Financial management lays the very foundation of a successful business. Likewise, the most successful hotels rely on fundamental financial management principles to manage their property profitably.
Best practices of financial management in the hospitality industry include creating an annual budget, building a detailed financial tracking model, having ongoing audits, and creating a reporting structure that helps managers keep a tab on P&L information.
On the human resources side, financial success also depends on accountability—making employees and managers responsible for achieving financial goals in their respective functional areas—and a team of highly skilled finance professionals.
Best Practices for financial management in the Hospitality industry
Effective financial management is crucial for the success of any hotel or hospitality business. Here are some key best practices for maintaining robust financial health and outlook.
1. Annual budget
Developing an accurate annual budget is one of the most important financial best practices for any hotel. The annual budget provides the complete financial picture of the property.
The key elements that should be included in a comprehensive hotel budget are:
- Revenue projections: Revenue projections should provide estimated figures for room revenue based on occupancy rates and average daily rates, as well as revenue from F&B outlets, banqueting, parking, spa and other ancillary sources.
- Operating expenses: Budgeted operating expenses need to capture itemised cost projections for different departments like food and beverage, housekeeping, front office, sales and marketing, and administrative costs.
- Capital expenditures: Capital expenditures involve planned replacement or upgrades of assets over the year.
Once figures are collected and documented, the budget helps evaluate the possibility of attaining financial goals and what can be done to increase them.
Read more: A Primer of Budgeting
It is crucial to build the budget with line item detail for accurate monitoring throughout the year. General categories are not sufficient.
Excel spreadsheets remain a popular budgeting tool for hotels due to their flexibility; however, properties should evaluate dedicated property management systems with integrated budgeting modules that streamline the process.
Detailed line item budgeting backed by reliable data sources is essential to evaluating targets and making informed business decisions for the coming fiscal year.
2. Operational tracking model
With a budget in hand, managers need to build a mechanism to capture and track expenses as well as revenue easily. A detailed financial tracking model can include worksheets covering daily payroll tracking, daily budget vs. actual reports for food and beverage outlets, weekly maintenance expense tracking, monthly utility expenses, etc. Core departments should have customised trackers.
This tracking data should then roll up into weekly flash reports for senior leadership. These brief reports present a high-level snapshot of weekly revenues, expenses, and budgets for each department, and property-wide metrics allow for prompt visibility into deviations.
They enable quick decision-making and course corrections if needed. It is also important to regularly track and report key performance indicators like RevPAR (revenue per available room), occupancy rates, average daily rates, and payroll expenses as a percentage of total revenue.
Including operational KPIs in the tracking model along with financial data provides the full context necessary for general managers and owners to pinpoint issues, optimise processes, and take strategic actions.
3. Actuals-against-the-budget comparison
The next step is to track expenses in each operational area against the budget. Managers now have the data to identify areas where expectations are exceeded or profit-threatening inconsistencies.
Performing a planned variance analysis between budget and actual is important to flag any unfavourable variances early in the period. Variance reports should identify over- or under-spending by department, highlighting costs exceeding budget by 10% or more.
Timely variance analysis and follow-up prevent variances from compounding and aid continual improvement in the budgeting process.
However, relying on the manual compilation of numbers risks delays and errors. Systems with integrated general ledger, payroll, and accounts payable modules facilitate the automated upload of daily financial transactions. This ensures accurate actuals are available for comparison with budgets on at least a weekly basis.
4. Financial reporting
Next, standard reports can be created to give managers a high-level overview of each operational area on a daily basis. In most cases, managers can create their own specific reports customised to their property and goals. As such, managers must be sufficiently trained to understand and use the reports to their advantage.
Well-designed financial reports are easy to analyse and support informed decision-making. Best practice guidelines for report formatting include using a consistent and standardised template across all reports for uniformity.
Reports should utilise visual elements like colour-coding for variances, charts, and graphs wherever applicable for visual impression. Key metrics must be prominently displayed on the first page for a quick executive summary.
Distribution lists for reports should be carefully considered based on role; department heads may receive reports on areas under their purview, and executives and owners likely need consolidated reports.
Distributing reports on a planned schedule keeps all parties updated, for example, by distributing weekly payroll reports post-payday and monthly P&L statements within the first week of every month.
Tying operational KPIs like current month and prior period RevPAR, average room rates, and profit and loss figures directly into the reports gives leadership a holistic operational and financial performance overview to assess causes for variances and take prompt corrective actions for improved outcomes.
Management needs to be held accountable for financial results, from occupancy to average room rate, inventory control, and operating expenses. An auditable environment should be created to track, trace, and reconcile differences where necessary.
Linking a portion of variable pay to budget achievement can further inspire ownership. Regular staff training on the property's financial policies and systems helps cascade accountability throughout each department. When staff understand how their work impacts budgets, they are more likely to be engaged.
Implementing internal controls like segregating duties for check requests, bill payments, and reconciliation helps create an auditable environment. Audit procedures involving random checks of documentation and paper trails for large expenditures aid in compliance.
Together, accountability, training, and internal controls foster an ethical culture where all teams work diligently towards optimised performance and outcomes benefiting the property's financial health.
6. Adapting to change
The hotel industry is inherently susceptible to changes in macroeconomic trends, demand patterns, and price sensitivities. For example, a recessionary economy may soften leisure demand while boosting stay-cations.
With an effective hotel accounting solution in place, managers can identify changing market conditions and devise steps to account for such changes.
Properties need agility to alter room rates, packages, and marketing offers according to changing demand cues. Financial scenario planning tools that allow modelling the impact of different what-if scenarios like sudden drops in ADR or increases in food prices become invaluable support.
Owners can test scenarios accounting for various what-ifs related to demand, operating costs, capital investments, or market competition. This supports strategic decision-making around adjusting budgets, capping FF&E replacements, or reining in discretionary spending during times of uncertainty.
Strong financial systems combined with scenario planning cultivate the required dynamism to pivot and withstand the disruptive effects of unforeseen changes.
7. Accurate financials for growth opportunities
With sound financials, owners can gain a true understanding of where they stand in the market at any point in time. Hence, they can explore refinancing opportunities, act upon an opportunity to secure better loan terms, lower interest rates, or sell the property with actionable insights. This could lead to significant cost savings and increased profitability for the hotel.
They can evaluate the market conditions, assess the property's value, and determine the optimal time to sell. By leveraging their financial data, owners can strategically position the property and negotiate the best possible deal. This could result in a profitable sale that maximises their return on investment.
Furthermore, lenders and potential investors heavily rely on audited financial statements to evaluate a property's creditworthiness. Accurate financials provide transparency and credibility, giving lenders and investors the confidence they need to approve new loans or make investments. By maintaining sound financial records, owners can attract potential buyers or secure financing for future projects.
In conclusion, sound financials not only provide owners with a true understanding of their market position but also open doors to various growth opportunities. Whether it is exploring refinancing options or seizing the chance to sell the property, having actionable insights derived from accurate financial data is crucial for making informed decisions and maximising profitability.
A powerful hotel financial management system can take businesses to a whole new level. There are reasons why Infor SunSystems is the chosen financial management solution of more than 2,200 hospitality companies worldwide. Find out for yourself by requesting a software demo today!
For more in-depth knowledge about the hotel industry, please visit our Hospitality Resource Portal.