How Much Capital Will Keep Your Hotel Afloat During Slow Times?

From bed and breakfasts to full-scale, multi-story hotels, many business owners in the hospitality industry struggle with one concern: what will the tourism season bring? While you might be at full capacity this summer season, what happens in September when everyone returns to work and school? If you’ve been in it for more than 10 years, chances are good you’ve seen many of the up and downs within this industry from the period when tourism seemed to halt after September of 2001 to the recent recession. Now the industry is picking up again, but are you doing enough to prevent financial trouble if things should turn bad again?

Financial Stress Testing for Hotels and Motels

One of the best ways for you to make sure you can weather any financial storm this is by conducting a financial stress test. In short, this is a way of identifying your hotel’s financial needs as well as risk factors to maintaining operations. Every hotel, no matter where you’re located or what component of the industry you’re in, faces financial “what if” situations. A stress test can help you better pinpoint potential risks so that you can take steps in planning for them.

This type of test is often conducted alongside a financial advisor. He or she can help you flesh out information and even use software to investigate end scenarios related to every risk. However, you don’t need to make that appointment just yet. Instead, the first step is to take paper and a pen and start writing down some of the many factors that can impact your bottom line. Take the time to answer the following questions, being as specific and through as possible about the implications to your business.

Who Is Your Customer Base?

You may believe it’s anyone that schedules a stay with you, but look deeper. There may be a specific age range that’s attracted to your location, such as families because of your proximity to an amusement park, or professionals because of your location near the downtown area.

Now, think about your competition. Which other lodging facilities within a 10 mile radius around your location are present? Think about these locations and how they compare to yours. Be honest here. There’s a reason why some people choose these destinations over your own. It may be price, ease of getting to their location, better amenities, or even how well your website performs.

What Are Your Hotel’s Financial Needs?

The next part of a financial stress test is to identify your financial needs. What amount of funds do you need to keep coming into your organization on a weekly, monthly, or quarterly basis to keep your hotel operational? Sure, you may be able to pare down some of your staff, but even in this situation, you need to have some available capital to remain operational. Think about all of your expenses, liability insurance, workers’ compensation, marketing, and so on. List these out thoroughly so you know what you need.

What Data Should You Be Tracking?

Now that you know what you need, do you know how to track your success and risks as you go? In other words, which variables should you be tracking on a regular basis to ensure you’re meeting your targets? For this area, you’ll want to focus on things such as sales trends, events and attractions near you that impact your business, employment-related costs, and incidents. You’ll want to look at not only how much you made, but also how many rooms you booked. This way, you can see trends in the industry without focusing too heavily on inflation.

What Are Your Risks?

Now that you have a good idea of what your business needs to remain operational, make a list of all of the risk factors impacting your business. There can be many. The following are just some ideas, but try to be as specific as possible in relation to your hotel.

  • What could happen to your hotel if the economy fell, leaving you with fewer tourists?
  • How will rising minimum wage and health care needs impact your ability to pay your employees as well as meet your budget?
  • How often do you need to upgrade or modernize your location in order to continue to meet the demand of your customers?
  • Do you have enough liability insurance to protect against a large lawsuit?
  • How would your hotel be affected by a natural disaster?
  • What would happen to your business if something should happen to your key management staff?

With this information, you can begin to create a plan. You can address many of these risk factors, know how much you need to have on hand, and even plan for the worst because you know the risks. Only a well-thought out financial stress test can create this level of confidence.