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Lecture 6

HTD 500 Lecture 6: Chapter 5


Department
Hospitality and Tourism Management
Course Code
HTD 500
Professor
Richard Wade
Lecture
6

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Chapter 5 Forecasting Revenues and Expenses
Full-Service Facility vs. Focused-Service Facility
Focused-service hotel require lesser analyses than full-service
appraiser in full-service facility must analyze more operating department (F&B,
banquets, recreational facilities)
final income & expense estimate for full/ focused service hotel should blend past
operating results & future expectation
Existing Facility vs. Proposed Facility
existing hotel require less fieldwork than proposed
existing hotel
1. review local supply & demand situation & project future revenues
2. estimate expense categories using operating ratios obtained from previous years’
financial statement
3. estimation should compare to operating results of similar properties
4. any differences should be resolved, discrepancies occur due to
unusual property characteristics: some hotels costly to operate than others (higher
maintenance expenses, energy cost)
assumed competent management: projected expenses reflect competent
management while actual management may better, equal/ less than usual
diff levels of occupancy & ADR: lodging facilities experience more efficient
operations as rates & occupancies increase
final income & expenses estimate for existing hotel should blend of past operating
results & future expectations
due to proposed hotel has no operating history, appraiser must obtain data from
existing comparable properties/ use industry averages to project revenue & expenses
Industry Average
categorizes operating statistics & ratios according to property size, room rate &
geographical location
data represent average operating results & management ability used to evaluate
existing operation/ project revenues & expenses
Uniform System of Accounts for the Lodging Industry (USALI)
provide simple formula for classify accounts used by hotels of all types & sizes; need to
update w/ latest version
can compare hotel financial statements & operating ratios from one hotel to other
which enables owners, operators & consultants quickly evaluate financial operations &
pinpoint problem
complete set of financial statement: balance sheet, statement of revenues & expenses
(primary interest), statement of changing in financial position, any disclosure needed to
comply w/ accepted accounting principles
revenues: room, food, beverages, telephone, rental & other income

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departmental expenses
undistributed operating expenses: expenses that cannot easily allocated to specific
department
fixed charges: nonoperational expenses that hotel’s management has little control
over (management fee, property taxes, insurance, reserve for replacement)
unit of comparison when analyze financial statement: dollar-per-available-room, % of
revenues, dollars-per-available-occupied-room
5 steps for successful hotel concept development
1. redefine your customer segmentation: demographics, local area, target different groups
2. combine your hotel’s best attributes: design, building history, location, landscape, type
of clientele, F&B
3. think of the details & make your uniqueness shine: service quality, cleanliness,
comfortability (increase guest experience)
4. embrace criticism of your concept ideas: feedback/ opinion for concept development
decisions
5. establish how your concept helps drive revenue: conductiveness to doing and
promoting business
Financial Analysis Techniques
maximize long-term revenue & minimize long-term expenses
Dollar-Per-Available-Room
best when evaluate expense items that have high fixed expense (energy cost, property
operations & maintenance, property tax & insurance)
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Percentage of Revenue
% of room revenue: room department expense varies directly w/ room revenues which
composed of occupancy & room rates (50% fixed 50% variable)
% of total revenue: expenses tend to be more variable & less fixed (management fees,
reserves for replacement, administrative & general expenses, marketing expenses)
property operations & maintenance: secondary unit of comparison
% of Department Revenue: departmental expenses (F&B, telephone, rental & other
income expenses) due to directly to volume of departmental revenue
Dollar-Per-Available-Occupied-Room
revenue (F&B, telephone), energy costs at limited-service hotels that don’t have
restaurants & kitchens
compare financial statement of a hotel with industry averages hotel to measure
operating management
ADR & Occupancy affected by management’s operating ability & driven by local market
condition
reason for high food volume
presence of active local banquet & catering business which hotels has appropriate
facilities to host events
good & reputable hotel restaurant which attract patron
key to evaluate competence of a hotel operator: unit of comparison for departmental
expenses (whether manager can control financial operation of property)
room expense ratio < 22% =good; > 27%= further investigation
Forecasting Revenues and Expenses
key component of estimate market value & evaluate economics of investment
forecast revenue & expense by convert occupancy & ADR projections into estimate of
room revenue
forecast of other revenue (F&B, telephone, other income) & operating expenses by
collect data in market & industry statistics
Rooms Revenue Defines: Annual Room Revenue = Occupancy * ADR * Room Count * 365
Fixed and Variable Component Approach to Forecasting Revenues and Expenses
one of the most accurate models of hotel’s future financial performance
Theoretical Basis
revenues & expenses have 1 component that is fixed & another component that varies
directly w/ occupancy & use of facility
fixed: held constant level (front desk salaries, cost of cleaning), variable: adjusted to
reflect & change btw projection occupancy & facility utilization and actual occupancy &
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