Without Hotel Occupancy Rate the business Cannot Survive!

Did you know that the Hotel Occupancy Rate is the valve to the revenue oxygen tank?

Without it there will be no oxygen supply!

In other words, your hotel will not have any revenue.

Am I exaggerating?

Not really.

Let’s find out why not!

25 Fin Terms Beginner Hotel Mgrs Must Know Series

Welcome to the 25 Financial Terms Beginner Hotel Managers Must Know Series.

My name is Lakshmi Narasimhan Soundararajan.

I will be guiding you through this series of videos.

You will be learning concepts using a real life hotel - Paradise Hotel.

Let us jump right in.

This Blog Post will cover

What is Hotel Occupancy Rate?

Hotel Occupancy Rate tells you the number of rooms that are occupied at any point of time.

Or, Occupancy Rate is the Rooms Sold in percentage terms compared to rooms available.

In the hotel industry, Occupancy Rate has different versions like:

• Total Occupancy %
• Paid Occupancy %
• Occupied Rooms
• Sold Rooms

When you say that:

• a hotel’s occupancy rate is 66%,
• you mean that 66% of Rooms Available
• were occupied or sold for that period.

Where Do You Find this in a Financial Statement?

Occupancy Rate is found in the Statistics section of the Paradise Hotel Profit and Loss Statement (see below).

Statistics are found at the bottom of a Hotel Profit and Loss Statement.

The above screenshot is the Statistics section of the Paradise Hotel Profit and Loss Statement.

As you can see Paradise hotel has Total Occupancy as follows:

• 66% in February
• 81% in March
• 93% in April

Notice that occupancy rate can be different in different months.

This is the seasonality factor in the hospitality industry.

It makes the hotel business model a challenging one.

COVID-19 Example

During the covid-19 pandemic, hotels suffered in their occupancy rates.

Even big players like Marriott, Hilton, Hyatt were running single digit occupancy rates at times.

You will see shortly why having a consistently good occupancy rate is key for revenue generation.

And this suffered greatly during the pandemic.

We will be providing covid-19 references throughout this series.

Why Should You Know?

Why is Occupancy Rate critical?

It is key because it determines partly the revenue earning potential of the hotel.

Owners and stakeholders have:

• poured millions of dollars as investment in the hotel project 
• with an objective of earning a reasonable return on investment.

The return on investment will depend primarily on the revenue earning potential of the hotel.

That revenue earning potential is dependent on guest rooms occupied in a hotel at any time.

Occupancy Rate is one of the factors in the market share that a hotel will command in the market.

The higher the occupancy rate, the better the possibility of a greater market share.

Market share is a KPI that determines positioning of the hotel among other things.

Based on the occupancy rate, a month could be categorized as:

• peak,
• lean or
• standard.

See how the Paradise Hotel Occupancy Rates are Lean, Standard or Peak in Feb, Mar & Apr months.

Occupancy Rate is a KPI (Key Performance Indicator) used for measuring other KPIs like:

• customer patronage,
• spending,
• room types sold etc.

This KPI is used to calculate powerful performance indicators like:

• room revenue,
• average daily rate
• revenue per available room etc.

which we will look at in later posts.

You could say that the hotel revenue generation is dependent partly on Occupancy Rate.

Owners and stakeholders often want to know how well the guest room asset is being utilized.

In other words:

• how much revenue is being generated and
• what profit is being retained from the rooms available in a hotel.

Occupancy Rate plays a part and is one of the most important KPIs which we will revisit later on.

In a later post, you will learn the powerful link between: 

• market segments (which represents customers) and
• the room types which are part of the Occupancy Rate in a hotel.

Formula for Financial Term

Let us relook at the Paid Occupancy Rates of Paradise Hotel for the three months.

NOTE: The three months are an extract to highlight Lean, Standard and Peak Months.

• 60% in February - Lean month
• 81% in March - Standard month
• 90% in April - Peak month

Notice first - Total Available Rooms - 4200 in February.

How did we get this number?

It is simply Daily Available Rooms of 150 multiplied by 28 days of February = 4200.

Note the Total Paid Occupied Rooms of 2772 in the month of February.

2772 rooms were sold (occupied) for 28 days in February 2019.

When you divide Total Paid Occupied Rooms by Total Available Rooms, you get the Occupancy Rate.

So, 2772 / 4200 x 100 = 66%.

February month here is considered a Lean Month.

Lean, Standard and Peak month occupancy rates depend upon type of hotel, location, a few other factors.

Note also difference between Total Paid Occupied Rooms and Total Occupied Rooms.

This is apart from rooms which were paid for (Total Paid Occupied Rooms).

Occupancy Rate for a Day

If you want to calculate occupancy rate for a day, the formula is:

Occupancy Rate for a Day = Daily Rooms Occupied / Daily Rooms Available x 100

Related Financial Terms

The following financial terms are closely related to the Hotel Occupancy Rate.

I will discuss these in later posts in this series.

• Rooms Available
• Average Daily Rate
• RevPAR

FAQs

What are KPIs used for in hotels?

KPI is a generic acronym which represents the financial term “Key Performance Indicator.”

KPIs can measure:

• financial performance,
• marketing effectiveness,
• customer satisfaction,
• employee retention,
• payroll costs and

various other performance indicators of a business.

What is the best indicator of hotel success?

1. Occupancy Rate
2. Average Daily Rate (ADR)
3. Revenue per Available Room (RevPAR)
4. Customer Acquisition Cost (CAC)
5. Employee Satisfaction.

How do hotels measure performance?

Occupancy Rate measures the business volume of the hotel.

• This means how many hotel rooms are occupied or sold in that period.

Average daily rate measures average revenue earned from prices charged on occupied rooms

• It measures average revenue earned from each occupied room per day.
• This sheds light on pricing strategies.
• Average Daily Rate is commonly known by the acronym ADR.

Revenue per available room is how hotel utilizes available rooms for revenue generation.

• It combines occupancy rate and ADR to give a comprehensive view of both room sales and revenue.
• Revenue per Available Room is commonly known by the acronym RevPAR.

25 Financial Terms Beginner Hotel Managers Must Know Series

Here is the list of 25 Hotel Financial Terms that Beginner Managers Must Know in this Series.

We will be discussing each of these in blog posts in this series.

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

Want to Learn from a Video on Hotel Occupancy Rate?

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Hotel Occupancy Rate - 25 Financial Terms

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Your Guide to Professional Success

So, there you go.

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

Click below for other hotel financial terms as chapters of this Ultimate Guide.

Chapters for 25 Hotel Financial Terms

Chapter 1 - Hotel Occupancy Rate

This Post.

Chapter 2 - Hotel Average Daily Rate

Coming Soon....

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