Disasters are inevitable.
So, do you know what reports you will need to determine lost revenue after a disaster?
NB: This is an article from Cayuga Hospitality Consultants
From a hotel owner perspective, coming up with fact-based hotel projections for lost revenue in the event of a disaster will ensure smooth discussions with your insurer and moving on with rebuilding your business as quickly as possible.
Let’s go over everything you need to know, starting with a review of business interruption insurance.
What is Business Interruption Insurance?
Business interruption insurance “BI” (also known as business income insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster.
How Does Business Interruption Insurance Work?
“Business interruption” is not sold as a stand-alone policy but as an add on to a property insurance policy or as part of a more comprehensive insurance package. The purpose of this type of coverage is to put your business in “the same financial position” it would have been if no loss had occurred.
Be Prepared for a Disaster
Before being able to calculate the revenue loss due to a disaster, make sure you have the proper business interruption insurance.
This comes down to one thing, being prepared.
Make sure your insurance policy includes reasonable business interruption coverage. Discuss this with your broker as soon as possible.
From there, do you have the proper hotel revenue reports ready to make revenue projections?
Ensure that you have full access to the following reports:
- Records of hotel historical performance such as STR reports
- Profit and loss statements
- Business forecasts including a calendar of special events affecting demand
- Future reservations or “on the books” reports for your booking window
Example #1: Water Damage to Destination Hotel
You run a select-service hotel on a destination market and a storm creates devastating water intrusion that forces you to close your hotel to perform restorations right before the beginning of your high season.
During the last year, you invested in remodeling your rooms and public areas and were hoping to gain ADR the following year. To make sure things worked your way, you recruited a top sales manager with plenty of contacts in the market to help drive higher paying customers to your hotel. Then the storm came right before the beginning of the season.
Here’s what you need to know in this scenario:
- Your STR reports show that your property had an occupancy index of 85% and ADR index of 95% for the rolling three months ending March 31 of the year prior to the event. Over the last three years, competition has been strong with new hotels opening so in order to drive business you had to sacrifice ADR with an index varying from 85%-95% over such period.
- When making your projections, you will be tempted to project the increases in ADR you expected to have after your renovations and the hiring of your new sales manager. Don’t. You really can’t bank on those figures as you did not achieve them yet. Since you haven’t achieved these stats, you shouldn’t be projecting on “what-ifs”. Chat with your insurer, stay focused on the renovations and getting back on track.
Example #2: High Hotel Room Demand During Music Festival
Now let’s say that a music festival has the potential to fill your rooms for the time of the event.
Here’s what you need to know in this scenario:
- Once the event happens, can you use your competitors’ data from the STR reports to claim a higher occupancy and ADR for the period than the one that shows on your historical reports? Most likely, Yes! Just stick to the actual data and project a reasonable share of what actually happened on your market.
Hotel Reports Needed to Calculate Revenue Loss Projections
When the time comes to make projections of lost revenue due to business interruption stick to the historical data. Avoid creating scenarios you cannot back up with actual data.
As mentioned you will need access to the following reports:
- Records of hotel historical performance such as STR reports
- Profit and loss statements
- Business forecasts including a calendar of special events affecting demand
- Future reservations or “on the books” reports for your booking window
A handful of additional reports can be used to substantiate projections that deviate from the historical STR data.
Some of them include:
- Cancelations reports (after the disaster)
- Market forecasts from your local CVB or a reputable valuation company.
- Business report data from alternative markets that were not affected by what happened to your market (this in case of natural disasters that affect your entire area)
Present a claim for lost revenue based on actual, verifiable data.
Depending on the extent of your losses, hiring a forensic accountant or a hotel consultant for loss prevention might be beneficial so you get all the lost income you are entitled to.
Such professionals can help you make a solid case for projections that include not only room revenue but also banquet, food and beverage outlets and meeting business.
