Reference no: EM133342625
Case: Shawn and Susan loved rock climbing. Once they turned 19, they left Vancouver and travelled around the world living in their RV. They worked as nurses in the communities they happened to be in at a given time, as they climbed and scrambled up their list of favourite mountains. After they had fulfilled their wish list of destinations and their two kids, Howard and Harold were ready to go to school. They decided to move from their RV to a home and settle roots for their family. Shawn didn't want to live in the city so they decided to relocate to Squamish. This way, they would still have rock climbing options close by to keep them fit and teach their kids to climb as well.
While searching for a home, Shawn saw a well-priced property that had room for a restaurant, a lobby, and could be repurposed into larger rooms to make for hostel rooms that can fit up to 4 people in each room. He envisioned building a hostel where the family could live, but could also run as a business to help bring temporary housing to those visiting the city to mountain bike, climb, hike or go skiing or snowboarding at the nearby Whistler Mountain Resort. Shawn and Susan named it H2 Hostel after their two boys.
20 years later, the hostel is one of the most popular in the area. It is an affordable option for those looking for adventure. Shawn and Susan's expertise, the clean and cozy rooms, and the fun atmosphere around the hostel has made it a success. Howard followed his parents' passion and became a nurse while Harold found a passion in law.
After an unfortunate mountain biking accident in the summer of 2021 left Shawn paralyzed from the waist down, Susan now spends most of her days caring for Shawn. Since the accident, the two don't have the resources to run the hostel as well as they had previously. They reached out to Howard and Harold to take over the business in their absence. Harold liked the city, and his law career was successful, so he was reluctant to return. However, Howard felt the need to continue his parents' legacy. Harold isn't confident about the ins and outs of business, so he has reached out to your group to assist in his business decision making.
Howard gathered some information and decisions for your group to assist him with. His priorities are to maintain a steady cash inflow for his family to cover additional expenses and care. He also wants appropriate processes and business strategies to be in place to run the business smoothly in the short and long term. Ethics are of high importance to him, and he wants to uphold a high ethical standard.
The H2 Hostel has 8 rooms in total- 5 shared rooms that have a capacity of 4 people and three private rooms that are meant for two people. Occasionally, there is 1 person that rents these rooms. The fees for shared rooms are $50 per person which gives them access to a bed, a locker, a shared bathroom and fresh linens. The shared rooms require bookings of a minimum of three people or the payment of a $200 flat fee. The private rooms cost $150 per night. Housekeeping costs $25 per hour. The 4-person shared rooms take 1.5 hours to clean every day and the private rooms take 1 hour to clean. Laundry costs $2.75 per person in the 4-person room. It is split in half for the private room. If a room isn't used laundry services and costs are not required. The front desk is open from 8 am to 8 pm and- the concierge is paid $18 per hour of work. They are available 7 days a week. They provide check-in and check-out services, organize with housekeeping which rooms to clean, provide recommendations to guests and deal with any security issues that may arise.
Manager fees were collected by Shawn and Susan for overseeing the operations, taking care of hiring and maintaining the records. They have charged a flat $35,000 each from the inception of the business and haven't changed the way things operate. They would like to continue to receive this annual payment even though they are not actively working as managers. Howard is deciding whether to leave his role at the hospital as a nurse or to shift to working part time. Howard was paid an average of $75,000 with the overtime that he worked. He would like to maintain the same level of income if possible while managing the hotel.
Electricity costs are higher in the winter, but lower in the summer due to the snow and wind that the city has. It costs about $30,000 per year. The mortgage cost is $3,750 per month. The mortgage will be completely paid off in 5 years. Depreciation expense on the building is $1,500 per month. Currently the hostel markets itself on the Squamish Adventure website and local brochures. This costs 15,000 per year. The company is looking for ways to improve their marketing. Harold wants to reach out to two local climbing icons: Kim House and Graham McGrenere to market the hostel on their Instagram profiles. The cost is expected to be $50,000 for the two of them and is supposed to increase demand by anywhere between 10 to 20%. Property taxes for the property are 10,000 and the city charges 4,000 for wastewater collection and 2,000 for garbage collection. Insurance on the property is 4,000 semi-annually.
In addition to the rooms, H2 Hostel runs a small restaurant in the lobby. The average patron brings in $15 per meal. They usually have a lunch or dinner plate and a drink. Howard is unsure of the breakdown of these items. Over the year there are approximately 25 people that come to the restaurant per day according to Susan. The average meal costs $9.50 to make. This includes cooks, wait staff and the raw food costs. Currently, Howard was unable to provide a breakdown of this.
The hostel currently charges $10 for breakfast. Breakfast is available to all and is a set menu of two eggs, toast and avacados. Some occupants choose not to purchase breakfast, but most do. The breakfast costs $4.75 per plate. Howard is wondering if he should offer a complimentary breakfast to guests to help increase and incentivize tourists to stay with him. He wants a breakeven analysis of how many breakfasts should be sold to cover the cost of a full-time chef, two waiters and the cost of food. Howard estimates it will cost $15,000 a year for a full-time breakfast chef and 10,000 for two wait staff to be brought in to tackle the additional work. He believes he can increase the price of a night stay by $20 per night.
Howard is torn about whether to fully quit his nursing job. He is contemplating work part-time and oversee the hotel part-time. His salaries would grow by 5% a year over his lifetime as a nurse. He was planning on purchasing a home with his girlfriend in Vancouver, but they are still working on saving 25% of their down payment. Howard's hospital has also offered to allow him to work part time for $30,000 a year so that he has time to assist with the hostel. If he pursues this scenario, he has talked to a former hotel manager, Emanuel who is willing to do the job and keep 35% of all the revenues generated. Alternatively, Emanuel wants a salary of $78,000 a year for working full-time to oversee the operations of the hotel.
Howard doesn't understand the difference between a fixed cost and a variable cost. He wants information about his product and period costs and seeks to understand how much profit he is making on renting out each room.
During the low seasons between mountain biking and ski season, he finds interest in the rooms diminish. He understands that if he reduces the price of the rooms, there is a possibility that demand will increase. He is curious about how low he can price the rooms during this period to incentivize increased room bookings and decreasing vacancies during these slower periods.
Currently, on August 31, 2022, H2 Hostel has $70,000 of cash in the bank. He wants know to rough quarterly budget assuming that all transactions are completed in cash. At what point will Howard need to borrow money for H2 Hostel? He has spoken with the bank and can borrow money at 7% interest rate. The interest and 20% of the principal payment must be paid back every year to keep the loan in good standing.
Howard has been approached by a large American Company the Chariott Hotels, to purchase the hostel and rebrand it as their chain of hotels for a value of $2,500,000. Alternatively, The Chariott Hotels are willing to give Howard and his family a total of 2,500 shares worth $100 each to become a shareholder of Chariott's Company. Chariott Hotels has stated that it will pay dividends of $30 per share each year plus a 5% profit share of the money it makes from operating the hotels.
Upon hearing this offer Howard's family friend Francis offered Howard $350,000 cash to invest in 50% of the hotel's shares. He said he wanted to run the company as a partnership and split the company's profits two ways between himself and Howard. Francis does not want Howard's parents involved in this transaction. Francis is a software engineer but really wants to get involved in the day-to-day business operations and after doing a walkthrough of the hotel has a lot of items that he wants to change about the way the hotel looks and is operated. He keeps talking about automating check in and check out processes and replacing housekeepers with robotic vacuum cleaners. He claims this will diminish overhead costs and improve margins by getting rid of needless staff working at the front desk and as housekeeping. Howard feels uncertain about all these changes but wants your assistance analyzing his offer.
When talking to Susan, Howard learned that there has been a lot of turnovers in the cleaning and housekeeping staff. Susan said they would work for 6 months and then put in their notice. Before Shawn's accident, Susan was looking at outsourcing the cleaning to two different local companies. Quick Clean Corp. has provided H2 Hostels with a flat fee of $30 per day that they are on-site and an additional fee of $8 per hour. They anticipate that they can clean the rooms more quickly - 1 hour for the shared rooms and 0.5 hours for the private rooms. They would run the laundry, but the laundry costs would not change. Canada's Squeaky Squamish Corp. have also provided a quote. They would charge a flat fee of $100 per hour for 8 hours a day to clean and do laundry. They would take care of all 8 rooms and laundry. They will try their best to reach every room, but if not, it would be the job of the concierge to clean the room and complete the laundry. Howard is unsure of which option to proceed with.
Question: Howard also wants some insight into the role of a business manager. Some tips on performance evaluation of employees and business ethics which relate to his situation would be greatly appreciated.