One of the many impacts of the ongoing COVID-19 pandemic is that it has highlighted the importance of working capital. "Cash is King" is all the more irrefutable as industries worldwide struggle to meet lenders’ and creditors' demands. With companies lacking reliable forecasts, more investors now gauge performance based on balance sheet metrics, namely debt levels, asset liquidity, covenants and stable cash flows. These are now, more than ever, favoured by owners and investors to assess if management can keep meeting obligations during the crisis.
Balance sheets deserve more attention and are an often-overlooked financial statement. While it is the Operator’s responsibility to ensure accuracy, the simple fact that they aren’t tied to management fees means there is often little effort going into keeping them accurate. Meanwhile, the P&L statement predominates negotiations and is keenly scrutinized by all partners involved in the hotel. However, it is of vital importance to question the P&L statement’s accuracy and this can largely depend on the validity of the Balance Sheet. Unfortunately, the importance of a strong balance sheet, in particular when it comes to working capital, is not something that is reviewed as regularly or as detailed as a P&L. There is a direct correlation between both financial statements, which can have a profound impact on valuations as part of either financing or a sale/purchase. Worse still, errors are sometimes only caught once the true-up period has passed. Owners and asset managers who don’t control their balance sheet don’t understand the hotel itself and are therefore unable to truly be in charge of any transaction relating to it.
Now is the perfect time to do some long-overdue housekeeping and dig deep into this statement. We’ve compiled some recommendations for owners, controllers and asset managers conducting their next forensic balance sheet review, focusing on line items that have the most impact. This review will help identify and define current risks and opportunities.
Hotels that are temporarily closed have the advantage that their guest ledger should currently be empty and their trade debtors very low. All invoices should have been sent out and, hopefully, paid. If not, it is clearly time to locate and aggressively chase the outliers.
It is essential to be realistic and either write off or provide for accounts such as Thomas Cook or other casualties. Asset managers should keep a close eye on the liquidity of the numerous travel agencies that will not be in a position to pay when dealing with excessive cancellations.
Before reopening, you need to ensure that your credit policies are robust and can identify companies changing their payment practices.
Upon reopening, asset managers should be prudent with the allocation of credit, but simultaneously assess the impact on trading. Only once things have stabilized can you take a fresh, realistic look. The less credit allocated the more you protect your future cashflow; the upcoming financial crisis is going to be difficult for a lot of companies and left unpaid invoices (e.g., the case of Marsans in Spain back in 2010).
Asset Managers should work with operators to improve the rigour of collection processes. It is easy to get lax about receivables when operations are thriving, but with cash flow increasingly crucial before and after reopening, it is time to take a hard look at the management of receivables. Encourage the operator to question procedures and identify patterns in issues experienced in the past. Areas of focus include an analysis of customer payment performance and the creation of practices supporting timely and precise invoicing.
A closed property planning to reopen is ideal for undergoing a full inventory review.
While perishables should have been disposed of before closure, alcohol is likely to be one of the current top items. Ensure that none have passed their sell-by date, paying particular attention to mini-bar items that are rarely refreshed.
Review your guest amenities and marketing collateral and question whether they are still usable. Ensure they respect the most updated brand logos; if not, they need to go.
Make sure that only new and packaged items form part of your stock.
Start thinking and stocking guest amenities, cleaning supplies and other equipment that will be demanded after reopening as part of the post-COVID-19 ways of operation, such as facemasks, hand sanitizers, PPE and the like.
Revise the need for silver/glass/china/linen and check whether the orders you placed before the COVID-19 period are still necessary. A lot of hotels have habitually placed new orders for these items, which, with the reduced forecasted occupancy might not be needed. You may be able to cancel/reduce some of them and help your cash flow.
Sundry debtors and prepaid expenses
Any other debit balances in your balance sheet are potential costs that have not been recognized in your P&L to date.
Be sensible about regular prepayments such as insurance, maintenance or advertising contracts. Work together and see how best to use the available time and expertise to get the asset in the best position possible for reopening. Ask whether you should be installing sanitizer dispensers or applying floor decals promoting social distancing. Now is an excellent time to question if your S&M should change their strategy or target a different audience. Still, remain critical of the relevance of any pre-booked S&M trade shows or events.
You should review your creditors in the same detail as the accounts receivable. Test how far you can push out some payments, especially for Capex, without degrading your relationships. This is only achievable through open communication with suppliers and partners. Meanwhile, tighten your vendor payment controls.
Collect any credit notes from suppliers that you don’t do regular business with and make sure that all payables are current. Any invoices that are unpaid and not chased by the suppliers may not be valid and can mean a welcome ‘write back’ into the P&L.
Your purchasing department should look at how their supplier networks have been impacted while re-evaluating and comparing other supplier possibilities. Purchasing should also be encouraged to review their payment policies and question how well they're followed and how they should be improved. Furthermore, check with the said suppliers whether they can revise their fees, especially the marketing ones, as they may not have been used during this period. You can either ask for a credit note or an extension of the contract for Alternatively, ask suppliers if you can explore reducing minimum ordering levels and so receive retro rebates.
While the hospitality industry is often praised for its guest-facing innovation, the back-of-house often remains archaic. Switching to automated ERP and accounting could be a transformative opportunity for hotels and their balance sheets. More and more technologies are being developed that allow users to predict cash requirements, track vendor balances and set up automated processes to either approve, prioritize or delay payments. These can be integrated with other software that limits manual processes, like the entry of AP invoices. Altogether, these technologies have the potential to streamline and optimize account payable management better than many operators’ current procedures.
Accruals & other creditors
All accruals and provisions for goods received without invoices must be accurate. If they are too low, there will be a P&L income at some stage.
Guest deposits have been the subject of many discussions triggered by the pandemic. On the one hand, each hotel should be flexible. At the same time, it should offer guests to re-book at later dates as opposed to refunding deposits and losing cash in these difficult times. Some companies give an extra night for free to their clients in order to postpone and not cancel their bookings, which would be a threat to their cashflow.
For owners working with large, global management companies, it could be possible to explore arrangements where incentive or even management fees are postponed. Alternatively, asset managers should push to make the FF&E a ‘nominal’ account instead of a restricted bank account. This cash should be used to continue paying and supporting staff during closure and the uncertain recovery expected.
Check that the accruals you build for holidays or 13th month for the staff are correct. You might have some old accrued holidays which you can give to the team and reduce costs if the occupancy allows it or the furlough measures are not enough. The same applies to the NI costs. Check whether you can get any subsidy following all the governmental measures taken in your country.
Income taxes payable
With many governments introducing corporate support schemes, it is crucial to stay informed of any relevant tax ordinances and ensure they are reflected in the balance sheet. This applies for all government support schemes; responsibility must be allocated for keeping track of finishing any application paperwork properly and on-time. Still, you must be wary of the risk any subsidies will pose for future credit.
This might be the right moment to make an inventory of your assets and write off any items that might not have been depreciated. Some companies keep buying new machinery but they forget to depreciate the replaced/broken ones fully. You might find some items which you can depreciate, decrease your NOI and pay fewer corporate taxes.
The explored importance of the balance sheet means it shouldn't just be a duty placed on the management company. At the end of the day, when a hotel's livelihood is at stake, it is the responsibility of all parties involved to work together and ensure it is safe against this pandemic and all the instability yet to come. Asset managers, operating companies and owners should support and work together to produce correct statements instead of pointing fingers. Ultimately, now is the time to get things clear and understand the risks and opportunities a hotel faces.
A special thank you to our partner, Alex Slors, for sharing his expertise on this topic.
Bloomberg Professional Services. (April 23, 2020). For investors, COVID-19 has us going back to balance sheets. Retrieved from www.bloomberg.com/professional/blog/for-investors-covid-19-has-us-going-back-to-balance-sheets/
Simon, E. (May 15, 2020). Stay Cal Hospitality expands Hotel Investor Apps partnership. Retrieved from hotelmanagement.net/tech/stay-cal-hospitality-expands-hotel-investor-apps-partnership
 Except in the case of amortisations, and the accounts related to financing, capital etc., which are usually the responsibility of the owner.