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Reasons why a hotel profitability study is important

Reasons why a hotel profitability study is important

The hotel profitability analysis is a key element to increase your establishment’s profits and, in turn, keep it growing in such a dynamic and competitive industry as the hotel sector. So, if you are interested in learning about the importance of a hotel profitability study, we invite you to read on.  Importance of a hotel […]

The hotel profitability analysis is a key element to increase your establishment’s profits and, in turn, keep it growing in such a dynamic and competitive industry as the hotel sector.

So, if you are interested in learning about the importance of a hotel profitability study, we invite you to read on. 

Importance of a hotel profitability analysis

Performing a hotel profitability study is of great importance because profitability is the basis for the success of any business. Therefore, if you own a hotel and you do not know the percentage of money invested that you have recovered, you cannot determine whether your investment was good or bad.

On the other hand, a profitability study allows you to know those operations that will help you to boost the growth of your hotel and to detect the errors that affect this growth.   

The need to keep up to date with P&L

First of all, the term P&L must be defined. It is an anglicism that comes from the English phrase “Profit & Loss”, which in Spanish means “pérdidas y ganancias”. So, this phrase is used to refer to the profit and loss statement of a business. 

Therefore, a P&L is a financial statement that shows the income and expenses of your hotel. This, in turn, allows you to calculate the net income during a given time interval. This is where the need to study the P&L lies, because if the net income is positive, then your establishment is making a profit, but if the net income is negative, your hotel is making a loss. 

Therefore, a proper hotel profitability study should take into account the P&L statement. Hoteliers should review the P&L every month so that they can analyze trends and changes on an ongoing basis. 

Indicators to be considered in a hotel profitability analysis

In hotel profitability studies, there are certain key performance indicators or KPIs that must be analyzed. These metrics allow the owner to observe the performance of his hotel and based on that performance make decisions that help improve the financial management of his business.

The following are the 5 main profitability indicators for the hotel sector:

THE ADR (Average daily rate)

ADR stands for “average daily rate”. It is one of the most important metrics for a profitability study. It allows you to measure the average rate per occupied room, which means that you can know the average revenue earned in a day for all occupied rooms.

This KPI also allows you to have a price forecast and sales strategies.

To calculate the ADR you have to divide the room revenue by the number of occupied rooms.

THE RevPAR (revenue per available room)

RevPAR stands for “revenue per available room”. It is a metric that shows the average revenue per room over some time. RevPAR can be calculated by multiplying the ADR by the occupancy percentage. Therefore, a high RevPAR means that there is a high occupancy rate.

This data allows you to have clarity when setting the price per night in your hotel.

THE TrevPAR (total revenues per available room)

TrevPAR or “total revenue per available room” is a KPI that includes the hotel’s total operating revenue (revenue per room, spa, in-room services, F&B, among others). 

It is calculated by dividing the hotel’s total revenue by the number of total available rooms.

As TrevPAR takes into account all the revenues of the establishment, it allows to observe the overall performance of the business.

THE GopPAR (gross operating profit per available room)

GopPAR or “gross operating revenue per available room” is another key performance metric for hotel profitability analysis. This is because it shows the overall performance of a hotel establishment. 

To calculate GopPAR, gross operating expenses (all expenses for all services offered) must be subtracted from gross operating revenues (revenues for all services offered). The result of this subtraction is divided by the number of rooms available.

THE LPAR (Total labor costs per available room)

Finally, we have the LPAR or “total labor costs per available room” which allows you to see the variation of labor costs over a given period.

It is calculated by dividing the total labor cost by the number of rooms available.

Hotel profitability study insights

There are other hotel profitability insights, such as:

  • Forward-looking data will be fundamental. Having access to forward-looking demand data will be very important for the hotel to identify small market trends and get an advantage over the rest of hotels.
  • Technology should be at the forefront of the hotel. Technology can help optimise hotel services, maximising revenue.
  • Personalization is key to attract more guests. Offering hyper-personalized experiences will differentiate our hotel, enabling guest loyalty.
  • Customer engagement will increase our revenue and maximise our profits.

 

All these metrics are important indicators of hotel profitability that allow you to measure the performance of any tourist accommodation. Therefore, if you want to start a hotel project or you are already an owner, it is necessary that you perform all these calculations. 

However, the best thing to do is to seek professional advice about hotel profitability study insights. Companies like IHCS have the experience and reputation to help you with whatever you need.

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