Evaluating Hotel Performance-3 Traps Managers Must Not Fall Into - Hotel Financial Courses (2024)

Evaluating Hotel Performance-3 Traps Managers Must Not Fall Into

Evaluating hotel performance is not difficult if you remember a basic universal principle.

However, not following this basic principle may land you into financial analysis traps that many hotel managers fall into.

That will be disastrous.

I will share with you this simple universal principle including how to apply it in evaluating hotel performance to yield powerful results.

And in the process avoid you falling into the 3 financial analysis traps.

So, let us dive straight in.

This Blog Post will cover:

• Evaluating Hotel Performance - The Financial Analysis Traps
• Evaluating Hotel Performance - The Foundation of Financial Analysis
• Example
• The Secret Principle of Financial Decision Making
• Evaluating Hotel Performance - The Effect Illusion (Trap 1)
• Evaluating Hotel Performance - The Misleading Symptom (Trap 2)
• Variances - Just a Symptom
• Evaluating Hotel Performance - The Hidden Cause (Trap 3)
• Example
• Do This
• The Misconception
• Action Steps You Can Take Right Now
• SIGN UP for Tips, Strategies and Secrets

Evaluating hotel performance is really not difficult.

That is, if you do not fall into traps which many hotel managers end up falling into.

A keyingredientof evaluating hotel performance isfinancial analysis.

Financial Analysis allows you to look atcurrentKey Performance Indicators in a hotel PNL anddeterminewhat they are depicting.

In evaluating hotel performance using financial analysis, one critical factor to be considered is a trigger.

You learned about triggers in evaluating hotel performance in Part 2 of this 3 part series of blog posts.

Click below if you missed that post.

This is the third and concluding part of this 3 part blog post series.

And now back to triggers.

Atriggeris something that may be thecausebehind a particular phenomenon or a Key Performance Indicator (KPI) or both.

Triggers oftentake the form of Key Performance Indicators themselves.

Triggers have theiroriginsin therelationships in a hotel PNL.

You learned about relationships in evaluating hotel performance in Part 1 of this 3 part series of blog posts.

Click below if you missed that post.

So, what are the 3 traps in evaluating hotel performance?

Before diving into that, it is important to understand what is the foundation of financial analysis.

Let us get right into the basic universal principle that I talked about in evaluating hotel performance.

The basic principle underpinning all financial analysis (in fact non-financial analysis also for that matter!) is that ofcause effect

Even If you do not have a financial background, you will easily master financial analysis if you just remember this basic principle - cause effect.

Cause Effect is all aboutwhat is causing something and what is being affected by something.

A related factor is asymptom.

So, you could say that cause, symptom and effect are the three pre-requisitesto financial analysis.

It may seem obvious but it has a level of depth rarely understood and worse utilized.

In the previous section you came across an ingredient which is critical for financial analysis and therefore in cause effect.

That ingredient isTriggers.

As you saw earlier, triggers can often be the cause behind a particular phenomenon or KPI.

You must understand what is causing a particular number in your hotel Profit and Loss Statement.

Let us say, this is a Key Performance Indicator (KPI).

And what KPI is affected in a Hotel Profit and Loss Statement.

If you did both these, I can safely tell you that you have won 50% of the financial analysis challenge.

EXAMPLE

Forexample, Let us assume your hotel RevPAR KPI is showing a decrease in a month.

Or whatever period you are considering compared to a previous period or year.

You need to know what is causing it.

Is it

• Occupancyor
• Average rateor
• Both

Let us use a metaphor to describe this.

Assume your Profit and Loss Statement is an iceberg.

You know, the one that featured in the movie Titanic!

What is the relevance?

Well, an iceberg only shows up in a small way above the surface of the water.

The Iceberg part that is below the surface of the water is the major part.

The part that is hidden.

And the part that is actually holding the ice berg together.

In the same way,cause effectis a phenomenonnot visibleabove the surface of the iceberg that is your hotel Profit and Loss Statement.

It needs to beunearthedinanalysis.

Financial Analysis carried outwithout exploring cause effectis superficial andmeaningless.

I will shortly prove to you how this is so.

The Secret Principle of Successful Financial Decision Making

Let usget into that basic, universal principle that I talked about with The Secret Principle of Successful Financial Decision Making.

Here let us focus ondistilling what cause effect is and a few related factors from this video.

WATCH the below video on the Secret Principle of Successful Financial Decision Making.

The Cause Effect features majorly in the video.

Watch the video right to the end and surprise yourself.

Are you able to distinguish between the various elements of the cause effect phenomenon from the Funnel Principle video?

Do you know where cause resides using the Secret Principle in the video?

Did you watch video on The Secret Principle to Successful Financial Decision Making?

If you did, you would have discovered the first of the 3 Traps of Evaluating Hotel Performance.

And that is The Effect Illusion.

However, before that.

Were you able to identifywhere cause resides in the Funnel Principle video?

Causeresides in thehotel operation.

Getting to therootof anyproblemorsituationconfronting you in a hotel will require decision making.

And there are tons and tons of those for producing consistent business results,.

This decision making will involve searching out thereason why something is happening.

In other words, search out the thecause.

You may now ask a question.

If that is cause, what iseffect?

More importantly,why is it criticalto know intrinsically what effect is?

The Effect Illusion

Effect is a phenomenon or KPI which reflects theend result.

It may be called theoutcome.

It is what you set out toachieve.

You will be surprisedhow ofteneffect turns out to be what youdid not expect.

And therein lies thechallenge.

If you address theeffectinstead of thecause, your results are likely to besuperficialand lacking depth.

So what does it mean to address effect?

The Profit and Loss Statement is most oftendepended uponby hotel managers totake decisionsin the operation.

Depending upon the PNL isnota problem in itself.

It is whenONLY what is showing in the PNLis used to take decisions that decision making issignificantly flawed.

Whyis it flawed?

Because what thePNL is showing is ONLY the Effect!

Like the smaller part of the iceberg that you can see above the surface of water.

Youcannot take decisions based on effect.

You need to go to thecauseto do that.

That is when yourdecisions are soundandlogical.

The cause in our iceberg metaphor is the major chunk which is under the surface of the water and which you cannot see.

However,before that, let us take a look atone more factorwhichconfusesthe issue.

It is something alsooften usedby hotel managers totake decisions.

This isflawedtoo.

And that is the second of the 3 traps.

Let us seehow.

You saw earlier whytaking decisions just based on effect is flawed and a trap.

Yourdecisionsneed to have astrong foundation.

That foundation is thecauseof the problem, not the effect.

You know that major chunk of the iceberg which is below the surface of the water and which you cannot see.

Yet another factor which confuses the issue is asymptom.

Why is it confusing?

Simply because, often asymptomismistakenfor acause.

And decisions taken based on the symptom.

That is not only flawed but a trap that can lead to decisions causing expenses and losses.

If the PNL is the iceberg, a major chunk of it is hidden below the surface (including the cause!).

The symptom (apart from the effect) is however seen above the surface.

And what is seenabove the surface(symptom and effect) is often thought to be good enough to take decisions.

However, the criticalcauseishiddenbeneath the surface.

Your next question will be:

So, how do we identify a symptom in a PNL?

Variances - Just a Symptom

Well, in the context of the PNL, asymptomis thevariance.

Yes, that variance which tells you how much less or moreyour actual results are compared to thebudget,forecastandlast yearresults.

Those variances youconstantlylook at in monthly PNLs.

And you can now understand what I was saying about hotel managers taking decisions based on symptoms - variances.

You may be doing it too!

But taking decisions based on just a symptom or the variance in the PNL is greatly flawed.

However, much before even decision making, in any financial analysis,variances should be scrutinized using only cause in the cause effect phenomenon.

If not, you will end up withdeceptive resultsand worse takeincorrect decisionsbased on that.

In that vein, let us first seehow to identify cause.

You saw in the earlier two topics, how effect and symptom are not the same as cause.

You learned that taking decisions based on what you see as an effect or symptom in a PNL is significantly flawed.

Well, how do we identify cause then is your question.

All in good time.

You will also discover how not to fall into the third of the 3 traps of Evaluating Hotel Performance - The Hidden Cause.

Remember the iceberg metaphor.

And the major chunk of the iceberg which is below the surface of the water.

Applying that metaphor, you identify causein thehotel operation.

What does that mean actually you ask!

EXAMPLE

Assume you are looking at your monthlyRoomsdepartment PNL.

You notice that in the Rooms department for thecurrent month,one expense line itemGuest Room Suppliesis showing apositive variancecompared tolast year.

Let us be reminded what apositive variancefor anexpenseitem means.

Actuals are lowerthan last year (in this case; it can be compared to budget or forecast too).

This principle works just the opposite for revenue line items.

Let us get back to our Guest Room Supplies example.

In other words, yousavedmoney in Guest Room Supplies expenses for the current month.

Here are a couple of reasons / conclusions you arrive at based on the positive variance:

• Great! we havesavedon expenses due to ourcost cutting
• Guestsused less of room amenitiesand so we saved

Do This

Use your notepad to write down (based on what you learned so far)at least 2 reasonswhy this approach is flawed.

Did you write your reasons down?

Do not read further until you have written that down.

Now, read on!

So, what thisscenarioshows is atypical oneconfronting hotel managers all the time.

And this is what they do often:

• They take a look at theRoomsdepartmentPNL
• IdentifyGuest Room Suppliesexpense line item
• Quickly go to what theexpenses variance is showingfor that line item.
• Their boss may be breathing down their neck about the overall rooms department results, although in this example, it is favorable.
• See thepositive variance
• Celebrate(telling themselves the two reasons (or even more) shown above
• Then theymove on to other expenseline items

So, what is the flaw in this kind of reasoning based on what we have learned?

The Misconception

To begin with, thetwo reasons laid outare purely based on asymptom.

And that symptom is thepositive variancefor the Guest Room Supplies expense line item for the current month compared to the last year

As we saw earlier, a symptom is just that -what seems to be.

And the positive variance is such a symptom -what seems to be.

it isnot verifiedyet.

What do I mean by verification?

Verificationmeans, per the Cause Effect principle,going to the real reasonwhy the positive variance happened.

And that cause can only be determined if youwent back to checka host of things in thehotel operation:

• What items constitutedthe Guest Room Supplies expenses for the current month?
• This means going back to theoriginal requisitions by the Housekeeping departmentfor issuance of guest room amenities to the operation
• Since the Guest Room Supplies is a Variable expense, checking to seeif the occupancy went up or downcompared to the last year

All of these reasons are found only when you go back to the hotel operation and determine the real situation.

The real situation is also thecause- why Guest Room Supplies expense for the current month is below last year.

You may be wondering where theeffectfeatures in this scenario since we have discussed what the symptom and cause are.

Well, theeffectis thePNLitself.

Theresultsshown in the PNL are the effect and the symptom the variance of line items.

So, what is the moral of the story?

Do Not Assume! Verify!

That a PNL just shows you theeffect overall and individual line items show you the symptomthroughvariances.

Cause does not feature at all in the PNL.

This is why the PNL iceberg metaphor shows cause as being beneath the surface.

Thatbeneath the surfaceis thehotel operation.

So there you are, the basic universal principle in evaluating hotel performance - cause effect symptom principle (The Secret Principle to Successful Financial Decision Making).

And how to avoid the 3 traps through understanding the cause effect symptom principle.

For your easy reference, here are the steps you can take right now to apply the above principle from this blog post.

STEP 1:

Look at Profit and Loss Statement in a Big Picture Overview basis first - it is the effect or result.

STEP 2:

Use Variances as Symptoms which just indicate something - they are not the cause.

STEP 3:

Go back to the hotel operation to find out what is actually causing the variance.

STEP 4:

Use that cause as the reason for whatever decisions you need to take.

STEP 5:

As a principle, always take decisions based on the cause effect symptom principle with cause in the center.