Investments
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Cost groups
There are three major cost groups visible in the operating review after each year:
- the fixed costs have stayed the same during all four years, and the fixed depreciation costs are one of them.
- the variable costs depend on the occupancy rate
- the costs Management Team Decisions, will depend on the decisions the management team takes after taking over.
Fixed depreciation costs of existing assets
There is a number of depreciation costs of existing assets, set at € 525,187 fixed costs which you can find in the operating review and which you cannot influence. This part of the fixed costs is called depreciation costs of existing assets. You do not have to bother about this amount, though it is around 34.64% of your total of costs as you have a rather big asset. As these costs are fixed they are not influenced by the occupancy rate nor by decisions in the near future and so will stay the same all over the years.
With a mouse-over in column A you will get additional information in the original example file.
New investments
However, if you do new investments, you will get a cost group Depreciation costs of new investments on your operating review.
In your explanations, you should calculate how you want to do this.
Looking at the market and the cost structure, a maximum investment of € 900,000 per year is advised by the accountant of the hotel. Of course, here needs to be an exact plan on what to use this money for. There is no worry about financing these kind of investments: liquidity to finance an investment of € 900,000 per year is no problem.
Let's have a look at an investment of € 900,000 per year. Presume the new investments would be linearly depreciated in 4 years without any residual value, we would see costs as in the table underneath.
| Investments and depreciation | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciation | Total depreciation costs inthis year |
| History | Not done | € 0 | € 0 |
| Year 1 | Max € 900,000 | € 225,000 | € 225,000 |
| Year 2 | Max € 900,000 | € 225,000 | € 450,000 |
| Year 3 | Max € 900,000 | € 225,000 | € 675,000 |
| Year 4 | Max € 900,000 | € 225,000 | € 900,000 |
| Total | Max € 3,600,000 | € 900,000 | € 2,250,000 |
But you can also choose for total different depreciaton systems (depending on the assets you finance) or have a different investment plan like:
| Investments and depreciation | |||
|---|---|---|---|
| Year | Investment | Additional yearly depreciation | Total depreciation costs in this year |
| History | Not done | € 0 | € 0 |
| Year 01 | € 100,000 | € 25,000 | € 25,000 |
| Year 02 | none | 0 | € 25,000 |
| Year 03 | € 200,000 | € 50,000 | € 75.000 |
| Year 04 | € 900,000 | € 225,000 | € 300,000 |
| Total | € 1.200,000 | € 275,000 | € 425,000 |
How big should the investment be?
As stated, the hotel is getting outdated and does have the liquidity to invest. First of all, you have to have a clear plan: what do you exactly want to do? Does this fit in with your strategy?
Secondly, realize that investments bring costs (the depreciation as explained above), so will the revenues compensate the costs and will, in the end, the profit go up?
But you do want to renovate the sauna, what does this cost? Well, check the internet, or look at similar cases. An educated guess is required, so estimate the costs yourself, based on any comparable prices you have found. Try to be realistic, but as in reality 'how much does it cost' depend on so many things and is not easy to answer.
The excellent Hotel cost estimating guide 2020 of JN + A and HVS design gives you information on the cost of upgrading elements in the hotel. Check this guide to get a grip on costs of new investments. Feel free to use another guide, if that is more appropriate for your hotel. Do not get lost in too many details: rather thinks in hundreds and in thousands of euro's.
Running a hotel
In the file Running a hotel we've gathered some benchmarks, examples of cost overviews, operating reviews etc. from different organisations. Of course, any situation is different, any time frame (think of the Covid period), the owners ship, the state (quality) of the premises etc. The file, though, this might give some ideas from a calculative perspective.
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