A hotel’s GOP is the key metric that investment funds focus on. The results of this metric are of great value to a hotel manager, and improving this metric is essential to the hotel’s financial performance.
The three objectives of hotel management are efficiency, competitiveness, and profitability. With regard to the latter, one of the key indicators we must track is the GOP ratio, which provides us with accurate data on hotel revenue and expenses. Let’s take a closer look.
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What is hotel GOP, and why does it matter to us?
In hotel accounting, gross operating profit (GOP) is calculated by dividing a hotel’s total revenue by the sum of the expenses associated with operating the business. GOP is the key financial metric for measuring a hotel’s annual profitability, and this figure will determine the basis for the property’s valuation. In short, GOP takes into account the hotel’s revenue and expense data.
Specifically, according to this indicator, indirect expenses such as payroll, utilities, and operating costs—including maintenance and administration—must be subtracted from the hotel’s total revenue. Expenses not included in a hotel’s GOP are those we consider extraordinary:
- Interest payments on debts incurred by the hotel.
- Expansion projects for the establishment.
- Payments resulting from any legal disputes the hotel may have had.
- Financial payments or payments related to currency exchange.
The Importance of GOP in a Hotel for Determining Hotel Revenue and Expense Data
Specifically, the data reveals that, currently, personnel expenses account for between 30% and 40% of a hotel’s revenue. Between 15% and 20% of revenue goes toward supplies, and another 15% toward food and beverage expenses for guests. Thus, the gross operating profit (GOP) for each hotel would average 30%.
The figures reflected in the accounting indicators are ultimately what determine a hotel’s income statement and, consequently, its value for potential business transactions or market investments. This process is complex and requires the involvement of a specialized consulting firm to directly handle the accounting analyses.
At IHCS, we can advise you on establishing the most appropriate strategies to maximize profitability in both operational and financial terms. In this article on our website, you can learn more about operational performance metrics in the hospitality industry, as well as find a guide to key hotel ratios.
What factors determine a hotel’s GOP?
In this regard, to understand GOP ratios and profitability, it is necessary to pay special attention to key related metrics used to measure our establishment’s profitability.
REVPAR (Revenue Per Available Room)
It is one of the most widely used metrics, and its purpose is to measure revenue per available room. (Revenue from Lodging / Available Rooms).
GOPPAR (Gross Operating Profit Per Available Room)
This is the gross operating profit per available room. (Gross Profit from Lodging / Available Rooms).
EBITDA ( earnings before interest, taxes, depreciation, and amortization).
It measures profitability before taxes and excludes non-cash expenses such as amortization and depreciation. The difference from GOP is that GOP only includes operating expenses, whereas EBITDA includes certain non-operating expenses. EBITDA is presented as an indicator that measures a hotel’s profitability in meeting its various financial obligations to banks, including both principal and interest payments.
IBNOIE (Income Before Non-Operating Income and Expenses)
. In cases where management costs exist, deducting them from the GOP will give us the IBNOIE. IBNOIE can be considered the result of operating costs adjusted for basic management fees, intended to compensate the manager for properly managing the hotel.
A hotel’s GOP is one of the variables that make up an effective revenue management strategy. The figures calculated for this metric provide us with the overall profitability of the hotel, as it takes into account both revenue and expenses. But if our goal is to adjust our hotel’s profitability metric, let’s take a look at how to improve it.
How can we improve this metric?
Our goals in hotel management must be specific, quantifiable, measurable, and, above all, aligned with the hotel’s capabilities and its position in the market.
A well-designed pricing strategy must be effective and lead to improved operating results for our hotel—that is, to an optimization of REVPAR (average revenue per available room)—and, consequently, to an improvement in our gross operating profit per room (GOPPAR).
Gross operating profit is the final metric that indicates the hotel’s operational efficiency. Therefore, to determine its potential for improvement and, consequently, its profitability, it is necessary to account for the expenses that must be included—such as all so-called fixed operating costs and expenses (even when the hotel is closed)—as well as variable expenses.
Other factors to consider
- Don’t drive up distribution costs. Optimize the channel mix: Hotels sometimes work with a multitude of channels that they don’t really need. Therefore, it’s necessary not only to conduct a financial analysis but also to take other criteria into account. Only then will we have a complete picture of our distribution and be able to improve the channel mix.
- Reduce intermediary costs: To do this, it’s necessary to go channel by channel, optimizing costs as long as they don’t subsequently impact revenue.
- Implement the minimum stay requirement: This can be applied to specific promotional packages or to the best-selling rooms on a particular channel.
- Consider predictive analytics: This is an increasingly common trend that helps you understand guest behavior. You’ll need to aggregate data from customers who match specific profile and activity characteristics. Models will be created to help improve the service the hotel can offer.
The coordination and execution of this entire process involve significant complexity, both in terms of accounting and the allocation of our human resources. At IHCS, we can advise you on all the details necessary to carry out this operational analysis and the associated process, and to make the appropriate decisions to maximize your hotel’s profitability.
