Cash Flow Management

Hotel Finance Course

A Comprehensive USALI-Compliant Guide

Module 7:

Cash Flow Management

Understanding and Managing Hotel Liquidity

Module 7: Cash Flow Management

Welcome to Module 7! You've mastered income statements, KPIs, cost behavior, and budgeting---all focusing on profitability. Now we explore cash flow, which is equally critical. A hotel can be profitable on paper yet fail due to cash shortages. This module teaches you why profit doesn't equal cash, how to manage cash flow effectively, and how to ensure you always have adequate liquidity.

As the saying goes: 'Profit is opinion. Cash is fact.' Understanding cash flow is essential for survival and success.

Learning Objectives

By the end of this module, you will be able to:

• Explain why profit doesn't equal cash

• Understand the cash conversion cycle in hotels

• Read and interpret a cash flow statement

• Create cash flow forecasts for planning

• Manage working capital effectively

• Address cash flow challenges proactively

Why Profit Doesn't Equal Cash

This is one of the most important concepts in finance. Many profitable businesses have failed due to cash shortages. Here's why profit and cash are different:

Reason 1: Timing Differences (Accrual Accounting)

Hotels use accrual accounting, which records revenue when EARNED (not when cash received) and expenses when INCURRED (not when cash paid).

Revenue Timing Example:

March 25: Group checks out, $50,000 revenue earned

March P&L: Shows $50,000 revenue

April 25: Group actually pays invoice

Result: March shows profit, but cash comes in April

Expense Timing Example:

March 1: Receive $20,000 food delivery

March P&L: Shows $20,000 expense

April 15: Actually pay the invoice

Result: March profit reduced, but cash paid in April

Reason 2: Non-Cash Expenses

Some expenses reduce profit but don't require cash:

• Depreciation: Accounting allocation of building/equipment cost over time. No cash actually leaves---it was spent years ago when purchased.

• Amortization: Similar to depreciation but for intangible assets (franchise fees, goodwill).

Example:

Monthly depreciation: $40,000

This reduces profit by $40,000

But no cash is paid this month

Result: Profit understates cash generation by $40,000

Reason 3: Capital Expenditures

Cash spent on long-term assets (renovations, equipment purchases) doesn't hit the P&L immediately---it's capitalized and depreciated over time.

Example:

March: Spend $500,000 cash on room renovations

March P&L: Shows $0 expense (it's capitalized)

Future months: Shows ~$8,333/month depreciation

Result: Cash down $500K, but profit hardly affected

Reason 4: Debt Principal Payments

Paying down loan principal requires cash but doesn't appear on the income statement.

Example:

Monthly debt payment: $60,000

Interest portion: $35,000 (expense on P&L)

Principal portion: $25,000 (not on P&L)

Result: Cash out $60K, but P&L only shows $35K

CRITICAL UNDERSTANDING: A hotel can be profitable (positive net income) but still run out of cash due to timing differences, capital spending, and debt payments. This is why cash flow management is separate from---and equally important to---profit management.

The Cash Conversion Cycle in Hotels

The cash conversion cycle measures how long it takes to convert operations into cash. Hotels have a VERY FAVORABLE cycle compared to most businesses.

Hotel Cash Cycle Advantages

1. Customers Pay First (Transient)

Most guests pay by credit card at checkout. You receive cash (or credit card deposit) within 2-3 days. This is BEFORE you pay most expenses.

2. No Inventory to Finance

Unlike retail (buying inventory months before selling it) or manufacturing (parts, work-in-process), hotels don't tie up cash in inventory. Room 'inventory' is capacity---exists without cash investment.

3. Pay Suppliers Later

Most vendors give 30-day payment terms. You collect cash from guests before paying suppliers.

Example Cash Cycle:

Day 1: Guest stays, pays $200

Day 3: Cash from credit card in bank ($200)

Day 30: Pay linen supplier for sheets used ($15)

Day 30: Pay housekeeping wages ($12)

Cash cycle: You held the $200 for 27-30 days!

The Group Business Exception

Group business has a different cycle:

Group Cash Cycle:

January: Group books for March ($50,000)

March: Group stays, incur expenses

March 31: Send invoice

April 30: Group pays (net 30 terms)

Result: 60 days from service to cash

This is why managing accounts receivable (collecting what's owed) is critical for group-heavy properties.

Understanding the Cash Flow Statement

The Statement of Cash Flows shows where cash came from and where it went. It has three sections:

1. Operating Activities

Cash generated (or used) by core business operations.

Typical Items:

• Start with: Net Income

• Add back: Depreciation & Amortization (non-cash)

• Changes in: Accounts Receivable

• Changes in: Inventory

• Changes in: Accounts Payable

IMPORTANT: Positive operating cash flow is ESSENTIAL. If operations don't generate cash, the business model is broken.

2. Investing Activities

Cash spent on (or received from) long-term assets.

Typical Items:

• Capital expenditures (renovations, equipment)

• Purchase of property

• Sale of assets

This section is typically NEGATIVE for hotels (spending on CapEx). That's normal and healthy---properties need ongoing investment.

3. Financing Activities

Cash from (or paid to) lenders and owners.

Typical Items:

• Debt proceeds (borrowing)

• Debt principal payments

• Owner contributions

• Distributions to owners

The Formula:

Operating Cash Flow

+ Investing Cash Flow

+ Financing Cash Flow

= Net Change in Cash

+ Beginning Cash Balance

= Ending Cash Balance

Cash Flow Forecasting

Just as you forecast P&L, you should forecast cash flow. This prevents surprises and ensures adequate liquidity.

Building a 13-Week Cash Flow Forecast

The 13-week rolling cash forecast is the gold standard for operational cash management.

Structure:

BEGINNING CASH BALANCE

+ Cash Receipts:

• Guest payments (rooms, F&B)

• Credit card settlements

• Accounts receivable collections

- Cash Disbursements:

• Payroll (weekly or biweekly)

• Supplier payments

• Utilities

• Debt service

• Taxes

• Capital expenditures

= NET CASH FLOW

= ENDING CASH BALANCE

Key Principles:

• Update weekly (roll forward one week)

• Use actual payment dates (not P&L timing)

• Include ALL cash events (even one-time items)

• Flag minimum cash balance requirements

• Identify cash shortfall weeks in advance

Managing Cash Shortfalls

If your cash forecast shows a shortfall, you have several options:

4. Accelerate Collections

Push for faster payment from groups, negotiate shorter terms

5. Delay Payments

Negotiate extended terms with suppliers (carefully---don't damage relationships)

6. Postpone CapEx

Delay non-essential capital projects

7. Arrange Credit Line

Have revolving credit available for temporary shortfalls

8. Owner Contribution

Request additional equity if needed

Working Capital Management

Working capital = Current Assets - Current Liabilities. It measures your ability to meet short-term obligations. Managing working capital effectively is essential for cash health.

Key Working Capital Components

1. Cash

Target: 30-60 days of operating expenses

This provides cushion for timing mismatches and emergencies.

2. Accounts Receivable

Target: Collect within 30 days on average

Monitor: Days Sales Outstanding (DSO)

DSO = (Accounts Receivable ÷ Total Revenue) × 365

Example:

A/R: $250,000

Annual Revenue: $9,000,000

DSO = ($250,000 ÷ $9,000,000) × 365 = 10.1 days

Lower DSO is better---cash collected faster. Hotels typically run 7-15 days DSO.

3. Accounts Payable

Strategy: Pay on time (not early, not late)

Take full payment terms but maintain good supplier relationships. Don't stretch payments excessively---it damages credit and relationships.

Improving Working Capital

Strategies to improve working capital position:

• Aggressive A/R collection: Call immediately on overdue accounts, require deposits for groups

• Optimize payment timing: Use full vendor terms without damaging relationships

• Reduce inventory: Keep F&B inventory lean, order frequently

• Encourage cash payment: Offer small discounts for upfront payment from groups

Module 7 Summary

Congratulations on completing Module 7! You now understand why cash management is separate from profit management and how to ensure adequate liquidity. Cash flow mastery is essential---even profitable hotels can fail without proper cash management.

Key Takeaways

9. Profit doesn't equal cash due to timing differences, non-cash expenses, capital expenditures, and debt payments.

10. Hotels have favorable cash cycles---customers often pay before expenses are paid, creating positive cash flow characteristics.

11. Cash flow statements have three sections---operating (most important), investing (CapEx), and financing (debt/equity).

12. 13-week rolling cash forecast is the best tool for operational cash management---update weekly.

13. Working capital management focuses on cash, receivables, and payables---optimize each for strong liquidity.

Looking Ahead

Module 8 explores capital expenditures and the PIP (Property Improvement Plan)---how hotels plan, budget, and execute major investments. You'll learn to evaluate CapEx projects, understand return on investment, and manage the renovation process financially.

--- END OF MODULE 7 ---

Continue to Module 8: Capital Expenditures & PIP