Among the many ways that the COVID-19 pandemic changed the hospitality industry, few are more apparent than in the area of capital expenditure. Even years prior to the pandemic, the rate of mergers and acquisitions in the hospitality industry was expected to increase — and this trend has shown little sign of slowing down.
The hospitality ownership and management landscape was profoundly affected by the pandemic, with many larger entities buying up smaller entities that were unable to support the financial strain of lost revenue. This naturally leads to facilities changes and updates — at the very least, to support new branding after an acquisition.
At the same time, as the concept of “revenge travel” takes root with more people wanting to travel after the end of pandemic restrictions, many in the hospitality industry are also increasing expenditures on renovations and new construction to match customer expectations.
This is especially prevalent in upper and upper-midscale hospitality chains, where new projects are increasingly getting the go-ahead. All of these trends are directly related to capital expenditure — making it more important of a consideration than ever before.
Understanding What Capital Expenditure Is …
As Investopedia explains, “Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.”
Continues Investopedia, “Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.”
Capital expenditures are purchases that have a useful life of longer than a single year. Any item that is expected to have a useful life that is shorter than one year doesn’t qualify as a capital expenditure, and instead must be spent on the business’s income statements.
For example, in the roof repair example offered by Investopedia, a hospitality business would pay for the repairs with the full expectation that they would be sufficient for much more than a single year.
The repairs would qualify as a capital expenditure because if they were done properly, they should be a facility upgrade that lasts for several years (if not decades). Other common capital expenditures include expanding existing facilities, replacing or renovating outdated facilities and the construction of new buildings.
Because capital expenditure tends to focus on physical property and equipment, it is always done with more of a long-term view of how it will impact the business as a whole. Some industry experts recommend that brands save as much as seven to nine percent of their annual revenue toward such projects due to how repair and renovation needs can vary from year to year.
Why Capital Expenditures Matter for Customers
Capital expenditures matter in practically every business category. After all, a well-maintained facility that meets the needs of both employees and guests is crucial for providing a positive experience and building a reputable brand. In the hospitality industry, however, the facility quite often is the brand.
Consider a hotel. While cleanliness and customer service are certainly important factors in determining the quality of a guest’s experience, many of the factors that most strongly influence a guest’s perception of the hotel come down to the physical facilities.
A study of reviews of hotels in China found that for four and five-star hotels, some of the leading predictors of customer dissatisfaction were room size and the proximity of the hotel to other attractions and amenities.
In this case, capital expenditure decisions that begin when a hotel is built — choosing a location and determining the size of the rooms — can have a direct impact on the customer perception of the facility.
Even in non-luxury facilities, capital projects can go a long way in making a hotel more attractive to prospective customers — and more likely to earn their repeat business by providing an enjoyable stay. Expenditure such as updating furniture, carpeting, and paint can help a hotel or restaurant feel more modern and in line with customer preferences. Curb appeal and the lobby are also major focus areas for capital projects.
In our increasingly digital age, such upgrades can have a direct influence on customer reviews, which are a major factor for hospitality businesses’ ability to gain new customers.
In fact, one TripAdvisor survey found that 72 percent of customers “always or frequently” read online reviews when choosing things to do and places to stay or eat while on vacation. For accommodation bookings, this was even more prevalent, with 81 percent using reviews to guide their decision-making.
Why Internal Management of Capital Expenditure Is a Must
While capital expenditure is undoubtedly a necessary investment for hospitality businesses, there is no denying that it can become a source of major headaches — particularly for enterprise-level businesses that have multiple projects going on at different locations.
Depending on the scope of the work, a single project could cost tens of thousands or even millions of dollars. While some projects can be completed in a matter of weeks, others require a multi-year plan, further complicating project management.
Because of these vast differences, each project has its own unique risks and challenges that can further drive-up costs, reduce the quality of the work and prevent timely completion of the project.
In some cases, failure to manage key challenges with a capital expenditure could even lead to a complete project shutdown. Regardless of the scope of the issue, such setbacks can cause a significant hit to the company’s profit margins. Without real-time tracking and monitoring of a project and its expenses, it becomes all too easy for key milestones to slip through the cracks.
Cloud-based technology is poised to alleviate many of the challenges the hospitality industry currently faces in managing capital projects. The capital budget cycle needs to be tracked at all stages — from the initial request and evaluation of the project, through approval and funding. By keeping all financial data in a centralized location, it becomes far easier for an organization to keep track of everything.
Key activities that can (and should) be managed through a centralized cloud-based system include budget and spend analysis, milestone tracking, project attributes and alerts and supplier RFQs and bids. With a centralized system for managing and tracking each project, organizations can better control their budget, ensuring that each capital expenditure project goes as planned — and that they can act quickly when an issue arises.
How BirchStreet Systems Capital Projects Can Help
Capital expenditures can be complex, particularly for larger hospitality businesses that manage multiple locations. Capital Projects from BirchStreet Systems can help you streamline all new construction, renovations and other expenditures with an intuitive system that promotes transparency and accountability.
Instant reporting (including live spend) gives immediate, complete visibility into project status, while also enhancing compliance so your business can save time on audits. Notifications when milestones are achieved or delayed, the ability to manage project RFQs with vendors and detailed project budgets are just a few of the ways this system can help you keep all capital expenditure projects on track.
BirchStreet Systems Capital Projects provides support for multi-year spending plans with project-centered workflows. Project customization allows tracking of everything from simple repairs or renovations to the construction of new facilities, as well as the use of plan hierarchies that can include sub-projects and items for each project. Customizable (and reusable) project templates and specifications allow for better control over the specific needs of your organization’s capital projects.
Better yet, direct integration into the BirchStreet procure-to-pay applications makes it easy to generate purchase requisitions, transfer funds between projects, estimate taxes and freight for a project budget, and provide full or partial funding to control spending. Real-time budget visibility and control enable smarter financial decision-making.
These and other elements combine to provide significant efficiency gains. BirchStreet Pay and Capital Projects has helped users achieve an 80+ percent compliance rate, while also enjoying savings of up to 10 percent through compliance improvements. Automating procurement can lead to productivity gains of up to 30 percent, in part by dropping approval times from three to seven days to a matter of minutes.
By leaving your organization better equipped to manage multiple capital expenditure projects through a cloud-based solution, you can turn these necessary investments into a true source of strength for your hospitality brand.
Making Capital Expenditures a Priority
For a hospitality brand to grow, it must invest in capital projects. Whether adding new facilities or improving the facilities you already own, these projects can prove transformative to the customer experience, helping you keep your current customers and gain new ones.
By investing in a cloud-based capital projects system that enables real-time tracking and management of each of your company’s capital expenditures, you can also ensure that each project stays on track.
No matter what the budget, location, or timetable for completion looks like, the ability to effectively manage each project will help keep your organization’s finances in the black as you make these necessary improvements.