Basics of Reading a P&L Beginners Struggle With

If you are a Hotel Manager of a property, reading a P&L is one of your top priorities.

It is what your bosses are demanding from you.

Often though, hotel managers take a hit or miss approach to reading a profit and loss statement.

This results in focusing on the wrong things in the financial statement.

And using incorrect analysis to take financial decisions.

Given this scenario, it is not surprising that results do not turn out the way hotel managers want.

Resulting in missed budgets and targets.

This is embarrassing, to say the least.

Would you not agree?

However, let me clarify what is going wrong here.

But before that, are you a victim of this syndrome?

What are those fundamentals you cannot afford to ignore?

Let’s get right into it.

I will lay out a 3 step approach which no manager can afford to ignore.

It will ensure that you achieve your revenue and bottom line targets consistently.

In this post pandemic era, achieving these targets is equivalent to surviving itself.

Are you prepared for this post pandemic challenge?

Let’s roll.

This is the concluding Part 6 of the Series on Hotel Profit and Loss Statement Basics Beginners Struggle with.

If you missed Parts 1, 2, 3, 4 and 5, click below to read them first.

This Blog Post will cover

Are You Focusing on the Wrong Parts of a P&L?

The Profit and Loss Statement is one of the critical P&L Reports  that managements use month after month.

It is a report that lays out the business results of the past month.

Most articles you read on a Profit and Loss Statement will tell you that it is a statement of revenues, expenses and profit or net income.

Sometimes it is just revenue and expenses.

Metaphorically, it is like the iceberg (one made famous by the movie The Titanic!).

Everybody talks about revenue (above the surface) but rarely anybody talks about the asset which is generating that revenue.

That is buried underwater per our metaphor and does not remain visible.

That first unseen iceberg chunk is Capacity.

Capacity is a owner’s favorite topic.

Not surprising though.

A hotel owner has sunk in sizable amount of money into the hotel investment.

Capacity is what drives revenue.

You could say that it is the highest capability of producing revenue with the asset.

In a hotel Profit and Loss Statement, capacity is:

• Rooms Available for Rooms department and
• Covers Served for the Food and Beverage department.

Without capacity, revenue cannot be generated.

It is astonishing how little importance this is given to in a hotel P&L.

Revenue is drilled down into in great detail according to market segments but capacity is barely shown in a single row.

Key Performance Indicators in a Hotel P&L

Most Profit and Loss Statements have one line showing Rooms Available.

In later blog posts, you will dive deep (pun intended) to unearth the hidden iceberg chunks, the most important of which is Capacity.

You will examine why capacity is a owner favorite.

Revenue is the next iceberg chunk.

But this one is seen above water mostly.

In later blog posts, I will explain why I say mostly.

What is the foremost feature of the hotel industry which has tremendous impact on its revenue generation and management strategies?

That feature is that it is primarily a seasonal business.

Each month of a 12 month cycle could see different business volume at which the hotel will operate.

Business Volume is about:

• occupancy for the hotel rooms business,
• covers served for the food and beverage and
• market segments for the Catering department.

Expenses are the next visible iceberg chunk.

In later blog posts, I will go into depth about the expense chunks we normally do not see.

Profit or Net Income is an unusual animal.

It appears to be visible.

But there are a lot of chunks below the surface.

This is primarily because profit is a derivative - it is the result of deducting expenses from revenue.

Without revenue or expenses, there would be no profit (or loss for that matter).

I will discuss them in detail in later blog posts.

Analysis of a Hotel P&L

Analysis is unfortunately the submerged chunk of the iceberg.

And this is because it is unseen to the naked eye, so to say. It is not apparent.

It needs to be fleshed out.

It is a grossly misinterpreted phenomenon.

There are as many versions and interpretations of analysis as users.

A lot of them are also grossly incorrect.

Analysis is considered an enigma.

Nobody understands it goes the refrain.

But it is not true.

Analysis, particularly financial analysis, can be simple yet powerful if only some fundamentals are understood.

Two basic principles underpin all financial analysis (in fact non-financial analysis also for that matter!):

• cause effect and
• context

Even If you do not have a financial background, you will easily master financial analysis if you just remember this first basic principle -cause effect.

Cause Effect is all about what is causing something and what is being affected by something.

This is central to a key part of financial analysis - variance analysis.

Cause Effect has another ingredient which is critical for financial analysis.

That ingredient is Triggers.

Triggers often can be the cause behind a particular phenomenon.

Triggers will be discussed in a later blog post in detail.

Variances should only be analyzed using cause effect.

If not, you will end up with deceptive results and worse take incorrect decisions based on that.

If you understand:

• what is causing a particular number, say, a Key Performance Indicator (KPI), and
• what KPI is affected in a Hotel Profit and Loss Statement,

I can safely tell you that you have won 50% of the analysis challenge.

For example, if your RevPAR KPI is showing a decrease in a month (or whatever period you areconsidering) compared to a previous period or year, you need to know what is causing it:

• is it occupancy or
• average rate or
• both?

But you will be quite shocked to learn (in later blog posts) what visible iceberg chunks in a hotel Profit and Loss Statement are not what they appear to be and what is hidden under the surface!

WATCH the video below on How to Read a P&L.

It is a Big Picture Overview of the Cause Effect Principle.

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