Revenue Management-5 Traps You Should Avoid

Are You Falling Into These Revenue Management Traps?

Losing market share and plummeting yield are two of the immediate consequences of revenue management strategy traps.

In this post pandemic era, these get aggravated even more.

Are you falling into these and other revenue management traps?

I will show you five ways you can beat revenue management challenges and traps and achieve peak profit.

And they can be achieved without any earth shattering strategies.

They just require a focused mind set on optimizing revenue management.

This blog post will cover the following 5 revenue management challenges and traps you must avoid:

Revenue Management Scenario

Consider this scenario.

You are the Revenue Manager of Paradise Hotel

You are frustrated.

For the past year, you have been following an ADR heavy market share strategy.

This revenue management approach worked for you in the peak months.

However, in lean months business volumes are dropping drastically.

The Covid-19 situation is an extreme form of that lean month scenario.

Price seems a major deterrent.

Customers are looking for cheaper alternatives.

Paradise Hotel revenue is hurting.

What do you do to get out of this situation?

Read on....

Loss of Market Share due to Faulty Price Positioning

Market Share is the holy grail of hotel revenue management.

What do I mean by that?

One of the most critical hotel KPIs (Key Performance Indicators) in revenue management is market share.

It literally is your share of the pie.

Every hotel operates in its own market.

This market is defined by what is known in the hotel business as the competitive set.

You look puzzled.

Let me explain.

It is impossible for a hotel to measure its own performance with all the other hotels in its market.

There will be too many of them.

It is not necessary too.

Why not you ask?

That is because you need to measure yourself with similar hotels.

In other words, you need to identify who are your direct competitors.

Direct competitors are those hotels which can take away business from you.

Aha, that got your attention didn’t it?

These direct competitors are the competitive set.

Coming back to our discussion, your market share is measured by this competitive set.

And you do not want to lose market share in your competitive set.

Not now, not ever!

How can you lose market share you ask?

Great question.

To begin with, if your price positioning is badly done, you will lose market share.

What is price positioning now you ask, impatiently?

Hang on, I am getting to that.

Price positioning is where (what level) you have pitched your hotel to be in your competitive set.

I know, I know. You look more confused.

Let me clarify

If you position your price too much above the perceived value for your product, your customers will look to your competitors for their business.

In other words if you are over priced in your market, you will lose market share.

What are some symptoms of over pricing?

Steady drop in business volume (occupancy) in one or more market segments.

Particularly when the market in general seems growth oriented.

So, what is the remedy, you ask in a resigned kind of way?

The remedy is quite simple (amazing how many hotels do not get it!).

Do not price yourself in a vacuum!

You are giving me a vacant look (pun intended)!

Let me explain.

Keep your price close to the value perception for your offering.

Ideally, keep it below the value perceived by your customer.

How do you do that?

Pay attention to what your customer is telling you about your product.

Are you seeking feedback from your customers?

Your survival depends on it!

No, I am not a doomsday merchant.

If you get regular feedback comments that your prices are too high, watch out!

That is a danger signal.

If it occurs with many customers, it is likely to result in loss of occupancy first and then market share.

Your price (average daily rate) might also show up as an outlier in the market share index.

Do not fall into this first of the 5 revenue management traps.

This is why regular surveys and feedback from your customers is priceless (pun intended!).

So, the moral of the story - lavish attention on your pricing.

Let us now move on to a related trap in revenue management.

Too Much ADR Focus - Take the RevPAR Route; Have a Lean Month Strategy

Often price positioning ends up being combined with an even more destructive trap.

This is the ADR (Average Daily Rate) obsession trap.

Hotel managements get ensnared by the attraction of higher average daily rates.

How does that happen?

Any revenue management strategy for a hotel depends on two foundational elements.

Business Volume and Price.

In other words, occupancy and average daily rate for room revenue.

In the quest for continuously higher revenue generation, a hotel has to make an important choice.

Between focusing on occupancy or average daily rate.

Of course, most times, it is the combination of occupancy and average daily rate that will produce room revenue.

Remember the price positioning trap you looked at earlier?

Well, that often also is combined with revenue management strategies that give price more importance than business volume.

Simply put, that means prioritizing average daily rate over occupancy.

How does that play out, you ask?

All in good time.

When a hotel pursues a revenue management strategy that is price obsessed, it often gives up pieces of business which do not offer higher price points.

This results in smaller business volume offers that are rejected.

That ends up having a negative effect on revenue growth over time.

Why do hotels pursue such a destructive strategy?

Well, it is to boast of higher average daily rates in a competitive set.

It however, as we saw earlier, impacts incremental revenue over time.

So, what is the way out of this trap?

The solution is to take a holistic approach to the revenue management strategy.

You look puzzled.

Let me clarify.

A broad based approach to revenue management takes the RevPAR route.

RevPAR is arguably the most powerful KPI in hotel revenue management.

RevPAR which stands for Revenue Per Available Room uses both occupancy and average daily rate as a revenue management strategy.

What is the big deal with that you ask?

Well, the big deal is that RevPAR uses the hotel rooms available or capacity to measure revenue management.

What does that achieve?

RevPAR takes revenue generation as a strategy as opposed to just occupancy or average daily rate.

It is thus multi dimensional.

You look completely baffled.

Hang on, I will clear the storm clouds right here.

With RevPAR, you use rooms available to measure revenue management.

That means you are getting a measure that also factors in revenue potential.

The standard revenue measure uses only business volume (occupancy).

It only tells you what level of business volume you are operating at.

It cannot tell you anything about potential revenue which RevPAR can.

So, the moral of the story is not to fall into an average daily rate obsessed strategy.

Now, on to the next trap and how to avoid it.

Short Sighted Market Segment Strategy

Digging a notch deeper is a trap which is related to hotel market segments.

A hotel’s revenue is contributed by one or more market segments.

Market segments are representative of your hotel’s target audience.

So, how could you be short sighted in this, you ask?

Market Segments are not just of one type.

There are short term segments and long term segments.

Short term segments are those that produce short lead business.

They are chunks of revenue that just plug in a small part of the occupancy.

They are also almost always one time pieces of business.

For example, a hotel package is often a typical short term segment.

On the other hand, long term segments sustain business over time.

These are based on contractual relationships that produce repeat business.

Repeat business helps sustain revenues over time.

Long term market segments are for example corporate agreements signed which span multiple years.

Even crew agreements can be long term although they tend to be smaller in volume than corporate business.

Hotels often fall into the short sighted trap of depending upon multiple short term market segments to procure their revenue.

The bread and butter of the hotel business is sustained over a period of time by the longer term market segments.

So, the moral of the story - build long term relationships which foster repeat business.

Use short term segments to supplement the longer term major revenue generation efforts.

Let us now move to the last two traps which are related.

Losing Sight of Cost of Your Hotel Bookings

In all of the market segments discussion thus far, we did not talk about the powerful impact of channels.

What are channels, you ask?

If market segments lay out your target audience, channels of distribution determine how to reach them.

You might have determined your target audience accurately.

However, if you do not adopt the right channels, you will not be achieving the revenue you should be.

And not surprisingly every type of channel carries its own cost.

Hotels often use global distribution system channels to increase occupancy volumes.

The cost that a channel carries is also known as the Cost of the Hotel Booking.

This cost is known to vary from 10% all the way to 25% or even more.

In other words, if you earned $1 of revenue, up to 25 cents or more will be the cost of the hotel booking or cost of earning that $1 of revenue.

Hotels often use channels to bump up occupancies and push up revenue.

And that is a deadly trap believe me.

They do not realize the dent that causes to the hotel bottom line!

That is enough to send the blood pressure of your hotel owners soaring.

Not to mention the blood pressure levels of your financial controller.

So, how do we avoid all that blood pumping, you ask in a totally resigned manner.

Enter the concept of the Net RevPAR.

Remember our discussion on RevPAR earlier?

If RevPAR takes into account revenue (as opposed to occupancy or average daily rate individually), Net RevPAR goes a step further.

It reduces the cost of the hotel bookings from every dollar of revenue generated.

In short, it gives you a hotel KPI that measures how much of take home revenue was generated.

Keep an eye on this KPI.

It may bridle indiscriminate use of channels to shore up occupancy.

So, what is an ideal situation of Net RevPAR.

Well, there is no such thing as ideal.

The goal is to keep the Net RevPAR as high as possible year on year.

So, the moral of the story is - watch the cost of your hotel bookings versus revenue generated.

And now on to the fifth and last trap in this blog post.

This trap is related to the one we just discussed.

Let us see how...

Ignoring Yield by Focusing On Actual Vs Potential Revenue

In the previous trap we discussed the principle of cost of hotel bookings.

That every dollar of revenue generated is at a cost and it is important to keep an eye on that.

That Net RevPAR apart from being one of the most powerful KPIs in the hotel business also represents a more big picture concept.

And that is the concept of yield.

Yield, unfortunately is like taxes.

Everybody needs it and yet avoids it.

And that brings us to the trap that many hotels (and other businesses too!) fall into.

The trap of ignoring yield.

You are giving me that questioning look!

Yes, I am going to clarify what yield means.

Simply put, yield deals with the concept of potential as opposed to performance.

For example, revenue is the actual performance expressed in dollar terms.

Revenue Yield or simply yield is the ratio of performance to potential.

In other words yield compares actual revenue performance with the potential or highest level that could be reached.

There are clear cut ways to determine room revenue potential using the concept of rack rates.

But that is a discussion for another day.

Now you will be beginning to see why ignoring yield is a perilous approach.

For example, Yield in room revenue is calculated as follows:

Actual Room Revenue / Potential Room Revenue X 100

So, if you achieved a room revenue of say, $10 Million in a month or year it does not tell you how well you did versus potential.

Only yield will tell you that.

And therein is the trap.

Hotels which like to give themselves a pat in the back for their revenue performance without determining where they are versus potential are really kidding themselves.

Mind you, their owners will not accept that.

Hotel owners are ingrained in how much yield is being delivered for their humongous investment.

So, the moral of the story - embrace yield and pre-empt what your hotel owners will already be looking at.

What Is Your Approach to Revenue Management?

Are you falling into the five traps?

How do you approach market share?

What is your way of looking at market segments?

Do you determine revenue yield at your hotel?

Steps You Can Take Right Now

STEP 1

Go back to your Hotel Marketing Plan and review your Pricing Strategy.

STEP 2

Identify your RevPAR goals in your hotel budgeting process. Have you allowed for peak, lean and standard months?

STEP 3

Identify Short & Long Term Market Segments in the hotel budget. Are you balancing these two?

STEP 4

Identify yield in your revenue management strategy. Are you analyzing yield thoroughly?

STEP 5

Ask yourself whether as a hotel manager your revenue management is not falling into the five traps.

Related Posts

Skills Academy Courses

Sign Up for More Tips, Strategies and Secrets

Sign up below to the Peak Profit Newsletter for more tips, strategies and secrets to hotel performance analysis which will allow you to take successful decisions and exceed your targets consistently..

Hotel Financial Performance Analysis Minus Hype - Ready for this?

Have you ever been stumped, not knowing how to make sense of your hotel financial performance?

Did you ever wish for a non-technical guide to measuring hotel financial performance?

Over a quarter of a century, I have sat in too many hotel financial performance meetings.

Meetings that were lost in a blizzard of information and went nowhere.

In this Hotel Financial Performance Analysis - Ultimate Jargon Free Guide, You Will: 

• Make the fictional Paradise Hotel a Case Study Example of performance analysis.
• Use simple, non-technical narratives.

Even those with non financial background will easily understand powerful financial metrics for the hospitality industry.

This Guide will explain key concepts / terms used at the end of the blog post.

We will cover the following areas:

How Will Performance Analysis Benefit You?

This blog post gives you two views of your hotel financial performance:

• dimension view and
• dashboard view

that the traditional profit and loss statement does not give you.

What do dimension and dashboard views achieve for your hotel?

1.  First, they make your hotel profit and loss statement dynamic, forward looking versus static, after the event.
2. Second, they facilitate decision making which achieves positive business results + arrest negative results
3. Third, they place you in charge of the situation and able to control your business more effectively
4. Fourth, they allow you to use Key Performance Indicator (KPI) triggers in financial statements
5. Finally, they Enhance Bottom Line on an ongoing basis which is what businesses aspire to do

They will change the way you manage hotel performance.

Through simple techniques that you can apply to deliver superior business results.

In other words, superior performance.

After going through this guide, you will be able to take the following action steps toward that performance:

1. Determine Relationships between  
   • revenue,
   • expenses and
   • profit in your Profit and Loss Statement
2. Identify Key Performance Indicator (KPI) Triggers based on relationships
3. Determine Cause Effect in relationships and triggers of KPIs
4. Target Cause in Financial Decision Making
5. Measure Action taken and Business Results achieved

Financial Performance Analysis Background

Welcome to Hotel Financial Performance Analysis - Ultimate Jargon Free Guide

How to perform a clinical Hotel Financial Performance Analysis minus the hype.

And in the process, squeeze out significantly more hotel profit!

Business ventures need to measure themselves in financial performance like any other worthwhile undertaking.

The age old, tradition of measurement of business performance is production of the Monthly Income Statement.

Income Statement is also commonly known as Profit and Loss Statement or the shorter P&L.

However, the monthly Profit and Loss Statement has inherent drawbacks. 

These are not immediately apparent from reading it sometimes even for accountants.

Despite this, all businesses place reliance upon it for financial performance analysis and measurement.

A Profit and Loss Statement is:

• a historical record of commercial transactions
• classified under revenue and expense categories.

However, they are past transactions.

They are after the event.

Whatever has happened cannot be undone.

You could say metaphorically that it is like performing an autopsy.

Hotel business ventures (like others) are known as going concerns.

Meaning, that they will continue existing indefinitely.

They produce results and survive on an ongoing basis.

Thus they are forward looking in order to generate more revenue and optimize expenses.

The net result is a positive one which is the goal of any business venture.

Financial Performance amidst Seasonality

The unique feature of the hotel industry is that it is primarily a seasonal business.

This facilitates different methods of measuring hotel financial performance. 

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

This has great impact on revenue and overall hotel financial performance.

Business Volume refers to occupancy for the hotel rooms business.

Inevitable parts of a business cycle and the seasonality factor are:

• revenue going down or being stagnant,
• losing or gaining market share etc. and so on.

During these times, the hotel has to ensure that it is optimizing each dollar of revenue earned and expenses incurred.

This is toward achieving the highest profit or bottom line.

In particular, are times of decreasing or even stagnating revenue.

Prudent management of expenses assumes huge significance.

In this goal, the Profit and Loss Statement is found wanting since by nature it happens to be historical.

You can only find out the results after the event.

Financial Performance & Degree of Control

One of the central elements of optimizing hotel financial performance is degree of control.

How much control can the business exercise over its revenue and expenses.

This may be in times of decreasing or increasing revenue situations.

These situations particularly apply to expenses which tend to be internal.

Revenue is external in a broad sense from the perspective of degree of control.

Degree of control simply means how much of room you have to take corrective action.

This is to ensure you can avoid future mistakes in the objective of revenue and expense optimization.

Hotel Profit and Loss Statements fall woefully short in this area.

This is because they are historical in nature.

They are not behavioral.

What does "behavioral" mean?

Hotels need a much better and forward looking method of analyzing revenue and expenses.

This is so that corrective action is taken to protect future mistakes or losses.

Hotel Financial Performance analysis mechanisms must be:

• Able to throw light on how revenue and expenses behave on the one hand
• On the other, they must be able to guide how to influence them through decisions and action.

Hotel Financial Performance & Flow Through

Enter a powerful, dynamic hotel performance metric or KPI (Key Performance Indicators).

Profit Flow Through Analysis.

It is sometimes also called Contribution Margin Analysis or Break Even Analysis.

This Guide will show how using this analysis, a Hotel Profit and Loss Statement can be turned multi-dimensional.

Multi-dimensional means:

• a hotel profit and loss statement can used to track many hotel financial performance indicators

In its original, traditional state, at best, it is uni-dimensional.

This Ultimate Guide will give you a unique 3 Dimensional View of the Hotel Profit and Loss Statement.

The 3 Dimensional view will throw up the element of "behavior."

Meaning, behavior of an expense or revenue item.

That allows you to take forward planning initiatives to be pressed into action.

Along the way, hotel financial performance analysis will reference some Key Performance Indicators like:

• Contribution Margin,
• Break Even Analysis etc.,

Profit Flow Through Analysis magically transforms a historical Hotel Profit and Loss Statement.

Into a dynamic, forward looking, living statement.

Such a statement can be used as a tool for:

• hotel financial performance measurement, 
• improvement and
• course correction.

Before that, let us see what are the pain points of a traditional hotel Profit and Loss Statement.

Financial Performance Analysis - The Pain

What Paradise Hotel Profit and Loss Statement Does Not Show You!

The Profit and Loss Statement below shows financial performance of Paradise Hotel, our Case Study Example.

It is for the year ended 31st December 2019 compared to Last Year and Budget respectively.

Comparison with previous period, budget are common methods of analyzing and measuring financial performance.

However, the statement lacks some key traits for facilitating effective financial performance analysis.

• First, it does not distinguish between financial performance of Current Month and Year-To-Date.
• Second, it does not show relationships between revenues, expenses beyond respective variances
• Third, the Statement does not show behaviour of expenses vis-a-vis revenue.

The pain from these huge shortcomings is almost paralyzing.

Meaningful financial decisions cannot be taken based on what is existing in these statements.

Decision making requires a point of reference which is indicative of situations in the future.

The Hotel Profit and Loss Statement unfortunately cannot deliver as it is historical.

Let us examine why these traits are so key to evaluating financial performance analysis.

Why are they critical to actionable decision making to deliver better profit consistently?

Financial Performance Analysis - The Problem

Historical nature of Hotel Profit and Loss Statement

The concept of a Hotel Profit and Loss Statement is to show:

• actual accumulated revenue and 
• expenses

for the current period.

This is compared with the budget of that period and resulting variance.

If there is a forecasting process in place, you compare with the forecast as well. 

It normally also makes a comparison with the actuals of the previous period and shows the variance.

The variance is expressed both in terms of dollar as well as percentage.

A Profit and Loss Statement thus normally:

• shows variances on a stand alone basis, ie., variances of revenues and expenses are shown separately
• variance is between actual and budget of the current period

but no effort is made to show relationship between movement in revenue and of expenses.

Financial Performance Analysis - Normal View

A traditional Hotel Profit and Loss Statement by virtue of being historical has only two dimensions to it: 

• revenue dimension and
• expense dimension

You could say that this is the normal view of the Hotel Profit and Loss Statement.

But this normal view suffers from serious shortcomings.

• Revenue and expenses are recorded historically - these are transactions over and done with.
  • They are not dynamic and forward looking.
• Only record of revenue and expenses are individual variances compared to last year or budget.
  • They do not show how one impacts the other.
• There are no connections shown between revenue and expenses.
  • That would, in a dynamic way, provide a cause-effect relationship.
  • Categorizing expense or revenue in a generic way does not allow cause-effect dynamism
• Often the revenue and expenses do not isolate current month from year-to-date performances
  • These are critical to understanding the way business cycles impact results.
  • I am talking about high, low periods of business behaving differently even in the same year

Enter the third dimension of a radically transformed Hotel Profit and Loss Statement!

Want to Read a P&L Easily?

Watch the Video Preview below!

Financial Performance - 3 Dimensional View

What is the 3rd Dimension of a Hotel Profit and Loss Statement?

Is this some kind of trick or a gimmick?

Do you have to wear 3D glasses to get that view?

No, the 3rd dimension of a Hotel Profit and Loss Statement is neither a trick, nor a gimmick.

And no, you do not need to wear 3D glasses!

It is a working, dynamic principle.

This principle elevates it to a powerful financial performance analysis tool in the kit of a hotel manager.

It supercharges hotel financial performance analysis.

Stop right here and do this now!

Give the nature of a traditional Hotel Profit and Loss Statement good thought.

Did you do that?

You will definitely have come to the conclusion that it tends to be grossly static.

Static, in the sense of dynamism.

There is no dynamism to it.

What does that mean?

I am talking about the kind of dynamism that is required to: 

• battle changing trends, 
• preferences and
• habits of the customers.

Not to mention the fluctuating nature of the business world itself.

In this backdrop of changing events and circumstances, what is of paramount importance?

The requirement is a tool which allows you to respond to the changing circumstances.

To do this, you should be able to understand the behavior of revenue and expenses in the Hotel P&L.

Financial Performance Analysis and The Behavior Dimension

Behavior of revenue and expenses is the third dimension of a Hotel Profit and Loss Statement.

In its traditional form, alas, it sadly lacks it.

Behavior is the dimension which will allow you to gain control over revenue and expenses.

With this control, you are able to respond and often anticipate the changing forces of the hospitality industry.

See the visual on the behavior dimension.

Behavior will put you in charge.

You will be calling the shots.

That means responding actively and dynamically to situations rather than just reacting to them.

In short, behavior dimension provides much needed depth to the normal/historical view of revenue and expenses.

Case Study Example of “Behavior” & the 3D View

Let us take a Case Study Example from Paradise Hotel to illustrate behavior dimension of a Profit and Loss Statement.

Below are the Rooms and Food and Beverage Department - Taste Buds Restaurant and Catering Profit and Loss Statements of Paradise Hotel.

Take a look at the departmental Profit and Loss Statements of Paradise Hotel.

You will notice that we have now gone a notch deeper into the financial statements.

We can now see the individual revenue and expense line items.

Each individual revenue and expense line item indicates the nature of revenue and expenses.

It helps us understand what categories of revenue and expenses:

• contributed to earning revenue and
• producing overall results.

Contribution also shows comparison with the previous year.

This is in the form of variances both in dollar terms and well as in percentages.

We have a good picture of what happened during the current period of financial performance.

However, here is also the classic dilemma.

Shortcomings of Historical Record of Financial Performance

We do not know the following important factors from this historical record of financial performance:

• How good is this financial performance in terms of potential to achieve more?
• Why are certain expenses the same as or similar to last year while others are increasing or decreasing?
• What are wastage and redundancies that can be avoided?
• Can we set targets for future years based on just historical financial performance?
• What degree of control can be exercised on the revenue and expenses through decision making for the future?
• Is there any relationship between revenue achieved and expenses incurred?
• If there is relationship, how can we leverage that for future improvements?
• Are we able to understand cause-effect relationship in revenue and expenses from this historical record?
• How can we create more accurate budgets and forecasts for the future?
• This is so as to get a better handle on financial performance from this historical record?

As you can see, there are major questions left unanswered by the historical, normal view of the traditional Hotel Profit and Loss Statement.

Financial Performance Analysis - The Results

This is where the behavior factor comes in.

Behavior provides the vital 3 Dimensional View of the Hotel Profit and Loss Statement.

Take a look at the statement below.

This is the same Rooms Department Profit & Loss Statement shown earlier.

However, now it has the behavior factor assigned to it.

What is the behavior factor and how does it work? 

The behavior factor is an additional categorization of expenses according to behavior - Fixed or Variable.

See the column to the right of the Rooms department Expense lines.

A character "F" represents Fixed and "V" represents Variable Expenses.

These are explained shortly in detail.

How does this help us?

All expenses can be categorized according to the way they behave or move during a business performance period.

This means analyzing how they move in relationship with the following key elements or movement in:

• revenue
• business volume

In short, what we are saying is that we would like to analyze and understand

• how movement in expenses is impacted by
• movement in revenue or movement in business volume.

This is a dynamic and forward looking method of analyzing business results.

Clearly, this is superior to the historical and static way of the traditional Hotel Profit and Loss Statement.

Hotel Financial Performance Analysis and Cause Effect Relationships

In this dynamic analysis, we are looking at the revenue-expense connection in terms of a cause-effect relationship.

Or in other words, we are going to study what are the causes that affect the movement of expenses.

Pre-dominantly we will look at expenses but in some instances revenue gets affected in a business performance period.

Now we are able to understand what is causing the movement and even in what proportion.

It is then a much simpler task to begin focusing on and influencing the underlying causes.

Effectively (pun intended), having a great degree of control over the effect.

What are the causes that we are looking at?

Cause in Hotel Financial Performance Analysis

In studying the cause elements which affect the movement in expenses, we look at two aspects:

• Movement in revenue - expenses which are directly related to movement in revenue (in dollar terms) will be impacted by their increase or decrease.
• For example: In Sales & Marketing Statement, one expense line item is Marketing Fees.
  • Marketing Fees are agreed upon (through Hotel Management Agreement) and stated as a % of revenue.
  • This means whenever revenue in dollar terms increases or decreases, a proportionate increase or decrease (based on actual percentage) will take place in expenses in dollar terms.
  • Revenue in dollar terms is the cause and the marketing fees in dollar terms the effect.
  • This is an example of a Variable expense which moves directly in proportion to revenue on which it is based
• Movement in business volume - expenses which move in direct proportion to movement of revenue in dollar terms are an exception rather than the rule.
• More often, expenses move because of movement in business volume.
• What we do mean by business volume?
• Business volume refers to Occupancy levels in the hotel for the Rooms revenue streams and to Covers Served levels for the Food and Beverage revenue streams.
• These require further explanation.

In the Paradise Hotel Rooms Department Profit and Loss Statement you saw earlier, Total Room Revenue is contributed by two factors - see Market Segments Statistics table below for Jan-Jun (6 months):

1. Total Paid Occupied Rooms (measured in terms of Occupied room nights) and
2. Average Daily Rate on Paid Occupancy

• These can be called Business Volume and Price factors which contribute to Total Room Revenue.
• In the study of movement in business volume above, the room occupancy is that business volume.
• It represents number of nights that guests of Paradise Hotel stayed in hotel in the business performance period.
• Note the Paid Occupancy % for each month over the six months - the occupancy % varies from 60% all the way to 91%
• This variation in occupancy is due to the seasonal nature of hotel business we talked before.
• Note the color coded month columns at the top of the table representing Standard, Lean and Peak months
• Taking this further, any movement in the occupancy of Paradise Hotel will impact certain expenses which are proportionate (or otherwise) related to such occupancy.
• For example: Guest Supplies/Amenities is one of the expense line items in the Rooms Department Profit and Loss Statement - see Jan-Jun months extract below
  • These expenses relate to supplies placed in guest rooms like bathroom amenities, etc.,
  • Cost of supplies increases with occupancy increase (more guests in rooms), decreases with occupancy fall.

Power of Cause-Effect Relationship Study

We can see the power behind analyzing cause factors as we can see now what is influencing expenses.

• This allows us to estimate expenses accurately (more effective budgeting and forecasting).
• It also gives us better control over their behavior.
• We can detect wastage or disproportionate movement in expenses as we know the cause.

Occupancies fluctuate from month to month as shown in the 6 month Statistics table above.

These are mainly affected by the business cycle and Standard, Peak and Lean months.

Our 3 Dimensional view provides us invaluable information on this factor influencing movement of expenses.

This further allows us to take corrective action.

Finally, this action dynamically optimizes the bottom line performance over time.

[5 Step Action Plan below of 3 Pillars of Hotel Profit & Loss Statement Analysis for this magic to happen].

How are Business Results actually achieved?

Dramatic results can thus be achieved over time through the study of the cause-effect relationship between revenue and expenses.

This is done by re-casting the Hotel Profit and Loss Statement to reflect the behavior factor described earlier.

Notice the RIGHT MOST COLUMN of the Operating Expenses section in Rooms Department Statement seen earlier - each expense line has an alphabet assigned to it

F stands for Fixed Expenses which do not change with occupancy levels

V stands for Variable Expenses which change (proportionately or otherwise) with occupancy levels

I must clarify here that in reality there is a third type called Semi-Variable Expenses.

However, we have ignored that in the interests of simplicity and to emphasize how Fixed and Variable expenses move.

We have until now understood how behavior factor can provide a 3D View of the traditional Hotel P&L.

This now brings us to the phenomenon known as Profit Flow Through.

With better control over revenue and expenses, we can influence a key measure of hotel financial performance - profit.

Profit Flow Through analysis shows how to do that effectively.

Profit Flow Through Analysis Concept

Earlier, in this blog post, we studied the cause-effect relationship between movement in revenues and expenses.

This provided us a third dimension and a powerful method to influence the profit.

How can we benefit from this fresh insight?

Profit Flow Through Analysis concept produces the results of the 3 Dimensional view of the Hotel Profit and Loss Statements that we talked about so much earlier.

It harnesses the cause-effect relationship to produce its magic.

Concept explained 

Profit Flow Through Analysis concept can be stated as follows:

This analysis measures:

• the extent to which any incremental change in revenue
• results in incremental change in profit.

Or, in other words:

• for every extra dollar earned in revenue,
• how much of that extra dollar revenue is reflected in extra profit.

Knowing what are the causes that influence the movement in revenue and expenses is going to be priceless if we are to optimize Profit Flow Through.

In a way, we have done our homework on this.

Hotel Financial Performance Analysis Using Current Month and Year To Date

Actual revenue, expenses and profit are commonly shown in a Hotel Profit and Loss Statement.

This is either by comparison to budget or last year or both.

There are two important elements to those actuals as follows:

• Current Month revenue, expenses and profit and
• Year To Date Actual revenue, expenses and profit i.e., for actual number of months completed in the current year

Current Month & Year To Date:

Why should we separate current month, year to date figures for actual revenue, expenses & profit?

Current month results:

• only reflect the performance of the hotel for the particular month and
• thus can be analyzed in isolation.

Current month could be Peak, Lean or Standard revenue month (see Jan-Jun color coded columns in earlier table).

We need to analyze its peculiarities or behavior within a business cycle.

Example.

Peak revenue current month will be able to absorb more of the fixed expenses.

This is the cornerstone of the Profit Flow Through analysis thereby resulting in better profit.

See Table below

In the Table, the two yellow color coded months (April & May 2019) are Peak Months with 90% and 91% Occupancy.

These are also months with the highest Departmental Income (Profit) - refer to the Rooms Department Statement;

In fact, May month with 91% Occupancy has the highest Rooms Profit $904,136 (85%)

On the other hand, two blue color coded months (February, June 2019) are Lean Months with 60% & 61% Occupancy.

These are also the months with the lowest Departmental Income (Profit);

In fact, February month with 60% Occupancy has the lowest Rooms Profit $526,702 (79%)

The above two examples emphasize a powerful phenomenon of the hotel operation.

That occupancy levels (cause) of a hotel in a month often influence revenue and profit (effect) in a significant way.

Moreover, results of current month can either raise or drop variance year to date versus budget or last year.

This has great significance depending upon whether we are in the beginning, middle or end of the year.

Significance of Year To Date in Hotel Financial Performance Analysis - Example

Year To Date figures for revenue, expenses and profits play a key role in hotel financial performance management.

Say, Paradise Hotel is in the first quarter of a calendar year and reporting results for end of first quarter.

Its business results as of 31st March 2019 will be reported as below (see Rooms Department Statement):

• Current Month revenue, expenses and profit for March 2019 compared to budget, last year and forecast and
• Year To Date revenue, expenses, profit as of 31 March 2019, i.e., at the end of three months of the year 2019

Some key elements of the hotel financial performance management are at play here:

• First, revenue, expenses and profit as of 31 March 2019 are compared with the budget first to determine whether Paradise Hotel is ahead or behind (for current month it is ahead of budget on revenue and profit).
• This is a preliminary step in hotel financial performance management and is called Big Picture Overview.
• Second, whether revenue, expense and profit are ahead or behind will determine the variance factor.
• The variance factor measures what is the extent to which they are ahead or behind.
• This is critical in order to determine course of action to be taken for the rest of the year.
• Third, we will ascertain whether the performance of the current month actually added to or reduced from the year to date revenues, expenses and profits.
• Finally, we will compare that to the Year To Date results as of the previous month.

Hotel Financial Performance Analysis - Formula

In other words, you could say that the formula is:

PREVIOUS MONTH YEAR-TO-DATE VARIANCE OF Revenue, Expenses, Profit - ACTUAL Vs BUDGET “A”

PLUS or MINUS

CURRENT MONTH VARIANCE OF Revenue, Expenses, Profit - ACTUALS Vs BUDGET “B”

EQUAL

CURRENT MONTH YEAR TO DATE VARIANCE OF Revenue, Expenses, Profit - ACTUALS Vs BUDGET “C”

Assume that “A” is a positive figure.

Whether “C” will be a higher positive figure than “A” will depend on whether “B” is a positive figure.

Let me repeat what was said earlier:

• If current month financial performance resulted in a positive variance of actuals vs the budget, 
• it will add to positive variance of actuals vs budget of previous months year to date performance.

Having done the above arithmetic, we have laid the foundation for our investigation.

Of what the financial performance of the current month meant.

Now we can decide what corrective action needs to be taken for the rest of the year.

Thus, it can be seen:

• analyzing financial performance of Paradise Hotel separately
• for the month and then for the year to date (See Table) is critical.

This is to isolate reasons negative or positive variance resulted compared to the previous month.

Revenue Expense Relationships in Hotel Financial Performance Analysis

Earlier we saw that a current month financial performance should be analyzed in isolation.

This will give us an indication of what corrective action needs to be taken for the rest of the year.

So as to impact year to date results positively.

It is now time to determine how to go about course correcting.

• First, we should understand the umbilical cord relationship between revenue and expenses.
• We will then use that understanding to leverage its power.

The single most critical analysis in the revenue expense relationship is the profit flow through analysis.

How Profit Flow Through Works

The entire concept of Profit Flow Through Analysis is based on:

• creating relationships between
• increase in expenses and revenue.

So, what is the Profit Flow Through Analysis?

How is this analysis powerful to a business venture?

The Profit Flow Through Analysis compares the difference between revenue and profit over two periods.

• The analysis could to a lesser extent compare between budget and actuals or forecast and actuals.
• It takes the difference between the profit over the same two periods and arrives at an index or Key Performance Indicator (KPI).
• This KPI shows how much increase in revenue was carried over to profit.

In short, profit flow through measures: 

• for every dollar increase in revenue for this period over the last period
• how much of that dollar increase flowed to the profit of this period.

Profit Flow Through Example

We take the figures shown in the Table (comparison between Current Year and Last Year) for Paradise Hotel for the Food and Beverage Department Taste Buds Restaurant for the year ending 2019.

Total Departmental Income (Profit) is $124,002 compared to $104,853 in year ending 2018.

Food and Beverage Revenue is $357,848 compared to $324,619 in year ending 2018.

Profit Flow Through in this example would be calculated by:

• dividing the difference between $124,002 and
• $104,853 in Departmental Income (Profit) first.

Then we take the difference between $357,848 and $324,619 in revenue.

Finally, we express the above two differences as a ratio percentage.

Profit Flow Through Formula

Difference in Profit (Current Vs Last Period) / Difference in Revenue (Current Vs Last Period) X 100

In this example, it would be 19,149 divided by 33,229 which in terms of percentage equals to 58%

Profit Flow Through % here is thus: 58%

This can be stated as follows:

• Out of the increase of $33,229 in revenues for year ending 2019 over year ending 2018, only 19,149 flowed to the profit for year ending 2019.
• It may be noticed that the increase in revenue for year ending 2019 over 2018 is 10.2% ($357,848 - $324,619/324,619).
• The increase in Total Operating Expenses for year ending 2019 over 2018 is 10.3% ($57,816-52,458/52,458).

This means that increase in expenses as a percentage was marginally higher than increase in revenue.

The percentage increase in revenue year on year is marginally lower than the percentage increase in expenses. 

Despite this, overall result of the analysis is a positive variance.

In dollars, Departmental Income increased by $19,149 in 2019 compared to year 2018) year on year.

Or, the Profit Flow Through is said to be positive.

Let us take a big picture overview.

In this example of Paradise Hotel, it can be said that:

• By understanding the relationships between movement in revenue and expense and
• their effect on profit, important decisions can be taken.

However, it is important to clarify that this is the first step - identifying what the flow through is.

[See 3 Pillars of Hotel Performance Analysis 5 Step Action Plan Infographic  below]

• Follow up steps need to be taken in going into which expenses went up or down and why.
• A similar exercise to be done for which revenue sources went up or down and why.
• At the end of the exercise, you will get a good fix on how your fixed and variable expenses are moving in relation to business volume and revenue as we saw earlier.
• Finally, it is critical to note that profit flow through percentages are different for different hotel departments.

For Rooms department, they can be as high as between 80% and 90%.

As we saw earlier though, in the Food and Beverage department it can be between 50% and 70%.

This is because Food and Beverage department has higher variable costs than the Rooms Department.

Another behavior that can be utilized for taking decisions and achieving a higher profit margin.

In summary, the normal view of the Profit and Loss Statement is the historical view.

It is simply a chronological accumulation of commercial transactions.

Moreover, it is static and historical.

The forward looking, dynamic view is the 3D view of behavior.

Hotel Financial Performance Analysis - Key Concepts & Terms Used

The key to understanding the concept and analysis of profit flow through is:

• understanding of how revenue and expenses are related
• and in what proportion.

The following concepts will help us:

• understand the profit flow through analysis and
• its powerful contribution to effective, results oriented decision making:

1. Business Volume
   • Business volume is the activity level a business operates at. Also known as the Output level.
   • For example, in the case of Paradise Hotel, business volume or output level would refer to the Occupancy levels that it runs in its operation.
   • Occupancy % is a vital statistic that is computed in a hotel operation to denote the average occupancy levels it runs.
   • It is comparable to the Capacity Utilization factor in a manufacturing organization.
2. Behavior of Expenses
   • The behavior factor is the additional categorization of expenses according to their behavior - whether Fixed or Variable.
   • How does this help us?
   • All expenses can be categorized according to the way they behave or move during a business performance period.
   • This means analyzing how they move in relationship with the following key elements:
     • Movement in revenue
     • Movement in business volume
   • In short, we would like to analyze and understand how movement in expenses is impacted by movement in revenue or movement in business volume.
3. Price and Quantity Factors
   • In the Paradise Hotel Rooms Department Profit and Loss Statement, the Total Room Revenue is contributed by two factors - see Statistics table for Jan-Jun (6 months) :
     • Total Paid Occupied Rooms (measured in terms of Occupied room nights) and
     • Average Daily Rate on Paid Occupancy.
4. In the course of planning the performance of Paradise Hotel for a year ahead, the budgeting process would target a certain occupancy % and number of guest covers.

This would be a starting point for building revenue targets for rooms and food and beverage operations.

Based on this, the hotel can set RevPAR, Market Share, Gross Operating Profit, Net Income and other KPI targets to measure its performance.

It can then monitor hotel financial performance against the budget and forecast for these metrics.

The variance analysis would throw up areas to correct and improve.

Hotel Financial Performance Analysis - Action Steps For You

[See 3 Pillars of Hotel Financial Performance Analysis 5 Step Action Plan Infographic ]

ACTION STEPS FOR YOU

1. Determine Relationships between revenue, expenses and profit in your Profit and Loss Statement
2. Identify Trigger Key Performance Indicators (KPIs) based on relationships
3. Determine Cause Effect in relationships and triggers of KPIs
4. Target Cause in Financial Decision Making
5. Measure Action taken and Business Results achieved

A Questionnaire on Flow Through for You

• What are the types of financial statements that you generate on a monthly basis? List these.
• Which accounting software or system or application do you use currently? Is it customized or off the shelf?
• Are financial statements directly exported from accounting software or extracted, produced on Excel?
• Do you currently have any reports showing Incremental Profit Flow Through?
• If yes, does Incremental Profit Flow Through track only actuals or forecasts, budgets numbers are included?
• Does your Chart of Accounts show revenue and expenses according to the different departments?
• Is Profit and Loss Statement showing behavior of expenses, Fixed, Variable or Semi Variable?
• Will your Chart of Accounts break down expenses into Fixed or Variable?

Phew! that was a long one! 

Hopefully, I shared with you some powerful strategies for hotel financial performance analysis.

The crux is to take the Profit and Loss Statement and turn it into a financial decision making powerhouse. 

A tool to guide you in sound financial decision making that will produce consistent business results.

That is what your hotel owners will be expecting in hotel financial performance.

Your Takeaways

What were the takeaways for you from the blog post? And from the video?

Are you leveraging the 3 Dimensional view in your hotel performance analysis?

What topics would you like to see as future blog posts?

Tell us in the comments section below.

Want to Read a P&L Statement Easily?

Enroll in the course below currently at 50% OFF.

Hotel Financial Ratios are like your car instrument panel dashboard!

You are giving me those looks.

As a manager, you regularly do think about your hotel performance, don’t you?

Or are you skipping this critical process?

What if you could quickly look at some key metrics of hotel performance?

Like the kind you glance at regularly when you drive your automobile.

And keep yourself updated on your progress against say revenue targets.

Let me now ask you a question.

Instrument Panel Metaphor & Financial Ratios

Why do you keep looking at your car’s instrument panel while driving?

So that you can check on some key readings on the panel.

For example

• what is the position of your fuel?
• What speed are you driving at?
• On your GPS, how much more distance and time to your destination and so on.

The idea is to measure progress along with some important indicators.

Well, your hotel operation also has its own set of metrics to watch out for.

But the question is: are you regularly reading those measures?

If you are not, you could be seriously losing out big time.

Let me explain how.

Before that, take a look at the infographic below on the Ultimate Guide on Hotel Financial Ratios.

This Blog Post will answer questions like:

• What are Hotel Financial Ratios that analyze financial statements?
• What are the categories of Hotel Financial Ratios?
• What is the ideal Hotel Financial Ratio?

and more.

Why Should You Care about Hotel Financial Ratios?

So, what is the big deal about hotel financial ratios?

As a hotel manager, why should you care?

Great questions.

Let me clarify.

Would you not want to know if your hotel’s performance is falling behind?

Or worse, some alarming signs are showing up?

Imagine if you get a nasty surprise when the month’s performance is revealed.

It would be quite embarrassing, right?

These are good reasons why you should be on top of performance measures.

Hotel Financial Ratios have the ability to provide you those progress indicators.

They often indicate warning signs of trouble ahead.

Once you get used to these KPIs as they are often known as, you will never let go.

KPIs are incidentally acronyms for Key Performance Indicators.

Let us see what these ratios are.

And how you can utilize them for performance updates.

What are Financial Ratios?

What are financial ratios?

These are comparison measures that tell a story about your hotel performance.

A ratio has got two key elements:

• Numerator and
• Denominator

No, we are not diving into a mathematics lesson.

Bear with me.

This will help us understand how to read these ratios.

A ratio has two numbers (sometimes more!).

One above the line and one below.

Numerator is the number above the line.

Denominator is the number below the line.

Each number is a performance measure by itself.

Often, they are then multiplied by 100 to get a percentage.

Enough of theory, let us see an example.

Financial Ratios Example

Let us first use a common personal example.

Say you earned $8,000 in a month and ended up saving $3000.

What is your savings percentage?

Your savings percentage will be calculated as follows:

$3000 / $8000 *100 = 37.5%

This 37.5% savings percentage is a ratio.

It is the ratio of savings dollars to earnings dollars.

A ratio can be with or without being stated as a percentage.

When you apply this calculation method to hotel KPIs, they result in Hotel Financial Ratios.

For a quick example:

How do you calculate the occupancy % of a hotel for a month?

You divide Rooms Occupied by Rooms Available and multiply by 100

FORMULA

In other words, the formula is:

Rooms Occupied / Rooms Available x 100 = Occupancy %.

This occupancy % is a hotel financial ratio.

It tells you how well the hotel sold its rooms for a month.

Here Rooms Occupied is the Numerator (above the line).

And Rooms Available is the Denominator (below the line).

How do you Read Hotel Financial Ratios?

We have now understood how hotel financial ratios are calculated.

Let us see how we can read them accurately.

To begin with, financial ratios are only indicators.

These indicators can show a positive or a negative picture.

Ratios may require further research into what is causing them to be positive or negative.

Let us use the earlier occupancy % example.

Say a hotel has 500 rooms available daily in the month of January 2024.

It sold 320 rooms each day in that month.

So, the calculation will go something like this.

First, 500 x 31 (days in January) = 15,500 rooms available in the month.

Second, 320 x 31 (days in January) = 9,920 rooms occupied (sold) in the month.

Occupancy % in January 2024 is 9900 / 15500 x 100 = 64%.

Is 64% a good performance or not?

This will depend upon many things.

Let us see a couple of them here.

First, what was budgeted (target) for the month?

If the budget was say 60% occupancy, then the hotel had a positive result (64% > 60%).

Second, what was the occupancy % in January 2023 (previous year same month)?

Again, if the January 2024 occupancy was higher than 2023, then it is positive.

Comparison with budget and previous year are two common ways for financial ratios to be used.

They tell you whether you are progressing at all.

Traps You Must Avoid with Hotel Financial Ratios

Remember, I said earlier that financial ratios are merely indicators.

They need to be verified further in most cases.

This is also where most hotel managers make errors.

It is why you must avoid some typical traps in reading financial ratios.

For instance, is the comparison apples to apples?

Say, the occupancy % budget was set assuming an abnormal event which did not happen.

In this case, the budget might have been set too high.

Comparatively, the actual occupancy % was much lower.

This by itself does not mean that the hotel did a bad job.

Again, I reiterate that this is why financial ratios are merely indicators.

They need to be verified with further factual information.

In chapters of this Ultimate Guide (see below), we will dive deep into understanding this better.

This post is Chapter 1 Hotel Financial Ratios - Why should you care?

Chapters in this Ultimate Guide on Hotel Financial Ratios

This Ultimate Guide is a twelve part series which will cover the following key areas:

• CHAPTER 1 of 12 - Hotel Financial Ratios - Why should you care? [This Post]
• CHAPTER 2 of 12 -Liquidity Ratios Intro - Acid Test Ratio [Next Up]
• CHAPTER 3 of 12 -Liquidity Ratios - Accounts Receivable Turnover Ratio
• CHAPTER 4 of 12 -Liquidity Ratios - Working Capital
• CHAPTER 5 of 12 -Solvency Ratios - Net Worth
• CHAPTER 6 of 12 -Solvency Ratios - Debt Equity Ratio
• CHAPTER 7 of 12 -Activity Ratios - Inventory Turnover Ratio
• CHAPTER 8 of 12 - Profitability Ratios Intro - Gross Operating Profit
• CHAPTER 9 of 12 - Profitability Ratios - Return on Investment Ratio
• CHAPTER 10 of 12 - Profitability Ratios - Return on Equity Ratio
• CHAPTER 11 of 12 - Asset Management Ratios Intro - Asset Turnover Ratio, RevPAR
• CHAPTER 12 of 12 - How to Identify Warning Signs in Hotel Financial Ratios

How to Feel the Pulse of Hotel Performance with KPIs

At the end of the day, it is important to get a hang of your hotel performance.

Rather like the car instrument panel we talked about.

So, how do you get to feel the pulse of your hotel performance?

Great question.

Broadly, hotel KPIs can be categorized as addressing following performance areas:

• Capacity KPIs
• Business Volume KPIs
• Price KPIs
• Revenue KPIs
• Expenses KPIs
• Profitability KPIs
• Guest Loyalty KPIs

This is certainly not an exhaustive list.

However, these are the most commonly measured hotel KPIs.

Then you could also categorize based on:

• Big Picture Overview
• Individual Focus

Big Picture Overview Hotel KPIs are those that cover the entire hotel operation.

For example, Market Share is a hotel KPI that measures a hotel’s standing in the market it operates.

While there are different ways to calculate what market share is, the concept is about the big picture.

Market Share includes some hotel KPI categories which we saw earlier like business volume, price etc.

Profitability Hotel KPIs measure almost the end business result of a hotel operation - the bottom line.

For example, Profitability KPIs include many individual area hotel KPI categories like

• revenue,
• expenses,
• capacity and so on

which we listed earlier.

So, that is the reason hotel KPIs are not all made the same.

It will depend on what your goal is in measuring hotel KPIs.

Moreover, you need to understand what are known as performance triggers.

For example, hotel revenue is contributed by 3 broad triggers:

• Capacity (represented by Available Rooms)
• Business Volume (represented by Occupancy)
• Price (represented by Average Daily Rate)

That should be a good overview on hotel financial ratios.

Next Week

We will dive into the world of Liquidity ratios.

We will see:

• What Liquidity is?
• Why are Liquidity ratios critical?
• How do you read and use Liquidity ratios?

and more…

Sign Up for Speed Tips - Learn in Minutes

Want to Learn Quickly?

Sign Up for Speed Tips - Learn Quickly Newsletter for quick tips, strategies, secrets straight to your InBox!

Related Posts

Would you Know the Liquidity Ratios for your hotel?

You look puzzled, you want to know what liquidity actually means.

Most importantly, what is the big deal about knowing it, you ask.

Fair enough.

I call financial ratios as an early warning system.

Remember the car instrument panel dashboard metaphor from Part 1?

Click here to read that.

It is like missing a key reading on your dashboard.

Say, you do not notice that the fuel in your car is running low.

The next thing that will happen is your car will stop running.

You can consider liquidity something similar to that.

If your liquidity runs low, you cannot run the hotel efficiently.

However, first, what is liquidity?

Let’s find out.

This is Part 2 of the 12 part Ultimate Guide on Hotel Financial Ratios series.

The blog post will cover:

Liquidity Ratios - Early Warning System

Why do I call hotel financial (and liquidity) ratios an early warning system?

Well, just like the instrument panel reading, you must be on top of hotel performance.

Like running out of fuel, you should not get into a crisis situation.

And one quick way to do that is by knowing which financial ratios to monitor.

There are tons of ratios that can be calculated.

It is not possible or necessary to keep track of all of the ratios.

However, a few major categories bear watching closely.

We will be exploring these major categories in this Ultimate Guide.

Financial Ratios by Major Categories

Financial ratios can be grouped into 5 major categories

• Liquidity Ratios
• Solvency Ratios
• Activity Ratios
• Profitability Ratios
• Asset Management Ratios

Let us take liquidity first.

Recall what I said earlier.

If your liquidity runs low, you cannot run the hotel efficiently.

Time to dive in and understand the liquidity concept.

Liquidity Ratios - Fuel that Runs Your Operation

Liquidity simply means cash.

Not exactly but let me explain.

It means the ability of an asset to turn into cash.

The higher the cash balances in a balance sheet, the more liquid the position.

Such assets are called liquid assets.

Liquid assets generally refer to the current assets category.

Want to know more about current assets?

Read the Ultimate Guide on Hotel Balance Sheet Basics.

Back to liquid assets.

For example, Current Assets (see below) are normally these three common types:

• Cash and Bank Balances
• Accounts Receivable
• Inventories

Current Assets can be of other kinds too.

However, these three feature prominently in most hotel balance sheets.

Now let us learn what Liquidity Ratios are.

Liquidity Ratios and Current Assets

Liquidity Ratios are ratios that measure how liquid hotel current assets are.

In other words, how quickly can the current assets be turned into cash.

Let me bring in again the common types of current assets in a hotel balance sheet:

• Cash and Bank Balances
• Accounts Receivable
• Inventories

The above list has a particular order to it.

This order is mandated by the Uniform System of Accounts.

All hotel balance sheets must follow this mandate.

Current Assets need to be listed in the order of their liquidity.

See Current Assets listing below:

In other words, the most liquid asset must be first and so on.

Notice how this is the case in the above list.

Cash is the most liquid of current assets.

This is because they are already in cash form.

Next comes Short Term Investments (less than 90 days mostly).

Then, Accounts Receivable.

Accounts Receivables are sales made but cash not yet collected.

Finally, we have Inventories (We will touch upon Prepaid Expenses in another post).

Inventories are stocks of goods that will be sold or consumed.

For example, food and beverage supplies are part of inventories.

Food and Beverage items will be issued out from inventories and sold in the hotel’s restaurants.

The inventory thus sold will become revenue.

Accounts Receivables Vs Inventories

Why are Inventories listed after Accounts Receivable?

Because Accounts Receivable represents sales already made but money not collected.

On the other hand, inventories are yet to be sold and hence not as liquid.

Inventories are considered the least liquid of current assets.

Now, we know common types of current assets, let us visit the major categories of liquidity ratios.

Liquidity Ratios

We will examine 3 major categories of Liquidity Ratios in this Ultimate Guide.

Take a look at the infographic below.

These are:

• Acid Test Ratio
• Accounts Receivable Turnover Ratio
• Working Capital

We will be understanding why these are the most important.

In the early warning system, these rank the highest.

We will be discussing Acid Test Ratio in this post.

The other two will follow in forthcoming posts.

Acid Test Ratio

What is Acid Test Ratio?

The Acid Test Ratio is a revised form of the more common Current Ratio.

You could say that Acid Test Ratio is a better indicator than the current ratio.

Let’s see why and how.

Current Ratio is simply the ratio of Current Assets to Current Liabilities.

The formula is:

Current Assets / Current Liabilities

Quick recap of what current assets and current liabilities are:

Assets used up within a financial year are current assets.

Liabilities payable within a financial year are current liabilities.

Take a look at the Current Assets and Current Liabilities of Paradise Hotel below:

The Current Ratio however suffers from a huge defect.

It can show an incorrect picture.

What do I mean?

For example, inventories are considered the least liquid of current assets.

If a hotel’s current assets are predominantly inventories, it may show a false picture of liquidity.

Is your hotel holding a lot of inventories?

Check them out.

In the above Paradise Hotel Balance Sheet, note that Current Assets total $221,000.

Current Liabilities total $214,000.

So, Current Ratio is Current Assets / Current Liabilities = $221000 / $214000 = 1.03.

Current Ratio is barely above 1.0.

We will see why this is a problem shortly.

Note that Inventories total $17,000 in Paradise Hotels current assets.

And Inventories are the least liquid of current assets.

How do we sort this issue out?

Enter the remedy for this: Acid Test Ratio.

Acid Test Ratio removes inventories from the current assets in its calculation.

And leaves the most liquid assets to be compared to Current Liabilities.

In other words, the formula is:

Current Assets Less Inventories / Current Liabilities.

Let us now see the example using the Paradise Hotel shown above.

Acid Test Ratio Example

The Current Ratio for Paradise Hotel as of 31.12.2018 is:1.03

Current Assets / Current Liabilities OR 

$221000 / $214000 = 1.03

Removing inventories of $17,000 from Paradise Hotel Current Ratio, the Acid Test Ratio is:

Current Assets Less Inventories / Current Liabilities OR

$204000 / $214000 = 0.95

Note how Current Liabilities are now higher than the most liquid current assets.

However, you would only know this if you calculated Acid Test Ratio.

Just calculating Current Ratio would have given you an incorrect picture.

Check out your hotel's current ratio and then verify it with the Acid Test Ratio.

How is Acid Test Ratio useful?

In the case of the Paradise Hotel, you discovered that Acid Test Ratio is below 1.0.

That is not a good situation to be in.

You are getting an early warning from this ratio.

Liquidity is one of the key measures of short term solvency.

In other words, the ability to pay current liabilities with current assets.

Is the hotel able to cover its short term liabilities with its short term assets?

Or, how liquid are the hotel’s current assets?

If current liabilities are not covered by current assets less inventories, the hotel will have a cash crunch.

This is because inventories are not sold yet.

So, they are not able to provide the cash necessary to pay liabilities.

This is the reason the Acid Test Ratio is so critical.

How to Read Acid Test Ratio

Current Ratio must always be verified with the Acid Test Ratio.

This is what we did with Paradise Hotel above.

In other words, calculate the Current Ratio but check with the Acid Test Ratio.

This is to ensure that inventories are not skewing the liquidity.

Acid Test Ratio below 1.0 is a warning that current assets are not very liquid.

They may not be able to pay the current liabilities.

Liquidity Ratios in Pre Opening Hotels

For hotels which are in pre opening stage, inventories tend to be higher.

This is because the hotel has not started operating.

Actual consumption of goods is not established since hotel has not opened.

Consequently, it may not have an accurate grasp of sales volume.

Moreover, the hotel will want to avoid a stock out situation initially.

Therefore, it will keep higher than needed inventory levels.

You could conclude that it is even more critical for pre opening hotels to calculate Acid Test Ratio.

Chapters in this Ultimate Guide on Hotel Financial Ratios

This Ultimate Guide is a twelve part series which will cover the following key areas:

• CHAPTER 1 of 12 - Hotel Financial Ratios - Why should you care?
• CHAPTER 2 of 12 - Liquidity Ratios Intro - Acid Test Ratio [This post]
• CHAPTER 3 of 12 -Liquidity Ratios - Accounts Receivable Turnover Ratio [Next post]
• CHAPTER 4 of 12 -Liquidity Ratios - Working Capital
• CHAPTER 5 of 12 -Solvency Ratios - Net Worth
• CHAPTER 6 of 12 -Solvency Ratios - Debt Equity Ratio
• CHAPTER 7 of 12 -Activity Ratios - Inventory Turnover Ratio
• CHAPTER 8 of 12 - Profitability Ratios Intro - Gross Operating Profit
• CHAPTER 9 of 12 - Profitability Ratios - Return on Investment Ratio
• CHAPTER 10 of 12 - Profitability Ratios - Return on Equity Ratio
• CHAPTER 11 of 12 - Asset Management Ratios Intro - Asset Turnover Ratio, RevPAR
• CHAPTER 12 of 12 - How to Identify Warning Signs in Hotel Financial Ratios

Sign Up for Speed Tips - Learn in Minutes!

Want to Learn in Minutes?

Sign Up for Speed Tips - Learn in Minutes Newsletter for tips, strategies, secrets straight to your InBox!

Related Posts

Behind the scenes, a major piece of the Financial Skills Academy PLUS ecosystem just went live.

I’ve spent the last few weeks building, testing, and refining a brand-new digital learning environment.

Addressing Hotel Middle Managers specifically.

The goal?

To take complex hotel financial metrics and make them accessible to operation managers.

Watch short video below.

No dense spreadsheets.

No rigid accounting lectures.

Just simple, actionable visual dashboards.

I quietly opened the gates to our "5 Real-World Hotel KPI Scenarios" flash course to a few early birds yesterday, and the automation is running beautifully.

Want to sneak in before the official public announcement tomorrow?

And start mastering your hotel’s profit triggers today?

You can grab free access right now.

Click Below to jump straight into Module 1!

Related Posts

Are You One of the Managers Who Missed Out on Your Hotel Balance Sheet?

Not to Worry!

I will get you up to speed in this Ultimate Guide on Hotel Balance Sheet Basics.

We will be answering the following questions:

But first, you are probably wondering why I use the term “missed out on.”

And yes you are also asking yourself what’s the big deal with missing out?

What if I answered you with a metaphor?

Assume that your hotel business is one big tree with lots of branches.

You may be familiar with the branches of the tree.

However, you have little idea what the roots of that tree stand for.

You look even more baffled than before.

What am I talking about?

Hold it.

I am about to clear the air.

Metaphor of Branches Vs Roots of a Tree

As a hotel manager, you look at your Profit and Loss Statement at least once a month.

That is for the monthly hotel performance meetings I presume you have.

However, quite possibly you may have never laid eyes on your hotel balance sheet.

The hotel profit and loss statement can be likened to the branches of the tree I spoke about.

And the hotel balance sheet to the roots of the tree.

With the branches, you are conversant with the performance of the tree in bearing fruit.

In other words, you are familiar with the performance of the hotel.

The Hotel Profit and Loss Statement is often called The Performance Statement.

it also means that in performance you will know about hotel:

• revenue
• expenses and
• profit

On the other hand, you possibly have never seen the roots of the tree.

Most times you take it for granted and really don’t care about seeing it.

However, you do know that if the roots of the tree are not healthy, the branches may not last too long.

Similarly, the Hotel Balance Sheet can be called The Financial Position Statement.

It literally tells you about the long and short term health of your hotel business.

Using our metaphor, the balance sheet tells you how healthy or otherwise the roots of the tree are.

So, it is kind of tragic that:

• you know a lot about the branches of the tree
• but not whether the tree itself is healthy.

Only the strength or otherwise of the roots will tell you that.

Not Interested in Health of Your Business?

Similarly, only the Balance Sheet can tell you whether the business itself is healthy or otherwise.

Would you not want to know that?

Also, this health element is something your profit and loss statement can never show.

[If you want to know more, click to know more about the profit and loss statement.]

Isn’t that a good reason to know the hotel balance sheet better?

In this instance, you do not even have to dig out the roots.

You have to go to your Financial Controller and ask him or her to show you the balance sheet.

I will lay out a strong case:

• why every hotel manager must regularly 
• pay attention to this often ignored financial statement.

So that you are aware of the health of your hotel business.

The Balance Sheet relates to the long and short term health of your hotel business.

I have explained all elements in a non-technical way so that any hotel manager can understand.

So, not to worry!

I promise that at the end of this ultimate guide, you will be a hotel balance sheet ninja!

This Ultimate Guide will cover:

How to Use This Ultimate Guide Effectively

You will get the most out of this guide if you follow some steps to learn this hotel financial statement.

Spend some time studying the Paradise Hotel Balance Sheet which begins with in Chapter 1 Below:

• Take Notes on what you do not understand [ask questions in comments section below the post]
• Understand concepts - Assets, Liabilities, Owner Equity or Capital as 3 Pillars of Balance Sheet
• Assets are “2”, Liabilities are “3” and Owner Equity are “4” in the Paradise Hotel Balance Sheet Infographic.
• Look them up right now.
• Go on! I will wait.

Chapter 1 - Paradise Hotel Balance Sheet Example

Chapter 2 - Current Assets

Click the Link below to go to the post that will explain everything there is to know about Current Assets.

Current Assets - Are You Optimizing Them in Your Hotel Balance Sheet?

For reference, Current Assets are “5” in the Paradise Hotel Balance Sheet Infographic.

Understand how Current Assets are different from Long Term Assets discussed in Chapter 4.

Chapter 3 - Current Liabilities

Click the Link below to go to the post that will explain everything to know about Current Liabilities.

Current Liabilities - Is Your Hotel Cash Flow Position Sound?

Understand first how Liabilities are different from Assets.

How are Current Liabilities different from Current Assets discussed in the previous chapter?

Chapter 4 - Long Term Assets

Click the Link below to go to the post that will explain everything to know about Long Term Assets.

Long Term Assets - Are They Delivering Optimum Hotel Revenue?

Refer to Long Term Assets shown in the Paradise Hotel Balance Sheet as Property and Equipment (”6”).

Understand how Long Term Assets are different from Current Assets discussed in Chapter 2.

Chapter 5 - Long Term Liabilities

Click the Link below to go to the post that will explain everything to know about Long Term Liabilities.

Long Term Liabilities - Do Earnings Cover Loan Obligations?

Refer Long Term Debt/Liabilities shown in the Paradise Hotel Balance Sheet Infographic in (”6”).

Understand how Long Term Liabilities are different from Current Liabilities discussed in Chapter 3.

Chapter 6 - Owner Equity

Click the Link below to go to the post that will explain everything to know about Owner Equity.

Capital - Are Your Monthly Business Results Improving Owner Equity?

Refer Capital / Owner Equity shown in the Paradise Hotel Balance Sheet Infographic in (”4”).

Understand how Owner Equity is different from assets and Liabilities discussed in Chapters 2-5.

Chapter 7 - Hotel Balance Sheet Relation to Hotel Profit and Loss Statement

Click the Link below for how a Hotel Balance Sheet is related to the Hotel Profit and Loss Statement.

Hotel Balance Sheet - How Is It Related to The Hotel Profit and Loss Statement?

Understand how:

• revenue,
• expenses and
• profit (net income)

form the pillars of a hotel profit and loss statement while

• assets
• liabilities and
• owner equity

are the pillars of a hotel balance sheet.

Understand how this relationship between the two financial statements works to sustain a business.

Chapter 8 - Hotel Balance Sheet Ratios

Click the Link below for the post that will explain 5 critical Financial Ratios in a Hotel Balance Sheet.

Balance Sheet - 5 Killer Ratios a Hotel Manager Cannot Ignore

You now have a thorough understanding of assets, Liabilities, owner equity in a hotel balance sheet.

Now get to know powerful financial ratios in a hotel balance sheet.

Understand that the 5 ratios or KPIs in the post use assets, liabilities and owner equity elements which you saw in Chapters 2 to 7.

This wraps up the basics of a hotel balance sheet.

Coming Soon...

Ultimate Online Course on Reading a Hotel Balance Sheet

So, you have taken the journey of understanding different parts of a Hotel Balance Sheet.

You are now ready to take it to the next level.

Utilizing your understanding of the Hotel Balance Sheet to take key financial decisions.

This online course will lay out:

• Why reading a hotel balance sheet correctly to take financial decisions is critical
• Decisions like purchasing long and short term assets to generate revenue, etc. and
• how to go about doing that

WATCH this teaser video for a glimpse of the forthcoming course.

Related Posts on Balance Sheet

Sign Up for Speed Tips below to get more Tips, Secrets, Strategies straight to your Inbox.

When Was the Last Time You Looked at Your Hotel Balance Sheet?

Did you know that there are immediate, often unpleasant consequences of ignoring a Balance Sheet?

Make no mistake about this.

At its simplest, you may not see a calamity approaching.

There may already be indications that something's Off!

You are wondering what I am talking about.

Hang on, I am coming to that shortly.

Before that, are you a victim of this situation?

Of ignoring the balance sheet I mean.

Rest assured that I will make myself clear what I meant.

I will lay out a strong case for:

• components with examples of the balance sheet including
• explanation of the fundamental accounting equation
• every hotel manager must regularly pay attention to.

They literally ensure the long and short term health in terms of the financial position of your hotel business.

This is something your profit and loss statement can never show.

Isn’t that a good reason?

This Chapter 7 of Ultimate Guide on Hotel Balance Sheet Basics covers:

Balance Sheet Vs Profit and Loss Statement

When was the last time as a hotel manager you looked at your Balance Sheet?

Your response may well indicate the importance you attach to it.

Believe me however, your hotel owners have close links to that financial statement.

Just try and remember the millions of dollars they have poured into the hotel project.

Do you have an idea how much that could be?

More specifically, do you know if the financial position of your company is sound?

Many hotel managers think that is not their job.

Your hotel owners may not agree with that!

Whichever way you see it, the truth is this.

Say, you have restricted yourself to studying only the hotel profit and loss statement.

Then, you will never get answers to some key questions.

Why not, you ask rather skeptically?

Simple reason!

The Profit and Loss Statement is a performance statement.

It does not tell you anything about the financial position.

More importantly, it just cannot!

For that, you will have to reach for the Balance Sheet.

Look at it this way.

Would you not want to pay attention to something that your owners are forever concerned about?

I do not want to sound like a doomsday merchant.

However, it is worth spending some time with the venerable hotel balance sheet.

It may well make you wiser.

Let us see why and how.

Without further ado, let us dive right in.

Look at the Paradise Hotel Balance Sheet below and identify the 5 killer balance sheet ratios in it.

Balance Sheet & Net Worth of a Hotel

Consider this scenario.

As a hotel manager you may have distanced yourself from the balance sheet.

In other words you may not be looking at it.

As a result, you may be focusing on your revenue, expenses and profit.

It is ironical that you are spending time with revenue but not the source of revenue generation.

What do I mean, you ask, feeling offended?

But it is true.

If you focused on just the Profit and Loss Statement, you will know revenue well.

But not something that produces your revenue!

And what is that you ask sarcastically?

Your assets of course.

Quick question.

Do you know the total cost of assets that your hotel business owns?

You cannot know that without consulting the Balance Sheet.

Which brings us to the first key element in the Net Worth ratio.

The Net Worth is the Holy Grail of Long Term Financial Ratios.

It is literally about how much your business is worth.

We just saw it’s first key element - total assets.

The second key element is Total Liabilities.

There is value to knowing about your liabilities.

They are moneys you owe others.

You need to pay back those.

Do you know the total cost of liabilities that your hotel business owes?

If you answered “No” to knowing the total cost of assets and liabilities, you do yourself a disservice.

You have ignored the two elements that will tell you whether your business is in good health.

In the long term.

Would you not want to know that?

Particularly if your hotel owner is going to be asking you that!

The Net Worth ratio deducts total liabilities from total assets.

See below:

The higher the ratio the better.

That means that total assets are far higher than total liabilities.

Chances of you paying off your total liabilities with your total assets are that much higher.

As a reminder, total assets are those resources that deliver your revenue in the Profit and Loss Statement.

And now on to the second killer ratio.

Balance Sheet - Working Capital

Have you heard of the expression “blissfully unaware”?

No, I am not being rude!

It is about not being aware of something which is likely to be unpleasant.

It is strange that on the one hand you focus on revenue but not the source - asset.

What about a situation when your revenue is decreasing sharply?

Or your profit.

These are all Profit and Loss Statement related.

You will still not know if this decrease is causing other kinds of problems.

Problems that do not show up on a Profit and Loss Statement.

Where do they show up then and what problems, you ask angrily?

In the Balance Sheet (note, I am not the gloating type!).

And the problem could be cash flow related.

The Working Capital Ratio in a balance sheet literally tells you the short term position of cash flow.

See below:

Cash Flow is needed to run the day to day business.

You could continue focusing on revenue and even profit but not know about the cash flow.

Working Capital deducts Current Liabilities from Current Assets.

Do you know what are Current Assets?

Current Assets as those which get used up within a financial year.

You will be familiar with types of Current Assets.

But may not know they are Current Assets.

Like Cash, Accounts Receivables, Inventories.

If Net Worth shows you the long term financial position, Working Capital shows you the short term position.

For an opening hotel:

• with no revenue earned yet,
• working capital is what the Owners approve as cash flow
• to run the pre-opening stages.

Say, you are the general manager of a managed hotel.

Your Hotel Management Agreement will lay out the Working Capital specifically.

You will see a pattern in all the five Balance Sheet Ratios we will be discussing.

That we know about the effect but not the cause (which is more important!).

I will make myself clear going forward in this post.

And now to a ratio which we touched upon peripherally when discussing Net Worth.

Balance Sheet - Fixed Assets Turnover Ratio

In discussing Net Worth earlier, we talked about Total Assets.

We also said that the hotel Profit and Loss Statement can only talk about revenue.

It cannot talk about the assets that produce the revenue.

But It is not enough to stop there.

What if you needed to know what is the potential of the assets to produce revenue?

Aha, we are gaining some ground.

What if we married the Profit and Loss Statement and the Balance Sheet?

Uh What, you sputter in outrage?

Hang on, let me explain.

What I meant is: what if we linked up the revenue to the source, the assets?

Voila!

The Fixed Assets Turnover Ratio does just that!

Turnover refers to revenue in the context of a hotel.

Fixed Assets are the long term assets (the benefit of which extends beyond a financial year).

So, this ratio tells you how many dollars your hotel is earning for every dollar cost of fixed assets owned.

A powerful ratio indeed.

See below:

It literally shows you the productivity of your fixed assets.

See now why it is great to know about the Balance Sheet.

That is not just an accountant’s pitch!

And now, let us extend our discussion of productivity of assets.

Let us learn about the last two ratios in this blog post.

Balance Sheet & Inventory Turnover

We will now turn our attention to two asset categories which are common in any hotel situation.

The first of the two current assets are inventories.

Inventories are familiar to you.

You plan to buy them, buy them, store them and then issue to the operation.

Did you know that you did all that and still have that same blissfully unaware situation all over again.

What, you ask angrily?

How would you know if your inventory management is efficient?

I do confirm here that this is something that most hotel managers might be looking at.

Even without reading a Balance Sheet!

Just with a schedule as part of the monthly profit and loss statement.

However, still that will not provide information on something critical.

Let us first see what this ratio is all about.

The Inventory Turnover Ratio literally tells you how many times your inventories turned over.

That means, how many times sold or consumed in the operation.

It is the productivity measure for inventory management.

See below:

Believe me, you do not want a low inventory turnover ratio.

It requires more storage, is susceptible to loss or pilferage.

And it locks up precious cash flow.

That last one you will not know if you are looking only at the Profit and Loss Statement!

A high price to pay indeed!

And now victoriously on to the last of the productivity ratios.

This is one which is linked to your revenue.

Aha, that earned your attention!

Balance Sheet Accounts Receivable Turnover

You may be throwing the kitchen sink at generating revenue.

But are you ensuring this translates to money in the bank?

This is the last but by no means least of the killer balance sheet ratios.

This is about the efficiency with which your accounts receivables turn over.

In other words, how quickly revenue translates to cash inflow!

Normally, hotels tend to pursue accounts receivables better than many other assets.

More possibly because owners are also switched on about collecting receivables fast.

Accounts Receivable Turnover Ratio compares average accounts receivables with Net Credit Sales.

See below:

Why credit sales?

Basically because cash sales have accomplished the money in bank simultaneously with the sales.

It is only the credit sales, or billed / invoiced revenue that needs to be collected.

When accounts receivables fail to be collected beyond six months, there is danger that they might go bad.

In other words, remain uncollected.

And will need to be written off.

A write off is a loss to the hotel.

And a failure of the collection effort.

Not to mention the revenue cycle remaining incomplete (no money in bank!)

Believe me, you do not want to be the general manager to tell the owner about a debt gone bad! Ouch!

So, there you go!

5 Killer Balance Sheet Ratios hotel managers cannot ignore.

Your Key Takeaways

Over to you.

Do you look at your hotel balance sheet at all?

How do you keep track of the 5 killer balance sheet ratios?

Do you still think focusing on just the Profit and Loss Statement is enough?

What is your plan to begin paying attention the Balance Sheet?

I am keen on knowing your thoughts on this.

Leave your comments below.

Related Chapters of Ultimate Guide on Hotel Balance Sheet Basics

Sign Up for More Tips, Strategies and Secrets

Sign up to the Speed Tips Newsletter for more tips, strategies and secrets straight to your inbox.

Are You on Top of Financial Terms as a Hotel Manager?

Or are you missing the forest for the trees?

What do I mean by that?

As a new (beginner) hotel manager, you are busy (hopefully) with the operation.

Because of that, often, you have not paid attention to an important factor.

You are not quite sure what some financial terms actually mean.

Don’t make that mistake (that many end up making!).

Learning the ropes or basics is critical.

It is the foundation for being a successful hotel manager.

But I have got your back.

In this Ultimate Guide on Hotel Financial Terms, you will learn all that you need to know.

It will make you a business savvy hotel professional.

And a successful one too.

You would want that right.

Let’s jump right in.

This Blog Post will cover

What are Hotel Financial Terms?

Hotel Financial Terms are definitions of important elements of a hotel operation and performance.

They can take the form of:

• Key Performance Indicators [KPIs]
• Financial Ratios
• Calculations
• Analysis

and more.

Let us briefly see what these definitions are with examples.

Definitions

Why Should You Know?

Your first question will be: Why should I know hotel financial terms?

Fair enough.

Let me make a strong case for that.

I will use the example of occupancy of a hotel.

As a hotel manager, you manage the operation.

You deal with occupancies on a daily basis.

This is to increase occupancy every day as much as possible.

You may know that occupied rooms divided by rooms available multiplied by 100 gives Occupancy %.

However, do you know the difference between Paid Occupancy Rate and Total Occupancy Rate?

Why is it important to understand this difference?

Do You Know what are Lean, Standard and Peak Month Occupancies?

Knowing hotel financial terms will allow you to:

• manage your operation and 
• in this case, optimize occupancies more efficiently.

25 Hotel Financial Terms for Beginners Series

Here is a list of 25 Hotel Financial Terms that Beginner Managers Must Know.

1. Occupancy Rate
2. Average Daily Rate
3. RevPAR
4. Market Segments
5. Hotel Room Revenue
6. Market Share
7. Average Length of Stay
8. Guest Repeat Ratio
9. Restaurant Seats Available
10. Food & Beverage Covers Served
11. Average Food & Beverage Check
12. Meal Period Analysis
13. Year on Year Growth
14. Fixed & Variable Expenses
15. Undistributed Operating Expenses
16. Management Fees
17. Gross Operating Profit
18. Depreciation
19. Net Income
20. Balance Sheet
21. Assets - Fixed & Current
22. Liabilities - Long Term & Current
23. Owner Equity
24. Cash Flow Vs Cash Balances
25. Financial Ratios

What You Will Learn?

In each of the 25 chapters, you will learn how to use these hotel financial terms.

You will learn about:

• What is the particular Hotel Financial Term?
• Why Should You Know?
• Where will You find it in the Hotel Financial Statement
• Covid-19 Example and Lessons to learn
• Formula / Calculation for the Hotel Financial Term
• What are Related Hotel Financial Terms
• FAQs on Hotel Financial Terms and Related Concepts

Your Guide to Professional Success

So, there you go.

25 Hotel Financial Terms which will make you a business savvy hotelier.

Click link below for each of the hotel financial terms as chapters of this Ultimate Guide.

Chapters for 25 Hotel Financial Terms

Chapter 1 - Hotel Occupancy Rate

Hotel Occupancy Rate - 25 Hotel Financial Terms

Chapter 2 - Average Daily Rate

Average Daily Rate - 25 Hotel Financial Terms

Chapter 3 - Revenue per Available Room

Revenue per Available Room - 25 Hotel Financial Terms

Chapter 4 - Market Segments

Market Segments - 25 Hotel Financial Terms

Chapter 5 - Hotel Room Revenue

3 Secrets to Highest Room Revenue

Sign Up for Speed Tips - Learn in Minutes!

Want to Learn in Minutes?

Sign Up for Speed Tips - Learn in Minutes Newsletter for tips, strategies, secrets straight to your InBox!

Ultimate Guide on Hotel Financial Terms - Other Chapters

Financial Literacy for Beginners - Ultimate Cookbook?

A cookbook on financial literacy!

Am I out of my mind?

Hmm…not really

Allow me to explain my thought process (however crazy it must sound to you!).

Take a look at some hotel middle manager profiles I have listed below.

Are you one of them?

If yes, you may have found a gold mine in learning!

Learning to be financially literate, I mean.

I will lay out the recipes (pun intended!) in this one of a kind cookbook.

Here is an infographic that represents the Financial Literacy for Beginners Ultimate Cookbook idea.

As you can see, cookbook is a metaphor.

I have used this metaphor considering that food and beverage is a big part of a hotel business model.

And not so out of place after all.

So, What’s the Financial Literacy for Beginners Ultimate Cookbook about, you ask.

All in good time.

Let’s get to it.

This Financial Literacy for Beginners Cookbook will cover:

Financial Literacy for Beginners Cookbook Vision

Well, my philosophy about this cookbook can be stated as follows:

Share focused, individual recipes for every aspect of hospitality finance like:

• hotel financial performance
• hotel financial analysis
• hotel financial statements
• hotel revenue management
• hotel financial decision making
• hotel asset management
• how to build financial skills, knowledge and ability
• restaurant performance

and more…

Are You One of These with < 1 Year Hotel Experience?

Front Office Manager

Food and Beverage Manager

Executive Chef

Revenue Manager

Hotel Owner

Restaurant Owner

Hotel Student

If you have a profile similar to the above and have difficulty in:

• reading hotel financial statements
• analyzing business results
• taking financial decisions

then the Financial Literacy for Beginners Ultimate Cookbook is your friend, philosopher and guide.

Why Financial Literacy?

Why am I focusing on financial literacy?

Well, every hotel middle manager is in need of regular professional development.

More specifically, financial skills based.

For that matter, who does not need it?

Post covid-19, financial literacy has become your own responsibility.

You grow skill sets that way.

Being financially literate is one such critical skill sets.

On the other hand, online learning has grown even bigger.

If you wait for companies to sponsor or conduct training, you will be left behind.

That means being committed to developing your own financial literacy.

You take ownership for becoming financially literate.

I am doing my bit to assist through the Financial Literacy for Beginners Ultimate Cookbook.

I founded Financial Skills Academy PLUS so that you could grow foundational finance skills like:

• Reading Hotel Financial Statements
• Identifying Hotel Key Performance Indicators
• Budgeting for Hotel Financial Performance and
• Managing Hotel Expenses

irrespective of your financial background.

I want you to give every accountant (never mind I am one too!) a run for their money.

I want to enable you to be more financially savvy than the finance fraternity itself.

How about that for a mission!

Want to go on this exciting journey?

OK, let’s get back to some specifics.

What’s unique about our Financial Literacy for Beginners Ultimate Cookbook, you want to know?

Unique Value Proposition for Financial Literacy

Often, learning platforms focus on knowledge only.

They drum a boatload of course information into you.

As if the world challenge currently is more information, not less!

Consider this though.

If you cannot translate financial knowledge to financial skills, is it not a waste of your time and effort?

Say you are not able to utilize your financial skills for problem solving and decision making.

Is that not meaningless for you?

Dale Carnegie once said: Knowledge isn’t power until it’s applied

Financial Literacy for Beginners Ultimate Cookbook is about building financial skills, ability in you.

One recipe at a time.

It is about empowering you.

How?

Through specific recipes that will grow financial skill sets in you.

In other words, make you financially literate.

That will build the all important basics.

Hotel Middle Managers are often found lacking in financial literacy.

I have taken great pains to ensure a few typical hurdles are removed for you.

The Financial Literacy for Beginners Ultimate Cookbook recipes are:

• Jargon free (as in non-technical).
• Example driven & Easy to understand.
• Action based Learning you can apply (to take successful financial decisions)

This is why we pride ourselves as the Complete Financial Learning Ecosystem.

And this cookbook is proof of that!

You get a glimpse of what's in store as well.

Expectations for Financial Literacy for Beginners Cookbook

What can you expect from this cookbook?

I am envisioning this cookbook to be like a Chef’s Recipe Library which you can :

• learn from, through understanding concepts
• utilize simple examples
• refer to as a manual
• look up for strategies and inspiration

If you like the cookbook idea, please share the recipes.

And spread the word to your hotel middle manager and other colleagues.

So that they benefit too.

You can Subscribe to Our Youtube Channel for Financial Literacy Video Recipes too.

My goal is reach an audience of at least 100,000!

I know, I know, I am sounding crazier than before!

However, bear with me.

And yes, do spread the word around.

Thank you in advance, I really appreciate it.

Format of Financial Literacy for Beginners Ultimate Cookbook

You will find the recipes in this cookbook laid out in the form of:

• Crisp Concept Explanations, Examples
• Visual Keynote Slides
• Byte Sized Videos & Shorts
• Colorful Infographics
• Excel file Templates
• Fictional Paradise Hotel / Taste Buds Restaurant companion financial statements

and so on.

It will be my endeavor to keep this cookbook as visual as possible.

How are the Cookbook Recipes organized?

I will keep the recipes simple and easy to digest (pun intended!).

It will broadly lay out as below (extending the metaphor of the recipe):

• Key Ingredient (concept)
• Sauces (example, how to calculate etc.)
• Taste (decision making)
• Nutrition (business results)

Chef’s Take

Every recipe in this cookbook will have a Chef’s Take.

Chef as in me.

What is my claim to fame?

I spent 26 years in the hospitality industry working alongside hotel middle managers.

Financial Literacy is a huge challenge for those managers.

I am here to overcome that challenge on their behalf.

In the Chef's Take section and relevant to that particular recipe, I will share:

• Traps to avoid
• Things to watch out for
• What you should pay attention to
• Owner expectations
• Experiences & Anecdotes in the industry

and so on

I will wear a typical stakeholder hat while providing that take so that you benefit.

Your Contribution to this Cookbook Recipes

This is not a one sided set of recipes I have decided on.

Ideally I look forward to your input on topics you would like me to create recipes on.

Your feedback on the recipes themselves will help greatly in making this cookbook dynamic.

Comment below each cookbook recipe on what you found useful.

Suggest topics for recipes which will benefit your financial literacy skills.

Complete Financial Learning Ecosystem

How can you go beyond these recipes?

What recipe or cookbook upgrades can you access to take your financial literacy to the next level?

Obviously, the cookbook will feature recipes which will give you a great taste of topics.

However, you will want to take your financial, skills and ability to a new level.

Particularly if you aspire to higher positions.

Well, you can enroll in the Financial Skills Academy PLUS (coming soon..).

Sign Up in advance below:

This will be the only complete financial learning ecosystem there is in the market..

You will get access to entire cookbooks themselves (to extend the metaphor).

Click here to learn more.

Financial Skills Academy PLUS follows the same philosophy as this cookbook.

To build financial literacy in hotel middle managers.

And transform you into a business savvy hotelier.

How about that?

Next 5 Recipes Cooked Up One by One

FLBC Recipe 1 - Restaurant Table Turnover Rate Magic

FLBC Recipe 2 - Managing Inventories for a Better Bottom Line

FLBC Recipe 3 - Yield Vs Revenue Management

FLBC Recipe 4 - Profit Flow Through Analysis

FLBC Recipe 5 - Restaurant Buffet Bundling Strategy

Your Feedback on Financial Literacy Ultimate Cookbook

Do you have any questions?

What do you think about the Financial Literacy for Beginners Ultimate Cookbook idea?

Any suggestions for improvement?

What recipes (topics) do you find difficult to understand?

Comment below and I will take a shot at it.

See you soon (very soon!!!) in the first recipe of this cookbook.

Here is a sneak peek at that first recipe:

Financial Literacy for Beginners - Ultimate Cookbook Recipes

Sign Up for More Tips, Strategies and Secrets

Sign up to Speed Tips Newsletter for more tips, strategies and secrets straight to your inbox.