Try to avoid these 5 financial pitfalls most hotels face
Ever since social media came into the global scene, tourism was never the same again. Travel became a status symbol, and everyone wanted a taste of it. More and more people have developed an awareness to travel, to try new experiences, and to boost their social media presence or influence. This meant a great venue for the emergence of businesses, particularly the hotel industry. People not only travel and spend on transportation. A huge chunk of tourism depends and lies on the existence of hotels and other forms of accommodation. If an area does not have a proper hotel or accommodation, tourism would be like a fish out of water, struggling to survive and be relevant. Hence the hotel industry and business are an easy lure to businessmen. The thought of fast and strong profit cannot escape in countries or cities where tourism is rather established, it is easy to fail as competition is as tight as ever. Not only is it luring to upcoming ventures but it is equally attractive to already recognized hotels. This is a chance to push and maximize for revenue. When done right, the hotel business is definitely one of the tourism industry’s most lucrative player.
While some make it, a lot of hoteliers do not. There is a ton of struggle especially when the lack of education, impulsive traits, poor research, and mismanagement come in play. Mishaps, traps and issues always beset this kind of business. Below are the most common yet most misunderstood and overlooked aspects that cause a string of hotel problems and advice on how to counter these mishaps:
Over-leverage means a business has more debt and is unable to pay loans, debts and operational expenses. It puts a strain on the cash flow as hotel revenue is allotted for some of these debts. In the hotel scenario, many tend to loan as much as possible for the hotel investment for many reasons namely appraisals, adequate equity, and a lot of times bankers who take advantage. This contributes to a high risk of investment failure as higher leverage translates to sky-rocketing interest rates which directly have an effect to higher cost of capital. It has a domino effect. Many hoteliers and investors lack the knowledge on this common mistake or simply cannot resist the temptation to over-leverage.
Preventing this through discipline and an adequate knowledge of balancing this financial act. Making sure a discipline investment plan is in place, being open to the fact that it will only generate lower investment returns however will put hoteliers in a better position in the long run to avoid total loss of capital. Moreover, it is very important to find a reliable partner and consultation firm in the field of hotel finance management and solutions for sound advice and maintenance.
#4: STATIC PRICING
Static pricing happens when a hotel does not adjust their pricing and maintains it at the same selling rate all the time. Factors such as market trends, demands and seasonality are disregarded in this type of pricing. This puts the hotel in a bad position in comparison to its competitors. In this time and age of mobile technology, consumers and clients have ultimate and easy access to various applications for hotel reservations hence comparisons for hotel promotions, location and rates are available at real time.
To avoid this pitfall, another type of pricing is widely practiced and that is Dynamic pricing. Dynamic pricing, or time-based pricing, is a great strategy that is dictated by time. It is determined by demand to supply to maximize top-line revenues for hotel. Seasonality is key-hoteliers area able to charge higher rates during higher peak seasons such as short local holidays or long international holidays, citywide or special events. Other demands can be predicted and adjusted accordingly. On the other hand, for low-demand periods, rates are adjusted to the lower bracket. The economic supply-and-demand model is the very essence of this pricing. However, if a hotel is not equipped to adapt and use the dynamic pricing appropriately, this may pose as an obstacle and might incur complications. A full knowledge on the chosen strategy is important.
#3: NOT WORKING WITH THE RIGHT PEOPLE
Just like any business, one consideration is always to go the cheaper route. This is true with suppliers, commodities, infrastructure and many more. But it is no surprise that it also applies to people. Whether it be manpower, consultancy, and other firms that are essential to the hotel business, and this is a major trap. People run the hotel, therefore it is crucial to choose a reliable and dynamic team for the whole organization to not only thrive but flourish. Hiring low-priced amateurs will always lead to mediocre disastrous results. In the aim of paying less for such services, the lack of expertise and experience may put the company at even more financial risk and always ends up more costly to try to undo, revive and restore the business as opposed to starting out with the best.
Although it is not easy to find the right people, it is definitely a preventive measure for complications in the future and this should be taken seriously by hoteliers. When we say working with the right people it mostly does not mean it is affordable nor readily available. With a huge investment and capital business such as putting up a hotel, finding experts in their fields should be part of that investment as they will assist the hotel in achieving the basic goal of return of investment, profit and more. Consider these attributes when selecting a team:
- Committed with a clear accountability to the project
- Reputable track record
- Able to identify conflicts and prepared to resolve within the confines of the business
- Knowledgeable about profit-making
- Loyalty for long-term relationships
- Genuine character of trustworthiness and integrity
#2: MAXIMIZING OTA’s
OTA is Online Travel Agency. A key and popular player in the hotel industry. OTA’s have a massive marketing reach and is widely accepted. It presents the consuming public with more options, easily narrow down and filter those options to their desired accommodation to eventually come up with a choice. Even if it is advantageous to the business, it may be costly due to initial charges and commissions. A common mistake is to be blinded by these costs and choose not to work with an OTA as opposed to what it could potentially do to the hotel’s revenue.
To avoid this pitfall, hotel managers should learn how to use OTA’s and manage the relationship while still being in control. Avoid the common mistake of listing whatever rate or package that suits the occasion. Continue to monitor prices across the competition, make inventories when needed, and to still offer higher rates on these booking sites than the hotel’s own website.
#1: POOR UNDERWRTING ASSUMPTIONS
Rounding the list of common mishaps in the hotel business is one of the first phases in putting up a hotel. It is already an obvious factor that could lead to making unsound investment choices however many investors still make the wrong decisions with the lack of knowledge, incomplete information and inaccurate assumptions that could all lead to failure. Unsound assumptions never did a hotel any good. It is still ultimately the hotelier’s responsibility to double check on the impressive numbers and glossy pictures presented by brokers. By making a decision without meticulously looking at all angles, the negative variables, and the unspoken factors, the hotelier has to pay for this in the end.
This is highly preventable by asking critical, strategic questions and demanding for transparency and accountability in all dealings. Investors who have long been in the business had good mentors and consultants or simply learned from their own mistakes to which they have applied in their next business venture. Avoiding investment risks involves comprehensive diligence with all assumptions backed by facts, research and understanding the specific demands of the kind of hotel you are building. Some of the factors included are as follows:
- Detailed assessment of the target market
- Foreseeing the potential for possible competition and its effect on your hotel business
- Anticipating future changes
- Areas of improvements
- Engineering reports accomplished and reevaluated for study of environmental status, bidding, construction and renovation budget
- Thorough operating budget
- Service contracts and title reports with their fundamental documents
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