How Revenue Management Can Drive Better Cash Flow

30th Nov 2013

Joseph MartinoNB: This is an article written By  Joseph Martino  President THEHON Enterprises, Inc

More cash flow = A more valuable asset: Hotels do not come cheap, just ask any hospitality investment group or private owner: from a huge initial capital outlay to purchase or construct a property, to ongoing reinvestment to ensure that the hotel continually meets guest demands, it is critical that the financial operations of a hotel are managed intensely and continuously to ensure their ongoing existence.

But while senior management may view their property’s finances from the perspective of ensuring there is enough cash flow to meet operating costs and continue to open their doors every day, what about the actual owners and their desire to enhance the value of their investment?

Well, whether a hotel’s objective is to maximize revenue per available room or drive increased operational efficiency, at the end of the day, the underlying motivation behind these objectives is almost always the same thing  to increase the value of the hotel through driving higher cash flow and returns.

There are many ways that hoteliers can reach this common objective. Whether it is as small scale as implementing weekend price promotions or as major as a total hotel refurbishment, any kind of strategy should be assessed against whether the cost will be offset by higher returns in the short, medium or long term.

Many hoteliers around the world, have recognised the benefits of revenue management and it’s potential for maximising revenue from hotel guests; in periods of both high and low demand. Yet some still view revenue management as an additional cost, due to the initial outlay required, rather than as the asset and strategic tool for increasing returns that it is.

Rapid technology advancements and a growing number of booking channels are seeing revenue management becoming an increasingly important tool in maximising a hotel’s revenue, and in turn increasing the value of the property. The high flow-through of additional revenue that comes from mastering this science, directly impacts bottom line results, making it a key tool in increasing a hotel’s valuation.

Increased revenue leads to higher cash flow, which has a number of flow-on benefits, from giving the hotel greater day-to-day liquidity, to having money in the bank to generate interest. By using revenue management to increase the revenues generated on a regular basis, the amount of cash available after expenses will also increase making further reinvestment possible, to further power the positive cycle of higher revenues.

Therefore to improve cash flow and grow the value of a property, it is in the hoteliers best interest to ensure they are leading the way when it comes to revenue management, so optimum value can be extracted from the hotel. Here are some tips on how How Revenue Management Can Drive Better Cash Flow for your hotel.

Proactive Forecasting and Pricing

Intelligent demand forecasting is at the essence of a successful revenue management strategy. Forecasts should be based on historical patterns, as well as taking into account likely future demand across a range of market segments. Many hotels tend to treat forecasts simply as projections of future revenues. However, those hotels that have embraced revenue management principles understand that forecasts need to be based on demand and detailed enough to allow decisions to be made that will lead to results. This means at a minimum that forecast need to be done by day, by segment.

A strong forecast allows for better decisions to be made about the mix between pricing and inventory management. For example, hoteliers will have a clearer idea what will happen to occupancy levels, as well as demand from different segments, when prices are changed or different promotions are implemented throughout the hotel.

Accurate forecasts also help on more of a macro level, and provide hoteliers the ability to consider a number of different “what if” scenarios, such as swings in aggregate demand or increased price competition from competitors. This powerful knowledge will allow hoteliers to react much more quickly to market changes and also help them put in place different strategies to address diverse market segments, with long-term revenue generation in mind. These optimised decisions lead to higher revenue and profits, which will translate into improved cash flow.

Optimising RevPAR and Ancillary Revenues

Revenue management helps ensure that rooms are priced at the right rate at the right time, generating increased Revenue Per Available Room (RevPAR), which leads to a higher flow-through of additional revenue and directly impacts bottom line results.

Beyond setting an optimal price, revenue management can also be used within a hotel’s systems and processes to safeguard the sustainability of a hotel and establish a solid foundation for optimising revenue and moving towards market-leading RevPAR performance.

Many hotels tend to apply a “first come, first serve” approach. This may be the easiest strategy, but will result in hotels filling with guests that do not contribute positively to the RevPAR performance of a hotel. In order to overcome this, using an accurate unconstrained demand forecast will allow hotels to choose the right business, before any bookings have been made. The right business may be the highest paying, but it is certainly not limited to this, it may also include factors such as length of stay, long-term loyalty and likelihood to come again.

Besides room revenue considerations, data from all transaction systems should be integrated to provide a clear picture of a guest’s preferred activities and their overall value, including ancillary spending, such as food service, day spa usage, gift shop purchases and so on.

By understanding what each customer from any given market segment is likely to use, hoteliers can make better decisions about which customer should receive that last available room, who should be offered discounted breakfast options or complimentary spa treatment promotions to drive demand in low periods etc.

This key consideration will ensure that a hotel’s doors are being opened to customers who offer the greatest value to the hotel today, but also over the lifetime of the property, meaning revenue potential is optimised now and in the future, which should translate into greater cash flow for the business going forward.

Operational Efficiency

If utilised to its full potential, revenue management can have a positive impact on efficiency and improve operational performance across the entire organisation. For example, if a hotel can accurately anticipate levels of demand it can ensure optimal numbers of staff are working at the right times. This will not only have an impact on both optimising costs but also on increasing customer satisfaction, and as hoteliers know all too well, customer satisfaction is one of the key drivers of repeat business, word of mouth marketing and hence, future business.

For instance, it is important that a hotel staffs appropriately to handle forecasted check-in / check-out and room turn around activities to help make the hotel experience as smooth and pleasant as possible.

Through forecasting demand right down to peak check-in and check-out times, hoteliers can ensure staffing levels are adequate for those “spikes” in guest numbers that occur during an upswing. This same principal can be translated into staffing and inventory levels throughout the hotel’s entire operations. These optimized wage costs translate to savings, which can be seen directly in the hotel’s bottom line.

Driving Better Cash Flow for a Hotel Group/Chain

Setting revenue management standards across a hotel group or chain will improve the performance of the portfolio overall. Through data collection and comparisons between properties, hoteliers are better placed to decide how to price a hotel chain in different markets.

Accurate forecasting data, combined with market research and analysis, also makes it possible for hoteliers to carry out more realistic feasibility studies for future hotels looking to join the group, refurbishment investments, or for those assessing future opportunities to open new hotels.

The ability to closely estimate the future success of these projects, before outlaying any capital investment, will help ensure the group or chain only makes decisions that are likely to increase its cash flow and value over the long-term.

Channel and Contract Optimization

To maximise revenue potential, and hence cash flow, hoteliers should form a strong understanding of all of its business channels and ensure they are well represented in each. Establishing mutually beneficial relationships with distribution partners can really help to generate incremental business, but hoteliers must ensure they are not locked into long-term inflexible contracts which can lead to missed potential profits throughout business cycle peaks or troughs.

Hoteliers can then make the most of historical and future channel benchmarking information from third party vendors to understand where a hotel is falling short against its competition and when competitors are moving their rates. This powerful knowledge will help the hotel position itself within the market at the right price, with the right business mix, to ensure business is maximised, to drive cash flow opportunities for the hotel.

A key element of this is also contract optimization. Often hotels limit their revenue management scope to yielding retail rates (or best available rates). However, the real impact will come from managing all segments and business types, including corporate and leisure contracts.

Evaluating whether a contract is RevPAR positive or not over the long term, and then controlling that business over the short to medium term are essential elements of revenue management. Hotel owners and managers that have addressed this area of revenue generation in their hotels will have a better control over their properties cash flow generation potential.

Integration Across the Entire Hotel

The pricing or channel strategies which revenue management set need to be strongly supported and aligned with the goals across the organisation.

Revenue management can help decide who the most valuable customers to target are, their individual preferences and assess the price points to set to attract these markets. But it is then the marketing department who must implement promotions or products to reach and bring in these customers, and their efforts will be what influences how these promotions or products are perceived, from the quality of the company’s website to how easy it is to find information on a promotion.

Therefore, it is extremely important that the two departments work closely together to achieve a common goal of bringing in the most valuable business. Revenue managers should also work closely with the sales team to ensure billing is implemented according to contracts, to avoid outstanding payments and keep cash flow coming in when expected, while also working with the finance department to remind each customer to pay by due date.

In today’s competitive hotel environment there are hundreds of ways that hoteliers are driving customers to their hotel and management are continually updating their strategies in relation to the competition, to drive business, achieve higher returns and increase the value of their hotel.

Yet in such a dynamic market, where demand for a hotel changes on a daily basis and bookings are influenced by anything from the quality of your website to the level of overall demand in the economy, optimising revenues at any given time can be challenging.

However, through utilising revenue management hoteliers are in a strong position to anticipate swings in demand and make sure they sell their rooms at the right rate, at the right time, to the right guests, and through the right channels, to ensure revenues are maximised now and into the future.

Revenue management’s influence can not only be seen in greater immediate revenues, but also in long-term cash flow generation capabilities of properties, which will ultimately lead to a more valuable asset for owners and investors.

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