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The importance of financial planning and analysis in the hospitality industry



The hospitality sector was one of the hardest hit industries during the pandemic. Travel (and international travel in particular) ground to a halt, and it was impossible to predict when and how it would return. While many businesses in the hospitality sector are still recovering from the COVID-19 pandemic, there are now an abundance of new challenges popping up which makes it difficult to plan and forecast.


While the pandemic restrictions seem to be over for the most part, inflation, supply chain issues, and labor shortages are putting a lot of pressure on an already strained industry. Despite offering an average of over 8% wage increases (far more than the national average of 3.4% wage increases) there is still a large difficulty in getting employees in the hospitality industry to return to work. All of these problems means that it is extremely challenging to plan and forecast, and in an industry with a famously tight revenue margin, having access to these insights can mean all the difference.


Implementing financial planning and analysis (FP&A) software, streamlines organizational decision-making by integrating real-time data from a variety of sources and enabling detailed planning and analysis. Hospitality organizations that have adopted FP&A solutions are able to plan ahead in real time and keep their business above that coveted 10% profit margin.


Confident Decision Making


Instead of relying on previous data from past reporting periods that don’t reflect the current market changes, or even worse, making decisions from biased intuitions, FP&A tools help business leaders base their operational and financial decisions on current information.


The key to this is real time updates. FP&A software generates all of the data- revenue forecasts and budgets- based on hard numbers, such as occupancy rates, labor metrics, and pricing. In addition, the software pulls data from different sources which allows the organization to zoom out and see the bigger picture. Past company performance is combined with local and national performance data to provide the most accurate and informed decision making.


Lastly, FP&A solutions integrate with all of the different software tools and metrics that a company already uses. Whether it be Hubspot for marketing analytics, Salesforce for sales numbers, or Bamboo HR for crunching HR and payroll data, FP&A software will pull data from all of these sources and take into consideration all of the marketing, sales, and HR implications.


All of these functions help hospitality organizations plan for both the short and long term:



Short Term: Occupancy Rate Predictions


Occupancy rates are the most important factor for hospitality companies, as this directly relates to revenue and cash flow. A few percentage points to one side in occupancy rate data can be the difference between negative cash flow and profit, and therefore accurate occupancy rates and predictions is the key to short term success.


While the ultra high risk periods of the pandemic seem to be over, there are constantly changing factors that affect occupancy rates such as:

Season- Ski resorts or summer rentals have different peak periods and need to be planned accordingly. This is more predictable because seasons are (somewhat) consistent.

Weather- Too much snow might cause people to cancel their ski vacation, while too little snow will do the same as well. This plays into the scenario and what-if planning as the weather is unpredictable more than a week or two in advance.

Consumer behavior- Hospitality is a luxury and things such as market downturns or a good economic outlook can play a role in whether people take more vacations or less. There are many aspects to this including some predictable factors and some less predictable.



FP&A software tools are the best way to predict short term occupancy rates. The combination of previous company data combined with outside factors, scenario planning, and a hint of experienced input from the finance team will help the organization make the best decisions possible.


As an example, predicting occupancy has a direct impact on whether to hire additional staffing. Pulling data from last year’s time period along with predictive analysis, outside factors, and industry wide data will help a company predict what the best course of action is.


Do they need temporary staff for peak season? Perhaps “downsizing” into specific floors or locations to save money on energy bills during the offseason is the trick? Maybe outsourcing specific functions will increase revenue? The software’s dashboards and reports will help with all of this.



Long Term: Optimizing Capital Investments


One of the most important business aspects that has been put on the back burner for many hospitality companies is capital investments. Although it is crucial for sustaining long term growth, many companies were focused solely on surviving the past few years. Now that the market is more stable it’s time for hospitality companies to return to efficient capital investments and long term strategies.


FP&A tools can help the organization compare and optimize capital spending alternatives. For example, will building a new hotel in a different region bring in more revenue than upgrading an existing one into a luxury hotel over a 10 year period? Will installing new windows save enough on energy costs in the long run that it’s worth it to invest in right now?


Each decision has multiple layers of data involved from many different sources but understanding the effects of these investments on operating cash flow will allow leaders to make the most informed decisions in the long run. In addition, marketing managers can use these tools to analyze different marketing investments and understand how to reach potential customers most effectively.



Conclusion


Now is the perfect time for those in the hospitality industry to invest in FP&A solutions. The extreme shakeup from the pandemic seems to be over and highly profitable opportunities are returning to the industry. However there are still many controllable and uncontrollable factors that play an important role in cash flow and revenue. Having a firm grasp on the implications of these factors and using all of the functions available by combining data and predictions will lead hospitality leaders to the most profitable short and long term decisions.





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