Introduction
In an industry as competitive and dynamic as hospitality, understanding the factors that drive profitability is crucial for the success of any hotel business.
Improving your hotel’s bottom line starts with enhancing its profitability. But is it that easy to analyze the profitability of your property? Well, yes and no.
Hotel profitability analysis is a multifaceted approach that considers revenue generation, cost management, and operational efficiency. By examining these critical areas, hoteliers can identify areas of improvement, capitalize on revenue opportunities, and mitigate financial risks.
But before coming to that, we must know why analyzing your hotel’s profitability is essential.
Table of Content
Why Analyzing Your Profit and Loss is Important?
Other than giving you a clear idea about your property’s revenue generated, the profit and loss report (P&L hereafter) helps you assess your financial performance. You can monitor and identify the areas of strength and weaknesses and take action based on them.
Profit and loss analysis allows hotels to closely monitor their expenses and identify areas where costs can be reduced or eliminated.
By understanding the breakdown of expenses, such as labor, utilities, supplies, and marketing, hotels can implement cost-saving measures and improve their bottom line.
Understanding profit and loss
Before analyzing the profitability of your hotel, it is essential to understand what exactly profit and loss are.
It is basically the financial statement that chalks out your property’s revenue and expenditure. It calculates how much profit you are making and your net income by subtracting all your expenses and debts.
If your net income is positive after deducting the expenses, it means you are in profit and if not, you are facing a loss. Ideally, you must analyze P&L monthly, quarterly, and annually to avoid massive ups and downs and to have control over your business in time.
In addition to regularly analyzing your P&L, measuring a set of key performance indicators is important. These metrics help in distributing the income, expenses as well as profit your property is making for all its inventory. Let’s dig into them.
KPIs You Must Know
1. TRevPAR
TrevPAR or Total Revenue Per Available Room is the total operating revenue of a hotel that includes the rooms revenue, food, and business revenue., etc. Basically, this accounts for all the means by which your property gains money.
You can calculate TrevPAR by dividing the total revenue of your hotel by its total number of rooms.
For example, if your total revenue collected for a day was Rs 20,000 and you have 100 rooms then your TRevPAR is Rs 200.
2. LPAR
Abbreviated from labor cost per available room, LPAR is the total cost a hotel spends for its labor in relation to the number of rooms it has.
It can be calculated by dividing the total labor costs by the total number of room nights available at a particular time.
Say you have spent Rs 2,00,000 as your labor costs and have 100 rooms to rent out, then your LPAR for that month would be Rs 2000.
3. GOPPAR
GOPPAR stands for Gross Operating Profit per Available Room. It helps hotels to determine how they are performing by calculating the overall profit compared to the number of rooms it has.
It can be calculated by dividing the gross profit your hotel made by the total number of rooms you have at a given point in time. If you made a gross profit of Rs 1,00,000 in May and had 100 functional rooms at your property then the GOPPAR for May is Rs 1000.
These key performance indicators will help you keep a record of your property’s performance at a given time. For example, if you find your net income was high in October compared to September, you might think it was because of seasonality or travel preferences.
But when you apply context and calculate your property’s Gross Operating Profit per Available Room, you will see October was more profitable because you had 5 rooms out of order in October than you had in September. So, on a room-per-room basis, October was more profitable.
3 Main Profitability Ratios
Other than the above-mentioned KPIs there are a set of profitability ratios that are crucial for all businesses.
ROI
ROI or Return on Investment is used to calculate the profitability of a business on the capital invested. The invested capital includes the assets plus the working capital. This ratio helps businesses to determine how much profit is making than the investment (owned + borrowed).
It can be calculated by dividing the operating income by the invested capital multiplied by hundred.
ROE
Return on Equity indicates a business’s profitability by measuring how much the shareholders or equity holders earned for their investment in their business. To indicate businesses are profitable, ROE should be at least equal to the amount a shareholder invested.
ROE can be easily calculated by dividing the annual net income by net equity and multiplying it by hundred.
ROS
The third ratio is ROS or Return on Sales and is used to calculate the average profitability a business has made in relation to its sales revenue. This ratio is used to measure the competitive advantage a business has over a similar business of the same size and in the same sector.
You can calculate the ROS of your hotel by dividing the operating formula by the net sales and multiplying it by hundred.
EBITDA
Another important term that financial analysts prefer is EBITDA which refers to Earnings Before Interest, Taxes, Depreciation, and Amortization.
This term shows a business’s earnings completely based on its earnings before it pays taxes, interests, depreciation, and amortization. It basically means how much liquid money is available to a hotel owner (any business owner to be precise), after all its expenditure.
EBITDA is very easy to calculate. You can deduct the expenses (excluding tax, interest, depreciation, and amortization) from revenue.
4 Steps to Successful Profitability Analysis
Though the hotel industry is rather volatile, hoteliers and property owners can take proactive measures to overcome the gap between revenue generated and profitability. Here’s how hotel profitability is determined
Improve Operational Performance
To improve your property’s operational performance the first thing you must do is address your guests’ pain points. Once identified, develop strategies to rectify them and you will see your operational performance has already improved. You can invest in hotel software or a channel manager to streamline operations and improve your efficiency.
Drive Gross Operator Profits
The next step to boost your profitability is by improving your Gross Operator Profits or GOP. This can be done by saving costs across areas that can be trimmed. Labor is one such area. Cross-training your employees so that they can work in different departments is a good way to streamline labor costs.
Improve Net Operating Income
NOI or net operating income is a crucial indicator that lets investors understand the estimated value of a property. Minimizing operational expenses will indirectly lead to maximized NOI. Thoroughly reviewing your property’s insurance, real estate taxes, energy costs, and cost-segregation strategies are a few ways by which you can increase your NOI.
Improve Net Asset Value
A property valuation or broker opinion of value is performed to increase the NAV or net asset value. It helps to analyze what is happening in the market or the competitive set and helps in assessing the property’s market value.
Conclusion
I understand the hotel industry is not easy to break through. With numerous factors affecting the profitability of your business, it is often discouraging.
But, every tunnel has a light at the end. With the right set of technology paired with effective strategies and market knowledge, hotel profitability is not that hard to achieve.
