Responsibility in the Financial Projection of Hotels

The importance of being taken seriously

If there’s one sector where everything seems to fit into Excel, it’s the hotel industry. In recent years, we have seen, in terms of Business Plans, part of the “less good” that we are witnessing in the economy as a whole.

Using a Business Plan to attract financiers who don’t do the maths or demonstrate within an organization that our unviable project should be made viable is a deep-seated evil that is all too recurrent and reflects an erratic and not very rigorous management culture.

Financial projections are an essential tool for managing any enterprise, and in the hotel sector, this practice takes on even greater importance, given the volume of investments and fixed costs inherent in the operation. Material accuracy and reasonableness in financial estimates can determine a hotel’s success or failure.

Within these principles, we leave you with some recommendations:

Detail assumptions:

What is debatable in a project is not the results but rather the variables and assumptions that give rise to them. Make your assumptions clear so that you can explain the deviations generated in the actual realization of the project later.

Investments:

1. Consider working capital needs as an unavoidable investment.
2. Estimate investments in real estate and equipment based on real (and realistic) budgets.
3. Reserve a margin for imponderables.
4. Assume that the execution of the investment may take longer than desired, increasing the gap between the actual investment and the start of revenue generation.

Revenues:

1. The average occupancy rate in Portugal can be between 55 and 65 percent.
2. Think carefully about the services you’re going to market and how they differ. Extras can account for 10-20% of turnover but 30-40% of operating profit. If you don’t have any extras, you may be missing something regarding the hotel concept.
3. Calculate revenue based on the actual rates you can apply at each stage of the year, based on real cases, not averages based on wishful thinking. You may think your project is unique, but the hotel graveyard is full of “unique” projects.
4. Create breathing space in the project, with achievable targets, rather than creating enormous pressure on the project’s profitability based on an unrecoverable volume of investments.

Operating costs:

1. Ask professionals in the field to help you identify the type of external services likely to be required and their typical cost.
2. Don’t forget about support services; no hotel can function without them.
3. Use salary assumptions that allow you to adopt talent retention policies, an additional challenge in this day and age.

Funding the project:

1. Be clear about where the money is coming from and what the remuneration is (cost of accessing the funds).
2. Analyze public and community support and incentives.
3. Identify the debt service of this funding and its viability, taking into account the project’s likely operational cash flows.
4. Have a cash-flow margin.

Carry out sensitivity analyses:

1. Assess the Business Plan’s sensitivity to relevant variations in the main assumptions.
2. Identify the break-even points for the primary income, cost, and investment variables.

The depth and realism of a Business Plan say a lot more about a project and a promoter than it might seem at first glance. The least credible idea they can bring us is an incredible project, with profits piling up from the outset, but where the project promoter doesn’t make the investment/financial commitment himself. That project that is spectacular, but that it is to be done with other people’s money.