Chapter 1Is Your Hotel Really Performing?

CHAPTER 1

Is Your Hotel Really Performing?

Your question: “My hotel looks busy. How do I know whether it is actually performing well?”

A busy hotel feels successful. Guests are arriving. Rooms are occupied. Breakfast is busy. The restaurant has customers. Staff are moving. The bank account has money. It is natural to think: Business must be good.

Sometimes it is. Sometimes it is not.

A hotel can be busy and still produce weak profit. Revenue can increase while profit falls. Profit can increase while cash becomes tight. The bank account can look healthy even when much of that money is already committed.

Do not judge a hotel from only one number.

Not occupancy. Not revenue. Not profit. Not even the bank balance.

I want you to understand the complete financial picture.

A hotel can look healthy before you see the numbers

Let me introduce the hotel that I will use throughout this book.

Harbour View Hotel is a fictional independent hotel. It gives us one consistent example as we move from revenue to cost, profit, cash, planning and owner decisions.

• 42 rooms
• breakfast service
• one restaurant and bar
• airport transfers
• a few small ancillary services

It is not a luxury resort or a large, branded hotel. It is a room-led independent property. The owner is involved in major decisions. A general manager runs the daily operation. A bookkeeper maintains the accounts.

One recent month felt excellent. The hotel was noticeably busier. Occupancy increased. The restaurant served more guests.

Revenue reached $139,620, compared with $126,480 in the previous month. Revenue increased by more than 10%.

The owner expected a much stronger profit. Instead, operating profit fell from $23,540 to $21,690.

The hotel sold more. But it earned less profit.

What actually happened?

If the only report I receive tells me that revenue increased by 10%, I know something. But I do not know enough to manage the hotel. I need to know

what produced that revenue

what it cost to produce it.

why costs changed

whether the resulting profit became cash. And

what is likely to happen next.

That is useful financial management.

Harbour View gives us the first contradiction: the hotel became busier and produced more revenue, yet it kept less operating profit. To understand how that can happen, we first need to follow the money through the hotel.

The money journey through your hotel

Before we look at reports, ratios or accounting structures, I want you to see your hotel as a simple economic flow.

Everything begins with a guest or customer. The customer buys something from you. That creates revenue. Delivering what you sold creates costs. What remains becomes profit.

But profit still needs to turn into cash. That cash may then be required for debt, investment, reserves or owner withdrawals.

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Figure 1.1 — The money journey through your hotel

Almost everything we will do later in this book fits somewhere in this picture.

When we discuss revenue, we will zoom into the top. When we discuss costs, we will move into the middle. When we build the P&L, we will bring revenue and costs together.

When we discuss cash and the balance sheet, we will follow the money beyond profit. When we budget and forecast, we will look ahead. When we consider renovation, expansion or debt, we will ask what the business can actually afford.

For now, I only want you to see the complete flow. Many reporting problems begin when we look at one part of this flow in isolation.

The four misconceptions that follow all come from judging one point in this journey as though it were the complete financial picture.

Misconception 1: High occupancy means good performance

Occupancy is important. But occupancy tells me only how many available rooms I sold. It does not tell me enough about the quality of those sales.

Consider two 42-room hotels operating for 30 days. Each has 1,260 room nights available.

Which hotel performed better?

Hotel A has much higher occupancy. It sold 176 more room nights. But Hotel B produced over $17,000 more room revenue.

Does that automatically mean Hotel B is the better hotel? Not necessarily.

Its distribution costs could be higher. Its guest acquisition costs could be different. It may have a different market position. Its operating costs may also differ.

That is exactly the point. Occupancy by itself cannot answer the performance question.

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Figure 1.2 — The first performance trap

I often want strong occupancy. But I do not want occupancy at any price.

If I reduce my rates heavily, give large discounts, pay high commissions and add expensive inclusions simply to fill rooms, the hotel may become busier without becoming financially stronger.

So a statement such as “We achieved 90% occupancy” is not the end of the discussion. It is the beginning.

• At what price?
• Through which channels?
• Compared with what?
• At what cost?
• What did we earn from it?

Later, we will introduce a small number of rooms measures that help answer these questions.

A full hotel is useful only when the business you accept makes financial sense.

Misconception 2: If revenue increased, performance improved

Revenue growth feels positive. Usually, I would rather see revenue rising than falling. But revenue is only the top part of the story.

Let us return to Harbour View Hotel.

Revenue increased by $13,140. Costs increased by $14,990. The hotel became busier. It produced more revenue. But operating profit fell.

I now have a management problem worth investigating.

I do not immediately say: “Costs are too high. Cut them.” That would be too simple.

Some costs should increase when business increases. More occupied rooms can mean more cleaning supplies, laundry, breakfast consumption, electricity, water, payment-processing fees and OTA commission.

If the hotel served more restaurant customers, food cost should also rise.

Did costs increase for a valid reason, and did they increase at the right rate?

Maybe Harbour View Hotel sold more rooms through an OTA. Revenue increased, but so did commission. Maybe occupancy increased because rates were discounted. Maybe extra casual staff were added. Maybe overtime increased. Maybe a large repair happened during the month. Maybe food prices increased. Maybe more guests stayed, but each guest spent less.

Maybe nothing is wrong. Or maybe several small issues combined to reduce profit.

This is why I do not stop at the financial result. I look for the operational reason behind it.

Numbers should lead to questions

A number becomes useful when it leads to a question and a decision. Chapter 9 gives you a simple P&L review technique for doing that.

A financial report is useful when it helps me ask a better question.

Suppose the report says: Revenue $139,620. That is a number.

If it says revenue increased 10.4%, that is better. I now know the difference. But I still need to know why.

Perhaps occupancy increased, average room price fell, OTA share increased, restaurant covers increased, or average restaurant spend fell.

Now I am closer to the business.

Did we create good growth, or did we buy the growth too expensively?

For now, the important point is simple. A report should not finish with the number. The number should start a conversation.

Misconception 3: Profit means the money should be in the bank

This is one of the most common sources of frustration for owners.

The P&L says the hotel made a profit. You look at the bank account and ask: “Then where is the money?”

There are many possible answers.

• Some guests have stayed, but their companies have not paid yet.
• An OTA or payment processor has not yet settled.
• The hotel bought inventory or equipment.
• A supplier was paid earlier than expected.
• Loan principal was repaid.
• The owner withdrew money.
• Tax was paid.

The P&L and the bank account therefore answer different questions.

Profit tells you what the hotel earned. Cash tells you what the hotel can pay. You need to understand both.

Imagine Harbour View Hotel reports an operating profit of $21,690. During the same period, $8,400 of corporate guest invoices remain unpaid, $12,000 was paid for replacement air-conditioning equipment, and $5,000 of loan principal was repaid.

I do not need to teach you accounting entries to explain the problem. The hotel can make a profit and still experience a reduction in cash.

Later in this book, we will build a simple bridge from profit to cash.

FROM MY EXPERIENCE — WHEN PROFIT WAS SITTING IN THE FREEZER
In one hotel I worked with, the team purchased a large amount of frozen food intended to cover roughly six to eight months of future consumption. The hotel had a profitable month. But when the owners asked where the cash was, a large part of it was no longer available in the bank. It had been converted into inventory.
The hotel had not suddenly become unprofitable. The timing of the cash had changed. We had used today's cash for stock that would support future months. That experience is one reason I keep profit and cash separate in my mind. The P&L can tell me that the hotel earned money. It cannot, by itself, tell me whether that money is still available for salaries, suppliers, debt, investment or withdrawal.
We will return to this properly in the chapters on profit-to-cash, working capital and seasonality.

Misconception 4: Money in the bank means you can spend it

The opposite mistake also happens. You check the bank. There is plenty of money. So the hotel appears financially comfortable.

But not every dollar in the bank is necessarily free for you to use.

Harbour View Hotel has a bank balance of $78,400. That sounds healthy.

But the hotel also knows that these amounts are already connected to future stays or upcoming obligations:

The bank contains $78,400. Known commitments total $71,300. Only $7,100 remains before considering the minimum cash buffer the hotel should keep for normal operations.

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Figure 1.3 — Bank balance is not available cash

This matters when you are deciding whether to withdraw money, renovate rooms, replace equipment, make an early debt repayment, hire more employees or open a new facility.

Do not ask only: “Do we have money in the bank?” Ask: “How much cash is genuinely available after the commitments of the business?”

So what does good hotel performance actually mean?

By now, you may notice that I have not given you one number that defines a good hotel. That is deliberate.

A hotel is performing well when several parts of the business work together. I find it useful to think about performance through five simple lenses.

1. Commercial performance

Are customers buying what you sell?

For rooms, this includes the number of rooms sold, the price and where the bookings came from. For a restaurant, it may include the number of customers and how much they spend. The exact measures will depend on your hotel.

2. Profitability

After earning revenue, are you keeping enough of it?

A hotel that produces strong revenue but consumes almost all of it in costs may not be creating enough value. I therefore need to understand both revenue and the cost required to produce it.

3. Cash

Is the profit turning into cash?

Can the hotel pay salaries, suppliers, taxes and debt? Does it have enough cash to survive a weak period? Can it fund necessary maintenance?

4. Financial health

What does the hotel own? What is owed to the hotel? What does the hotel owe to others?

Are debts manageable? Is maintenance being postponed because there is no cash? Is the business becoming stronger or simply surviving month to month?

5. Forward outlook

What is likely to happen next?

A good month can hide a weak future. A weak month can also occur just before a strong high season. I therefore want some visibility into future bookings, expected rates, major expenses, payroll, suppliers, tax, debt, capital expenditure and expected cash.

Five questions I use to manage the numbers

Throughout this book, I will keep returning to five questions. They form the basic management loop I recommend for you as an owner or owner-manager.

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Figure 1.4 — The five-question owner loop

1. SEE — What happened?

What did you sell? What did you spend? What did you earn? What cash do you have?

2. EXPLAIN — Why did it happen?

Was the result driven by volume, price, sales mix, channel mix, productivity, usage, waste or a one-off event?

3. JUDGE — Is it good or bad?

Compare the result with budget, last year, recent history, your expectation and relevant market context.

4. LOOK FORWARD — What happens next?

What do bookings, rates, costs, cash, commitments and risks look like over the coming weeks and months?

5. ACT — What should you do?

Change price? Control a cost? Change staffing? Improve collection? Delay expenditure? Protect cash? Invest?

You do not need to be an accountant to ask these questions. Most of them are business questions. Finance gives you the evidence needed to answer them.

Let us use the five questions on Harbour View Hotel

We know Harbour View Hotel had a busy month. Revenue increased. Profit fell. Let us work through the management loop.

SEE — What happened?

The hotel produced higher occupancy, higher total revenue, higher operating costs and lower operating profit.

That describes the result. It does not explain it. So I continue.

EXPLAIN — Why did it happen?

Suppose further review shows that the hotel sold more rooms, average room price fell, a larger percentage of bookings came through OTAs, OTA commission increased, payroll increased because additional shifts and overtime were used, restaurant covers increased, and average restaurant spend per customer fell.

Now the financial result begins to connect with the operation. Revenue did not simply increase. It increased in a particular way. And that way affected profit.

JUDGE — Is it good or bad?

Now compare the result with something meaningful. Perhaps revenue was above budget, occupancy was above last year, average rate was below budget, OTA share was higher than expected, payroll was above the level expected for the amount of business, and operating profit was below budget.

The month was commercially strong. But the quality of the revenue and the cost of delivering it need attention. That is more useful than saying either “We had a great month” or “Costs are too high.”

LOOK FORWARD — What happens next?

Suppose bookings for next month are currently softer, several high-demand weekends are still available, a large corporate receivable remains unpaid, annual insurance is due next month, a loan instalment is approaching, and two air-conditioning units may need replacement.

Last month matters. But your next decision should consider what is coming.

ACT — What should you do?

You and the general manager may decide to review pricing for high-demand dates, reduce unnecessary discounting, review OTA dependence, compare staffing hours with actual business volume, follow up overdue corporate accounts, protect enough cash for upcoming commitments, and delay a non-essential purchase.

Notice what happened. We started with “Revenue increased 10.4%.” We finished with specific management actions. That is what I want financial reporting to achieve.

Better reporting does not mean more reporting

At this point, you may be thinking: “Do I now need many more reports?”

No.

The purpose of this book is almost the opposite. I want you to have fewer, better reports.

A useful report should help you see what happened, understand why, identify what requires attention, look forward and make a decision.

More detail is not automatically better.

Suppose your hotel earns $200 per month from a small incidental service. You probably do not need a separate department, fifteen accounting codes, three KPIs and a monthly departmental analysis.

If that additional detail will not change a decision, it may simply create work.

But if airport transfers generate meaningful revenue, carry high external costs and create frequent guest complaints, you may want to see them separately.

Will this additional information help you understand, control, plan or decide?

If the answer is no, question why you are collecting it.

Your accountant sees numbers. You need to see the business.

Your accountant or bookkeeper has an important role. Good accounting records matter. But you need something different from a set of correctly recorded transactions.

You need the numbers to explain the business.

Accounting may tell you: OTA commission expense was $8,420.

Management reporting should help you ask: Why did commission reach $8,420?

Perhaps OTA revenue increased. Perhaps channel mix changed. Perhaps discounting increased. Perhaps direct bookings weakened. Perhaps the hotel used an OTA promotion.

The accounting number can be correct. But the management conversation begins when you connect it to the operating reason.

This distinction will become important later in the book. Your accounting system contains financial information. Your PMS, POS and other operating systems contain operational information. Useful management reporting brings them together.

Do not ask whether a number is “good” too quickly

You may naturally ask: Is 75% occupancy good? Is payroll at 30% too high? Is food cost at 32% acceptable? Is a 20% profit margin good?

Sometimes benchmarks can help. But be careful with universal answers.

A remote lodge and a city hotel may have very different staffing requirements. A hotel with a full-service restaurant cannot be compared directly with a rooms-only hotel. A seasonal resort may need to earn most of its annual cash during a relatively short period. A hotel undergoing renovation may temporarily show unusual costs.

So I normally begin with more useful comparisons:

• What did you expect?
• What happened last year?
• What has happened over the last few months?
• Has the business model changed?
• Has the market changed?
• What operational driver explains the difference?

A benchmark can then add context. It should not replace thinking.

Warning signs I would not ignore

These are simple questions. Asking them consistently changes the quality of the discussion.

Financial management is not only about explaining the past

Traditional reporting often focuses heavily on the previous month. That is necessary. But it is not sufficient.

Once the month has ended, you cannot change it. You can learn from it. You can act on it. But you cannot change it.

The real value comes when you use the past to make a better future decision.

For example, last month tells you OTA business increased sharply. Current bookings tell you next month’s demand is strong. The decision is not to complain about last month’s commission. The decision may be to reduce unnecessary OTA inventory or discounting for the strong dates ahead.

Another example: last month tells you payroll exceeded budget. The reason was overtime. Next month’s occupancy forecast is lower. The decision may be to adjust the roster before the cost occurs.

That is why this book moves from what happened, to why, to what happens next, to what you should do now.

Now For Your Hotel

Remember

1. Busy does not automatically mean profitable.

Occupancy matters, but price, mix and cost matter too.

2. Revenue growth is not enough.

You need to know what created the revenue and what it cost to create it.

3. Profit and cash are different.

A hotel can be profitable and still have cash pressure.

4. Bank balance is not the same as money available to spend.

Some cash may already relate to future guests or upcoming obligations.

5. Every useful number should eventually lead to a decision.

Use the loop: SEE → EXPLAIN → JUDGE → LOOK FORWARD → ACT.

Next question

At this point, I have deliberately not given you a large financial report.

That comes next.

First, I wanted us to agree on what we are trying to understand.

Your hotel has a commercial result. It has a profit result. It has a cash position. It has financial obligations. And it has a future.

You do not need hundreds of numbers to see this. You need the right numbers.

They should help you understand what happened, why, whether it is good or bad, what happens next and what you should do.

So the next question is straightforward:

What should you actually know every month?