Capital Expenditure in the Hospitality Industry

3069 Words Jan 16th, 2011 13 Pages
Capital Expenditures in the Hospitality Industry

Abstract
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
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Capital expenditures offer the management team an opportunity to reduce labor cost repair and maintenance of equipment, gain market knowledge by upgrading to better systems, and increase associate productivity by providing them with the necessary tools to do a more efficient job. In order to keep the priorities of the business separate from the preference of the individuals involved, the capital expenditure process requires solid analysis and planning. This is more significant if the management team is aware that they might face pushback from the ownership team when it comes to the release of funds for a particular project. Once approved by the ownership group, capital expenditures are normally funded through one of three sources: * An escrow fund established for the replacement of fixed assets * Projects that can be classified as having a return on investment * Owner’s out-of-pocket special projects.
Industry practice, followed by major hotel chains is to set up an escrow fund of three to four percent of total sales. This percentage is often less during the first three years of operating a newly built hotel, as there is less need to replace equipment. Analyses conducted by the International Society of Hospitality Consultants have shown that these reserves are often insufficient to keep a hotel or restaurant operating to customer’s expectations and with the efficiencies that new technologies provide
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