How to Properly Account for Utility Cost

Those of you who are users of our Profit Evaluation tool, or participate in Choice Hotels International’s Project GROW, know that we send out Monthly Tips on issues of compliance with the hotel industries accounting standards (The 11th Edition); the goal of the emails is to help you get your accounting lined up with industry standards. Without that attention to detail, the comparisons of expenses and knowledge you may gain from them, are seriously impacted.

“It’s the little details that are vital. Little things make big things happen.”

– John Wooden

 

One of the areas where comparisons can be of the most help to you is Utility Cost.

  1. Electricity
  2. Gas
  3. Oil
  4. Water/Sewer
  5. Steam
  6. Chilled Water
  7. Other Fuels (examples include propane, kerosene, diesel, geothermal, solar, wind)
  8. Contract Services (firms that are engaged in energy audits, water reclamation, or other services that reduce energy consumption)

Things that don’t belong under Utilities (and where they belong): Cable (Rooms Expense), internet (Information & Technology), Garbage (Maintenance), Pest Control (Maintenance).

Next Up – Accuracy Matters

Be sure to post each type of cost to the appropriate line, and keep current with your postings. Sometimes, accountants will post several types of cost to a single account, or miss a month and post two months at a time. This will cause issues for you in the event your Utility Cost is out of line with other operators. If your cost is high, the next thing to do is look at ach cost individually. If you are not tracking your expenses by type of utility, you find that you cannot determine which cost(s) are causing the issue. It should not be any harder to book the expenses individually than together. Similarly, season and volume of business are also contributors to Utility Cost variances. Posting monthly amounts will allow you to better see these fluctuations.

Help Is Out There

There are a number of FREE tips and resources for improving your utility costs, and you can learn about them from us, your Brand Representative, your local utility provider, or Google.

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How to Better Understand your Star Report

One of the tasks were hoping to accomplish on this site to assemble a collection of resources to help you address the various areas of profitability and the measurements you see in the various sections. Now you know what they say about reinventing the wheel, and some of the items we track, trend, and report to you have been written about extensively.

So when we talk about resources, they could be: Videos of presentations we’ve done, PowerPoints, Articles, Specific instructions on implementing a strategy, or sample report formats. Now we aren’t so arrogant to think only WE can tell you how to improve. From time to time we will invite other industry professionals to add content, and in addition to that we will also put articles like this up to help you find resources related to a specific topic.

This month we are featuring Smith Travel Research’s STAR Report. I’m sure that you have heard of and are using the STR Report. In my dealings, I have come across very few owners and operators who haven’t heard of the STR report and/or review their STR report. The group of hotels who understand all of the various measurements and can make sound decisions based on what they see, is a much smaller group.

I asked a dear friend of mine once what was the biggest thing she thought most companies missed on the STR report. Now this wasn’t some neighbor or coffee friend, she was a Cornell educated, Hotel Underwriter, who has worked as an Asset Manager for one the largest hotel REIT’s. Her response was “Their Rank in the Comp Set”. Her contention was that Index only told part of the story, and that her question to operators centered more on what are your plans for improving your Rank in Occupancy, ADR, and REVPAR. What’s interesting about her approach is that, unless you are ranked first, the index is not the whole issue. In some markets, 2 or 3 hotels hold large indexes, while 3 or 4 hotels are well below fair share. This could be a bad comp set issue, it could be a lot of things, but focus on Rank is a much clearer goal for the hotels in positions 2, 3, and 4. Their indexes may say more about the failings of the bottom performers than anything about their own success.

The STR report is a valuable tool, a weapon to wield. How well you can use it, can determine how well you succeed.

What Smith has to Say

Why not start at the source. The STR website has a lot of good content, and mush of it is actually understandable. There are documents and videos that can help you to figure out “What is all this?”

The link below will take you straight to their documents page
http://www.str.com/resources/documents

This link will take you to their videos page.
http://www.str.com/resources/product-tutorials

This link will take you their Glossary of Common terms.
http://www.str.com/resources/glossary#G

Other Resources

This is a quiz someone put together
https://quizlet.com/63247732/str-exam-flash-cards/

Here is an easy to understand article about understanding Market Penetration
https://www.xotels.com/en/revenue-management/revenue-management-book/market-penetration-index

Sometimes the STR report results are skewed by a bad comp set. Yes there are rules you have to follow, but there are bet practices in selecting a comp set. Here are two articles about the subject.
http://rethinkhotels.com/how-to-define-your-compset/
http://www.hotelnewsnow.com/Articles/27510/How-to-create-a-better-comp-set

Check these resources out. Email us with any specific questions about your hotel. If your index isn’t 100, let’s figure out why. If it is above 100, let’s see what your rank is. If you are above 100 and/or ranked #1, let’s talk about to protect your position. Highly Profitable hotels are predators. They are never satisfied and always looking to improve their position. There are hotels with REVPAR Index’s in the 200 range.

“Remember, contentment is the enemy of Profit. ABGB Always Be Getting Better”

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WHY you should follow the 11th Edition

Did you know that the Hotel Industry has a standard chart of accounts and Operating Statement format?

If you’ve heard me speak at a convention, or used one of the industries many profitability comparison reports then you’ve heard of and seen it.

The 11th edition was put together by a group Hotel Financial Experts in association with the American Hotel Lodging Institute (USALI) and the Hospitality Finance and Technology Professionals (HFTP). The standard Is used by virtually every large hotel company in the United States, be they brands, management companies, or REITS. Why do they all use the same format? Easy, comparability. The same way that hotel companies use the STR report to compare their Revenue and Room Sales, large publicly held companies want to compare expenses and profit. They use the comparisons to stay aware of expense trends and look for areas to improve the costmanagement and efficiency, much the way you might use the STR report to help set rates.

A second reason they use the 11th edition is investor comparisons. Wall Street and other investors require that the companies Profit and Loss statements be in a standard format to ensure a fair comparison to other hotel companies. REIT’s and other investors often own stock or assets from a variety of brands, and assess future investments and rebranding based on performance. Often times our clients ask for reporting on which of their management companies are run the best Labor Cost, Best Maintenance Cost, etc. This requires continuity across the reporting.

“We cannot solve our problems with the same level of thinking that created them”

– Albert Einstein

11 Reasons For Using the 11th Edition

So with apologies and acknowledgements to David Letterman, here are the top 10 11 reasons YOU should embrace the industry standard.

1.  Industry standard

    There is an industry standard, so why not use it? What advantage do you perceive to doing things differently than every other hotel? If your objection is, “What difference does it make”? Check out the next 10 reasons.

2.  Accurate expense coding

    You know the old saying “Everything in its place”. Well this is one of the first benefits that you will gain from embracing the standard. There is an Expense Dictionary in which you can look up any item or service you purchase, and it will reference exactly what account to which the item should be coded. In a study of Maintenance Expense we found that the average cost per occupied room for 700 hotels was $5.94, the HOST average for Limited Service Operators was $4.11. If you are one of the hotels in our study, would you want to know how to save $1.83 per room? For a 60 room hotel, running 70% occupancy, this would produce over $28,000 more in income. The first issue to resolve is: “Are you accounting for Maintenance the same as these other hotel”? If you are on the 11th Edition, the answer is YES! Oh and one more point, the lowest cost reported by a hotel was .81 cents, and the highest was $38.76. I assure you those owners have accounting issues, and it shows.

3.  Comparison to industry averages and studies

    Maybe you get Smith Travel’s HOST report, or CBRE’s annual study of hotel profitability, or you are user of CIA’s Hotel Operating Profit Evaluation, or participate in CHOICE hotels Project GROW. Your use of all these tools is heavily impacted by how well your accounting and reporting comply to the industry standard. All the reports mentioned are based on the 11th edition. You will need to have standardized department totals for Payroll Cost, Taxes and Benefits, and Other Expenses. Without these totals, all you can learn is how you compare at the top and bottom. If your Profit is 35% of revenue, and the industry average or your segment is 45%, then all you will know is that you are well below average in profit production. Now if you line up throughout the report, you will see exactly where you need to improve. Beyond the reports listed, there are sources like online articles, sessions at conventions, industry blogs, etc. that discuss hotel cost and profit. Your ability to benefit from this type of material will increase if you are following the industry standard.

4.  Financial Lending Requirement

    As discussed earlier, financial professionals, almost uniformly, require reports submitted to them to be in the standard format. A large part of their valuation is based on your earnings, and how those earnings compare to other hotels. In order to make this assessment, they want to compare apples to apples, and they often don’t want to have reformat your reports. I can tell you from personal experience of owners who were looking to refinance their property, or were presenting a current properties P&L when trying to secure financing for a new project, and were told to resubmit their report in the standard format.

5.  Operations vs accounting reporting

    In addition to the standard accounts and definitions of what goes in them, there is a common format to the report as well. The format chosen is designed to create an “Operating Statement”. This is a report that can be used to make Operations Decisions, not just compile numbers for tax filing. The statement is separated by department, and includes subtotals of payroll, payroll burden, and other expenses for each department. The format shows both Monthly and Year to Date amounts on the same page. This allows to see not only what happened last month, but to also see if there are long term trends that need reviewing. This format also includes comparisons to prior year and budget, and metrics that make for truer comparisons than just dollars. You should be able to share the report with managers, be able to have monthly P&L reviews using only the report, and be able to develop detailed action plans to make improvements.

6.  Comparison to your own history

    One of the features of the standard format is the inclusion of values from the same time frame Last Year. Owners look for year over year improvement, in the same way employees have some to expect an annual increase in wages. (If the notion of giving employees an annual increase pay is a new concept to you, read some of our material on the cost of turnover). This goal, make Year Over Year variance a key variances that owners want operators to manage. Assuming you can accept this reality, then you should understand the value in putting the Last Year numbers, and variances versus Current Year front and center on the report. Part of your P&L Review should be an examination of performance versus last year, and an honest understanding of what is causing the variances. In addition to Last Year, all major operators and highly profitable hotels, also include comparisons to Budget on their Operating Statement as well. Having an established set of goals for the property, and managing to those goals changes you from a passenger along for the ride, to driving your own success.

7.  Metrics

    We all can understand that when you are comparing expenses from two periods of time (this year vs last year, this month vs last month, etc.), comparing to other hotels (or groups of hotels), the first question is “How many rooms did they sell”? This is necessary because it is axiomatic that if you had more rooms sold, you are going to spend more servicing them. If there are two hotels each with 70 rooms, and one spent $7,000 on Housekeepers and the other spent $10,00 on Housekeepers, there isn’t much you can tell from this. In fact, if you are the first hotel, you may think “I’ve won. I spent less.” But, if we use Cost Per Occupied Room we can learn a lot. By dividing the expense by the number of room occupied, we get a fair comparison. Using this method, we see the first hotel spent $6.45 per room and the second $5.15. The second hotel is clearly more efficient.
    This same approach is needed for accurately comparing your current year and last year values. Unless you had the same number of rooms and the same revenue, a comparison of dollars can be very misleading.
    Your Operating Statement should include Cost Per Occupied Room and Cost Percent of Revenue at a minimum. For some line items (expenses) you may also want to see Cost Per Cover, Cost Per Available Room, or Cost Per Day.
    Conversations with managers, brand representatives, accountants, etc. will be much more productive if you focus on the proper metrics, and eliminate cross talk about differences in volume of business. If you have ever been involved in a conversation like this:
    Owner, “Why are spending so much in breakfast?”
    Manager “We had more rooms.”
    Owner, “We had that many more rooms?”
    Manager, “I guess.”
    Then you need to be looking at and discussing metrics, whether you are the Owner or the Manager. Make your conversations meaningful.

8.  Informed decisions and improved communication

    As I touched on above, the standard operating statement became the standard because it helps Multi-property managers, Owners, and Analysts to have clear communication, and ask more meaningful questions. When reviews and discussions focused on dollars, entirely too much time was wasted trying to determine the impact of volume on the numbers. The inclusion of metrics allowed hoteliers to find the real issues and move on to solving for the problems.
    The Metrics and Comparisons described above give you accurate benchmarks to agree on, and will stop owners and managers from arguing over whether or not a goal is fair, and get on to planning specific actions to obtain it.
    In a recent conversation with an owner we were discussing Room Attendant cost. The manager was convinced that there had to be something different about their hotel, because they were spending so much more. We sat together and looked the Cost Per Occupied Room and Hours Per Occupied Room on a day by day basis for 6 months. When we reviewed it this way, the manager was able to see that were plenty of days where she was running the same levels she thought wasn’t possible. Together we determined what conditions were causing the “bad” days. The manager made the changes, and payroll cost dropped into line.
    Awareness and understanding of industry measures, focus on comparable values (metrics), and having a format that make both clear, will allow you to work together to improve performance.

9.  Hiring qualified people

    One of the best habits of highly profitable hotels is that either hire or develop highly skilled managers. Their managers have a high financial acumen, and our as skilled at managing a P&L as they are at managing guest and employee relations.
    In converse to this, low profit operators tend in, strong numbers, to have inexperienced managers. Often time their managers are extremely hard working, and were the best desk clerk on property. They know the PMS and Reservations system like the back of their hand, they are wonderful with the guest, they are the first ones to come in and cover when someone doesn’t show up. They are valuable employees, and can be developed into quality managers, but they have no knowledge of financial statements. Teaching them to manage an industry standard statement will pay dividends to you for many years to come.
    If you are new to the industry, or looking to improve your properties performance, bringing in an experienced manager can pay immediate dividends. When I use hiring GM’s for a large brand, the first two questions I asked candidates was: What’s the GOP at your current hotel, and What do you run for payroll cost? These are two questions that experienced GM’s will answer off the top of their head, because they live and breathe these two values. If your reporting isn’t in the industry standard, it will say a lot about you. The same way you are interviewing candidates, they are considering you. Presenting professional, industry standard reports, and a knowledge of them WILL help you to secure better candidates.

10.  Reputation

    This brings us to how other view you and your properties. Whether it is dealing with financiers, brand representatives, potential candidates for positions, other owners, or any one in the industry in general, your compliance to reporting standards and your understanding of industry metrics and benchmarks is going to be a positive on your business.
    No bad numbers in the correct format are not going to magically look better. The correct format, and your ability to explain your numbers does tell others that you are actively driving your business, and not merely a victim of luck (be it good or bad). Think of all the situations where you want to be taken seriously and seen in the best light. In many ways, the reporting we are discussing is the foundation of your reputation. You keep your hotel clean, you make sure your employees are polite, and do other things to make sure that customers think highly of you and want to stay at your hotel. The reporting standards establish the same value in the eyes of your company with business partners.

11.  Value of your asset

    So all of this comes down to the value of your asset. You did the work to build and acquire hotels, you work hard to maintain and operate them. Someday you will want need to move on from them. Whether your exit strategy may be to sell your properties, or to pass them on to family, you want them to be a valuable as possible.
    Think about the 10 reasons above this one. They are all moving you in a specific decision: Make as much profit as possible without destroying your investment. Show margins as good as, or better than similar operators. Be a knowledgeable, savvy, operator who is taken seriously by outside entities. All with the end goal of making sure there is no reason anyone will discount the values of your asset.
    I realize that the Business Man in you is probably thinking, “If my numbers are good, who cares what the report format looks like.” I would only as you to consider the accompanying quote.
    Little things that may seem unimportant can have a big impact. Choose reports and measurements that help you dig deep, and stay aware of how things relate and affect one and other.
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Why 23% Labor Cost Matters To Limited Service Operators

If you’ve heard me speak at conventions, the number in the title is no big surprise. After years of benchmarking thousands of P&L’s, and measuring Labor Cost vs GOP, we have found a strong correlation between the two values. Labor Cost % is your total payroll divided by your revenue compared to your Gross Operating Profit divided by your revenue.

“It is not enough to do your best; you must know what to do, and then do your best.”

– W Edward Deming

 

First, a little ground work. In math there is a calculation known as R2 or R squared, known as the Coefficient of Determination. I know, great name, right. The R2 value is used to measure how much a number impacts another number. For instance, how much does what I spend effect my bank balance. Well that would be an R2 of 1.00, as every dollar spend reduces my balance by the same amount. So a perfect direct correlation would be 1.00. Okay, so back to our story. If we charted Revenue vs Profit we would find an R2 of around .83. So think of it this way, if we were comparing 2 hotels, the one that made more in revenue would make more in profit 83% of the time. That’s easy enough to believe. You would expect to make more profit if you made more revenue, right? When we look at Payroll Cost we find an 2 of around .73. So if we looked at 2 hotels, the one who had the higher Labor Cost Percent of Revenue (or Ratio to Sales) would have the lower GOP Percentage 75%of the time. Labor cost is almost as accurate a predictor of profitability as revenue.

This gives you a great way to measure how well you are controlling your labor, and driving your profits. 98% of all hotels whose labor cost was below 17% posted GOP’s better than 35%. 91% of hotels with labor cost between 17% and 20% had GOP’s of 35% or better. The trend continues on a pretty straight line. When reach hotels above 23% they are only 23.3% likely to achieve a GOP above 23%. The odds are even worse once you get above 27% Labor Cost. Take a look at the chart below.

What’s Your Birthday?

If you look at the chart you will see that only once, out of 738 hotels, does someone run a labor cost higher than 27%, and still achieve a GOP above 35% (The arrow). This means that you have a 1 in 369 chance of pulling this off. The next time you are on a plane, or at a theater, ask the person next to when their birthday is, there is a 1 in 365 chance it will be the same as yours. So… there is a better chance you will find someone randomly sitting next to you has the same birthday than you will break 35% GOP with a Labor Cost over 27%.

Check out what your Labor Cost is running on the dashboard here on VOA. Look in the Personal Profit Improvement Plan for more information about Labor Cost and how to control it. Email us or your Brand Representative to get some specific recommendations.

You know what they say about death and taxes being the only two guarantees in life. This isn’t a guarantee, but it is pretty darn close, 75%. How many things in your life happen 3 out of every 4 times?

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Operations Process Assessment

For the past several years I have spoken at Choice’s Annual conference. The overriding theme of those sessions is “The Habits of Highly Profitable Hotels”. The concept that is there are common reports, measurements, and processes used by hotels that achieve high GOP’s. Don’t get me wrong, they start out with making sure they producing the proper revenue, but there is also a way they approach managing their business that drives their daily, weekly, and monthly task list.

With that in mind, I set out to find out how they approached some of the industry standard practices. The idea is pretty simple. The same we can show you a direct line between Labor Cost and GOP, with a very high correlation (labor cost will correctly indicate GOP around 74% of the time), we wanted to see how using certain reports, understanding certain metrics, and performing certain processes had a direct correlation to GOP. For instance, do we find that the frequency with which hotels perform Linen Inventory equates to higher GOP, at the very least, what practices can we say are truly common across high profit operations.

Operations Process Assesment

There is a reason these operators ae successful, and there is a reason they value certain processes. Our hope is that we can provide all of our clients’ guidance and reinforcement on the implementing “Profitable Practice. If you are user of the Virtual Operations Analyst, think of this as a “Conversation with ProfitScape residents, on what life is like in Pinnacle City.” (If you don’t what that is, Ask Jim is always on option. It’s over there on the left.)

So with that in mind, we started with our most successful clients and trusted advisors. These are people who include Brand Representatives, Owners, REIT Analyst, Multi-Property Managers, Property Managers, Consultants, my Mom, and some others. The criteria for the baseline group is; Limited Service Hotels had to be running GOP’s above 42%, and Full Service Operators needed to be above 32% GOP.

We found somethings were consistent across the full sample, some were in practice at the vast majority, and some were not as widely adopted. Interestingly enough, the percent of people using a tool was not directly proportionate to its perceived value. Let me try to clear that up. Some of the practices recommended for use by less than half of the group, but the people who recommended ranked it as very important to their financial success. Based on the final results, come of the survey group actually adopted the practice. This is what I love the most about profit driven operators, they are always looking for ways to get better, and never cling to the past just for the sake of believing they are right.

How on earth does this help you!

Where is all this going, where can you find out these “Habits”? Here on www.ciavoa.com, there is an Operations Process Assessment. You can get to it from the “Activities” menu, the “improve Your Operations Quotient” menu, or (well shoot) just click HERE.

This is a simple survey that will ask you about the same items as the survey group. For each item you will indicate: Do you have the process in place (do you do it) is a simple Yes or No. How important is it to you, where you will rank importance on a scale of 1 – 5, and How well do you think you are executing this, which is another scale of 1 – 5.

So let’s look at “Hotel has a PM program in place with checklist performed on all guest rooms 3 times per year”

If you don’t know what PM stands for click on Ask Jim on the left, or ask your Brand Representative. By the by, it means Preventive Maintenance. So if you have a Preventive Maintenance program like the one described, you would check the box for “Do you have this in place?” If you don’t do it, don’t check the box.

Now comes how important is it to you?

If this is something you believe is critical to operating your hotel put a 5. If you do it, but honestly you don’t know why”, then you would rank it as a 1. And so on, and so forth.

Finally, how good are you at the task, or how well do you understand it?

Again this is a 1 to 5 scale. If you have a maintenance person doing PM, but management doesn’t spot check the work, then you are probably at a rank of 3. If you have a PM process, but it does include a checklist of what should be done, you are probably a 2. If you don’t track the completed room numbers and the dates they were completed, then you are likely a 1.

Don’t worry about the ranking scale, answer to the best of your ability. Once you are done you can share your results with your Brand Representative and discuss whether adopting or improving your execution of the actions would pay you benefits. In addition, we will be able to present you with specific articles, links, and exercises to show you how the task in question will improve your profit, and how to properly implement and execute the task.

This could be articles like “How PM improves your REVPAR and reduces your Capital Expense”, a link to a written PM process, or a link to an expert who can help you.

Oh yeah, one last thing, for a low fee ($50.00) we will give several additional resources that will help you to implement the various tasks on the questionnaire. We will score you based on your answers, and show you how your overall score compares to others (and to the high profit survey group), as well as how your answers on individual item compare. As with all of our other comparisons, our goal is to give you the ability to compare your use of the items listed to: Your Brand, Hotels Your Size, Your Geographical Area, etc.

I know this isn’t as direct and exciting as Labor Cost at high profit hotels (<17% of revenue FYI), but this gives you some direct feedback on how high profit hotels operate, and some actions that you can implement. Properly implementing these processes, reports, and measurements WILL have a positive impact on your profit.

 

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10 ways CIA makes your accounting and reporting better

10 ways CIA makes your accounting and reporting better

1

Electronic posting of Property Management System data eliminates transposition errors.

2

Electronic posting of Property Management System data eliminates miss-coding.

3

Regardless of your accounting system, our interfaced reporting package provides you with an industry standard format, with no additional data entry.

4

Provides an automated way to ensure your payments and revenues are in balance.

5

Provides an automated way to ensure that your Guest, Advanced Deposit, and City Ledgers are in balance.

6

Improves credit card reconciliation by creating daily records and balance checks, reducing unseen variances.

7

Provides a Daily Report that not only tells you what happened yesterday, but also helps you plan out what you’ll do tomorrow, and suggest ways to drive PROFIT.

8

Provides all the metrics and comparisons your managers need to make better operations decisions

9

Provides an easy to use Combined and Comparable report to see how all your hotels are doing on 1 report.

10

Provides you a monthly comparison of spending compared to similar revenue, same brand, similar size, similar markets, etc.  Comparisons are at a detailed account level, and are in dollars and metric.  (Comparisons available are based on other users in the program meeting the requested criteria)

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