Industry, Product  |  19 October 2021  |  Jovana Aničić  |  4 minute read

The importance of cashflow management in hotels

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Cashflow isn’t one of those small things that you can put to the back of your mind. A strong, reliable cashflow is vital for your property’s financial health, and is largely determined by the way you set up your payment operations. 

How do you reach a place of cashflow calm? There are a few important decisions you need to make when it comes to booking channels and payment policy, as well as certain things you’ll want to avoid. Maybe you know them already. Maybe you don’t. But I don’t think I can add any more suspense to this introduction, so let’s get to it. 

 

The ultimate goal of cashflow management

The holy grail of cashflow management is to have a steady stream of income throughout each month. Your property should be able to accurately forecast when money is coming in so that you’ll know in advance that you’ll have enough in the accounts to take care of all the outgoing payments. 

When it comes to expenditure, you’ll typically have a variety of expenditure that’s billed on a monthly cycle, namely paying bills, suppliers, and staff. Then there are the less regular but still frequent costs like maintenance, renovations, and absorbing refunds and cancelations. To pay these expenses on time, you need to have a healthy balance you can rely on. In short, your payment processes are vital. 

Managing cash flow is essentially managing guest payments. The ultimate goal for any property should be a set and forget philosophy – in other words, you decide at what point in the guest journey the payments are taken, and then use payment automation to handle the actual nuts and bolts of the processing. 

 

The problem with OTAs and cashflow

You shouldn’t have to run around chasing incoming payments because you might have a shortfall to pay your suppliers in the middle of the month. Setting up an automated payment process solves this problem for any direct bookings, but there are still some things you have less control over, such as bookings through OTAs. 

Despite their high commission rates and the rising costs of Virtual Credit Cards, OTAs aren’t going anywhere. But when it comes to cashflow and revenue, there are some serious problems with the set-up for their payments. 

You may have been asked by an OTA to move to a monthly invoicing model. The promise of less admin may be appealing, but there are significant drawbacks, not least the decrease in regular cashflow. Waiting until the end of the month for a lump sum could have devastating consequences, particularly if unexpected costs suddenly arise. It’s particularly risky if the majority of your bookings come through this channel, as it’s effectively putting all your eggs in one basket if you’re unable to guarantee cashflow from direct bookings. 

They may offer to move you up their listings, but in truth your money would be better spent on your own marketing for direct bookings. Direct bookings are not only 12.5% more profitable than OTA bookings, but they have a much lower cancelation rate – they lost only 18.2% of on-the-books revenue from cancelations, compared to 49.8% of Booking Group bookings. And don’t forget (as if you could) the commission rate that sometimes reaches as high as 30%. 

 

Virtual credit cards are harming cashflow

Let’s start with virtual credit cards. Reservations made through operators like booking.com are often done through VCCs. They’ve probably been sold to you as timesaving and just the same as regular cards but with guaranteed pay-outs from the relevant OTA. This is only partially true, not to mention that virtual credit cards are more expensive. 

These cards used to be charged on the day of arrival, but during the pandemic, booking.com changed this to the day after arrival. It sounds like a small difference but it can have an impact, particularly for smaller properties for whom every day matters. But arguably the biggest concern is that this demonstrates that these companies have the power to influence your hotel’s workflow, changing policy whenever they like because it benefits them. Oh, and by the way, chargebacks can still happen with VCCs, so don’t think of it as money in the bank. 

The other issue with virtual credit cards is that they don’t encourage further spending. Upsells and cross sells can make a big contribution to cash flow, so you should make it as easy as possible for guests to spend more. However, a VCC has a block for a certain amount, i.e. what the guest paid for their reservation. If they want to purchase anything else after the initial booking, they’ll have to present their card details again.  

Compare this to a guest who’s booked direct through Mews Payments. Their tokenized card details are already ready to go in the system – booking a spur-of-the-moment spa treatment can be done with the tap of a button. It’s a big mindset difference that will make guests more likely to buy add-ons.  

Moreover, virtual credit cards make it harder to charge guests retroactively, such as for minibar items or room damages. This also means you probably don’t have your guest’s true email address, which makes it difficult to drive future direct bookings and run loyalty offers. Fortunately, we have a way to get real guest emails from OTA bookings

 

Embrace revenue management

Although we consider the primary purpose of revenue management to maximize revenues, it also plays an important role in cashflow. Good revenue management software will help you forecast and improve your property’s cashflow by using automation and analysis to boost occupancy and guest spend. Sidebar: are you still relying on ADR and RevPAR? Download the Metrics that Matter to discover the new generation of accurate and holistic data you should be using. 

If your property is part of a group or chain, a centralized revenue system will be a huge help. Comparisons between properties will allow you to determine how to best price your rooms, and will provide more accurate forecasting data to predict monthly cashflow. It will also help to encourage longer term thinking when it comes to cashflow. By tailoring your room offers and prices, you can focus on targeting guests with a higher lifetime value – those who are likely to return again and make ancillary purchases – thus ensuring a more stable cashflow in the coming years. 

 

The future of cashflow

The events of the past 18 months have shown us that we never truly know what’s around the corner, and that having a reliable cashflow is more important than ever. One positive trend is the continued adoption of cashless payments. It varies by region, but in some countries, particularly in Europe, cash is now the vast minority. In Belgium, non-cash payments are 93% of all payments; in France it’s 92% and in Canada it’s 90%.  

Why is this good? It means your property can operate more efficiency by automating payments at the point of the guest journey that suits them best. If a guest is paying by cash, that reservation stays out of your cashflow until check-in at the very earliest – and then once the cash is in your register it then has to be manually entered into the system somehow.  

With a tool like Mews Payments, however, the money can be processed automatically and will become a part of your cashflow much faster, whether that’s at the point of reservation, the day before arrival, check-in or check-out. If that sounds good to you, you can read more about it here.

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Jovana Aničić | 19 October 2021

Jovana is a product-driven enthusiast focused on customers, and she's on a mission to take the world of payments in the travel industry to the next level.

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