Chapter 13 Managing Resort Financial Resources

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3. Reports Included in a Strategic Plan Pro forma income statements Pro forma balance sheets Pro forma statements of cash flows Capital expenditure budgets (CapEx plan) 2

4. Potential Economic Indicators Overall economy and business climate from local, national, and international perspectives Key business drivers in the host community and receiving destination: new business startups, business failures, construction, employment trends, consumer confidence index, inflation index, discretionary income spending, etc. The community’s economic health measured by real estate factors, home inventories, sales turnover, and price changes; office space occupancy and rental levels Tourism statistics and visitor arrival projections by geographic breakdown; airline load factors 3

5. 4 Potential Economic Indicators Convention center bookings that affect bookings of resort rooms and catering services Current renovations (rooms, public spaces, etc.) or announced expansion plans of competing properties that may affect one’s own property in terms of future occupancy and room rate competitiveness New properties, including restaurants, coming into operation that will affect market share for rooms and F&B business The owner’s strategic plan for the resort that will support or defer capital expenditures

6. Components of a Business Operating Plan A detailed sales/revenue forecast Departmental profit projections Administrative and general expenses Marketing expenses—advertising, promotion, Internet Energy costs and energy systems maintenance expenses Repairs and general maintenance expenses Pro forma income statement and balance sheet Capital budget Sources and uses of funds Cash flow projections 5

7. Operated Department Categories Guestroom revenues: transient, group, contract, and other Food and beverage revenues: outlet revenue, in-room dining, banquet/catering, mini-bar, etc. Other operated departments: laundry and valet, in-room pay-per-view fees, garage/parking, telecommunications Rentals and other income: space rental and concessions, commissions, cash discounts earned, cancellation penalties, attrition penalties (unfulfilled guarantees given for rooms, F&B, etc.), and foreign currency transaction gains/losses 6

8. 7 Operated Department Categories Ski mountain: lift tickets, group and private ski lessons, rental shop, merchandise revenue, clothing revenue, etc. Golf course and pro shop: green fees, tournament fees, golf cart rental, golf equipment rental, practice range fees, lesson fees, golf club maintenance fees, storage fees (e.g., personal locker rental), membership fees, and merchandise revenue Spa/health club: club use, fitness lessons, health/wellness services, massage, spa treatment, salon treatment, and clothing sales

9. Three Basic Steps of Budget Control Comparison of actual performance results for each line item against the budget to disclose significant variations. Analysis of all variations outside of acceptable tolerances, which might be as small as 0.5 percent or as large as 5 percent, depending on the nature and manageability of the cost item. Prompt attention to corrective actions and revising plans when the problem is beyond management control. 8

10. Potential Cost-Control Decisions What impact might a decrease in an expense have on departmental operating efficiency? High or low? Are expenditures for such items as repairs and maintenance being deferred to achieve favorable expense variances? What is the impact of such deferral in terms of property quality and market competitiveness? Are favorable expense variables being achieved at the expense of service standards? Is the service level being maintained, improved, or lowered? What would be the impact in terms of guest responses and possible revenue consequences? 9

11. Resort Financial Statement Elements Balance sheet Equity statement Income statement (sometimes called the profit and loss statement or simply the P&L) Statement of cash flows 10

12. Complexities Associated with theCondotel Business Model Managing the condominium owners’ association budget Promoting ongoing communication and relationships with owners Collecting annual maintenance fees from owners at the beginning of each year and keeping adequate FF&E and repairs and maintenance reserves Maintaining consistent standards and averting conflicts with individual owner’s “embellishments” to décor 11

13. 12 Complexities Associated with theCondotel Business Model Aligning unit sales objectives with the hotel’s sales and marketing program Dealing with multiple draws on room inventory by owners, sales and marketing, and outside distribution channels to balance room inventory and revenue management goals Working with “space deposit” concepts in resort timeshare exchanges

14. Five Common Ratio Groups Solvency ratios Liquidity ratios Profitability ratios Activity ratios Operating ratios 13

15. Profitability Ratios GOP Margin Ratio = Gross Operating Profit ÷ Total Revenues    ROE Ratio = Net Income ÷ Average Owners’ Equity    ROA Ratio = Net Income ÷ Average Total Assets 14

16. Capital Budgeting Proposal Parts Background: The history of the proposed project and an explanation of the present circumstances that make it necessary to consider the project as a low-, medium-, or high-priority item. Description: A detailed account of the project’s scope, utility or purpose, costs, etc., and where, how, and when implementation would occur. These latter questions are particularly important if business disruption is expected to occur while changes are being made. Economic analysis: Analysis of the economic impact of the proposed project. Basic assumptions and projections about costs and revenues should be included in the form of supporting schedules. Alternatives to the proposal should be stated along with explanations detailing why these alternatives were rejected. 15

17. Three Important Factors inInvestment Proposal Evaluation Net cost of the investment Net returns from the investment Acceptability of the rate of return 16

18. Evaluating Returns on Investments Net present value methods Accounting rate of return Payback period   Accounting Rate of Return = Average Annual Project Income ÷ Average Investment   Payback Period = Project Cost ÷ Annual Cash Flows 17