In troubled times like today, Bed and Breakfast Innkeepers have an overwhelming feeling that the best way through this downturn (say recession!) is to put their room rates on sale. Isn’t that just what the retailers do at Christmas time to survive a bad season? The answer is that discounting in the travel business not only does not work, it creates a pattern of customer behavior that will last for years, even when times are better. Let’s look at the specifics.
Following 9/11, the Hotel Industry reacted to the basic loss of corporate business by deeply discounting their rates and putting large blocks of unused inventory on third-party web sites. The result was $50 a night rooms on sites like hotels.com which set up a huge expectation with consumers that this was the right price to pay for hotel rooms, no matter what the differences were in quality between each hotel. Many subsequent studies showed that the hotels basically killed their business for several years after the original reason for the discounting had gone away. The PAII Industry Study for 2002 and 2004 shows clearly that while occupancy at bed and breakfast and country inns decreased somewhat over the same period, rates did not go down significantly. Innkeepers knew the value of their product and held their rates. The result was that the Inn Industry basically avoided the meltdown that the Hotels suffered during that time.
By the end of 2007, rates for both Hotels and Inns were higher than in 2001, and occupancy rates had climbed back for the most part to 2000 levels (the best year to date in the Inn business). It is hard to tell where we will end up in 2008, but it clearly will not be a growth year. More important, where will we be in 2009?
Let’s put this into perspective. What would be the impact of your Inn business if revenues declined by say 10%? For an Inn grossing $400,000, that would mean a decrease in sales of $40,000. If the Gross Margin for that Inn (net cash flow/gross revenue) was an efficient 46%, then the net cash flow will also go down by 10%. In this example, the net cash flow would decrease by $18,400 from $184,000 to $165,600. The expenses also have to decrease, and there clearly can be cost reductions since many of the Inn’s expenses are variable and related to occupancy. In other words, as occupancy decreases, certain expenses like housekeeping, amenities and other costs related to occupancy levels will decrease as well. Added to this are the discretionary spending that can be reduced or deferred, all of which leads to the conclusion that even a 10% decrease in revenue will not result in a calamity for a well-run Inn business. It is more like something that needs to be weathered.
Most Innkeepers have a good sense of what the true expenses of operating the Inn are, and can find the ways to reduce costs. More important, most of your personal expenses seem to be interwoven in the Inn’s finances as well, providing a really sound way of reducing expenses. Knowing what is the real cost of the Inn gives you a better way of knowing how much you have to charge in rates to make an adequate return on investment (i.e. to pay the mortgage and have some for yourself) at any level of occupancy. Once you do this, you do not have to discount, you need only charge a fair price to achieve a fair rate of return on investment.
The real concern then remains this nagging feeling among Innkeepers that the only way out of a downturn is to discount. This should be avoided at any cost, because, as described above, once it is done, your guests will never again feel like paying your full rates. It will take many years to climb out of that hole. A better approach is to sell well priced packages and have value-added specials to supplement your rates. This has always worked well for our Industry, and will work again.
Finally, a word about cutting costs. Marketing and maintenance are the two areas that are easy to cut, but have the longest negative affect on your Inn business. This is the time to do what you can to increase marketing, because while the overall travel business may be decreasing, by great marketing you can stabilize or even increase your market share of the business that exists. Deferring maintenance is also something that comes back to bite you, since the cost of making repairs will always be more in the future if something is deferred.
The long and short is that you can favorably impact your results, even in bad economic times. Have faith that this too will pass, but in the interim, cut costs and market, market, market!
Showing posts with label Expense and Income Tracking. Show all posts
Showing posts with label Expense and Income Tracking. Show all posts
Tuesday, November 04, 2008
Thursday, April 03, 2008
Bed and Breakfast Expense/ Income Tracking
The only way to improve your Bed and Breakfast or Inn business is to effectively track where you are today and to make realistic goals for the future of your business. At the 2008 PAII Conference Howard Levitan of Quantum Hospitality Group will be discussing the best methods to track where your business is today and how to increase your profits using metrics and the PAII Industry Study. We hope to see you at the Conference! If you cannot attend, we have provided our slide show presentation:
Bed and Breakfast Expense/ Income Tracking
Bed and Breakfast Expense/ Income Tracking
Monday, January 28, 2008
ARE YOU READY TO MAXIMIZE YOUR PROFITABILITY?
Arden Dale writes in a compelling article published in the Wall Street Journal on January 8, 2008 that “Want to Sell a Business? You May Not Be Ready.” Ms. Dale goes on to state quite cogently that many small business owners are relying on the ultimate sale of their business for their own personal retirement funds. The author’s thesis is that many small business owners do not have proper financial records, detailed operational documentation, and may not have a very realistic idea about the price for their businesses. She goes on to point out that buyers are much more sophisticated than in the past and are insisting on receiving extensive due diligence materials before agreeing to any purchase. The author’s solution is to start getting the business ready to sell several years in advance, to keep proper books and records, and to improve the operating profitability as much as possible.
Sound familiar? This is what we have been talking about this for years now with our program to Achieve Maximum Profitability at your Inn well before it goes to the market. Looking at the financial condition of an Inn as compared to Inns across the Country is achieved by looking at results compared to other similar Inns. In this regard, one source of information for the smaller Inns would be the PAII Industry Study (2007-2008 utilizing 2006 financial results is the most recent version). Other sources includes our own Quantum Hospitality/Oates & Bredfeldt, LLC Standard Cost Analysis Study. In either case, the concept is to conform your own Inn’s financial performance to the Chart of Accounts set forth in the appropriate study, and to determine on an account-by-account basis whether or not your income and expenses are in line with the average Inns in each such study. I can state, without any doubt, that each time we do such analysis for an Inn, we are able to come up with potential cost savings well in excess of our charges for doing this work. We do in depth reviews of the operations of 30-50 Inns across the Country each year, and there are very few that stand up to this type of rigorous, detailed study. The result is that we are then in a position to suggest operational and expense cost savings which will improve the financial results prior to selling the Inn, irrespective of the process used to market the Inn. This is especially true about the “personal” costs and expenses that seem to always be present in the Profit and Loss Statement of the Inn. A good couple of years before any contemplated sale is a really good time to eliminate these additional costs and show some real profitability and net cash flow in the Inn.
Dale’s point about researching the price for the Inn is also well taken. Most Innkeepers look at what they think another Inn has sold for without first hand knowledge of the financial condition of that Inn. They think that if that Inn down the street sold for $X then their Inn has got to be worth more since it is “better” or “more popular,” etc. Another practice is simply to utilize the various rules of thumb like Gross Revenue Multiplier (see previous Article dated May 17, 2007 called “Best Methods for Finding the Ideal Inn”). Often Innkeepers are told to price their Bed and Breakfast Inns at 5-6 times gross sales, even though the business results do not justify such lofty pricing. The solution is to obtain professional advice as to what your Inn Business is really worth compared to other similar Inns before going to the market.
The point about written operational policies and procedures is another really important one. Two or three weeks training from the prior keepers of the Inn can not teach new Innkeepers what they really need to know in order to maintain the value of their new Inn Business in the first year. Those Inns which have written checklists and policies, training manuals, job descriptions, recipes, and stated practices for all of their operational tasks are simply worth more than Inns that do not have this documentation. Buyers will quickly figure this out in the due diligence process, and may walk or run away from a poorly managed Inn notwithstanding the price.
Finally, a word about where we seem to be on the National economic front, as it may impact the ability of Innkeepers to achieve their goals of selling the Inn. Some commentators have downplayed the impact of the Sub-Prime Mortgage Crisis on business. This, of course, is pure foolishness, and a disservice to those whose dreams can be destroyed by buying Inns at the wrong time or at the wrong price. It is now clear from the daily economic news, the plummeting real estate markets, and the rapidly falling stock market that the Country is at grave risk of a real recession, if we are not already there. This will clearly be felt in the tourism market, and all forms of accommodations across the Nation will be feeling this pinch. The Inn business survived the fall off after 911 by not falling prey to the discounting that the hotel business jumped on. We hope that the greater hospitality business has learned its lesson, but for Innkeepers, this year will clearly be a real challenge.
For Sellers, this is not good news. It will clearly have an impact on the prices that will be achievable for their Inns, especially if results take a down turn for them. It already has impacted time on the market for Inns, especially full service Inns with restaurants. Most Inns are staying on the market for 1-2 years before they are sold, even if they are at the right price. For buyers, this does created somewhat of an opportunity, with the Federal Reserve pushing interest rates back to the really low levels of the past several years, however the real key is to make certain that there is sufficient cushion in the net cash flow of the Inn to weather the likely fall off in the hospitality business caused by an economic recession. So buyers need to be very careful that they look at the reality of the financial performance of an Inn opportunity, that they make absolutely certain that there is sufficient cash flow to get by if things go bad, and that they have good working capital at the outset. Making an emotional “lifestyle” decision is not a very good idea in the immediate future (or perhaps ever!). The best performing and operating Inns will likely still be very attractive at the right price with such low interest rates, but marginal operations simply will not sell at any price. In any event, we will be there to offer help when and where needed.
Sound familiar? This is what we have been talking about this for years now with our program to Achieve Maximum Profitability at your Inn well before it goes to the market. Looking at the financial condition of an Inn as compared to Inns across the Country is achieved by looking at results compared to other similar Inns. In this regard, one source of information for the smaller Inns would be the PAII Industry Study (2007-2008 utilizing 2006 financial results is the most recent version). Other sources includes our own Quantum Hospitality/Oates & Bredfeldt, LLC Standard Cost Analysis Study. In either case, the concept is to conform your own Inn’s financial performance to the Chart of Accounts set forth in the appropriate study, and to determine on an account-by-account basis whether or not your income and expenses are in line with the average Inns in each such study. I can state, without any doubt, that each time we do such analysis for an Inn, we are able to come up with potential cost savings well in excess of our charges for doing this work. We do in depth reviews of the operations of 30-50 Inns across the Country each year, and there are very few that stand up to this type of rigorous, detailed study. The result is that we are then in a position to suggest operational and expense cost savings which will improve the financial results prior to selling the Inn, irrespective of the process used to market the Inn. This is especially true about the “personal” costs and expenses that seem to always be present in the Profit and Loss Statement of the Inn. A good couple of years before any contemplated sale is a really good time to eliminate these additional costs and show some real profitability and net cash flow in the Inn.
Dale’s point about researching the price for the Inn is also well taken. Most Innkeepers look at what they think another Inn has sold for without first hand knowledge of the financial condition of that Inn. They think that if that Inn down the street sold for $X then their Inn has got to be worth more since it is “better” or “more popular,” etc. Another practice is simply to utilize the various rules of thumb like Gross Revenue Multiplier (see previous Article dated May 17, 2007 called “Best Methods for Finding the Ideal Inn”). Often Innkeepers are told to price their Bed and Breakfast Inns at 5-6 times gross sales, even though the business results do not justify such lofty pricing. The solution is to obtain professional advice as to what your Inn Business is really worth compared to other similar Inns before going to the market.
The point about written operational policies and procedures is another really important one. Two or three weeks training from the prior keepers of the Inn can not teach new Innkeepers what they really need to know in order to maintain the value of their new Inn Business in the first year. Those Inns which have written checklists and policies, training manuals, job descriptions, recipes, and stated practices for all of their operational tasks are simply worth more than Inns that do not have this documentation. Buyers will quickly figure this out in the due diligence process, and may walk or run away from a poorly managed Inn notwithstanding the price.
Finally, a word about where we seem to be on the National economic front, as it may impact the ability of Innkeepers to achieve their goals of selling the Inn. Some commentators have downplayed the impact of the Sub-Prime Mortgage Crisis on business. This, of course, is pure foolishness, and a disservice to those whose dreams can be destroyed by buying Inns at the wrong time or at the wrong price. It is now clear from the daily economic news, the plummeting real estate markets, and the rapidly falling stock market that the Country is at grave risk of a real recession, if we are not already there. This will clearly be felt in the tourism market, and all forms of accommodations across the Nation will be feeling this pinch. The Inn business survived the fall off after 911 by not falling prey to the discounting that the hotel business jumped on. We hope that the greater hospitality business has learned its lesson, but for Innkeepers, this year will clearly be a real challenge.
For Sellers, this is not good news. It will clearly have an impact on the prices that will be achievable for their Inns, especially if results take a down turn for them. It already has impacted time on the market for Inns, especially full service Inns with restaurants. Most Inns are staying on the market for 1-2 years before they are sold, even if they are at the right price. For buyers, this does created somewhat of an opportunity, with the Federal Reserve pushing interest rates back to the really low levels of the past several years, however the real key is to make certain that there is sufficient cushion in the net cash flow of the Inn to weather the likely fall off in the hospitality business caused by an economic recession. So buyers need to be very careful that they look at the reality of the financial performance of an Inn opportunity, that they make absolutely certain that there is sufficient cash flow to get by if things go bad, and that they have good working capital at the outset. Making an emotional “lifestyle” decision is not a very good idea in the immediate future (or perhaps ever!). The best performing and operating Inns will likely still be very attractive at the right price with such low interest rates, but marginal operations simply will not sell at any price. In any event, we will be there to offer help when and where needed.
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