Guide to Successful Financial Planning in Hospitality Industry

Just like any other industry, hospitality businesses need to take care of their finances, and this is inevitably true when the Covid 19 pandemic hits the world.

Hotels, restaurants, and resorts face significant losses, and many of them shut their businesses because of changing customer preferences. People eventually stop going outside.

Till today, many hoteliers ignore their financials, thinking that it'speople's business. Behind the success of any hospitality business, data remains the strong backbone. 

Relying on intuition won't work anymore; you need NUMBERS to grow your hotel business because growth doesn't come by CHANCE—it requires monitoring the key metrics.

In this blog, we'll be talking about key financial metrics that matter for your hotel business, the secret sauce to doing financial planning in the hospitality industry, and the tried-and-tested budgeting strategies you can adopt to deal with market ups and downs.

A Sneak Peek of Financial Metrics in the Hospitality Industry

Financial metrics are the key performance indicators (KPIs) used to assess the performance of a hotel for the specific period.

That's why hoteliers need to focus on these metrics so that they can grow their hospitality business twofold and increase its revenue.

Another reason can be that hotel managers need to plan financially to see where they're spending most of their money. At the same time, they should look for smart ways to allocate their saved funds that make their guests happy.

Let's discuss some of the important key metrics that a hotelier should keep track of:

1. Occupancy Rate

Occupancy rate indicates the number of occupied rooms divided by the number of available rooms in a hotel. 

Here's the simple formula to calculate the occupancy rate for your property:

Occupancy rate = Number of filled rooms/Total no. of rooms available *100

Hoteliers consider this metric to identify the period when the property has more demand, such as during weekends or when sporting events take place.

But if your hotel operates at full occupancy, then it doesn't mean that you get higher profits in the end. Hotel occupancy rate doesn't give a true picture of your overall revenue. It just tells you that your hotel has XYZ rooms filled up.

You can drive higher occupancy through any of these strategies:

• Giving discounted offers such as free meals or discounts on rooms.
• Training your staff well so they SELL the best experiences for your guests.
• Attracting bigger groups of people during the time of Christmas events or any big event that is yet to be scheduled near your hotel.

2. Average Daily Rate (ADR)

ADR metric tells hotel managers about the average price of the room that guests are willing to pay for during a specific period. It doesn't take into account unsold rooms.

Hotel ADR is a Must-have metric to consider for revenue managers as they get insights into their financial performance and see how much room revenue they're making for specific days, months, or even the entire season.

ADR = Total room revenue/Number of rooms sold

3. Revenue per Available Room (RevPAR)

RevPAR indicates the total amount of revenue that a hotel makes from both sold and unsold rooms. 

Higher RevPAR indicates that hoteliers have either increased their room prices or are operating at maximum occupancy, while a lower RevPAR states that your hotel has kept the prices too low.

RevPAR = Total room revenue/Total number of available rooms

4. Gross Operating Profit per Available Room (GOPPAR)

GOPPAR isn't just limited to revenue; rather, it provides a true picture of your hotel's profitability. By assessing this metric, you can understand whether revenue outweighs operating expenses or not, and how profitable your hotel is.

Unlike ADR and RevPAR, which focus on revenue you make from each available room, GOPPAR considers operating expenses on utilities or payroll. It focuses on how much actual profit is left after cutting operational expenses.

A low GOPPAR signifies that your hotel earns a significant amount of revenue but you're not able to turn it into profits because of huge expenses.

Alternatively, GOPPAR can be significantly lower during the off-season or when you incur significant costs such as hiring hotel staff. That's where you know where you're getting revenue from and where it's going.

GOPPAR = Gross operating profit that the hotel generates/Available rooms

Here's what Terry McCartney, the managing director at Belmore Court and Motel, says:

His father opened Belmore Court and Motel in 1990, and he wanted to provide quality accommodation to travelers without counting the overheads of restaurants or bars.

After taking over that business in 1995, he realized he needed to look at financial metrics from a bird's-eye view. At Belmore Court, he grew his business from 30 bedrooms to 60 rooms and a Lodge with a turnover exceeding (£) million. Here's how:

He focused on 3 core metrics:

• Occupancy rate –
• For him, consistent occupancy remains a great challenge. He reached an occupancy of 65%, which went to 82% during peak season. So, understanding your occupancy pattern is super important.
• Average daily rate (ADR)
• - His ADR increased after adding superior and executive rooms in 2009. He wanted to find a sweet spot, meaning high enough to be profitable and low enough to stay competitive.
• RevPAR –
• He primarily focused on this metric as it provides a clear picture of overall performance.

How to Do Financial Planning in the Hospitality Industry?

There are always times when your hotel experiences highs or lows. Sometimes good weather can scale your hospitality business, and a cancelled business meeting or event could lead to a downfall. It then affects the financial performance of a hotel.

That's why it's important for you to proactively manage your finances from DAY 1 because seasonal variations affect your hotel's financial performance.

Here are some best ways of managing your financials in the hospitality industry:

1. Annual Budgeting

One best practice for financial management in the hospitality industry is creating an annual budget.

A budget starts with forecasting revenue and seeing where it’s coming from (ancillary to accommodation).

Historical data, market trends and confirmed bookings also form the foundation of projections. Then, operational expenses are taken care of such as room supplies, breakfast supplies, maintenance and technology costs. Then other administrative costs are also considered such as quality maintenance and future planning.

Once you organize the data in one place, you can plan to manage your hotel business profitably and reach your financial goals. Budgeting tells you where you're spending your money and how much income you earned or spent over a certain period.

Analysis of those figures helps you to forecast for days, weeks, or even months in advance.

For Instance – At Belmore Court, their approach was to create detailed budgets each year, breaking down the revenue stream between Standard rooms, Superior rooms, Executive rooms, and conference facilities.

They found seasonal variations and peaks in summer, but their corporate business helps to balance quieter months.

2. Measure the Actuals Against the Budget

Hotel managers can compare the actual figures against the budget.

They can figure out loopholes if they find any inconsistencies. By tracking figures, they can assess what inconsistencies there are with respect to revenue vs. bookings.

Through reports, they can figure out whether they underspend or overspend.

3. Creating Financial Reports

By creating financial reports, managers can get insights into routine hotel operations and pinpoint red flags, irregularities, or inconsistencies. They can then make decisions as to how to work towards achieving profitability goals.

What Are Some Top Budgeting Strategies That Hotels and Restaurants Adopt?

Budgeting is like a financial blueprint for a hotel that outlines the total revenue earned and expenses incurred over a specific period.

Such figures not only help hoteliers to keep track of money but also help them make strategic decisions as to how they would spend money in the best way to deliver the results and achieve their goals.

Every hotel should create a budget plan to set their revenue targets, reduce their operational cost, and prepare themselves for future contingencies.

Here are a few budgeting strategies hoteliers should adopt for managing finances:

1. Count Historical Data

One way to do financial planning for the hospitality industry is to analyze historical data. When you have access to previous data on expenses, then you can create a new budget keeping those figures in mind.

Let's say you observed in the previous budget that food expenses rose significantly during a specific month of the year; then you can forecast the expected expenses or income before they occur this year.

You can even take a rough estimate from PMS and assess figures related to occupancy for a certain period, and then you can create a future budget.

2. Prepare a Demand Calendar

A demand calendar can be a game changer for revenue managers as it provides information about historical data and seasonal trends (past events) that affect the demand for hotel services.

Before creating a budget, the demand calendar is represented in visual form with the purpose of helping hotel managers create a perfect revenue management strategy.

To create a demand calendar, you need to identify all the events, whether they're positive demand generators or negative demand generators. These events affect hotel pricing strategy.

Using that, hoteliers can create a future demand calendar predicting that upcoming future trends can tell them whether they can expect an insane flow of revenue or low revenue.

You can create a demand calendar through any of the following ways:

• Collect historical metrics such as RevPAR, ADR, and occupancy rate.
• Keep track of peak events or holiday season. This is where the demand for your hotel will rise.
• Invest in revenue management software and forecast future demand. This saves your time and effort.

Thus, you can plan your budget as to how you can increase hotel revenue during the seasons of highs and lows.

3. Track Changes in Hotel Staff Productivity

The next way to do financial management for your hotel is to measure the productivity level of your employees. Study the relationship between the salary they receive and how productive they are.

The only way to calculate the productivity of hotel staff is to calculate their working hours and analyze whether they're satisfied with their current job, whether guests are satisfied with their services, or whether they are satisfied with their current pay.

This data becomes your starting point for creating a future budget. Keep track of current trends that can increase or decrease your hotel demand. 

4. Digital Technology is GOLDMINE

Another budgeting strategy that hotels can adopt is digitizing every hotel operation. The need for digital transformation is rising so that hotels can spend more time enhancing guest experiences, cut costs, and achieve a competitive advantage.

Investing in hotel management software or using different technologies such as IoT, smart rooms, AI chatbots, contactless check-in/checkout, and digital room keys smoothens the workflow and makes hotel staff even more productive.

5. Invest in Your Website

Creating a hotel's website is a game changer as it comes with direct booking capabilities. While OTAs are important, direct bookings offer better margins and allow them to build stronger relationships with guests.

Wrapping Up

No matter whether you're running a small B&B business or operating a larger property, you need to understand key metrics and financial management principles to grow your hotel business exponentially.

But the success of a hotel or resort business lies in more than mere numbers; it's also about the value you add to your guests' lives.