We have seen hotel failures in the past, in many cases there have not been any financial accounts provided on a regular basis to assess the financial health of a hotel.
So why are regular financial health checks important to the success of your hotel?
From our experience, astute hoteliers concentrate on a single key performance indicator such as weekly turnover to assess performance, and know for their venue each $1 in turnover equates to a certain percentage in profit e.g. 21%. These operators have established strong venues over time with tight internal controls, planned cash flow management, strong balance sheets with regular financial returns to key stakeholders based on sound management financial reports.
This level of trading performance has been established over time by constantly aiming to achieve and exceed industry benchmark key performance indicators in all trading areas of the hotel. This information comes from management financial reporting and interpretation of the reports. Operators need to think strategically and concentrate on the processes needed to change to reach the outcome in mind. Short term operational fixes will not address the stakeholder’s long term interests.
To ensure the financial health of your venue, we recommend as a minimum your management reporting and practices includes the following six key areas:
1. Trading Departments
- Turnover for each department – with comparison to prior periods to identify trends including comparative periods in prior years. A period is not 12 months, it is every month.
- Allocation of costs – especially wages to trading departments and comparison of department trading profit over time.
- Comparison of key performance indicators – such as department gross profit percentage, wages percentage and promotions to industry benchmarks and best practice.
- Reconciliation – of external reports to your financial reports such as gaming turnover, TAB, Keno and point of sale systems.
- Comparison of adjusted hotel profitability – to prior periods to compare performance and outcomes of initiatives to improve performance.
- Ensure you have a strategy – what is the strategy to provide regular financial returns to stakeholders?
- Stock movement – ensure this is reflected in your management financial report and is reconciled to your point of sale reports to ensure any discrepancies are eliminated.
4. Balance Sheet
- Tight cash controls – ensure all cash balances held by the hotel are regularly reconciled. Compare movements in your reports.
- Establish benchmark ratios – for your current assets to current liabilities to ensure strong liquidity and for cash flow purposes.
- Compare the financial return – from your net assets to prior periods, other venues and alternate investments.
- Review your loan to value ratio – to ensure you are not overly exposed to the bank/creditors and take necessary steps to reduce this exposure. Ensure your bank loan convents are constantly reviewed.
- Have a capital expenditure strategy – to ensure the venue remains competitive and your hotel asset is not reducing in value. Hospitality venues constantly need to reinvest within the premises to ensure competitiveness.
- Strategies to reduce any surplus cash – or assets or secure additional funding or equity to fund long term requirements.
5. Cash Flow
- Be aware of profits of the venue – and how they are being applied to reducing debt, payment of taxes and to shareholders.
- Long term issues – if you are constantly making arrangement to pay debts or required to pay cash on delivery address these issues.
- Operators need to ensure they understand the financial reports and ensure they are reporting on “measures that matter” to the venue and themselves as stakeholders. If you are unsure, then get advice from your accountant and business adviser.
In summary, if you are looking at purchasing another venue, introducing managers, or just looking to manage your venue more effectively, then you need a venue that is financially healthy with strong internal financial controls, poised for future improvement and effectively able to monitor new initiatives to improve underlying financial performance.
We recommend you tick each of the items above with your current reporting and if you are not sure, devote the time to ensure you have meaningful financial reports to base your future decisions to improve the financial health of your venue.
For more information on how we can help with your hotel or hospitality venue Contact us.