maximize flow through at your hotel with some less-than-obvious tips.  

The job of owner representatives and asset managers is to maximize value. Since hotel value is largely determined by cash flow, their focus is on bringing the most to the bottom line as possible.

The term “flow through” is used to determine what percentage of incremental revenue results in incremental profit. Flow through can be calculated based on actual results relative to budget, actual results relative to last year or budget projections relative to last year.

The standard goal for flow through is typically 50%, however, it will vary depending on what is driving the revenue increase. For example, if a revenue increase is rate driven, one would expect the flow through to be higher given there are few additional variable expenses that would need to be added to generate the additional revenue.

How to maximize flow through
Currently, the hospitality industry is experiencing decelerating revenue growth. Simultaneously, many costs are growing faster than revenue—including labor rates, benefits, insurance and taxes. This makes achieving industry acceptable flow through more challenging. Below are a few “less obvious” ideas to consider, from Hotel Asset Value Enhancement (hotelAVE) and Post Script Hospitality:

Revenue opportunities

  • Implement resort fee or urban amenity fee with high consumer value proposition (minimum three times retail).
  • Yield manage pricing for weddings, at restaurants, and spa-based on-demand patterns/special events.
  • Turn cost centers into break-even or revenue centers, for example: outsourcing concierge services to a tour operator, third-party concierge or virtual.

Labor productivity

  • Evaluate hours of operation in each outlet and business unit; compress start and end times.
  • Review labor standards relative to new technology; for example: could front-desk staffing be reduced due to virtual check-in and email check-out?
  • Review on-site reservations and productivity; revise hours of operation and staffing. Leverage regional and national centers.

Eliminate/modify services clients don’t value and enforce those they do; for example:

  • A Post Script study concluded that 67% of customers reject turndown service in urban luxury hotels, when offered.
  • With green (sustainability) programs, allow guests to opt out (versus opt in), and offer more savings if policies are enforced.
  • In food-and-beverage, analyze buying more “pre-prepped” items at a higher cost of sale to eliminate labor, such as a butcher position.

Contracts and service agreements

  • Revisit and challenge scope of services.
  • Competitively bid using a defined scope for apples-to-apples comparison.

F&B operations

  • Isolate the profitability of each operation to target cost opportunities.
  • Review banquet profit model targets and include variable costs (management and brand fees, for example) to define a profitable event.

ROI projects

  • Invest in equipment that eliminates labor (Autovalet or automated cash management systems, for example).
  • Lighting projects typically have less than oneyear paybacks including government subsidies.
  • Evaluate revenue/square feet of standard rooms versus suites and paid demand for suites. Could some suites be converted to two keys to increase return on investment?

Michelle S. Russo, CHAM, MAI, CHA, has more than 25 years of practical, hands-on experience with hotels, restaurants, resorts, convention centers, real estate, and finance. In 2003, she founded Hotel Asset Value Enhancement, the largest hospitality asset management firm with a current asset management portfolio comprising over $5.5 billion, 22,000 rooms and over 30 different hotel operators. Prior to founding hotelAVE, Russo was vice president, senior leisure analyst for Deutsche Banc Alex Brown and managed a $500 million portfolio for John Hancock Mutual Life Insurance Company, where she improved the portfolio and achieved 20 percent cash-on-cash returns. She is a regular guest lecturer at Cornell University and has appeared on CNBC and CNN to provide commentary on the hospitality and leisure industry. She serves on the dean’s advisory board for Cornell University’s School of Hotel Administration and is a member of ULI’s hotel council, Marriott’s distribution strategy advisory committee, the AHLA’s financial management committee, Morgans board of directors, and the Pillsbury Institute for Hospitality Entrepreneurship advisory board at Cornell University.

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