Cash flow — definition and significance in the hotel industry

Cash flow definition and meaning

Literally, the term comes from the English language area and means cash flow or cash flow.

The simplest explanation for cash flow is to determine where the money in the company came from and how it was used. This is measured for a specific period of time, usually the marketing year.

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In other words, this business key figure indicates what finance/money generated in the financial year is available to the company to finance investments, pay off debts and distribute profits.

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There are several methods for calculating cash flow. However, we would only like to present the most common (practitioner) method here.

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Cash flow is regarded as an indicator of a company's earning power and self-financing capacity. It also shows the financial flexibility and independence of investors/financiers. For example, a high figure means that the company can get by without taking out loans in a predicament.

Cash flow, liquidity and other key figures: the Quick Test

Cash flow and liquidity are often confused or equated. Even though both have to do with cash flow, there is still a difference:

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Cash flow is a comparison of cash inflows and cash outflows in a period (i.e. a stream quantity that measures changes over a period of time).

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Liquidity represents the current availability of money/liquid assets. Accordingly, it is the ability of a company to meet its payment obligations to the supplier/debtor on time.

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In order to be able to quickly assess company situations, financiers, analysts and bankers often use the so-called Quick Test. This is a fast-track procedure with just four key figures and yet represents the economic situation of a company.

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Four are selected from the various key figures used in the annual financial statement analysis:

• the equity ratio for assessing capital strength
• Cash flow to assess financial performance
• the return on total capital to assess the return, and
• the debt repayment period to assess the indebtedness

Using an assessment scale, the key figures are rated between 1 (very good) and 5 (at risk of insolvency). A meaningful comparison is therefore possible.

https://happyhotel.uk/lexicon/hotel-purchase-real-estate-evaluation-what-is-important-when-buying-a-hotel/

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Cash flow in the hotel industry

Both in the financial sector and among entrepreneurs, it is often claimed that cash flow should be the central consideration. Because then you would no longer have to worry about a financial emergency or even insolvency. Of course, this also applies to the hotel industry.

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One area in which the code is repeatedly used in a specific process is the hotel reviews at sale. Here, the discounted cash flow process enables investors to include, among other things, the effects of capital costs and tax aspects in the valuation.

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However, even without sales intentions, it is important to look at cash flow. Because if it is positive, a hotel's liquid assets increase and thus make it possible to pay off debts, reinvest in the business and have a buffer for challenging times. Those who did this before the corona pandemic are in good shape today.

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Negative cash flow, on the other hand, stands for a deficit: No money was generated. In the long run, this is likely to lead to a liquidity bottleneck.

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Improve cash flow

We've shown that it's important to keep an eye on cash flow. And to improve it when necessary. Here we would like to share a few more suggestions on how this is possible.

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Take care of revenue

• active collection of receivables: Claim all outstanding debts
• Try replacing any refunds with vouchers
• Rethink your marketing concept: Are there other partnerships/OTAs that increase sales, for example
• Actively manage your room occupancy and room rates

Control/reduce your costs

• Review all costs: Are there services/collaboration/services that can be suspended or minimized
• Plan and improve your use of goods and personnel
• Reduce inventory levels if they are excessive
• Liabilities to suppliers: Check out all options/payment deadlines and take advantage of attractive supplier accounts

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