How Operational Efficiency Leads to Optimal Profitability

By David Eisen - Director of Hotel Intelligence and Customer Solutions for HotStats

21 October 2020
Eisen

In the hotel industry, the deeper decision-makers can drill down into departmental figures, the easier it is to generate revenue, chisel away at unnecessary costs and post a healthy profit. Simply put, the best decisions are driven by in-depth analysis of departmental revenue and operational costs.

Sound like too much work? Analyzing these critical figures and unlocking higher profits may be easier than you think.

Is the Hotel Industry Measuring Revenue Wrong?

First, why is it important to measure departmental metrics? The answer is clear when you look at what most leaders in the hotel industry are doing wrong.

The majority of the hotel industry relies on revenue per available room (RevPAR) numbers to gauge hotel performance. Unfortunately, RevPAR gives hoteliers just one sliver of a hotel's financial performance. It only focuses on the money that's coming in from the sale of rooms. A large portion, yes, but only one part of a hotel's total revenue.

A truer picture of a hotel's financial performance forms when hoteliers examine revenue, costs and departmental efficiency.

A focus on operational efficiency allows hoteliers to revamp departments for higher profit. When each department is running at its maximum efficiency, all of the extra revenue that comes can flow though to a hotel's bottom line.

How to Analyze Departmental Costs

In order to fully understand departmental costs, it's important to identify all of the departments that make up a hotel operation. Just keep in mind that even if a department's contributions seem small at a glance, it's still feeding into the hotel's broader financial performance. Here are a few examples of departments to examine in the hotel industry:

When all of those departments are front and center, it will be time to uncover costs. Here are some important expenses to analyze:

  • Payroll-Management & Non-Management
  • Complimentary breakfast
  • Operating supplies
  • Utility costs
  • Loyalty program expenses

With a clear understanding of costs, it's easier to see where cutbacks and investments will go the farthest. Remember, cutting costs altogether may not always be the best option. That's why it's a better idea to examine departmental revenue, measure demand and weigh costs against departmental profit before slicing or increasing a department's budget.

How to Analyze Revenue

When looking at a hotel's revenue, RevPAR only skims the surface. That's why the hotel industry needs to zoom in on all of those hotel revenue streams that are trickling into the hotel's full revenue pool. Here's how to analyze departmental revenue for a more accurate picture of a hotel's income:

  1. Break Down Revenue by Department
    Operational metrics will reveal how much revenue each department is bringing in. Remember to include all revenue sources that fall under each department's umbrella. For instance, if the hotel is hosting conferences or events, it's a good idea to include revenue from ticket sales as well as any concessions sales, conference room rental revenue and other moneymakers.
  2. Compare Departmental Revenue to Total Revenue
    By comparing departmental revenue to total revenue per available room (TRevPAR), it's possible to see how specific departments are contributing to the full revenue picture. With these figures, hoteliers can predict how cutbacks or operational investments will affect the hotel's revenue flow.

Bring It All Together with GOPPAR

When a hotelier has expenses and revenue in hand, they have the raw materials to revamp operations for higher profit.

Wondering how to see if changes are working?

A simple way to see how departmental operations are affecting full hotel finances is with gross operating profit per available room (GOPPAR).

GOPPAR accounts for all of the hotel's operational profit and breaks it down on a per-room basis. Here's how to calculate GOPPAR:

  1. Find the hotel's gross operating profit. To find gross operating profit, add up all of the hotel's operational costs and subtract them from the hotel's gross revenue.
  2. Determine room capacity. Simply add up the number of rooms the hotel offers.
  3. Find GOPPAR. Divide the hotel's gross operating profit by the total number of hotel rooms.

GOPPAR doesn't just provide clear insight into the hotel's financial health. It also works as an excellent benchmarking figure. As hoteliers make departmental cutbacks and investments, they can keep an eye on GOPPAR to see how those decisions are affecting the hotel's bottom line.

Take a Holistic Approach to Benchmarking

Effective hotel benchmarking requires an in-depth look at both departmental costs and revenue. Unfortunately, the hotel industry has become hyper focused through the years on one singular figure—RevPAR—when there are myriad KPIs that deserve attention, from TRevPAR through to GOPPAR

Wondering about the risk of RevPAR-only strategies? Check out our RevPAR infographic for the frightening facts about RevPAR.

Click here to view the original version of this release.

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David Eisen

David Eisen is Director of Hotel Intelligence and Customer Solutions for HotStats, a monthly profit-and-loss data benchmarking service. He is responsible for business development activity in the Americas and developing marketing strategies to drive HotStats’ brand awareness. Prior to joining HotStats, David served as Editor-in- Chief of the Questex Hospitality Group, which includes Hotel Management magazine. His responsibilities included overseeing content direction for the magazine and website, and leading content creation for events and conferences under the Questex umbrella. Prior to Questex, he was hotel editor at Business Travel News. David has a master's degree in hospitality industry studies from New York University’s Jonathan M. Tisch Center for Hospitality and Tourism. He frequently participates on panels and roundtable discussions on myriad global hospitality industry trends and topics.

David Eisen

Director of Hotel Intelligence and Customer Solutions for HotStats
david.eisen@hotstats.com