Running a hotel can sometimes feel like an uphill battle against rising expenses, fluctuating revenue, and constant pressure to stay competitive. If you’ve ever found yourself wondering where all the cash is going, you’re not alone. Many hoteliers face the challenge of turning their businesses from cash-eating monsters into profitable, well-oiled machines. However, by shifting your mindset and making a few key changes, you can start driving profitability and efficiency from the ground up. Here are some key takeaways that can help you achieve just that.

1. Take Your Profit First, Not Last

As hoteliers, we often get caught in the traditional formula: Sales - Expenses = Profit. But let’s face it—too often, that leaves us with little to no profit at the end of the day. Here’s the key: reverse the formula. Instead of treating profit as a leftover, prioritize it from the start. Use this new formula: Sales − Profit = Expenses.

By taking profit first, you force your hotel to operate efficiently, finding ways to innovate with fewer resources. Start small. Allocate just 1% of your income to a separate profit account and gradually increase it over time. This simple yet powerful habit ensures your hotel is profitable from day one while encouraging you to streamline operations and cut unnecessary costs.

Benefits of taking profit first:

• Ensures profitability from the start

• Drives efficiency and innovation

• Aligns with natural human behavior

• Builds a crucial habit through small, consistent actions

When it comes to running a hotel, profit often feels like an afterthought, something that happens only if everything goes perfectly. However, by shifting our approach and prioritizing profit from the start, we can ensure that our hotels thrive financially from day one. Let’s dive into what this means for your hotel and how you can implement this principle with clear, real-world examples.

The traditional accounting formula—Sales - Expenses = Profit—often leaves hotels with little to no profit, especially after paying off operating expenses, wages, utilities, and unexpected costs. To change this, we flip the formula to Sales - Profit = Expenses, ensuring that profit is guaranteed upfront, and operations adjust accordingly.

Example: How a Boutique Hotel Can Take Profit First

Imagine you run a 50-room boutique hotel in a busy urban area. On average, your hotel generates $200,000 in monthly revenue. Traditionally, you’d subtract your operating expenses—such as payroll, utilities, marketing, and food and beverage costs—before looking at your profit, which might be minimal after all expenses are paid.

Now, instead of waiting to see what’s left over, you allocate 5% of your monthly revenue to a profit account first. So, you set aside $10,000 immediately at the start of the month for profit. This leaves you with $190,000 to cover all other expenses.

Impact on Operations: Efficiency and Innovation

By doing this, you are forcing your hotel to operate within the remaining $190,000, which might seem tight at first. However, this constraint drives you to innovate and manage your resources more effectively. Here’s how this could play out:

• Negotiating Supplier Contracts: Knowing you have less to work with, you negotiate better deals with suppliers. You might switch to a local supplier for fresh produce at a lower cost or renegotiate your laundry service contract for a 10% discount.

• Streamlining Payroll Costs: Perhaps you realize that you can reduce payroll expenses by cross-training staff to handle multiple roles, like having front desk employees assist with concierge duties during slow periods. You might also adjust shift schedules based on guest traffic to avoid overstaffing.

• Energy Savings Initiatives: With less budget available, you implement energy-saving initiatives, such as installing motion-sensor lighting in hallways and common areas, upgrading to energy-efficient HVAC systems, or switching to bulk toiletries instead of single-use items to save on waste management costs.

Building the Habit: Starting Small and Growing

You don’t have to start with 5%. Begin with 1% of your monthly revenue—$2,000 in this case. Over time, as your hotel adjusts to operating with less, gradually increase the percentage you allocate to profit. Each month or quarter, review your expenses and efficiencies. Can you move from 1% to 3% without negatively affecting operations? As you build the habit, you’ll reach the goal of industry-standard profit margins, which typically range from 8% to 15%.

Benefits for the Hotel Owner

By taking profit first, you ensure that your hotel is consistently profitable, even during low seasons or unexpected downturns. Additionally, this practice encourages you to maintain financial discipline, which will lead to long-term sustainability and the ability to reinvest in your property for future growth.

Conclusion: Profit is a Priority

By adopting this approach, you set your hotel on a path toward consistent profitability. Taking profit first isn’t just a theoretical concept; it’s a practical shift that forces you to operate within your means and become more resourceful. Start small, stay consistent, and watch your hotel transform into a money-making machine.

When you prioritize profit in this way, your hotel becomes a more efficient, innovative, and financially stable operation. In the next step, we’ll explore how to control expenses and get better results with fewer resources by applying the principle of using “small plates” in your hotel’s budget management.

2. Use Small Plates to Control Spending

As hotel operators, we know that expenses tend to expand to match the revenue available—a principle known as Parkinson’s Law. To counter this, I recommend creating artificial scarcity by limiting the resources available for operating expenses. Just as using smaller plates helps with portion control, limiting the funds available forces you to operate more efficiently and creatively.

By allocating a smaller portion of your revenue to operating expenses, you’ll be amazed at how resourceful and efficient your team can become. Use separate bank accounts for different purposes, and allocate funds based on predetermined percentages. This creates a structure that controls spending while maximizing efficiency.

Strategies for creating artificial scarcity:

• Use separate bank accounts for different purposes

• Allocate funds based on set percentages

• Remove temptation by making certain funds less accessible

• Regularly reassess your allocations to adjust as needed

In the hospitality industry, expenses can quickly spiral out of control, especially when revenue is flowing steadily. It’s easy to fall into the trap of thinking that having more money means you can afford to spend more. However, by applying the concept of “small plates,” you can gain control over your spending and drive efficiency and innovation in your hotel’s operations.

The idea of “small plates” comes from the concept of portion control: if you use a smaller plate, you tend to eat less. In business, this means deliberately limiting the amount of money available for operating expenses, which forces you to find ways to achieve the same (or better) results with fewer resources. This drives creativity and efficiency, making your hotel more resilient and profitable.

Example: How a Mid-Sized Resort Hotel Can Control Spending

Let’s say you manage a 150-room resort hotel that averages $500,000 in monthly revenue. Traditionally, you might allocate a large portion of this revenue to operating expenses, such as housekeeping, utilities, marketing, and guest services. But with the small plates approach, you set a strict budget for each category based on a percentage of revenue.

Imagine you decide to limit your operating expenses to 50% of your revenue—so, $250,000 per month. The other $250,000 is reserved for profit, taxes, and owner’s compensation. Now, you have to make do with $250,000 to cover all operational costs, which forces you to think more strategically.

Creating Scarcity to Drive Efficiency

Here are some specific ways your resort can operate more efficiently under this smaller budget:

• Housekeeping Efficiency: Instead of keeping housekeeping staff on fixed schedules, you implement a demand-based staffing model. Housekeepers are scheduled based on room occupancy, with part-time staff brought in during peak seasons and cross-training other staff to assist with light cleaning duties during slower periods. You also invest in housekeeping management software that tracks cleaning times, guest preferences, and room readiness to optimize scheduling and reduce labor hours.

• Utility Savings: With less money allocated to utilities, you initiate a sustainability program to reduce energy consumption. You switch to LED lighting throughout the property, install energy-efficient appliances, and encourage guests to reuse towels and linens during their stay. You might even implement a smart thermostat system that adjusts room temperatures based on occupancy, further reducing utility bills.

• Marketing Adjustments: Instead of spending heavily on traditional marketing channels, such as print ads or billboards, you shift to more cost-effective digital marketing strategies. By focusing on email marketing, targeted social media campaigns, and influencer partnerships, you reach your target audience more efficiently. You might even use AI-driven tools to optimize your ad spending, ensuring that every marketing dollar is spent wisely.

• F&B Cost Control: Your food and beverage (F&B) operations are another major expense. With a smaller budget, you streamline your menu to focus on high-margin items and reduce food waste. You might implement portion control in the kitchen or source ingredients locally to cut down on supply chain costs. Additionally, offering more digital payment and ordering options (such as QR codes for room service orders) helps reduce the need for extra staffing during peak hours.

Leveraging Parkinson’s Law: Work and Expenses Expand to Fit What’s Available

By using the small plates approach, you’re leveraging Parkinson’s Law: just as work expands to fill the time available, expenses will expand to consume the revenue available. By artificially limiting the resources at your disposal, you force your team to become more resourceful and innovative.

Here’s another example: if you typically allocate $50,000 per month to maintenance costs, try capping it at $40,000. This forces you to reassess where maintenance is necessary, which equipment can be maintained in-house rather than outsourced, and whether any preventative measures can reduce future costs. Perhaps you invest in a predictive maintenance tool that flags potential issues before they become expensive repairs, reducing long-term costs.

Building Systems for Success

To make this work, it’s essential to have a system in place that enforces these spending limits. Here’s how you can implement the small plates method:

• Use Separate Accounts: Create separate bank accounts for each major expense category—such as payroll, utilities, marketing, and guest services. Transfer only the budgeted amount into each account every month, so your team has a hard limit on spending. This forces everyone to find ways to make the most of the resources available.

• Implement Cost-Tracking Software: Utilize software that tracks expenses in real-time and alerts you when spending approaches the allocated limit for each category. This keeps your team accountable and allows you to make adjustments before overspending occurs.

• Regularly Reassess Your Budget: Every quarter, review your budget allocations and spending patterns. Are there areas where you’re consistently under budget? Can you reallocate those savings to more critical areas, such as guest experience improvements or staff training?

Benefits for the Hotel Owner

By controlling spending through the small plates approach, you’re not just cutting costs—you’re fostering a culture of efficiency and innovation. Your team will learn to do more with less, find creative solutions to challenges, and ultimately drive better results with fewer resources. This not only protects your profit margins but also positions your hotel for long-term success, even during downturns or low seasons.

Conclusion: Less Can Be More

The small plates approach to spending isn’t about cutting corners; it’s about being strategic and intentional with your resources. When you limit the funds available for operating expenses, you encourage efficiency and innovation, which can lead to higher profitability and a more resilient business. In the next step, we’ll explore how to implement the Profit First system with five core accounts to further solidify your hotel’s financial health.

By using small plates to control your spending, you’ll create a leaner, more efficient hotel that maximizes every dollar. Stay tuned for our next post, where we’ll discuss setting up the Profit First system with five core accounts to ensure consistent profitability.

3. Implement the Profit First System with Five Core Accounts

To truly transform your hotel into a money-making machine, consistency is key. That’s why I recommend using the Profit First system, which involves creating five core bank accounts:

1. Income

2. Profit

3. Owner’s Compensation

4. Taxes

5. Operating Expenses

Every two weeks, on the 10th and 25th of the month, allocate funds from your Income account into the other accounts according to predetermined percentages. This creates a habitual rhythm of managing cash flow and prioritizing profit. Over time, you’ll build a sustainable system that keeps your finances in check and ensures profitability.

Key steps for implementation:

• Open the necessary bank accounts

• Determine your initial allocation percentages

• Start with small, manageable percentages

• Consistently follow the twice-monthly allocation schedule

• Gradually increase percentages over time

Once you’ve started to prioritize profit and control spending through the “small plates” method, it’s time to solidify your hotel’s financial foundation with a systematic approach. The Profit First system revolves around establishing separate bank accounts that help you allocate funds in a way that ensures profitability, taxes, owner compensation, and operational efficiency. Let’s explore how this can be applied specifically to the hotel industry.

Example: Setting Up the Five Accounts for a Mid-Sized Hotel

Let’s say you run a 100-room hotel with an average monthly revenue of $400,000. Here’s how you would implement the Profit First system by establishing the five accounts:

1. Income Account: This is where all revenue flows into, including room bookings, F&B income, event sales, and any other services. Every dollar your hotel earns goes into this account first.

2. Profit Account: Based on your chosen profit allocation (let’s say 5%), you would immediately transfer $20,000 from your Income account to your Profit account. This ensures that profit is set aside and protected before any expenses are paid.

3. Owner’s Compensation Account: Next, you allocate funds for your personal compensation as the hotel owner. Let’s say you’ve decided that 15% of revenue should go toward owner’s compensation. You transfer $60,000 into this account from the Income account, ensuring you’re paid appropriately for your role in running the business.

4. Taxes Account: To avoid scrambling for tax payments later, you allocate a percentage of revenue specifically for taxes. For this example, let’s say 20% of revenue is set aside for taxes, so you transfer $80,000 into the Taxes account. This ensures that when tax season rolls around, your hotel is fully prepared and there’s no need to dip into operating funds.

5. Operating Expenses Account: Finally, the remaining revenue is transferred into the Operating Expenses account. This covers all ongoing hotel expenses such as payroll, utilities, supplies, maintenance, and marketing. Based on our example, you would transfer the remaining $240,000 (60% of revenue) into this account.

Why This Works: Creating a Financial Discipline

By splitting your revenue across these five accounts, you enforce a system of financial discipline that prevents overspending and ensures that your hotel remains profitable. Here’s how this could work in real life for your hotel:

• Profit Protection: By transferring profit into a separate account first, you guarantee that no matter what happens with operational expenses, your hotel is consistently making a profit. Even in low seasons or during unexpected downturns, the money in your Profit account is protected and can be reinvested in the business or saved for future growth opportunities.

• Owner’s Compensation: Many hotel owners fall into the trap of underpaying themselves, putting the needs of the business ahead of their own. By allocating a set percentage of revenue to owner’s compensation, you ensure that you’re properly rewarded for your hard work and dedication. This also helps you maintain a personal financial balance while running the hotel.

• Tax Preparedness: Allocating funds to a Taxes account means that tax obligations are no longer a source of stress. When tax payments are due, the money is already set aside, preventing the need for last-minute scrambling or the use of credit to cover tax bills.

• Operating within Limits: By restricting your operating expenses to a set percentage of revenue, you enforce spending limits that drive efficiency and innovation (similar to the “small plates” concept from Step 2). This ensures that your hotel operates within its means, even as you continue to prioritize profit and tax obligations.

Creating a Consistent Allocation Rhythm

One of the most important aspects of the Profit First system is consistency. Twice a month, on the 10th and 25th, you allocate funds from your Income account to the other accounts based on predetermined percentages. This rhythmic approach ensures that cash flow is consistently managed and that you’re regularly prioritizing profit, taxes, and compensation.

For example, if your hotel’s revenue is consistent at $400,000 per month, on the 10th, you might allocate half of the funds (50%) to the five accounts:

• $10,000 to Profit

• $30,000 to Owner’s Compensation

• $40,000 to Taxes

• $120,000 to Operating Expenses

Then on the 25th, you allocate the remaining 50%, maintaining balance throughout the month. This steady rhythm ensures that no account is neglected and that your finances remain under control, no matter what surprises arise during operations.

Adapting Over Time: Gradual Percentage Adjustments

As your hotel becomes more financially stable and efficient, you can adjust your percentages. For instance, if you’re able to reduce operating expenses by introducing more efficient processes, you might increase the percentage allocated to profit from 5% to 7%, or boost owner’s compensation from 15% to 17%.

Quarterly reviews of your allocations can help you adjust based on your hotel’s performance and any changes in operational needs. For example, after implementing energy-saving measures, you may find that your utilities budget decreases, allowing you to shift some of that savings into the Profit account.

Benefits for the Hotel Owner

This system not only helps you maintain consistent profitability but also provides peace of mind. By implementing the five core accounts and sticking to a regular allocation schedule, you avoid the uncertainty of financial surprises. This gives you the clarity and confidence to focus on growing your hotel rather than constantly worrying about cash flow or debt management.

Conclusion: Financial Structure Equals Financial Freedom

Implementing the Profit First system with five core accounts provides your hotel with a structured approach to managing cash flow and prioritizing profitability. By ensuring that profit, taxes, and owner compensation are accounted for first, you create a financially stable operation that can withstand the ups and downs of the hospitality industry. In the next post, we’ll look at how to assess your hotel’s financial health with an instant assessment to identify areas for improvement and growth.

By setting up these five core accounts, you’ll take control of your hotel’s finances and create a foundation for consistent profitability. Stay tuned for our next post, where we’ll discuss how to assess your hotel’s financial health and set actionable goals for long-term success.

4. Assess Your Hotel’s Financial Health with an Instant Assessment

Every hotel needs a financial health check from time to time. The Instant Assessment is a simple yet effective tool to help you gauge where your business stands financially. It compares your current allocation percentages to target percentages based on your revenue range, giving you a clear picture of where improvements are needed.

By conducting this assessment, you’ll be able to identify areas where you might be overspending or underfunding key operations. From there, you can set actionable goals for gradually adjusting your allocations to achieve healthier profit margins.

Key components of the Instant Assessment:

• Real Revenue calculation

• Current allocation percentages

• Target allocation percentages

• Gap analysis between current and target percentages

• Action items for improvement

Now that your hotel is set up with the Profit First system and five core accounts, it’s essential to regularly assess your financial health. This helps you gauge whether your hotel is on the right path toward profitability and efficiency. The Instant Assessment is a powerful tool that can quickly provide insights into how well your business is doing and where improvements are needed. Let’s dive into how you can use the Instant Assessment to optimize your hotel’s financial performance.

Assess Your Hotel’s Financial Health with the Instant Assessment

The Instant Assessment is designed to provide a snapshot of your hotel’s current financial situation. It compares your actual allocation percentages—how much of your revenue is going to profit, owner’s compensation, taxes, and operating expenses—to target allocation percentages (TAPs) based on industry standards for a hotel of your size and revenue range. By doing this, you can identify gaps between where you are and where you should be, and set actionable goals to close those gaps.

Example: Performing an Instant Assessment for a Mid-Sized Hotel

Let’s say you run a 120-room hotel with an average monthly revenue of $350,000. You’ve already set up your five Profit First accounts and have been allocating your funds consistently for the last few months. Now, it’s time to assess how well your allocation percentages align with your target goals.

1. Real Revenue Calculation: Start by calculating your real revenue. Real revenue is your gross revenue minus pass-through costs such as direct costs of goods sold (e.g., food for the restaurant, amenities for guest rooms, etc.). Let’s assume your direct costs total $70,000, so your real revenue is $280,000.

2. Current Allocation Percentages: Next, take a look at your current allocation percentages. Let’s say that out of your real revenue of $280,000, you’ve been allocating as follows:

   • Profit: 4% ($11,200)

   • Owner’s Compensation: 10% ($28,000)

   • Taxes: 15% ($42,000)

   • Operating Expenses: 71% ($198,800)

3. Target Allocation Percentages (TAPs): Based on industry standards for a hotel of your size and revenue, your target allocation percentages might look like this:

   • Profit: 10%

   • Owner’s Compensation: 15%

   • Taxes: 15%

   • Operating Expenses: 60%

4. Gap Analysis: Compare your current percentages to your TAPs to identify the gaps. In this case, you’re falling short in both profit and owner’s compensation, while operating expenses are significantly higher than the target.

   • Profit: 4% vs. 10% (6% gap)

   • Owner’s Compensation: 10% vs. 15% (5% gap)

   • Operating Expenses: 71% vs. 60% (11% gap)

Actionable Steps to Bridge the Gaps

Once you’ve identified the gaps, the Instant Assessment guides you on how to close them. Here’s how you can apply this process to your hotel:

• Reducing Operating Expenses: Since your operating expenses are above the industry standard, your focus should be on finding ways to reduce these costs. You could start by conducting a line-by-line review of your expenses. For example:

  • Utility Costs: Implement energy-saving measures, such as installing smart thermostats in guest rooms and upgrading to LED lighting. You might also negotiate better rates with utility providers or install solar panels to reduce long-term energy costs.

  • Housekeeping and Maintenance: Review your labor costs in housekeeping and maintenance. You could reduce shifts during low-occupancy periods or outsource certain tasks during peak seasons to avoid paying full-time wages year-round.

  • Food and Beverage: In your F&B operations, consider reducing food waste by offering a more streamlined menu that focuses on high-margin items. You could also renegotiate contracts with suppliers to lock in better rates.

• Increasing Profit and Owner’s Compensation: To increase profit and owner’s compensation, you’ll need to slowly adjust your allocation percentages. Start by making small increases to your Profit and Owner’s Compensation accounts every quarter. For example:

  • Quarterly Adjustments: In the next quarter, increase your profit allocation by 1%, so it moves from 4% to 5%. Simultaneously, reduce operating expenses by 1%, from 71% to 70%. Continue this gradual adjustment each quarter until you reach your target allocation of 10% for profit and 15% for owner’s compensation.

• Boosting Revenue Without Adding Costs: Another way to close the gap is to increase your hotel’s revenue without proportionally increasing expenses. Here are a few ideas:

  • Upsell Services: Implement upselling strategies for guests at check-in, offering room upgrades, premium Wi-Fi packages, or exclusive experiences like spa services or private dining.

  • Package Deals: Create value-added packages that combine rooms with dining or activities, allowing you to boost revenue per booking while keeping costs steady.

  • Corporate Partnerships: Partner with local businesses to offer special corporate rates for long-term stays or conferences, which can generate additional revenue streams.

Using the Instant Assessment to Set Goals

Once you’ve identified the areas for improvement, use the Instant Assessment to set specific, measurable goals. For example, if your current profit percentage is 4%, you could set a goal to reach 6% within six months by implementing the cost-cutting and revenue-boosting strategies outlined above. Likewise, if operating expenses are 71%, aim to bring that down to 65% over the next two quarters.

By regularly reassessing your financial health, you can ensure that your hotel is continually moving toward its target allocations, becoming more efficient and profitable over time.

Tracking Progress

To track your progress, you’ll want to perform an Instant Assessment at least once a quarter. This allows you to measure improvements and make adjustments as necessary. For instance, if you’ve successfully reduced operating expenses but still haven’t reached your profit target, you might need to implement additional cost-cutting measures or explore new revenue-generating opportunities.

Benefits for the Hotel Owner

Performing regular Instant Assessments provides hotel owners with a clear view of their financial health. Instead of guessing where money is going or hoping that profits will improve, you have a concrete method to identify issues and implement solutions. Over time, this process helps you build a stronger, more profitable business that can withstand industry fluctuations and economic challenges.

Conclusion: Continuous Assessment for Continuous Improvement

The Instant Assessment is a vital tool for ensuring your hotel is financially healthy and on the right path toward consistent profitability. By comparing your current allocations to target percentages, you gain actionable insights into where your business needs to improve. In the next step, we’ll explore how to gradually increase your profit allocation percentages over time, building a hotel that consistently generates wealth for its owners and reinvests in its future growth.

The Instant Assessment provides a clear roadmap to financial health, helping you identify areas for improvement and setting you on the path to achieving your profit goals. Stay tuned for the next post, where we’ll discuss how to gradually increase your profit allocation percentages and make your hotel a more profitable business.

5. Gradually Increase Your Profit Allocation Percentages

Transforming your hotel into a profitable business won’t happen overnight. Start small and gradually build momentum. Begin by increasing your profit allocation percentages just slightly above your current levels. This makes the transition manageable and creates a sustainable habit of prioritizing profit.

Reassess your percentages every quarter, aiming for 1-3% increases in your Profit, Owner’s Compensation, and Tax accounts. This steady progress will help your hotel adapt and become more efficient over time, without the shock of sudden drastic changes.

Guidelines for increasing allocation percentages:

• Aim for 1-3% increases per quarter

• Focus on the Profit, Owner’s Compensation, and Tax accounts

• Reduce Operating Expenses to accommodate increases

• Adjust based on business performance and cash flow

Once you've established your hotel's financial structure using the Profit First system and assessed your financial health with the Instant Assessment, it’s time to take the next step: gradually increasing your profit allocation percentages. The goal here is to build on the foundation you've created by slowly raising the percentage of revenue allocated to profit, owner’s compensation, and taxes, while reducing operating expenses. This steady progress allows your hotel to adapt without causing operational stress. Let's explore how to make this work specifically for your hotel.

Gradually Increase Your Profit Allocation Percentages

Your hotel’s financial health will improve over time if you make small, incremental changes rather than drastic, unsustainable shifts. This is why gradually increasing your profit allocation is key. By making small percentage adjustments, you allow your hotel to become more efficient and profitable without disrupting day-to-day operations.

Example: How a Boutique Hotel Can Increase Profit Allocation

Imagine you operate a 75-room boutique hotel with an average monthly revenue of $250,000. You’ve been allocating 5% of your revenue to your profit account, which means you set aside $12,500 per month. Your goal is to increase this percentage gradually until you reach the industry standard of 10% for profit.

Step-by-Step Process to Increase Profit Allocation

1. Assess Your Current Financials: Before you increase your profit allocation, review your latest financials. Let’s assume that after your Instant Assessment, you’ve determined that your current allocation percentages are:

   • Profit: 5%

   • Owner’s Compensation: 12%

   • Taxes: 15%

   • Operating Expenses: 68%

   Your target allocation percentages (TAPs) might be:

   • Profit: 10%

   • Owner’s Compensation: 15%

   • Taxes: 15%

   • Operating Expenses: 60%

2. Start Small – Increase by 1-2% Per Quarter: In the first quarter, you decide to increase your profit allocation from 5% to 6%. This means that instead of setting aside $12,500 each month, you now allocate $15,000. At the same time, you aim to reduce operating expenses by 1%, bringing them down from 68% to 67%. This small, incremental change is manageable and forces you to make slight operational adjustments without causing financial strain.

   Example Operational Adjustments:

   • Utility Savings: Implement energy-saving technologies, such as installing smart thermostats in all guest rooms. These systems adjust heating and cooling based on room occupancy, reducing unnecessary energy use. You might also negotiate lower rates with your utility providers.

   • Supplier Negotiations: Negotiate bulk purchasing agreements with your suppliers for amenities, linens, or F&B products, securing lower rates. Small reductions in costs across multiple categories can add up to significant savings.

3. Review and Adjust Quarterly: After three months, review the impact of the increased profit allocation. Did you successfully reduce operating expenses by 1%? Were you able to maintain or increase guest satisfaction while operating with slightly fewer resources? If so, you’re ready for the next step.

   In the following quarter, increase your profit allocation by another 1%, raising it to 7%. This means you’ll now allocate $17,500 to profit each month. Again, you reduce operating expenses by another 1%, bringing them down to 66%.

4. Continue Incremental Increases: Repeat this process each quarter. Over time, your profit allocation will gradually rise to the desired 10%, while operating expenses shrink to the industry target of 60%. This steady adjustment allows your hotel to adapt without the disruptions that come with more aggressive cost-cutting measures.

Example of Gradual Increases:

Here’s how this might look over the course of a year:

• Quarter 1:

  • Profit Allocation: 5% → 6%

  • Operating Expenses: 68% → 67%

• Quarter 2:

  • Profit Allocation: 6% → 7%

  • Operating Expenses: 67% → 66%

• Quarter 3:

  • Profit Allocation: 7% → 8%

  • Operating Expenses: 66% → 65%

• Quarter 4:

  • Profit Allocation: 8% → 9%

  • Operating Expenses: 65% → 64%

By the end of the year, you will have increased your profit allocation by 4%, moving closer to your target of 10%, while reducing operating expenses by 4%, driving your hotel’s efficiency and overall profitability.

Maintaining Balance and Flexibility

It’s important to remember that while you’re increasing profit allocations, you must also maintain operational standards. As you reduce operating expenses, you need to ensure that the quality of guest services remains high. Here are a few ways to balance cost-cutting with maintaining excellence:

• Lean Operations: Review every department’s processes to identify inefficiencies. For example, you might find that your front desk staff spends too much time on administrative tasks that could be automated through software, freeing up their time to focus on guest interactions.

• Staff Training: Invest in cross-training your staff. When your employees are trained to handle multiple tasks, you can operate with a leaner team without sacrificing service quality. For instance, your housekeeping staff might be trained to assist with simple maintenance tasks, reducing the need for extra maintenance personnel.

• Guest Experience Enhancements: Look for low-cost ways to enhance the guest experience that don’t require additional staff or large investments. For example, you could introduce personalized digital communication via an app that allows guests to make requests or check in remotely, reducing strain on your front desk team.

The Importance of Flexibility

It’s crucial to stay flexible. If at any point you find that reducing operating expenses is negatively affecting guest satisfaction or service quality, you may need to adjust your approach. For example, if you’ve implemented cost-cutting measures in housekeeping but start seeing complaints about room cleanliness, it’s better to adjust your staffing levels than to lose valuable guests. The key is to find the right balance between profitability and guest satisfaction.

Benefits for the Hotel Owner

Gradually increasing profit allocations provides the hotel owner with consistent gains without the risk of destabilizing operations. This approach allows for organic growth in profitability while reinforcing a culture of efficiency and innovation among your team. By the end of this process, your hotel will be consistently generating higher profits, which can be reinvested into the business or used to build financial security.

Conclusion: Steady Growth for Sustainable Profitability

Increasing your profit allocation percentages gradually is the key to sustainable financial health for your hotel. By making small, manageable adjustments over time, you’ll strengthen your hotel’s profitability without disrupting its operations or compromising the guest experience. In the next step, we’ll explore how to destroy debt while building profit, ensuring your hotel is free from the burden of debt while continuing to grow.

By gradually increasing your profit allocation percentages, you create a financially stronger and more efficient hotel. Stay tuned for our next post, where we’ll dive into strategies for eliminating debt while continuing to build profit for long-term success.

6. Destroy Debt While Building Profit

If your hotel is burdened by debt, it’s time to take action. Begin by implementing a Debt Freeze—stop accumulating new debt immediately. Cut unnecessary expenses and negotiate with creditors for better terms. Once you’ve stabilized your cash flow, use the Debt Snowball method to eliminate your debts, starting with the smallest.

Celebrate small victories along the way to maintain momentum, and continue building your profit habit by allocating 1% of your income to your Profit account, even while paying down debt.

Strategies for debt reduction:

• Cut unnecessary expenses

• Negotiate with creditors for better terms

• Use 99% of profit distributions for debt repayment

• Celebrate small wins to maintain motivation

Debt can feel like a heavy burden, weighing down your hotel’s ability to grow and thrive. Many hotel owners find themselves in a cycle of accumulating debt to cover expenses or finance upgrades, which can ultimately choke profitability. However, it’s entirely possible to destroy debt while still building profit. The key is to tackle your debt methodically while maintaining a steady focus on increasing your hotel’s profitability. Let’s look at how you can implement this strategy in your hotel.

Destroy Debt While Building Profit

The first step in eliminating debt is to stop accumulating new debt. Once that’s under control, you can begin paying down existing debt in a way that complements your Profit First system. The goal here is not to ignore profitability while focusing on debt, but rather to strike a balance—chipping away at your debts while continuing to allocate a percentage of your revenue to profit.

Example: How a Mid-Sized Hotel Can Implement a Debt Reduction Plan

Imagine you manage a 150-room hotel with $2 million in annual revenue, but you also carry $200,000 in debt—perhaps from a renovation loan, unpaid invoices, or credit lines used during low seasons. Here’s how you can systematically destroy this debt while building profit.

Step 1: Implement a Debt Freeze

The first thing you need to do is implement a “debt freeze.” This means stopping any new borrowing immediately. Here’s how you can achieve this:

• Cut Unnecessary Expenses: Look at your expenses and determine where you can make immediate cuts. For example, if you’ve been investing in non-essential upgrades, consider delaying them. Focus on essential expenses like payroll, guest services, and necessary maintenance.

• Negotiate Better Terms: Reach out to your creditors and vendors to negotiate better terms. Perhaps you can secure lower interest rates, extend payment deadlines, or arrange for smaller payments in the short term. For instance, renegotiating a renovation loan from a 5% interest rate to 3.5% can save you thousands over time.

Step 2: Use the Debt Snowball Method

Once you’ve frozen new debt, it’s time to eliminate the existing debt. The Debt Snowball method is a proven strategy for doing this. Here’s how it works:

• List Your Debts: Write down all your debts from smallest to largest. For instance:

  • $15,000 in credit card debt

  • $35,000 in unpaid invoices

  • $150,000 in a renovation loan

• Pay Off the Smallest Debt First: Focus on paying off the smallest debt first while making minimum payments on the larger ones. In this example, you’d focus on eliminating the $15,000 credit card debt first. Let’s say you allocate an extra $5,000 per month to this debt. In just three months, that debt would be paid off.

• Move to the Next Debt: Once the smallest debt is cleared, roll the amount you were paying into the next debt. So after paying off the $15,000 credit card debt, you’d allocate that same $5,000 to the $35,000 invoice debt, which would be cleared within seven months.

This method creates momentum and a sense of accomplishment, making it easier to stay motivated as you work through larger debts.

Step 3: Continue Building Profit While Reducing Debt

While paying down debt, it’s essential to continue allocating a small percentage of your revenue to your profit account. For example, even if you’re aggressively paying off debt, commit to putting 1% of your revenue into profit every month.

Example: Let’s say your hotel generates $2 million in annual revenue, or roughly $167,000 per month. Even during debt repayment, you allocate 1% of that revenue—$1,670—into your profit account each month. This ensures that your hotel continues to build financial reserves even as you work to eliminate debt.

• Use 99% of Profit for Debt Repayment: While building your profit account, you can use 99% of your quarterly profit distributions to pay down debt. For example, if your profit account reaches $10,000 at the end of the quarter, you can take $9,900 and apply it directly toward the remaining debt, keeping only $100 to continue building the habit of profitability.

Step 4: Celebrate Small Wins to Stay Motivated

Destroying debt can be a long and sometimes exhausting process. To stay motivated, celebrate small victories along the way. For example, after paying off each debt, treat your team to a small celebration, such as a team lunch or a bonus for staff. This keeps morale high and reinforces the importance of working together to achieve financial stability.

Strategies to Accelerate Debt Reduction

To accelerate the process of debt elimination, consider the following strategies:

• Increase Revenue Without Increasing Costs: Implement revenue-generating initiatives that don’t require significant additional costs. For example, you could:

  • Offer seasonal packages that bundle rooms with meals or spa treatments, attracting more guests without significantly increasing operational costs.

  • Increase direct bookings through targeted marketing campaigns, avoiding OTA commissions and increasing your net revenue.

• Streamline Operations: Continue looking for ways to reduce costs without sacrificing quality. For instance, you could:

  • Automate routine tasks such as check-ins and check-outs through self-service kiosks, reducing the need for front desk staff during peak times.

  • Implement energy-saving practices, such as upgrading to energy-efficient appliances and offering guests incentives to reuse towels and linens, which can reduce utility bills and housekeeping costs.

Step 5: Gradually Increase Profit Allocation as Debt Decreases

As you pay down your debts, you’ll free up more of your hotel’s cash flow. When this happens, gradually increase your profit allocation percentages. For example, after paying off the $15,000 credit card debt, you might increase your monthly profit allocation from 1% to 2%. As you continue to eliminate more debt, you can increase that percentage even further.

Example: Once your renovation loan is paid off, you may decide to allocate 5% of your monthly revenue to profit instead of 1%. With your debt burden reduced, you’ll have more flexibility to grow your profit and invest in strategic improvements that will further enhance your hotel’s profitability.

Benefits for the Hotel Owner

By following this method, you achieve two critical goals: eliminating the stress and financial drain of debt while still building profit. This ensures that your hotel remains financially secure even during the debt repayment process. Over time, as debt decreases and profit increases, your hotel will emerge stronger, more efficient, and better positioned for long-term success.

Conclusion: Building a Debt-Free and Profitable Hotel

Destroying debt while building profit is a powerful strategy for ensuring your hotel’s financial health. By implementing a debt freeze, using the Debt Snowball method, and consistently allocating a portion of your revenue to profit, you can reduce debt without sacrificing profitability. In the next step, we’ll explore how to find hidden money within your hotel through efficiency improvements, so you can further accelerate your journey toward financial freedom.

By implementing these steps, you’ll transform your hotel into a leaner, debt-free, and highly profitable business. Stay tuned for our next post, where we’ll focus on uncovering hidden money in your hotel operations through efficiency and innovation.

(Part 2) Transforming Your Hotel from a Cash-Draining Operation to a Profitable Business Machine

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