How to prepare a 5-year proforma
Preparing a five-year financial plan for your hotel might sound daunting, but it is all in your head.
Let’s lay it out. You are either dreaming about a business that does not exist yet and you need a plan, or you are up and running and you want to look into the future and pave a path forward. Either way you need to same tools. The first tool you need is market information: CBRE or STR are both helpful. CBRE can provide you in-depth marketplace analysis that will draw you a very clear picture of the rates and occupancy of several different hotel asset classes in your area.
If you are already up and running, it is your current STR report. They do not always have studies in every town and city, but you should be able to find relevant comparisons. This is critical because you just cannot enter a market with your hotel and crush the competition in your asset class. Depending upon the type and brand of your hotel determines how you will need to compete, and that means there is a range of REVPAR that is reasonable to assume.
For example, the hotel you want to build will be located in SE Phoenix and it is a select service hotel. The marketplace report will show you what the REVPAR is for that asset class in that market. Let’s imagine you are building that additional asset and it is on track to open in 18 months. You are limited to the REVPAR that is produced in that market in that class of hotel.
Here is an example: Select service hotels in SE Phoenix currently produce a REVPAR of $90 – the trend over the last three years has been strong single-digit growth.
You need a jumping-off point and your assumption is you can normalize your REVPAR at 100% of the comp set after Year 2 is complete. Because you are new and you do not see any competition with building permits, you can push your index to 115% after four full years. That is the revenue picture and to think you can arrive and do somersaults over the competition in a defined market is fool’s talk.
Now that you have your REVPAR for the first five years you can set about planning your staffing and expenses. Start with the payroll. Start with defining the structure. Let’s imagine you plan on having a GM and AGM. They will run the hotel and manage the front desk. On top of that you will need a housekeeping manager and a maintenance lead. Add to these the hourly positions using an hour’s per room occupied formula for the desk and housekeeping. The additional maintenance hours can be fixed and let’s assume one additional full-time person.
You will need to decide on pay rates for all these positions and a study of online job postings for hospitality positions in your area again will dictate what your wages will be, and you probably want to add 5% to the going rates just to be safe. From your five-year REVPAR, you have extracted the occupancy and rate working backward from the yearly REVPAR. The occupancy times the hours per room occupied at the desk and housekeeping, and it should be between 1.0 and 1.5, times the wage rate in the area plus the taxes and benefits. This will dictate the variable payroll. In short order, you have your wages and benefits for all areas of the hotel for your five-year plan.
Now it’s on to the expenses
Using the USALI framework you know what expenses you are going to incur, and the biggest challenge is how much.
There are three types of expenses:
Work through each line item in each department noting your assumptions, and here is where some experience really helps. Knowing what typical margins, good and bad will help you model a reasonable plan. For example, your rooms expenses based on your hotel type are probably going to be 10-15% of room revenue and probably between $10 to $15 per occupied room.
Non-operating area expenses are more fixed and the list from USALI will help you carve out assumptions. For example, in A&G you have security costs, legal fees and a payroll service. You have marketing costs.
There is no avoiding maintenance expense but you can go a little lighter in the early days if you are a new build. With some research and assumptions, you can estimate a reasonable cost in all areas. Just do not think for a moment that you are going to be able to run your hotel on oxygen and good luck. Everyone must pay!
With anything like this, make sure you are conservative:
Franchise and brand guides, information are available
Lists of the various franchise fees by brand are available online. You can purchase financial data for your area or a like area that will show you the costs per available or occupied room, and even as a percentage of revenue for your asset type. Do not ignore the facts.
Finally, put all this information into your trusty Excel five-year proforma sheet. The sheet must be laid out in detail according to USALI and give departmental results. Pro tip here, use the sheet to note all assumptions for payroll and expenses with as many notes as possible.
With budgeting and forecasting, always remember the “golden rule” and that is – the only thing we know for sure about the budget or the forecast is – It’s wrong! But don’t worry about that, just make your plan as complete as possible and do not imagine you are a superstar hotelier that is capable of operating your asset without the necessary costs.
Look at your numbers realistically and get some help!
David Lund – The Hotel Financial Coach Contact David at (415) 696-9593
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