Ultimate Guide on Hotel Financial Ratios

What if I told you that 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 You Must Know About

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 Financial Ratios?
• What are the types of Financial Ratios?
• What is the ideal Financial Ratio?

and more.

Why Should You Care about Financial Ratios?

So, what is the big deal about financial ratios?

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.

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?

So, 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 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

In other words, the formula is:

Rooms Occupied / Rooms Available x 100 = Occupancy %.

This occupancy % is a 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 Financial Ratios?

We have now understood how 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 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.

In comparison, 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 individual 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?
• CHAPTER 2 of 12 -Liquidity Ratios Intro - Acid Test Ratio
• 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.

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

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

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…

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