A hotel profitability analysis is key to increasing your establishment’s profits and, in turn, ensuring its continued growth in an industry as dynamic and competitive as the hotel sector.
So, if you’re interested in learning about the importance of hotel profitability analysis, we invite you to keep reading.
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The Importance of a Hotel Profitability Study
Conducting a hotel profitability analysis is of great importance. After all, profitability is the foundation of any business’s success. Therefore, if you own a hotel and don’t know what percentage of your investment you’ve recouped, you can’t determine whether your investment was a good or bad one. A hotel profitability analysis allows us to assess the hotel’s financial health. From there, we can optimize our processes and thereby improve customer satisfaction.
On the other hand, a profitability analysis allows you to identify the operations that will help drive your hotel’s growth, as well as to pinpoint the mistakes that hinder that growth.
The Need to Stay Up to Date with the P&L for Hotel Profitability Analysis
First of all, we must define the term P&L. It is an Anglicism derived from the English phrase “Profit & Loss,” which in Spanish means “pérdidas y ganancias.” This phrase is used to refer to a business’s profit and loss statement.
Therefore, the P&L is a financial statement that shows your hotel’s revenue and expenses. This, in turn, allows you to calculate net income over a specific time period. This is why it’s important to analyze the P&L: if net income is positive, then your hotel is making a profit, but if net income is negative, your hotel is incurring losses.
Therefore, a proper hotel profitability analysis must take the profit and loss statement into account. Hotel owners should review the P&L every month so they can consistently analyze trends and changes.
Key Performance Indicators to Consider When Evaluating a Hotel’s Profitability
In hotel profitability studies, there are certain key performance indicators (KPIs) that must be analyzed. These metrics allow the owner to monitor the hotel’s performance and, based on that performance, make decisions that help improve the financial management of the business.
Below, we present the top 5 profitability indicators for the hotel industry:
ADR (Average Daily Rate)
ADR stands for “average daily rate.” It is one of the most important metrics for a profitability analysis. It allows you to measure the average rate per occupied room, which means you can determine the average daily revenue generated by all occupied rooms.
This KPI also allows you to forecast prices and sales strategies.
To calculate the ADR, divide the room revenue by the number of occupied rooms.
RevPAR (revenue per available room)
RevPAR stands for “revenue per available room.” It is a metric that shows the average revenue per room over a given period. RevPAR can be calculated by multiplying the ADR by the occupancy rate. Therefore, a high RevPAR indicates a high occupancy rate.
This information helps you make an informed decision when setting the nightly rate for your hotel.
TrevPAR (total revenue per available room)
TrevPAR, or “total revenue per available room,” is a KPI that includes the hotel’s total operating revenue (revenue from rooms, the spa, in-room services, F&B, and other sources).
It is calculated by dividing the hotel’s total revenue by the total number of available rooms.
Since TrevPAR takes into account all of the property’s revenue, it provides insight into the business’s overall performance.
GopPAR (gross operating profit per available room)
GopPAR, or “gross operating profit per available room,” is another key performance metric for analyzing hotel profitability. This is because it shows the overall performance of a hotel property.
To calculate GopPAR, gross operating expenses (all expenses for all services offered) must be subtracted from gross operating revenue (revenue from all services offered). The result of this subtraction is divided by the number of available rooms.
LPAR (Total Labor Costs per Available Room)
Finally, there is the LPAR, or “total labor costs per available room.” It allows you to see how labor costs vary over a specific period of time.
It is calculated by dividing the total labor cost by the number of available rooms.
All of these metrics are important indicators of hotel profitability that allow you to measure the performance of any tourist accommodation. Therefore, whether you want to start a hotel business or are already a hotel owner, it is essential that you perform all of these calculations.
Setting objectives is key to studying hotel profitability.
Using the data obtained from the profitability study to establish specific short- and long-term goals will allow us to ensure a hotel’s profitability. Once these objectives are set, the process of developing a strategy to achieve them will begin.
However, it is best to seek professional advice. Companies like IHCS have the experience and reputation to help you with whatever you need.
