Financial Management: Best Practices in the Hospitality Industry
The technical team of the Malta Institute of Accountants, interviews the Finance Director of Hilton Malta, Ms Lorna Bonnici, Mr Ian Bonello, the Financial Controller of Dolmen Resort Hotel and Mr Ray Sladden, Group Finance Director & Company Secretary of Tumas Group.
Q: Most successful hotels, like any other businesses, rely on fundamental management principles to enable them to maximize their property profitably. The keys to financial success include an annual budget, detailed financial tracking model, ongoing audits and reporting structure. Would the same principles in hotel financial management apply to a hotel which relates to a chain and to an independent hotel?
A: Yes – the principles in general are the same and an independent hotel stands to benefit from having a similar structure to that of a hotel forming part of a chain.
The purpose and benefits of budgetary planning and control process include:
- Establishing financial and organisational objectives through discussions between hotel owners and hotel senior managers.
- Communicating objectives and plans.
- Planning and coordinating operations through discussions between hotel senior and middle management.
- Participating in the budget process motivates managers and employees – they get to “own” the budget.
- Measuring and controlling organizational performance.
- Evaluating managerial performance which is linked to a reward structure. This stimulates superior performance.
It is fundamental that heads of departments are conversant with budgets and financial information in general and it is the role of the management team to train, explain and support heads of departments in the use of financial information. The finance team of any hotel should hold monthly meetings with key departments to analyze profit and loss results and discuss short term future operational and financial expectations. The finance department of any hotel, just like that of any other company, needs to position itself as a financial consultant to other department heads as these evaluate fresh models of how to enhance revenue and/or explore ways to reduce costs.
Q: Revenue management has made its way from the airline industry into the lodging sector. The five pillars of revenue management are (a) segmentation and customer knowledge, (b) capacity management, (c) forecasting and overbooking, (d) channel management and distribution, (e) pricing strategies. Could you describe to the readers of ‘The Accountant’ how a hotel forming part of a chain, practises revenue management?
A: Indeed revenue management is one of the key pillars of our organisation and vital to the success of the operation. It is all about the basic concept of maximising demand and a given supply and thus optimising our yield. In order to do this, the gathering of market information, historical information and having the right tools to analyse the business trends are all critical to help us adopt the right strategies and making the right decisions in maximising revenues. Being part of a chain helps us to gain synergy from a Central Reservation Systems and our loyalty program.
Our international sales offices also focus on low periods and support the individual hotels. Tapping such a resource, sharing the right information and proper forecasting are important elements to ensure that central marketing campaigns are effective and essential to drive business home. Revenue management is not something to be visited once a month but it has to be practiced in real time, all the time.
In our industry, certainly the 5 star hotels, revenue management normally falls under the remit of the revenue department, often headed by the director for business development. The function is fully embraced and supported by the general manager. The critical role of the financial controller is to review, challenge the numbers, look at the overall picture and give constructive feedback.
Q: Do independent hotels follow the revenue management regime?
A: Yes independent hotels also have a revenue management regime in place. This includes:
(a) segmentation and customer knowledge
- Segmentation by source: individuals, leisure groups, meetings, incentives, conferencing and exhibitions (MICE); online, direct.
- Segmentation by country: mainly UK, Germany, France, Benelux, Scandinavia, Italy.
- Using internet and social media to interact with our customers, as well as following customer reviews of our own hotel and competitors’.
(b) capacity management & (c) forecasting and overbooking
It’s a balancing act between lowering rates to secure business earlier than competitors versus retaining higher rates with the prospect of achieving superior room rates, but risking a lower occupancy which might ultimately result in lower revenues than the previous option. The stance adopted along this spectrum depends on the business outlook perceived by the sales and marketing department and risk appetite of the management team.
(d) channel management and distribution
We endeavour to increase the number of tour operators, liaise with Destination Management Companies (DMCs) for meetings, incentives, conferences and exhibitions; participation in sales trips and travel fairs to establish direct business connections, investment in technology to grow the online segment which allows us to set room rates in the short term depending on the market’s current supply and demand.
(e) pricing strategies
Apart from the seasonality aspect which translates into higher rates in summer, the vast amount of information on room rates available on the internet (both ours and that of our competitors), makes it more difficult to charge rates which are much different from those of our competitors or different rates to different operators based on the perceived affluence of their target market. Any pricing differences stem from qualitative factors such as differences in the manner tour operators package their offers, the hotel’s “augmented services” -free WIFI, free safe deposit boxes, “free upgrades” to sea-view rooms, etc. or the discount schemes (loyalty or early booking discounts) and the commission structure agreed with the tour operators and DMCs.
Q: What are your suggestions to financial managers working within an independent hotel, in terms of best practices in revenue management for 2017?
A: In the current business environment where tourism figures have been increasing year after year for the past five years, our common goal as hoteliers should be to keep building on our achievements by nurturing profitable relationships with our business partners and engaging in healthy competition through product development and quality enhancement rather than undermine the entire industry through aggressive price competition. This would be more so important for when there is a dip in the business cyclical which would increase the pressure to reduce room rates, as these might then take a number of years to recover.
Q: How can revenue management assist an independent hotel in times of weaker demand?
A: It is only through revenue management, that any hotel (whether independent or part of a chain) can protect and potentially grow its fair market share and RevPar index (revenue per available room). The stronger the hotel’s knowledge about the customer, segmentation, capacity, and competition, the better equipped a hotel is in making the right decision and thus maximizing on its yielding potential. In tandem with a thorough understanding of the hotel’s cost structure, management would be able to retain an adequate margin of profit to ensure the sustainability of the property in challenging times.
Q: Do you agree that pricing strategy is one of the most important of the previously mentioned pillars?
A: Indeed, the correct pricing strategy for each market segmentation is critical. An incorrect pricing strategy immediately leads to ultimate loss of revenues / RevPar, and hence, repercussions. However, the negative effects of incorrect pricing strategies tend to have a much longer term impact on the business. One must keep in mind that our product is a perishable one and its sell-by date is gone immediately the day is over.
Q: What does asset management mean in the hotel/hospitality industry?
A: Asset management for the hotel industry is maximising our return from the way we run the business. It is a systematic approach to manage our assets and identify business improvement opportunities. The asset itself ranges from the actual tangible product (the rooms; restaurants ; meeting rooms ; public areas; recreational facilities, IT systems), to the service provided by our frontline employees who are central in ensuring that the hotels’ guests enjoy a memorable experience.
Q: What type of business model should a hotel forming part of a chain and an independent hotel follow on asset management?
A: Due to its various brands a hotel forming part of a chain has to adapt to various business models – ranging from owned/ leased properties; managed or franchised. Following the managed hotel business model requires that we represent our brand – to fulfil the brand promise and provide consistency of product and quality through proper control and management of our assets within our direct control. It is one big continuous circle – by exceeding guest expectations, we will drive our RevPar results and through proper cost management, we maximise our owners’ return and hence the return on Investment….which in turn leads to reinvestment in the property.
As an independent hotel, forming part of larger group of companies which has been a pioneer in Malta’s hospitality industry and has now evolved into a diversified group with a sterling reputation with its local and foreign business partners, allows us to pool our resources to enjoy synergies and economies of scale in certain areas like purchasing, financing and project management. This has to be assessed on a holistic basis, as with any other asset we need to ensure a satisfactory return as we compete for capital resources which from an owner’s perspective can alternatively also be assigned elsewhere. Of course our approach is for continuous asset renewal & upgrading so as to score goals and actually make the expected return. This will enable the shareholders to put more money into these assets. In all, we need to deliver enterprise value to our owners essentially by exceeding customer expectations, thereby maximising revenue while retaining appropriate cost control.
Q: What is your advice from a financial manager’s perspective to the hotel industry in Malta for the near future?
A: Like any other business, in order for a hotel to thrive, grow and be successful, there needs to be a solid structure and backbone to sustain the operation. Having excellent facilities for the end product is key but without the know how to manage and maximise the use of these assets, they will fall apart. Investing in the right people to run the business, working with various partners such as MTA, Malta Enterprise and Airmalta, knowing our customers, knowing our market, managing our revenues, a pro-active credit control function and perpetual cash-flow management, investing in modern tools and technology, having well trained team members (both front and back of house), and having sound internal control processes to support any operation, is key to the success of any hotel/business. We definitely need to be innovative and keen on embracing new techniques and systems ensuring a total customer focus. It is ultimately all these factors woven together that sow the seeds of success.