Lies, Damned Lies and Statistics
If I said that Cadel Evans had recently won the Tour de France by one and a half minutes, a statistician would swiftly remind me that Cadel actually won by a margin of 1 minute and 34 seconds.
This type of statistic is straightforward, but others require a bit more understanding – the kind the great American writer Mark Twain was referring to when he popularised the phrase Lies, damned lies and statistics.
Understand your reporting: When running a management rights business your trust account management software, or MYOB, can produce a number of management reports such as: occupancy rates, average room rates, profit (broken down month by month, compared with the prior month) and any number of other scenarios. When running these reports it’s important to understand how the numbers are derived, what they mean and how various actions (both inside and outside of your control) may impact them.
Focus on the effect you want: I recently visited a client who has been running a complex for a number of years and, from our discussions, it was clear to me that he understood how the various results related to each other. The resort had recently carried out a big advertising campaign, with a mailout and special accommodation rate offer. This increased the current occupancy rate and forward bookings but reduced the average nightly rate due to the discounted price on offer. The manager knew this and focused on the effect on revenue, rather than on occupancy. The increased occupancy was more than enough to offset the lower tariffs therefore, it was a successful marketing campaign.
Some events are beyond your control: Some events, such as the recent series of natural disasters, will be completely outside of your control but will still affect your complex’s results. Many permanent complexes could have close to 100% occupancy in the letting pool, with just a couple of days’ changeover betweens tenants who may be there for six months, twelve months or longer. However, this may have been a different story in early 2011 when the floods in Queensland forced tenants out for days, or even weeks at a time. Holiday complexes were not spared either as guests cancelled their bookings while they dealt with flooded homes, or didn’t fancy getting caught in a cyclone zone. In far North Queensland some sites recorded single digit occupancy for the month of February 2011.
Understand what makes up the numbers: 2011 could well be a lean year for would-be vendors of holiday complexes wishing to sell. They may be reluctant to allow events to impact their net profit for sale and the eventual selling price. I hope, though, that operators, buyers and industry professionals take the impact of such events into consideration when ‘looking at the numbers’.
Another set of numbers commonly referenced by management rights operators are those that make up the accountant’s verification report that was prepared as part of the initial purchase process. I’ve heard of managers becoming so disenchanted by the fact that their actual profit differs so markedly from the profit figure in that verification report that they promptly change accountant!
What needs to be understood in this case is the context in which the verification report was originally prepared. Each report carries the disclaimer:
“For the purpose of this clause net operating profit shall be calculated by deducting from the gross income of the business for the relevant period the actual expenses of operating the business for that period (in particular excluding depreciation, interest on borrowings and any payment for labour related to work that would normally be performed by a two person resident management team).”
The part that often causes confusion is the mythical ‘two person resident management team’. If the complex is particularly large or busy or has extensive grounds, the accountant may factor in an allowance for the additional demands this places on operators.
This allowance could be in the form of a certain number of hours per week for casual reception staff at award rates or an amount to pay for maintaining the grounds and pools. If the accountant has not made this allowance and you choose to employ staff or are forced to due to unforeseen circumstances, you need to be aware that these additional labour costs will impact your profit results.
You are in control: When comparing your actual results with the verification report make sure you read through it carefully to understand these impacts. When results differ widely from previous years take the time to understand why the change has occurred. Your bank manager will appreciate when you are able not only to discuss the results but also how they were achieved.
If a change comes about because of your positive actions, build on that. Where your actions have a negative impact, recognise this early so you can minimise, or better yet, reverse, the effect. If your results are impacted by a one-off event outside of your control, accept and understand it. As the sporting coaches say, you can ‘control the controllables’.
Sheryl Mahoney
Suncorp
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