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Hotel Consulting and Development Group
Hotel design
and construction support
from project plan to commissioning

Business Planning

The financing of a hotel and tourism project can reveal to be a challenging task for those clients who wish to formulate a summary package of the project's feasibility and profitability to investment and lending institutions. This set of documents commonly referred to as "business plans" are prerequisites for bank loans and equity financing provided by institutional investors. Essentially the business plan explains how the business will develop during the first five years and provides a net cash flow forecast for that period. In order to ascertain the level of investment requirement to launch the project, the estimated income streams that the venture will generate, and the investment impact that the project can have on the balance sheet, the business plan must account for the market environment supporting the project's viability.

Most importantly, this set of documents form the basis upon which banks assess the creditworthiness of the project and approves a loan.

In order to assist companies in the financing of hospitality and tourism projects in Russia and CIS, Hotel Consulting & Development Group carries out the preparation of business plans for its clients. When preparing business plans, HCD Group places their main emphasis on objectivity and accuracy in interpreting market data, producing a fully comprehensive financial forecast model based on the concept definition of the project and integrating the findings from a market study prepared to that effect.

After the first contact with the financial partners who agree in principle to fund the project, our specialists work on their client's behalf to quantify the following components:

  1. Pre-Financing Plan, which contains the first estimations of the investment volumes requirement for the implementation of the project development. The investment level will depend on the proposed concept, land costs, construction costs, viability, take-over of good will, insurance, interim financing costs, advertising costs, initial inventory and working capital. Once the investment volume has been accurately quantified, solid financial engineering must be assembled to support the project. The capital structure (combination of equity and debt) will affect the project's risk level.
  2. Operation Revenue Projections. These comprise all of the profit centers envisaged within the proposed concept. For a standard city centre hotel, the room, food, beverage, and catering operations generate the main revenue. Smaller revenues are regrouped under "Minor Operating Departments". These include among others revenues originating from telephone, room hire and leisure facilities.
  3. Projected Operating Cost established along the same period as the revenue projections, usually for five or more years, depending on the scope of the project, the nature of the contract operation (lease, management contract or franchise) and the financial obligations, which the asset must service. These costs can be either defined as percentages of total revenue (cost of goods sold, sales and marketing, management fee) or as fixed amounts (lease, insurance policies, personnel).
  4. P&L Forecast on 5 or 10 Years. In view of accurately simulating the operational performance of a hotel, a Profit & Loss forecast enables a preview of the project's performance based on the following factors: market location, concept parameters, facilities mix, product positioning, competitive benchmarking, and management structure. From the forecast, we can already derive the Gross Operating Profit (GOP), Income before Fixed Cost (IBFC), Net Profit, Residual Cash Flows further to servicing of the long term debt and applicable taxes.
  5. Estimation of the Working Capital Requirement. Managing a hotel's working capital entails the management of cash, inventory, and other current assets, as well as current liabilities. To secure the hotel or catering project's operational feasibility, particular attention should be placed on proper management of the working capital to avoid illiquidity to service the current liability requirement.
  6. Estimation of a Financial Plan or Cash Flow Analysis, whereby the yearly financial requirements (debt service, tax, insurance, real estate tax and reserves for FF&E Replacement) of the project are deducted from the hotel's generated Net Operating Profit. These residual cash flows enable a bank or investor to assess the viability of the project. This resulting flow should be consistently positive, or the lending or investment entity considering the project will be reticent in backing the venture.

The cash flows can then be used in estimating the full feasibility of the project. By applying a discount rate appropriate to the level of risk and the market conditions applicable to the project, the Net Present Value (NVP) and Internal Rate of Return (IRR) can be calculated using as the first cash flow the total investment volume that the project represents. The NVP can then be divided by the amount of rooms of the hotel project to provide an indicator of profitability per rental unit.

No business plans relies strictly on financial findings. HCD Group also consider the facilities requirement of the proposed project, the designated site, and the surrounding hotel market. To support and complement our financial assumptions and methodology, we integrate a thorough hotel market analysis and concept development into each of the commissioned business plans. Please find below a sample business plan outline prepared by HCD Group.

1. Executive Summary
   1.1. Objectives
   1.2. Mission
   1.3. Project Findings and Recommendations

2. Company Summary
   2.1. Company Profile
   2.2. Project Characteristics
   2.3. Investment Requirement for Concept Implementation
   2.4. Project Property Location and Facilities

3. Definition of Project Product and Service Concept
   3.1. Site Analysis
   3.2. Definition of a Proposed Hotel
   3.3. Recommended Project Facilities Mix
   3.4. Space Allocation Programme

4. Market Analysis
   4.1. Introduction
   4.2. Local Economy and Tourism Trends
   4.3. Analysis of the Market Potential
   4.4. Local Competitive Hotel Supply Analysis
   4.5. Future Hotel Supply
   4.6. Local Hotel Demand
   4.7. Envisaged Demand for the Proposed Project
   4.8. Market Analysis Commentary

5. Strategy and Implementation Strategy
   5.1. Marketing Strategy
   5.2. Sales Forecast
   5.3. Management Summary
   5.4. Staff Plan

6. Performance Feasibility Forecast
   6.1. Operational Revenue and Expense Forecast
   6.1.1. Rooms Revenue
   6.1.2. Food and Beverage Revenue
   6.1.3. Health Club Facilities Revenue
   6.1.4. Minor Operating Department Revenue
   6.1.5. Average Occupancy, Average Room Rate, RevPAR
   6.1.6. Cost of Sales
   6.1.7. Payroll and Related Expenses
   6.1.8. Management Fee (Deal Structure)
   6.2. Summary Statement of P&L Projections
   6.3. Performance Sensitivity Analysis
   6.4. Statement of Cash Flow
   6.5. Estimation of Working Capital
   6.6. Projected Balance Sheet
   6.7. Investment/Profitability Ratios

7. Exhibits

8. Appendix

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