Capital Expenditure in the Hospitality Industry

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Capital Expenditures in the Hospitality Industry

Hotels of any size are costly investments to begin with. The costs involved in maintaining the property to the necessary levels to keep attracting customers can at times be very high. Capital expenditures projects in the hospitality industry are primarily focused on the achievement of customer safety and comfort in a clean, friendly, and healthy environment. This paper will describe what capital expenditures are, what is involved in setting up a capital expenditure plan, how it is funded, and who the stakeholders in the process are. Keywords: capital expenditure, return on investment, funding

Capital Expenditures in the Hospitality Industry
General accounting principles define capital expenditure or CAPEX, as an amount of money spent to acquire or upgrade productive assets, such as buildings, machinery and equipment, to increase the capacity or efficiency of a company for more than one accounting period, (, 2010). In the hospitality industry, capital expenditures include furniture, fixtures, and equipment as well as major improvements to the buildings, landscape and systems. The creation of new business units within a hotel or resort may be capitalized.

From the above definition it can be deduced that capital items are generally big ticket items, expected to support the quality of an operation for many years. These items also will have a substantial impact on the property owner’s cash flow and net profit, as well as on the performance of management to deliver customer and associate satisfaction, associate productivity, and superior financial results. In many instances it is difficult (and too often open for interpretation) what is a CAPEX item and what is a regular maintenance or repair item. An example of this is the choice between replacing a whole roof versus continuously fixing leaks, which demand substantial man hours from operations.

A thorough understanding of a property’s needs for capital expenditures should be clearly defined and agreed to by owners and their assets managers on one side, and management on the other. Since capital expenditures reach beyond the normal fiscal year budgeting process, agreements in writing between owners and management should be drawn to protect the vision both parties may have for the business and its future. As much as any business, the fundamental objective of a hotel is to attract and retain profitable customers, who will chose the hotel for a variety of reason, including its appearance, number of outlets and recreational facilities. Both the owners and operators need to subscribe to the goal of maintaining the hotel to the level needed to ensure that the fundamental objective is met. There will certainly be times where owners and operators will disagree on the specific level of quality necessary to achieve the objective, and as such there will be discrepancies in the required amount of funding that should be made available.

The owner’s point of view regarding how much they want to spend might differ if the initial reason for owning the property is for short term gains, such as upgrading the property for resale, or they might have a long term vision such as making the property the centerpiece of a community project or support facility in a business park. Whichever the owner’s reason for owning the property, the management team cannot operate in a vacuum and disregards the owner’s goals and limitations. CAPEX can add significant financial burdens to the owners. Cash reserves are often held, and expenditures timed by the operator, thus limiting the owner from free access to cash flow. In addition there may be tax implications; while operating expenses may be posted against current profits, CAPEX items are generally written-off over a multi-year period.

From the management team’s perspective, the effectiveness of a hotel operator is fundamentally measured by the capability to maximize...
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