Hotel Asset Management Guide: The Budget Process

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11/10/2017 - Hospitality

TFG Asset Management has recently published their latest hotel asset management guide article on Hospitality Net. With the fourth quarter of the year being the busiest for hotel stakeholders, we were encouraged to share our process in one of the period’s most important tasks, the budget.

The annual budget which is set for the following business year is extremely important due to its direct link with the operator’s performance clause. Asset Managers act as the owner’s representative during hotel budgeting process discussions with operators and it is imperative that they revise and challenge these proposals to ensure an optimal but realistic outcome.

The first draft is to be submitted according to the specifications in the management agreement. The asset management team carries out due diligence, using their asset management model and tools to analyze the data. This process involves the assessment of historical annual and monthly performance and comparisons with the competitive market in order to obtain the most accurate analysis.

Meetings will then be arranged between the operators and the asset managers in order to revise the proposed budget. During these encounters both parties will analyze all figures, from the top-line to the bottom-line, covering capital expenditure and operating expenditure.

When discussing top-line revenues operators will propose a conservative approach in order to make the performance clause more achievable. Since owners prefer optimistic figures, it is the asset management team that will have to provide a more accurate prediction that leads to an agreement between both parties.

Expenses need to be assessed using different ratios, a method which places the figures into context of the market, looking at each department for a more efficient approach. Fixed charges which comprise the license fee, insurance, rental fee, management fee, FF&E etc. require particular attention, where asset managers should ensure the allocation is aligned with the performance that the operator is projected to achieve.

The hotel’s vision and strategy can be a point of contention, as the operator and the owner may not share the same priorities. The asset manager is responsible for aligning the objectives of each party and ensuring the highest profitability is obtained from the property. Many encounters and negotiations will take place before the final outcome is achieved, but if the owner appoints a credible asset manager there will be less resistance from all parties when it comes to approving the budget in a timely manner.

For the in-depth article, please click on Hospitality Net to access our article.