Cash Flow Management

Cash Flow Management for the Hotel Industry

While “cash flow” has become something of a euphemism in a world where most currency exchanges hands digitally, the reality is that managing the flow of your money is of utmost importance in any business. The problem with cash flow is that you often have to pay for things before you are ever paid for your services. If bills are due before you have the income to pay them, you put yourself at risk of not only going into default on your loan but also of having your lender put your property into Hotel Receivership. Properly managing cash flow is a crucial part of Hotel Finance. Here’s a brief overview of how to best deal with cash flow in a hotel economy.

Managing Cash Flow is Dependent on Three Key Variables:

1) Accounts Payable: When and how you pay your bills.

2) Accounts Receivable: When and how you receive income from your guests and clients.

3) Shortfall: Unforeseeable issues when you do not get paid what you were expecting or your accounts payable are greater than your accounts receivable.

Hotels have one key advantage over most other businesses in that you generally don’t have to bill or invoice your clients and wait 30 or 60 days for them to pay. On the other hand, you are still subject to shortfalls just like any other business. If a large party books your entire hotel in the off-season, they may still cancel at the last minute. While you may still make back a certain amount on cancellation fees, it may not be enough to cover what you spent in preparation for their stay.

Know Exactly Where Your “Break Even” Point Is

What is a break even point? How do you calculate it? A break even point is simply when your hotel makes enough revenue to cover 100% of the expenses resulting in a Net Profit of 0.  Calculating your hotel’s break even point involves breaking down the fixed and variable costs associated with operating the hotel.

Fixed costs are expenses that are unaffected by the occupancy rate of the hotel. For instance:

  • Mortgage
  • Insurance
  • Property Taxes

Variable costs are expenses that are affected by the occupancy rate of the hotel. Examples include:

  • Staff Wages
  • Cleaning Supplies
  • Continental Breakfast Supplies

To find your break even point, use this calculation:

  • Break-Even Point (Rooms Booked) = Fixed Costs / (Price of Room – Variable Costs)

Understanding the amount of revenue needed to cover the expenses of your hotel is key to successfully understanding your cash flow.

Managing Accounts Payable Wisely

  • If you have a bill that is not due for 30 days, wait until the due date to pay, rather than paying it early.
  • Keep a cash reserve to help you cover bills during off-peak seasons or unexpected lulls.
  • Prepare a very conservative yearly budget and stick with it. Be sure and budget for upgrades, emergencies and other unforeseen expenditures.
  • If you have a sudden windfall, like a fully booked hotel at full rack rates in an off-peak season, don’t just immediately put it into upgrades – put it in reserve and stick with a pre-determined plan for upgrades.

Negotiate With Suppliers

  • Do your best to negotiate with suppliers to bill larger amounts or higher rates during peak seasons and lower amounts or rates during off-peak seasons.
  • Don’t always go with the supplier that offers the lowest prices. Sometimes it’s better to pay more for a supplier that will be more flexible with billing times or offer better finance terms.

Effective cash flow management is crucial for any business, but sometimes can be even trickier in a hotel environment. This is one more area that our experienced Hotel Brokers at The Passport Group can help you stay on track and turn your hotel business into a stellar success!

By |2017-06-29T02:01:09-07:00June 29th, 2017|Hotel Operating, Hotel Owner's Tool Kit|Comments Off on Cash Flow Management

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