Operational and financial assessment of the hospitality industry
The people behind hotel management understand that experience on a strategic and executive level is key in identifying an establishment’s operating shortfalls while optimizing its business operations and improving its financial results.
The hospitality industry plays a major role in economic activity, and accounting is managed by departments, based on the USALI (Uniform System of Accounts for the Lodging Industry). This instrument divides a hospitality business into eight departments: four operational and four functional (depending on whether services are provided directly to guests), and costs are distributed and allocated to these departments.
Today, the hospitality industry constantly needs sufficient information in order to make decisions and optimize operations. Once financial results are available, key performance indicators take center stage. These indicators determine the management efficiency of the costs, expenses and variables that affect how sales are made and the profitability of a hotel business. Hotel operations management changes the organization’s structure and the system of roles and duties. It also affects employee training, technology and the introduction of technical and strategic innovations.
The fundamental purpose of hotel operations management is knowing how to properly use resources and capabilities to achieve specific operational and financial results. The targets must be specific, quantifiable, measurable and, above all, aligned with the hotel’s possibilities, its positioning in the market and in terms of competitors, its potential, and its prospects for the short, medium and long term.
The importance of performing an operations analysis involves having an overall perspective and looking beyond. This analysis can be used to define fixed and variable costs and estimated profits by level of sales, based on the state of the hotel business. It aims to diagnose and evaluate the operational and financial results of hotel management.
What ratios are used the most in the hospitality industry?
The main purpose of these ratios is to help the hospitality industry make decisions and improve profitability. The most important, ADR (Average Daily Rate) and RevPAR (Revenue per Available Room), are defined in detail below:
- ADR (Average Daily Rate): Average daily rate per occupied room. In other words, this is the average price for which the room is sold. (Room revenue / Occupied rooms).
- REVPAR (Room Revenue Per Available Room): As one of the most commonly used indicators, it measures the revenue per available room. (Room revenue / Available rooms).
- TREVPAR (Total Revenue Per Available Room): This differs from REVPAR because it takes into consideration room revenue as well as all the potential revenue generated by a room. This indicator is used at establishments where clients tend to spend more on services such as spas, casinos, etc. (Total revenue / Available rooms).
- GOPPAR (Gross Operating Profit Per Available Room): This is the gross operating profit per available room. (Gross room revenue / Available rooms).
- REVPAG (Room Revenue Per Available Guest): This refers to the room revenue per available guest and is increasingly used based on the need to segment the market and quantify customer loyalty. (Room revenue / Available guests).
- TREVPAG (Total Revenue Per Available Guest): This differs from REVPAR because it takes into consideration total revenue as opposed to just room revenue. (Total revenue / Available guests).
- GOPPAG (Gross Operating Proﬁt Per Available Guest): This is the gross operating profit per available guest. (Gross room revenue / Available guests).
Improved operational and financial results are directly linked to how the aforementioned ratios are used. In summary, a good operations analysis is essential in order to have an overview of every hotel department, estimate occupancy levels and thoroughly understand the establishment’s needs.