When modeling hospitality deals are both departmental and undistributed typically variable based on seasonal occupancy swings? I have found that if undistributed expenses remain fixed we have significant shortfall during off season months, however a recent client had them as fixed.
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Based on the most helpful WSO content, here are some key points regarding hospitality modeling and expenses:
Departmental Expenses: These are typically variable and can fluctuate based on seasonal occupancy swings. This includes costs directly associated with the operation of the hotel, such as housekeeping, food and beverage, and other operational departments.
Undistributed Expenses: These can be more complex. While some undistributed expenses might remain fixed (e.g., certain administrative costs, property maintenance), others can be variable. For instance, utilities and some maintenance costs might vary with occupancy levels.
Seasonal Occupancy Swings: It's crucial to account for these swings in your model. If undistributed expenses are treated as fixed, it can lead to significant shortfalls during off-season months when revenue is lower. This discrepancy needs to be carefully managed to ensure accurate financial projections.
Client Preferences: Some clients may prefer to treat undistributed expenses as fixed for simplicity or based on their specific operational structure. However, this approach can lead to inaccuracies in financial modeling, especially in highly seasonal markets.
In summary, while departmental expenses are typically variable, undistributed expenses can be a mix of fixed and variable. It's essential to tailor your model to reflect the specific operational realities of the hotel in question to avoid significant shortfalls during off-season periods.
Sources: Student Housing Model, Lunch & Learn - Hotel Industry & Hotel Development, https://www.wallstreetoasis.com/forum/investment-banking/modelling-has-to-be-the-biggest-misnomer-in-this-industry?customgpt=1, Why Hotels?, Hotel Help
Yeah bro if you're in a seasonal market that's how it goes. For us we go by line item - things like rooms expense or electrical should be adjusted based on POR, others like G&A and undistrib payroll will be pretty stable month to month. Just think through the logic of each expense category, what goes into it and you'll quickly see which should be straightlined vs adjusted to seasonality/occ in your model.
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