Hotel rooms and costs: The profit is in the details
There is no such thing as getting rich while you are sleeping. Not even in our hotel industry. I will be the first person to agree with that statement. But if you are alert enough, there is a world to be gained. The profit often lies in smart savings. Seemingly small steps that you can easily take. How to do that? Check the costs and clearly keep the multi-year target in mind.
Let us circle back to my first blog. With the purpose of: where would you like to go in the long run? Many hoteliers work with (half) yearly numbers and with that in mind, they look ahead. That will not get you a solid, financial buffer. A vision of the future, with a horizon of three to five years, offers better guarantees. Ideally, hotels achieve an overall profit of 10%. You can work towards that efficiently. The first step: review the costs and see where you can save. If you cannot reach that 10% yet, then your room price is too low.
In order to determine the correct room price, you first have to calculate the correct cost price. With this blog series, we will work through the entire profit and loss account.
We kick off with the moneymaker for each hotel: Rooms Division. A department where it is all about the hotel room and the costs that are attached to it.
Wait. Let me give you a calculation example first in case you are not convinced that the extra result is within reach. Say, you have a hotel with 40 rooms and the yearly occupancy is 60%. That would be a total of 8760 overnight stays. Take a critical look at your linen package, a standard expense item. Is it possible to save € 0.50 per room? That will give you an extra profit of € 4,380. just like that.
Don’t let your money be ‘dormant’ and get to work today!
The department Rooms Division is a department where hoteliers not only book the highest revenue, but also the most profit. So, via this department, you can make big strides towards higher profitability.
Rule of thumb for the hotel business: the department Rooms Division achieves a result of about 70%. The higher the price of the room and the occupancy, the easier it is to achieve this percentage. So, you can strive for a higher result.
The following items fall under the Rooms Division. I will dive deeper into them in this blog:
• Revenue rooms (for some also no show/day use)
• Cost of personnel
• Other costs
With the method that I use to analyze, I look at the number and the price. All revenue and costs are built up from a combination of these two factors. With Rooms Division revenue it concerns the average room price and the occupancy percentage. If we assume a result of 70%, then the personnel costs and the other costs may be 30%.
• For the medium term, it is important that the average price at least keeps up with inflation. This inflation causes suppliers to increase their prices and that collective work agreements are indexed. In order to keep profit on the mark, the average room price must grow with it, at about 2% per year. My tip: look at the average room price of the past ten years. Then calculate to see if you are on the right track on average.
• Next to inflation correction, the starting value of the average room price must also guarantee good profitability. Otherwise, you continue to fall further behind. If you cannot get your profitability up to 70%, while your costs are “in order”, that means you are going to have to increase the price more than the inflation to be able to still work to that 70%.
• The number of available hotel rooms indicates which occupancy you can achieve. That is an important fact for the optimal profit and loss account. A yearly occupancy rate of 60% means that 40% of the space is not rented out. From an economical point of view that is overcapacity, which you probably can utilize in different ways. So, think about how you make money from that capacity. How are you going to make sure, long-term, that you end up at that 80%? Also, consider alternative revenue for those areas. Combine hotel rooms so that you can ask for a higher price or create extra facilities, for instance.
• With a high occupancy that approaches the maximum capacity, the price will already be pushed up. Because there are fewer rooms ‘left over’ and so you can ask a higher price. This is where it is interesting to see how this successful product can grow concerning capacity. Is there space within the building for more rooms by a more efficient division? Are there possibilities for growth outside the building?
Cost of personnel
Personnel costs also consist of two factors. In this case, the number of hours worked times the hourly wage.
• Cleaning the rooms is the largest cost item within housekeeping. The going rate for a cleaned room: starting from 8 Euros per hour.
• Cleaning has a one-to-one relationship with the number of sold rooms. Depending on seasonal influences the hotel needs larger or smaller flexibility from employees. By hiring a cleaning company that you pay per cleaned room, you purchase that flexibility. However, this rate also includes absenteeism and administration. For hotels with a good personnel policy and absenteeism management, it is cheaper to hire employees yourself. You can also pay attention to unnecessary ‘changes’ on Sundays and during holidays. That is because during these days the hourly rate is higher because of surcharges. If you can clean on another day, you will save yourself those extra costs.
• For the deployment of hours in housekeeping you can look critically at what does and does not need to be cleaned on a daily basis. A different cleaning time can be calculated for stayovers and checkout guests. If you hire an external cleaning company, then that also leads to different purchase prices.
Reception, reservations, and concierge
• Depending on the size of the hotel, the costs for reception and reservations will increase accordingly. Continuously turning points are created with minimal occupancy. It is interesting to deal with peaks at the different departments. How can you do that? A receptionist who helps out during the first hour of breakfast or a receptionist who helps out during dinner, for instance. Another option: extend the reception desk into a bar, so that one employee can serve both.
It is also interesting to take a closer look at other (smaller) cost items. Think about TV subscriptions, cleaning supplies, and office supplies. Let me discuss the three main cost items from this category.
• A large cost item is the cost of commissions. Percentages that reach up to 20% of the room price are not unheard of. So, it is important to attract the right mixture of guests and to educate employees well for the direct sale. Make sure that returning guests always book directly with you, against a better price. Make sure that guests who contact you directly, also book immediately. Of course, it is always a good thing to sell rooms last minute via booking sites or during quiet times. However, create a policy with a good mixture!
Cost of linen
• These costs vary from two to four Euros per room sold. Take another critical look at the amount. Is the standard a supply for one or two persons in one room? How often are the linens and the towels changed?
• The price of linen depends on sale or lease, not considering negotiation with suppliers. Do you launder it yourself or is there a linen service that does it for you per assignment? Research the best option for your company. You can possibly increase or save costs with the quality of the linens.
• With guest supplies, it’s all about the quantities. What do you provide standards in the room and what will you supply on demand? The assortment is limitless, and a guest can easily take loose items home with them. For shampoo, there are also large dispensers available, next to the individual packages.
• The luxury of the assortment determines the price. Weigh the costs against the added value of the room. The price of several guest supplies is usually between one and four Euros per room sold.
In this blog, I focused on the department Rooms Division. That is just one segment of your hotel. But it really pays to take small steps and to thoroughly look at each department. I will take you on that journey in the next blogs.
In the meantime, stick a post-it or note on your bulletin board or your fridge. Don’t fixate on the successful numbers of the previous (half) year but remind yourself of the long-term target. And that is: a higher profit margin and a decent financial buffer.
A simple calculation example will show you what it yields.
Of the 100% of revenue, 30% is available for costs. So, the result at the department Rooms Division is 70%. With a room revenue of € 1,000,000 that would be € 700,000. If you manage to make a 1% improvement, that means an extra addition of € 10,000 to the result of the department.
With a normal 10% net profit for the entire hotel (= € 100,000), this 1% improvement on Rooms Division thus delivers a strong improvement of 10% for the total net profit.
Revenue | 1,000,000 | 1,000,000
Department result Rooms Division | 700,000 | 710,000
Net profit | 100,000 | 110,000
Create a work plan
Curious about your own results and opportunities? Take last year’s numbers. Then make a work plan for Rooms Division, where all points are reviewed. Our platform Statler BI provides even more insight into your numbers. And if you have any questions, you can always spar with me of course. Good luck!
Stefan van Heerwaarden
Owner Statler BI
Strategic solutions based on data. That means looking beyond numbers. A sharp analysis leads to the practical management of your hotel. The result? Better profit margins, satisfied owners, motivated personnel, and happy guests.