I know a lot of people have some confusion and a slight frustration when it comes to the financial information that’s available in a hotel and the way it’s presented.
NB: This is an article from David Lund, of Hotel Financial Coach
The 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI) is rock solid in its acceptance and use in our industry for those who know about it and choose to use it. But what if there is a better way to look at the financial information that helps operators see their results (and better still their budgets and forecasts) in a different light? A light that shines on the various different levels of profitability by business type.
That’s what this piece is about. An idea that perhaps time has come. A way of presenting financial information that’s new and completely different. Using a format that allows the reader to unlock profitability questions that have previously been unanswerable.
Technology that now provides a way to generate information in a new and more functional way.
To date our industry organizes financial information by department. Exactly the way the hotel is organized: first its rooms, then F&B, MODs, overheads – GOP – NOP – Ta da!
This is the approach that is the foundation for understanding the financial beast in any hotel regardless of its major characteristics. The same financial sheet is applied to resorts as to city center hotels; the same sauce is used in convention hotels as to limited service hotels.
What this allows us to see in a somewhat limited way is the profitability by department that is contrived by the USALI method. What if we could see profitability by market segment? What if we could see profitability by customer? Today we can clearly identify the room revenue by market and by customer so what would things look like if we, as a popular saying goes, “Follow the money?”
What if we could measure all revenues by customer and segment? Room revenues, F&B revenues and minor operating department revenues by customer? What if we could determine the cost of sales, direct payroll and direct expenses by customer? If we could determine the revenues and the direct costs by customer and customer segment? If we could do this, we could determine the gross margin by customer and customer segment.
Lots of discussion and words around segment and margin.
If we follow this path it leads us to a point that we currently don’t have on our compass. Today we stop at total revenue. Total revenue by rooms available. Total revenues by rooms occupied and the furthest we can get is average room revenue by market segment.
The new starting point would be total revenue by individual market segment, total revenue by customer
From this point of organizing our revenues by segment we could then determine the operating costs by segment and customer as well. This would give us data we don’t have today. Which segments are producing the highest gross margin? This is valuable information that would allow us to determine which customers are more profitable and which ones to go after with the sales and marketing resources we have.
What customers equal more profit?
Getting more of the higher margin customers equals more gross margin which drives more gross operating profit and in turn generates more NOP.
I’m going to stop here as the allocation train for the costs and the non-operating costs would be another series of articles. What do you think? Would the ability to measure hotel financial gross margin by customer segment be worth the effort it would take to make these changes?
I am envisioning this possibility and I think it’s a logical step to want to know where the most profit comes from. After all, that’s the goal.
- Who is the most profitable customer and how can we get more of them?
- Is it the leisure guest with their great rate but high commission and low F&B spend?
- Is it the corporate customer who stays regularly, has carrying costs, eats breakfast, frequents the lounge and treads lightly in the room?
- Or is it the group customer who comes at a discount, with or without a commission, that meets, moves and eats together?
We have long pontificated on which one and maybe the answer is we still need them all anyway. But wouldn’t it be a step forward to start to measure the profitability of our customers more? I bet Mercedes Benz knows which automobile model makes the most profit and the least. So, as usual, we are late to the party, right?
Maybe it’s finally time someone makes a change?