A profitable property can run out of cash. A cash-rich property can post weak earnings. This module covers the difference, the working capital cycle that's unique to hotels, and how to evaluate the capex projects that keep the asset alive.
The P&L is built on accrual accounting. Revenue is recognized when earned, not when collected. Expenses are recognized when incurred, not when paid. This makes the P&L a good measure of performance — and a misleading measure of cash. A property can post strong earnings while burning through cash, or weak earnings while accumulating it.
The cash flow statement reconciles the two. It starts with net income, adjusts for non-cash items (depreciation is the big one), adjusts for changes in working capital, and produces the actual movement of cash. For working managers, the cash flow statement is read less often than the P&L but matters at least as much — particularly during stressed periods or during major capex.
Three things to understand at a working-manager level: where cash diverges from profit, how working capital movements affect that divergence, and what cash flow tells you about the property's ability to fund its own operations and capital needs.
Working capital is current assets minus current liabilities — what's tied up in the day-to-day operation. In most industries, working capital is positive: companies extend credit to customers (receivables) and pay suppliers later (payables), netting to a positive number that ties up cash.
Hotels work in reverse. Guests pay at check-in or by credit card immediately. Suppliers extend 30–60 day terms. The result: hotels typically run negative working capital, which is unusual and powerful. As a hotel grows revenue, it actually generates additional cash from the working capital cycle rather than consuming it.
The implications matter. A growing hotel has working capital tailwind; cash builds faster than profit. A declining hotel has working capital headwind; cash shrinks faster than profit. The first time a hotel manager experiences this in either direction, it's a surprise. The mechanic is worth understanding before it happens.
Most operating managers never read the balance sheet. That's mostly fine — the balance sheet lives more with the asset manager and ownership than with operations. But four lines on it are worth understanding even for someone whose job is the P&L.
How long it takes to collect what's owed to the property. Healthy: 25–35 days. Above 45 days suggests collection problems with corporate or group accounts. Worth knowing the trend, even if AR isn't your direct responsibility.
F&B inventory, retail inventory, operating supplies. Should turn 24–36 times per year for F&B. Excess inventory ties up cash and signals procurement discipline issues — both belong on the manager's radar.
How long the property takes to pay suppliers. Healthy: 30–45 days. Pushing AP out too far damages supplier relationships and may signal cash strain. Watching this protects the operation, not just the balance sheet.
How much cash is actually set aside for FF&E renewals versus how much should be. Reserves are often raided during weak years and underfunded for long stretches. The gap is one of the biggest hidden risks in hospitality.
Every capex project — replacing the boiler, refreshing the lobby, repositioning the restaurant — should be evaluated against three metrics. Each answers a different question. Owners typically want to see all three before approving anything material.
How many years to recover the investment. Simple, intuitive, ignores time value of money. Useful for short-cycle projects (3–5 years). Owners often want payback under 5 years for discretionary projects.
Net Present Value. Discounts future cash flows to today using the property's cost of capital. Positive NPV means the project creates value above the hurdle rate. The metric for any project with a horizon over 3–4 years.
Internal Rate of Return. Expressed as a %, comparable to other investment opportunities. A 15% IRR project means the investment earns a 15% annualized return. Owners typically want IRR above their cost of capital plus a risk premium.
Not every project lives on the spreadsheet. Brand-required PIP investments may have weak IRR but be non-negotiable. Competitive responses may have hard-to-quantify benefits. The numbers inform the decision; strategic fit completes it.
The replacement reserve was introduced as a concept in Module 3. Here we treat it operationally. The reserve is supposed to fund FF&E renewals — soft goods every 5–7 years, case goods every 10–15, mechanical equipment on its own cycle. Most management agreements specify a reserve contribution of 3–5% of revenue, escrowed and controlled.
The reality is messier. Reserves get raided during weak years (with owner consent, sometimes without). Owners under-fund newer properties because "the FF&E is still good." Properties defer renewals to make the EBITDA number, creating a debt to the asset that compounds. The result, industry-wide, is a chronic under-investment in FF&E that catches up with properties roughly every cycle.
The working manager's role here is mostly visibility: knowing what reserve is funded versus required, what's scheduled versus deferred, and what the bow wave of catch-up looks like. The decisions live with ownership. But ownership decisions are only as good as the operator's reporting of the underlying condition.
Pick a real capex project at your property — one that's been proposed, deferred, or recently completed. Walk through the three-metric analysis as if you were presenting it to ownership.
Capital decisions vary widely across ownership structures. The cohort call surfaces how different owner types actually decide.
The post-mortems are more valuable than the pre-approvals. Where did the original numbers prove right? Where did they prove wrong?
Most properties answer "approximately" yes to the first part and have no answer for the second. The gap is the asset's deferred debt.
Some owners publish hurdle rates. Most don't. The properties that get capex approved are often the ones whose operators have figured out the implicit hurdle through experience.