NB: This is an article written By : Alphy L. Johnson
The budget presentation season is upon us and the outlook is as uncertain as ever. Many owners/investors are not able to pay their debt service and face foreclosure, default and or bankruptcy. The 2010 budget should provide asset managers, owners and lenders with a path, or several paths forward to meeting their objectives.
The biggest question mark hangs over revenues, particularly when RevPARs are expected to decline by 17-18% in 2009, and nobody has a credible answer as to when the revenues will start to rebound, and how quickly.
The hotel industry was lauded for its quick actions to reduce expenses early in the recession, but still did not expect the steep decline in revenues caused not only by the recession, but compounded by the reduced airline capacity and the vilification of luxury, also know as the “AIG Effect.”
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Operating expenses have already been thoroughly trimmed, but asset managers and owners will still be looking for more savings so that they can meet their debt service obligations.
There is no single magic bullet to eliminate expenses, but there are several additional tools that can create win-win solutions. Using the Lean Six-Sigma process, zero-base budgeting and helping owners reduce expenses between the GOP and NOI lines will result in lower and fully justified expenses. Implementing good energy and water conservation practices will add significant benefits to the bottom line.
The 10 new steps for 2010
It’s the right time to think outside of the budget box, and demonstrate the value and expertise that the asset managers and owners expect.
1. Start now, if you haven’t already, with a rolling 12-month budget. It allows you to adjust for the big unknowns and keep the planning process pro-active.
2. Think outside the hotel box on ways to generate additional revenues. Provide services and product to your community, not just to guests, to maximize the utilization of your resources.
3. Zero-base every line item, and your thinking. Look at each component of every expense line and validate its necessity, true cost of both the product and process, and benefit to the guest. We are experts at justifying expenses, but we should be better experts at giving guests and owners the best value.
4. Think like an owner, and below the GOP line. How can you help reduce expenses such as insurance and property taxes?
5. Perform sensitivity analysis on your budget. Model the effects that higher/lower revenues and expenses will have on the NOI.
6. Communicate early and often in the process with the asset managers, owners and stakeholders.
7. Sandbags are for floods, not droughts. Enough said.
8. Use Lean Six Sigma, or similar processes to improve quality and reduce waste. The aim is to achieve the most rapid rate of improvement in customer satisfaction, quality, process time and cost reductions.
9. Minimize your utility costs by implementing sound energy and water conservation practices.
10. A five-year plan is more important than ever. Let’s face it, the 2010 budgets will be very sour and we should make every effort to sweeten the budget with a realistic five-year plan. This will be particularly helpful to owners and investors as they chart their way forward and understand the future and long-term cash needs and flows.
11. Add value by saving on CAPEX. Use financial tools to identify only the CAPEX projects that provide the highest return on safety and investment.
Now is the time to start the rethinking process. The pressure of economic survival has the opportunity to better fuse together the interests of the hotel staff, ownership, management companies, asset managers and lenders. By now there should be a strong realization by all that there is a very strong interdependence and that alignment needs to be strong as ever to weather this economic turbulence. The budget process should be used as a tool to strengthen this alignment.
