Long Term Assets-Are They Delivering Optimum Hotel Revenue? - Hotel Financial Courses (2024)

Would you know if long term assets of your hotel are not delivering the highest revenue?

Did you realize that long term assets are also known as fixed assets in a hotel balance sheet?

Can you find out if your hotel asset utilization is healthy?

In the post pandemic era, asset under utilization can have a disastrous effect on revenue generation.

Are you leveraging the right hotel asset management strategies?

I will lay out a strong case for leveraging long term assets of the hotel in revenue generation.

Along the way, I will share some steps you could take to enable this.

But first, we will understand what long term assets are.

This Chapter 4 of Ultimate Guide on Hotel Balance Sheet Basics will cover

What are Long Term Assets anyway?

How are they different from Short Term Assets?

Let us see some long term assets examples.

Look at the long term assets of Paradise Hotel below:

Long Term Assets Examples

The main category of long term assets shown above is Property and Equipment.

Property and Equipment are also commonly known as Fixed Assets.

Fixed Assets are assets whose life extends beyond a financial year.

These are different from Short Term or Current Assets whose life is within a financial year.

We learned about current assets in an earlier post.

Read Related Chapters of Ultimate Guide on Hotel Balance Sheet Basics at the end of this chapter.

Let's see the most common categories of long term assets in the above balance sheet.

Land

Land is an immovable asset.

It forms part of long term assets for almost every type of hotel and other businesses.

Buildings

Buildings are the next common category of long term assets.

These are most important for a hotel business.

Why is that you ask?

Well, because, a hotel's principal revenue comes from selling guest rooms.

Guest rooms are housed in the hotel building asset.

The building asset undergoes what is known as depreciation.

Depreciation is the wear and tear of an asset due to use.

Plant and Machinery

Plant and Machinery mainly refers to long term assets which are installed to the ground.

Examples are like the Boiler, Chiller, Laundry Flatwork Ironer etc.

Furniture and Equipment

A hotel has furniture in its guest rooms, function rooms, restaurants and so on.

Other than the above, furniture is also present in offices of the hotel.

Equipment is any kind of smaller movable long term asset.

Examples are office equipment, kitchen equipment etc.

Long Term Assets can be:

• revenue producing (like guest rooms) or
• otherwise (office equipment).

It the role of producing revenue that is critical in the life of a long term asset.

Let's see how.

Long Term Asset management is an often ignoredstrategy that hasconsequences.

Do you remember thosenumerous occasionswhen your hotelrevenue was stalling?

It wasimpactingyour profitability badly.

You may not have realized it but thesolution is closerto youthan you thought.

This chapter will revealto youresourcesthat your hotel itself possesses.

And which you canleverage to address stalling revenue.

You are the General Manager ofParadise Hotel.

Your hotel revenue isstallingbadly in what you consider is alean month.

A lean month is when average occupancies arebelow 40%

You aretrying outall strategies to push up occupancy levels.

Unfortunately, theydo notseem to beworking.

What do you dodifferentlyin this situation?

Have you come across Stephen Covey'sSharpening the Sawphenomenon in his iconic book"7 Habits of Highly Effective People.?"

If not, read on.

You may well be surprised

If you are a hotel operations manager one of your top most priorities ishotel revenue performance.

TheTop Line(as revenue is known often) is the first major hotelKey Performance Indicator.

Yourboss, ownerand all members of thehotel managementteam are obsessed about that.

With you as the General Manager of the hotel property, thebuck stops at your doorfor revenue performance.

It is what your bosses who are often your hotel owners aredemanding from you.

Often though, general managersget distanced(or consciously distance themselves) frommonthly performanceresults.

However, keeping apulse on revenue performance is criticalfor a hotel general manager.

Revenue is the foundation on which profitability is built.

Given this scenario, general managers may bethrowing the kitchen sinkat revenue generation strategies.

Don't get me wrong.

This is good.

The only problem is they may be ignoring something closer homethan they have realized.

This isdetrimentalto their own success, to understate it!

Why is that you query?

I am glad you asked.

The Profit and Loss Statement is theperformancestatement.

It isindicative of the business results of a month.

It tells you how much revenue you earned among other things.

But itcannot throw light on somethingcritical.

What is that, you ask?

That critical element isrevenue potential.

The Profit and Loss Statementcannot tell youwhat the revenuepotentialis of the hotel.

It can only tell youwhat revenue is actually earnedby the hotel.

So, what is thesolution, you ask sarcastically?

I am getting to it.

Thatcritical elementwhich isrevenue potentialcan only be known if you go to therevenue source.

More specifically,what is producing the revenue.

You are giving me that skeptical look.

Hang on, I am almost there.

Thesourceof revenueis not what you may be thinking.

These arenot the channels of distributionfrom where you get yourmarket segmentsand generate revenue.

What I mean is theresourcethat is producing thatrevenue.

It is something most general managers (and actually all operations managers too)pay little attention to!

And that is theassetthatproduces the revenue.

In our current discussion, more specifically it is the long term assets.

You seem disappointed.

And you want to knowwhyattention isnot beingpaid to long term assets.

But let me clear the air.

To begin with, I already gave one reason earlier, remember.

Hotel managersonly look at the Profit and Loss Statement.

Andthat does not show assets.

More importantly, it does not show long term assets.

You may be wondering why I am so obsessed with long term assets.

Well, let me get your attention.

Would it help if I tell you that long term assets produce upwards of 70% of a hotel revenue.

Aha, that did get your attention.

So, what is thesolution, you ask quite exasperated.

Well, the only solution is to go to a financial statement which shows long term assets!

And thatother financial statement is the Balance Sheet.

The Balance What, you say!

That isexactly the reaction most timeswhen hotel operations managers including the general manager hear about the Balance Sheet.

Now, allow me toask a questionfor a change.

When was the last time as a senior manager you actually saw your hotel Balance Sheet?

Now, I havereally gotten your attention.

In short, operations managers mostly never see the Balance Sheet.

And that is whythey have no ideawhat thedollar cost of their assets(among other things) is in that financial statement.

Whyis that important you ask?

Remember the upwards of 70% contributed by long term assets of a hotel?

Let us say you did not know the extent to which your hotel holds assets, specifically long term assets.

You would then not know of the resource that produces your revenue.

In effect, you haveno idea of its potential too!

Is that not an alarming situation?

Can you see where I am going with this?

I amnot advocating the Balance Sheet because I am an accountant by profession.

I am recommending becauseit gives you a perspective that a Profit and Loss Statement cannot.

Ever!

Andit is not meant to!

So, a Balance Sheet isnot just a “good to have.”

It is anecessity!

So, how will a hotel general managerbenefitfrom a look at the Balance Sheet?

To begin with, aBalance Sheet gives you the financial position of your hotel.

Ittells you more than just assets.

It tells you aboutassets,liabilities,capital- all critical elements of yourhotel business.

Our current discussion is focused on long term assets.

So let us stick to that.

As a hotel unit head, you need to know everything that is central to your hotel.

And I have and willcontinue to provethatassets are at the centerof a hotel's business results.

You took a look at Current Assets in an earlier chapter.

[If you missed that, click below for related chapters of theUltimate Guide on Hotel Balance Sheet Basics.

In thisChapter 4, we are focusing only onlong termassets.

We will stick to that category of assets that has astrong link to revenue generation.

You saw earlier Property and Equipment of Paradise Hotel.

Consider this.

You have only been dealing with theeffectin acause effectphenomenon.

A Profit and Loss Statement is just that - aneffectthat showsbusiness results.

You need atoolwhich will allow you to see thepotentialforrevenue generation.

Assetsallow that.

Long Term Assets are part of that.

And youneedthe Balance Sheet for that.

In a Balance Sheet, one of theprimary sourcesof revenue generation are the Long Term Assets.

You saw them classified as Property & Equipment in the Balance Sheet [see below].

Long Term Assets of Paradise Hotel

Forexample, in the case of Paradise Hotel, you can see Property & Equipment totals $1,108,000.

This includes theHotel Buildingwhich houses theguest roomsamong other things.

In other words, the:

• Rooms Available that you see in a hotel Profit and Loss Statement is
• actually a quantity representation of the long term asset that is the hotel building.

A long term asset is an asset whose benefit will extend beyond a financial year.

In the case of the hotel building thebenefitwould extend from30 to 40 years.

At some point of time in thelife of a hotel,revenue generation strategies may getsaturated.

You may thus be facingnew challenges in your long term assets management.

What do I mean by saturation?

Saturationmeans:

• your long term assets cannot produce
• substantially incremental (higher) revenue any more.

So,is there a way out,you ask skeptically?

Yes and No!

You look confused.

Let me clarify.

Currently, your hotel Profit and Loss Statement has a Key Performance Indicator(KPI) that may provide clues to further revenue generation capacity.

Notice, I said "clues."

It is not a full blown solution.

And those clues you will find in your hotelRevPAR!

Notice how the RevPAR tells you the dollar revenue you are earning per available room.

Or you could sayper available long term assetin the Rooms department.

But theRevPARtells you onlypart of the story.

Thepowerof the RevPAR is toindicate say, that:

• while the RevPAR of the marketin which you operate has beengrowing,
• your hotel RevPAR has been stalling.

It is anunmistakeable warning sign.

That yourrevenue earning capacity from the relevant long term assets is hitting its peak.

Theonly way out(other than nominal increases in RevPAR due to price increases or even abnormal events) isupgrading the long term asset.

You may now be realizing where I am headed.

Planning ahotel renovationis almost all about thisupgrading of the long term assets.

It is aclassic long term assets management scenario.

So, what is themoral of the story?

Look at yourhotel RevPAR versus the marketover the past five years or as many years that you have.

Do you see thatstalling RevPAR symptoms?

Some immediate steps you can take is to see if yourBalance Sheetshows anyadditional land adjacent to the hotel.

If yes, you canexplore constructing a new wingto increase guest room capacity.

Suffice to say here that merelylookingat your hotelProfit and Loss Statementis not good enough.

All of this is applicable tohotel room revenue.

Is there a way to quickly find out what the hotel long term asset revenue potential is, you ask?

Awesome question.

Yes there is and I will now tell you about that.

Long Term Assets Turnover Ratio

Your hotel ownersalso look at aKPIcalledLong Term Assets Turnover Ratio.

Often also known as Fixed Assets Turnover Ratio.

This takes anoverall measureof how muchrevenueyou are earning from thelong term assets you currently have.

Anotherasset potential based KPI.

Anotherlong termassets management priority

You get the picture.

These are some reasonswhyhotel managersmust acquaint themselveswith the hotel Balance Sheet.

It will tell you more about whatrevenue potentialthere is inyour hotel assets.

You would want that, wouldn’t you?

You can take some immediate action steps as laid out below.

How are you looking at your hotel revenue potential?

Are you paying attention to the long term assets of your hotel?

Comment below, I will be keen to know what you think.

STEP 1

Goto your Hotel Financial Controller and ask him to show you theBalance Sheetfor the hotel.

STEP 2

Identify Long Term Assets in your hotel balance sheet. They will be under Property and Equipment.

STEP 3

Noticehow Land, Building, Furniture & Equipment are laid out. What type of Equipment does your hotel have?

STEP 4

How much are Long Term Assets for your hotel? Do you know the ratio to revenue for them?

STEP 5

Ask yourself whether as a hotel manager you are managing your long term assets effectively.