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Case Study IProfitability Analysis

Executive Summary The Client is a 5 star hotel in North Goa. The hotel was making operating profits but the

same were not up to the expectations of the Owners.

The owner already had a highly reputed Audit firm engaged for the purpose of Internal Audit of the hotel, however, no value add was received from them.

In this respect, the promoter-director of the hotel, approached MAS to conduct a Profitability Analysis, and suggest ways and means of rectifying the same.

ProcessAnalysis of

Financial

Statement

s

•The Financial statements for the previous three years were obtained and detailed cost rationalisation was carried out.

•The movement of costs and incomes were studied for irregularities

Evaluation of

Processe

s

•Processes and controls were understood through interviews with department heads •Audit of processes was carried out to check the level of adherence by staff•Controls, checks and balances were analysed and evaluated for process risk management.

Creation of

Revenu

e Verticals

•The Income was broken down into revenue verticals based upon source of income•Costs were allocated to the revenue verticals on the basis of certain cost drivers so as to obtain a Revenue Vertical – wise P&L which reconciled with the overall P&L

•The Revenue verticals were created for a 3 year historic time horizon.

Strategi

c Evaluation

• Understanding of the overall business strategy• Evaluating the business strategy for sustainability

Observations

• The cost structure of the company did not change much year on year which indicated consistency in operations.

• The cost of guest transportation was found to be unjustified for the scale and occupancy of the hotel.

• At almost 30% of Revenue, Staff Related expenses (including salary and welfare expenses) were found to be unjustified for the scale of the hotel

From Financial Statements

Observations

• The front desk attendants were given the additional responsibility of marketing, which they were not able to carryout in the best way possible.

• The laundry was sub contracted to a vendor which was charging the hotel on a per Kg basis, however, the housekeeping department did not have any way of weighing the outgoing laundry. Bills were approved without a weight check

From the Process Evaluation

Observations

• Both Purchase and stores were handled by the same person, which meant no checker-doer relation

• There were no sub stores maintained on the system. Housekeeping and Kitchen items were issued directly to the department at the time of material receipt.

• There was no reconciliation done of material issued to housekeeping or the kitchen to ensure proper control.

• F&B service time was a major issue. Overall time from ordering to receiving an item was measured to be 25 minutes.

From the Process Evaluation

Observations

• The purchase process was not consistent. In some cases, purchases were made having taken only one quotation.

• There were no checklists for housekeeping staff to follow at the time of minibar replenishment or checkout which caused a number of instances of under-billing

• There was no formal process for obtaining guest feedback after a stay.

• There was no segregation of food stock into in-room dining, restaurant dining and banquets.

From the Process Evaluation

Observations

• Room sales accounted for over 50% of total revenue, however occupancy was found to be very low at just 53%

• The revenue from F&B sales was found to be very low contributing just 19% of the total revenue vis-à-vis an industry norm of over 30%

• The revenue from the Casino was really high in spite of it being just rental income. This contributed to over 25% of the income.

• All other sources of income contributed to hardly 3% of the total income which is very low.

From the Revenue Verticals

Observations

From the Revenue Verticals

• Margins on room rent were very low. This was attributed to firstly low occupancy rates and also to high expenditure on guest transfers

• Margins on F&B were found to be negative. This was attributed to a possible pilferege/ wastage of raw materials as the consumption recorded and the cost in the statements did not reconcile. Moreover, it was observed that the pricing of the restaurant was quite low (about 30% lower than the competition)

Observations

From the Revenue Verticals

• In spite of the property having 2 banquet halls, the revenue from banquets contributed just 5% of the income.

• Minibar pricing was found to be quite low. 30% lower than the nearest competitor.

• Spa materials were sourced from a consultant who was hired to advice on the running of the spa. There was no evidence of the company trying to source an alternate vendor.

Observations

From the Revenue Verticals

• It was observed that Rs. 10 lakh worth of maintenance supplies were purchased for which there is no documentation in the system. Maintenance stock is directly issued to the maintenance department showing it consumed.

Changes Suggested

Organisational Changes

• Front desk should be independent of marketing. A separate marketing department to be put in place which will increase focus on marketing and hence improve occupancy rates.

• Stores and purchase should be independent functions so as to have a doer- checker process in place.

Increase in income by at least 20 lakh per annum

Changes Suggested

Process Changes (Stores and Purchase)

• Sub stores to be made for Housekeeping, Kitchen, and Maintenance.

• The sub stores to be handled by the respective departments and consumption recorded on a daily basis.

• A weekly reconciliation of consumption vis-à-vis production to be done in all cases.

Possible saving opportunity of INR 16 Lakh

Changes Suggested

Process Changes – Housekeeping

• Minibar checklist was created and handed over to Housekeeping HOD

• Minibar checking Process was revamped so as to ensure responsibility and accountability

• A weighing scale was installed into the laundry dispatch area so as to verify the weight of laundry before dispatch.

• Quotes were taken from other laundry vendors and overall cost was reduced by 10% through negotiations

Possible savings of INR

2 lakh annually.

Changes Suggested

Process Changes – F&B

• Introduction of a second out-door Tandoor was suggested as most of the Tandoor items were found to consume a lot of time.

• A reduction in the room service menu offerings was suggested so as to ensure a shorter service time

• Overall pricing was increased to match up to the nearest competitor

Gross Profit increase by INR 49 Lakh per

annum

Changes Suggested

• The main reason for low occupancy was found to be lack of awareness.

• Use of special promotions through online portals was suggested so as to increase awareness

• Usage of better marketing channels was suggested such as advertising in airplane magazines, e-marketing and use of travel agents in other cities.

Process Changes – Room Sales

Estimated Income Increase

of 21% and profit increase

of 36 Lakh

Changes Suggested

• Usage of Eco friendly methods of housekeeping which help in cost saving such as interval of sheet changes for same guest, use of soap dispensers.

• Use of a bus for guest transportation rather than outsourcing the same through cabs

• Implementation of a CRM system so as to improve the guest service.

Other Changes Suggested

Estimated Cost Saving

of INR 8 Lakh per annum.

Summary Estimated Revenue Increase by

proposed changes – INR 150 Lakh per annum (30%)

Estimated cost saving opportunity – INR 121 lakh per annum

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