Evaluating ALL Expenses is essential for both long term successes and short term cash flow!

The global economic news continues to be rather solemn. Declining occupancy in many markets, the lingering effects and seriousness of the terrorism in India, political protests in Thailand and Greece and the unknown relating to a number of industries worldwide are all having their toll on the hospitality industry.

I find in listening to radio, television or internet reports that they all begin to run together, as the "experts" try to predict this or that potential government or business action.   While we may be required to respond to some government action, this quote from one of best known business minds of all times articulates it best – we must take action ourselves in focused, logical steps to address our circumstances and begin to turn the situation around.

This two part series is very straight forward and common sense in approach.  While the 1st part addressed several fundamentals of sales, this segment focuses on careful examination of expenses.

The following dozen activities may appear very rudimentary in approach, yet I recall in my career as both a consultant and as a hotel operator that it can be those fundamental practices that are too frequently disregarded.   A major focus in these times must remain on every hotel's two most important assets: its workforce and guests.

 Consider these lines of attack when trying to assess all factors in looking for ongoing success in tough times:

1. Re-examine all operating budgets.   

Strong managers have annual budgets usually prepared 6 months before the beginning of any year in advance, which often means projections could be as far out as 15-18 months.  While most of us projected potential trouble in 2009, few of us anticipated the international financial meltdown that unraveled in late summer 2008.

It is time to re-evaluate all operating budgets immediately and determine planning for action steps that need to be taken NOW.

2. Initiate aggressive, but realistic goals for achieving specific expense savings that are linked to any changes in the operating budgets you have just re-forecasted. 

There will be revenue lines projected at lower levels and the expenses associated with them should be identified.  I am not a big fan of zero-based budgeting unless it is realistic, but the approach is worth considering in times like this to be certain that ALL expenses are directly anticipated and linked to volume.

3. Develop a labor management reporting and evaluation system where software predicts daily or hourly volume and the amount of labor needed on the basis of seasonality.

Almost all hotels have a trend or cycle that can be measured with either per unit or time increments.  Once one gets beyond the perception that your hotel cannot be tracked this way, the results will follow. 

In reality, every hotel has some patterns in check in/out volumes and times, in restaurant volume, in energy consumption, etc. and determining yours is the initial step toward determining how to better manage your labor cost. The objective here is not just to increase or decrease hours for staff, but to properly service guests according to agreed upon standards. 

Improving labor scheduling and productivity that link to activity requires more accurate occupancy forecasting, but it pays off!

4. Encourage all associates or staff to take advantage of direct deposit for their paychecks.

This reduces the cost of generating paychecks and encourages them to establish regular accounts and stability.

5. Determine whether your new hires or any existing staff would qualify for any government Job Tax Credit program whereby a percentage of training dollars is refunded. 

Laws vary by state and it is probable that new government programs may be introduced in 2009, given the global economic challenges.

6. Become familiar with all of your insurance policies—know which items are covered.

Hotels spend many dollars on damage claims, equipment replacement, and lawsuits, often without checking whether particular items may be covered by insurance.

7. Competitively re-bid all significant vendor and supplier contracts.  

This can include a wide range of services and products, including utility purchasing options that might offer incentives or access through energy cooperatives.  

It is not being suggested to break contracts, but every company in every industry is feeling strained resources these days.  Discussions on terms, pricing, quantities, payment schedules and other factors are all items that should be analyzed short term and ongoing.

8. Evaluate the charges that banks are assessing your organization.

Strong relationships in banking are essential for long term success and the credit markets are operating in atypical fashions these days.  Maintain relationships with your bank(s) and ensure that the fees being charged now remain competitive - banks need long term good customers, too.

9. Evaluate carefully guest amenities. 

This is straight forward if your hotel is an independent operation, as you can make decisions quickly on your own. If your hotel is part of a brand, there are agreed upon standards that perhaps may be delivered in alternate ways. Chain management may be open to options if the guest experience is not diminished. 

For example, there are several chains that are allowing certain items such as shower caps or lotions to be available 24 hours a day but not placed in every room.  Lobby coffee may be offered in known peak times or on request, but not 24 hours a day with known waste.  Newspapers are part of most brands' standards, and some hotels I have stayed with recently have offered the delivery option or a small credit to the account can be taken.

This approach is both green in nature and a service that is optional rather than wasted or unused products that requires staff services

10. Examine every part of your credit policy and practice.  

Credit is an essential part of the business cycle in today's world and we have seen what happens when the system breaks down.  The current global financial crisis is at least partially mired due to credit snafus. 

Hotels in fact are lending the use of money when extending credit and must maintain a proper balance when considering the use of credit as a potential feature.  Care must be used when considering credit – even large companies have been known to renege on credit provided by hotels, yet it can be an important point of difference.

11. Engage in an assessment of your hotel's real estate tax. 

These taxes are based on different criteria, depending on where your property is located.  In markets where real estate has declined for more than two years or if the last assessment was when revenue and occupancy were stronger, there may very well be grounds for an appeal of the real estate tax, which could positively impact the hotel for several years.

12. Plan and monitor Monthly cash flow (forecasted and actual)   

Too many entrepreneurs new to the hospitality industry disregard the difference between cash flow and profits and even some veterans do not fully appreciate the value of monitoring cash flow. While a hotel or any business needs both to survive, cash flow is the more indispensable of the two. 

Cash flow basically refers to the flow of cash into and out of a business over a period of time - what is needed to keep the doors open while trying to make a profit. Without adequate cash, a hotel cannot pay its suppliers, taxes, meet payroll, market itself or operate professionally. If an adequate cash flow is not maintained, there is the very real danger of bankruptcy or going out of business.

Planning and monitoring the inflows and outflows of cash must be a top priority for every hotel owner and general manager. Planning ahead for seasonal fluctuations and unexpected emergencies, such as is now the case in many locations, allows for dealing with challenges and at least partially reduces stress.

Knowing where you are in cash positioning allows you to also maintain more open and constructive relationships with suppliers, banks, hotel staff and business partners. By monitoring your cash, you can better anticipate potential problem spots and conceivably lessen or avoid a liquidity crisis. 

In this type of economy, the potential for shortfall in business levels is real, which means cash flow will likely be diminished. Being able to deal with this underperformance in advance will definitely help bridge the challenge.

Please contact me if I can be of service, feel free to share an idea at johnjhogan@yahoo.com anytime or contact me regarding consulting, customized workshops or speaking engagements.  Autographed copies of LESSONS FROM THE FIELD – a COMMON SENSE APPROACH TO EFFECTIVE HOTEL SALES can be obtained from www.smartbizzonline.com, THE ROOMS CHRONICLE  www.roomschronicle.com , and other industry sources.

All rights reserved by John Hogan and this column may be included in an upcoming book on hotel management.   The opinions expressed in this article are those of the author and do not necessarily reflect the views of this publication

John Hogan is  frequently invited to speak at Franchise Meetings, Management Company and hospitality association industry events.   He writes for a number of global online services and is actively involved in sharing industry 'best practices' .  He conducts mystery shopping reviews of quality in operations and marketing, including repositioning of hotels.