Preparing Hotel Business Plan

hotel business plan

The financing of a hotel can reveal to be a challenging for those who wish to formulate a summary package of the project’s feasibility and profitability to investment. Documents commonly referred to as “business plans” are prerequisites for bank loans and equity financing provided by institutional investors. Business plan explains the business will develop during the first five years and provides information of net cash flow forecast for that period. In order to ascertain the level of investment needed to launch the project, the estimated income projection that the venture will generate and will be needed for the investment that the project can apply on the balance sheet, the business plan must account for the market environment supporting the project’s viability.

Importantly, this set of documents form the basis upon which banks assess the creditworthiness of the project and approves a loan.

In addition to help companies for financing the hospitality and tourism projects in Indonesia, Hotel Consulting  Equity provide the preparation of business plans for its clients. When preparing business plans, Equity Hotel Management places the main emphasis on objectivity and accuracy in interpreting data, producing comprehensive financial forecast model based on the concept of the project and integrating to a market study prepared to that effect.

After the first discussing the results with the financial partners who agree in principle to fund the project, our hotel specialists work on client’s behalf to quantify the following components:

  • Pre-Financing Plan. Consist  of the early estimations of the investment requirement for the implementation of the project development. The investment steps will depend on the proposed concept, construction costs, land costs, viability, good will, insurance, advertising costs, interim financing costs, initial inventory and working capital. Once the investment volume has been choosen, complete financial engineering must be assembled to support the project. The capital structure will affect the project’s risk level.
  • Operation Revenue Projections. These consist all of the profit centers within the proposed concept. For a standard business hotel, the room, food and beverages and catering operations generate the main revenue. Smaller revenues are regrouped under “Minor Operating Departments”. These include among others revenues originating from telephone, room rented and leisure facilities.
  • Projected Operating Cost the same period as the revenue projections, normally five or more years, depending on few thins like the scope of the project, the nature of the contract operation (management contract, lease or franchise) and the financial obligations. These costs can be either defined as percentages of total revenue (cost of goods sold, sales and marketing, management fee) or as fixed amounts (lease, insurance policies, personnel).
  • Profit &Lost Forecast on 5 or 10 Years. To view the of accurately simulating the operational performance of a hotel. Profit & Loss forecast enables a preview of the project’s performance based on the following factors: market segment, concept and design parameters, facilities, positioning, competitive benchmarking and  structure of management. From the forecasting results, we can derive the Gross Operating Profit (GOP), Income Before Fixed Cost (IBFC), Net Profit, Residual Cash Flows further to servicing of the long term debt and applicable taxes.
  • Estimation of the Working Capital. Handling a comprehensive working capital entails the management of cash, inventory, and other current assets, as well as current liabilities. To setup a secure the hotel or catering project’s operational feasibility, particular attention should be placed on proper management of the working capital to avoid il-liquidity to service the current liability requirement.
  • Estimation of a Financial Plan or Cash Flow Analysis, For yearly financial requirements (debt service, insurance, tax, real estate tax and reserves for FF&E Replacement) of the project are deducted from the hotel’s generated Net Operating Profit. Residual cash flows enable investor or bank to assess the viability of the project. The resulting cash flow should be consistently positive. The lending or investment entity considering the project will be reticent in backing the venture.

The cash flows can be used in estimating the full feasibility study of the project. By applying a discount rate appropriate to the level of risk and the market conditions applicable to the project, a bank or NVP (Net Present Value) and IRR (Internal Rate of Return) can be calculated using as the first cash flow the total investment volume that the project represents. The Net Present Value can then be divided by the amount of rooms of the hotel project to provide an indicator of profitability per rental unit.

No business plans relies strictly on financial findings. Equity Management also consider the facilities requirement of the proposed project, designated site and the surrounding hotel market. To support and complement our financial assumptions and methodology, we  will integrate hotel market analysis and concept development into commissioned business plans.