Hotel Profitability Analysis: A Step by Step Guide
By Jordan Hollander
Last updated November 18, 2022
3 min read
Do you know how profitable your hotel is? Maybe you know your occupancy and RevPAR like the back of your hand, but when was the last time you took a deep dive into your profit and loss statement? Profitability seems like a simple metric to measure, but performing a profitability analysis can be challenging if you aren’t familiar with P&L statements. In addition, you may want to add context by benchmarking your performance against some competitors. This article will give you all the tools you need to read, interpret, and contextualize your P&L so you can truly understand your hotel’s revenues, expenses, and profitability.
P&L Basics: Overview and Key Terms
Let’s start at the beginning: what’s a P&L? A P&L, or profit and loss statement, is a financial statement that outlines your hotel’s revenues and expenses to calculate profits and losses during a given time period. The P&L statement shows your hotel’s net income, also known as “the bottom line,” which is calculated by subtracting all expenses from your total revenue. If net income is positive, then your hotel is turning a profit, If net income is negative, your hotel is incurring a loss. Net income is a good indicator of how well your hotel can sell rooms and manage expenses. Hoteliers often review P&Ls every month, looking at both month-over-month and year-over-year trends.
P&L Terms to Know
Besides looking at your net income over time, a savvy hotelier should measure a couple key performance indicators. These KPIs distribute your income, expenses, and profit across your total available room count so the metrics are more actionable and contextual.
Total revenue per available room (TRevPAR): Total operating revenue (rooms revenue, F&B revenue, etc.) divided by the number of available room nights in a given period.
Labor cost per available room (LPAR): Total labor cost divided by the number of available room nights in a given period. This metric illustrates how labor costs stack up to other costs and how labor costs may vary throughout the year.
Gross operating profit per available room (GOPPAR): Gross operating profit divided by the number of available room nights in a given period. This metric helps you compare profitability across time and across properties in an apples-to-apples manner.
These metrics will help you make sense of variances in your P&L numbers. For example, if you notice net income was higher in April compared to March, you might assume seasonality drove higher rates in April. But, when you add context and calculate GOPPAR, March was a more profitable month because you had 10 rooms out of order for the whole month. So, on a per-room basis, March was more profitable.
Why Analyzing Your P&L is Important
By comparing your revenue, expenses, and profit against your budget, your competitors, and your historical data, you can truly understand your performance. Is your hotel becoming more profitable over time? Are expenses increasing? Do the same seasonal patterns appear every year? Keeping tabs on your own P&L trends, as well as benchmarking to competitors, helps you ensure you’re capturing your fair share of the market.
On-property leaders benefit from P&L analysis because these insights can help them make department-level decisions and initiatives. For instance, if the Director of Housekeeping sees that labor costs are increasing faster than ever, she can make strategic decisions around staffing, training, and technology investment. Hotel owners and investors also rely on the P&L statement to determine how effective their strategies are and to estimate feasibility of future projects or investments.
Example Profitability Analysis
So what does a profitability analysis look like in real life? Let’s look at a simple scenario, comparing Hotel X to Hotel Y. Hotel X is a large full-service hotel, while Hotel Y is a smaller boutique hotel with limited F&B. Hotel X generates far higher operating income than Hotel Y does.
Looking at department-level income, we see that a higher percentage of operating income comes from F&B at Hotel X, compared to Hotel Y. Hotel Y only offers room service and some grab-and-go items, so Hotel Y’s F&B income is lower, but their F&B labor cost is also lower. Hotel X employs more F&B staff, and their labor cost is quite high. In addition, Hotel X has many other F&B-related costs, including supplies, linens, and maintenance in the restaurant space. On a per-room basis, Hotel X incurs higher LPAR than Hotel Y.
To determine which hotel is more profitable, we can compare both hotels’ TRevPAR and LPAR to understand their GOPPAR, which will tell us which hotel is more effective at passing income through as profit.
Hotel X has a TRevPAR of $180 and, after subtracting expenses, a GOPPAR of $65. Hotel X’s profit margin is 36%.
Hotel Y has a lower TRevPAR of $145; after subtracting expenses, Hotel Y yields a GOPPAR of $58. Hotel Y’s profit margin is 40%.
Even though Hotel Y’s operating income is less than that of Hotel X, Hotel X’s high expenses make it a less profitable and less efficient hotel. All else being equal, an investor would consider Hotel Y to be a more attractive investment because it generates a higher profit margin.
The Bottom Line
Whether you’re a hotel owner, manager, or investor, P&L statements and profitability analyses can uncover valuable insights to drive your decisions. Studying your hotel’s profitability can help you find opportunities to increase income, reduce costs, refine your operating strategy, and capture market share from your competitors.