The Chesapeake Point of View

Budget Season and Time to Assess

Budget Season and Time to Assess

October 12, 2012

It is that time of year again: budget season. As hotel owners, investors and franchisees all around the country sit down to review 2012 performance and outline a reasonable budgetary framework for 2013, some very important decisions are being made. And not all of those decisions are related to 2013 line items; some are much more significant—and have the potential to impact the bottom line in a way that is much more far-reaching—than any single budget.

Sitting down to work through the financial and operational details of your hotel(s) affords an ideal opportunity to take stock: it is an excellent time to make a critical assessment of your asset. Fundamentally, owners and investors need to be asking themselves tough questions about not just performance, but performance relative to the broader marketplace, performance relative to the competition, and performance trends. In other words: are you headed in the right direction? If the answer is no or you have doubts, maybe it is time you performed a full operational evaluation to assess your situation.  Start by appraising and analyzing annual and year-to-date financial statements for trends and performance lapses. Review market metrics such a Smith Travel Research, the marketing plan, past budget performance and capital improvement plans. Examine franchise inspections and guest satisfaction trends provided through your brand partner. Assess your leadership at the property level, review turnover reports and overall employee satisfaction.

By now, you are either becoming more comfortable with your property performance or wanting more answers to your questions. If you are an absentee owner it may be time to make a visit and see your asset firsthand. Do not hesitate to challenge your management company and hold them accountable to explain deficiencies. Their response to your questions will most likely dictate if it is time to consider a management change. While a large part of the value of the budgeting process is the analytical rigor of black-and-white numbers, owners and investors should be careful not to disregard less formal—but arguably no less important—ways to take stock. It is not uncommon for properties that are consistently performing below the brand threshold to also exhibit signs of under-investment and poor maintenance. Ironically, however, if your property looks good and is well-maintained, that may also be a sign of a problem. If there is a disparity between property aesthetics and performance, that can be a red flag that you might have a management problem. Here are some critical points during the budgeting process to consider:
Numbers Don’t Lie
Your thorough review of the financial statement should begin to reveal the truth of whether your management team is producing results. What trends have you identified and are they cause for concern? Be wary of inertia. Don’t be lulled into accepting mediocre performance. At least in most markets, a sluggish economy should no longer be a valid excuse for weak results. If your management team is not proactive and focused, and not providing you with a specific action plan on how they will improve their performance; that should be a red flag.

Franchise players
Although the owner/franchisor relationship can often be wrought with its own set of challenges, what is your hotel management team’s reputation with the brand and are how they performing to expectations? Review of customer service scores should provide benchmarks for performance and insight into management focus. Certainly, any brand ‘red zone’ items are always cause for concern, but equally as important is management’s method of addressing and resolving these issues. An antagonistic approach is rarely effective; instead management should be continually focused on achieving the best return on the franchise investment.

While most hotels and markets are benefitting from positive RevPAR increases the past couple of years and room revenue is up, the more important measurement of your revenue management performance is: is your room revenue increasing faster than your competitor’s? Management’s focus needs to be taking share from the competition While 2013 RevPAR projections vary from one analyst to the next, and different brands and markets have different expectations for 2013 performance, the general consensus within the industry is for continued growth and the continuation of a number of positive trends. With RevPAR on the rise and occupancy projections up across the board, owners should be raising their eyebrows—and expectations—accordingly.

Looking back to move forward
Budget time is the time of year when owners and investors are more focused than ever both on what their performance has been and what their projected performance is going to be. It is a chance to take a longer-term view, integrating year-to-date and end-of-year projections into long-term patterns and analysis. As a result, this is also the time when month-to-month performance excuses come to roost. Your budget is an opportunity to step back and look at the macro numbers and determine if you are meeting expectations. Owners who are making that evaluation need to use past performance as a common-sense guide: if your management company projected $14 million in 2012 and instead you did $9 million, ask yourself whether there you have any good reason to believe that 2013’s $13 million projection will be any more accurate.

A switch in time
Pay attention not to the numbers, but to your timelines. If you determine that a management change is needed, now might be the time to make a move if you want your new management company in place on January 1, 2013. While the best management companies can often hit the ground running within two weeks (and never longer than 30 days) the 60 to 90-day termination clauses in many management contracts mean that now is the time to pull the trigger on a change. For owners and investors wrestling with their budgets and looking ahead to 2013, the bottom line is this: don’t look at where you are—look at where you should be relative to how the industry is growing and how your competitors are performing. Use the context and perspective of the budgeting process to decide if your current strategy is going to get you to where you want to be, or if you need to make a management change to boost your performance.

Thank You