Calculating + Controlling Your Hotel Operating Costs
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With so many operational costs to juggle, staying profitable requires a detailed plan. That's where this guide to calculating and controlling your hotel operating costs comes in handy.
So, should you just worry about “heads in beds” to keep revenue flowing? Not exactly. A hotel operating expenses breakdown below reveals that there’s much more to operations management than this simple principle.
If you’re hoping to better manage your hotel operating budget, the guide below is just what you need. You’ll find a helpful hotel operating expense ratio, actionable strategies for lowering operating costs, and more.
What’s included in hotel operating costs?
Let's dig in to what makes up hotel operating costs. The first step in better managing your hotel's expenses is understanding your current costs. Hotel operating costs can be broken down into two main categories: fixed and variable.
No matter what occupancy the hotel is at, these costs remain in place. Because the hospitality industry is service-focused, employee wages often make up a large chunk of fixed costs. From the concierge to cooks to the housekeeping, there are many staff members on the payroll at all times. This is why labor costs are typically the largest part of average hotel operating expenses.
Other costs that fall into the fixed costs category include:
Rent and property taxes
Employee healthcare premiums
Contracted services (example: security)
Internet, phone, and television
Hotel management software
As you can see, fixed costs are costs that are not directly influenced by occupancy. Fixed costs can (and do) shift over time, but they are generally steady and predictable, making them easier to manage than variable costs.
Now onto variable costs. These costs fluctuate depending on how many guests are staying in the hotel. The higher the occupancy rate, the higher the variable costs and vice versa.
Variable costs include:
Food and beverage
Utilities (water, electricity, etc.)
Third-party travel site commission
Decor and floral arrangements
Linen and laundry operations
While variable expenses can be harder to predict, utilizing a tracking system will help provide insight into these costs. Examine data from your property management system (PMS) to see where inefficiencies lie in terms of operating costs.
For example, if busy seasons are leading to major energy costs, consider implementing smart thermostats, motion-sensor lighting, or campaigns to encourage the reuse of towels. We’ll cover more strategies to save later on. For now, let’s turn our attention to calculating costs.
Calculating and managing hotel operating costs
You no doubt have a lengthy list of items that make up your hotel’s operating costs. Once you’ve added these up, it’s time to get some valuable information: your hotel’s profit and loss statement.
Utilizing a profit + loss statement
Your profit and loss statement allows you to view revenue and expenses line by line. In it is the hotel operating expenses breakdown and much more. Because the statement breaks down costs and revenues by department, you’ll be able to have a detailed view of what’s affecting your bottom line.
Simply put, the profit and loss statement showcases total revenues minus total expenses in each department, leaving you with the total profit. Keeping a detailed profit and loss sheet allows you to pinpoint exactly where improvements can be made.
Calculating costs per room
Knowing the cost of filling a room is foundational in managing hotel operating expenses. The handy Cost per Occupied Room, or CPOR, formula is one way to uncover this number. Understanding CPOR lets you determine whether the operating costs per room are appropriate or straining your hotel operating budget.
To calculate Cost per Occupied Room:
CPOR = Total Rooms Department Costs / Total Rooms Sold
The CPOR takes both fixed and variable costs into account and reveals the profitability of each room.
Calculating costs using RevPar
While knowing the cost per room is essential, it is only one piece of the puzzle. For a look at overall hotel performance, calculating RevPar is useful. Short for revenue per available room, RevPar evaluates a hotel’s ability to fill rooms. RevPar provides more information than occupancy rates alone and can help you make important decisions in regards to pricing.
It starts with the Average Daily Room rate, or ADR: ADR = Room Revenue / Rooms Sold
Once you have this number, you’ll need to calculate the occupancy rate:
OR = Total Rooms Filled / Total Rooms Available
The product of these two values gives you the final RevPar:
RevPar = Average Daily Room Rate x Occupancy Rate
A high ADR doesn’t mean much if the rooms are largely empty. On the other hand, a high occupancy rate with a low ADR signifies a lack of full profit potential. RevPar takes into account both elements to give an accurate picture of the hotel’s performance. It can also provide insights into whether pricing per room should be adjusted, which can offset operational costs.
How to lower your hotel operating cost
From floral arrangements in the hallway to perfectly folded linens in the rooms, details matter. When it comes to managing costs, minor adjustments can compile to make a big impact for your profits. So, to lower your operating costs, consider making the changes below.
Rethink labor spending
Balancing the amount of staff you bring on board with the high and low seasons hotels naturally experience is a common challenge. Having too many employees on payroll will drain your operating budget. Too few, and your guests may feel neglected. In light of this, it’s no wonder that labor often consumes the lion’s share of a hotel operating budget.
The solution? Utilize a flexible staffing platform like Qwick. Qwick allows you to post open shifts on an easy-to-use app or business dashboard, which are then matched with experienced hospitality freelancers. You receive skilled talent, added flexibility, and avoid the costs that a full-time hire requires. From line cooks to dishwashers to banquet servers and more, Qwick can connect you with top talent across more than 20 different hospitality shift types.
When you work with Qwick, you are taking on 1099 contractors rather than employees that require a W2. This means you're not required to pay payroll taxes or benefits. So, if labor costs are negatively impacting your hotel operating expense ratio, consider cutting back on staff and supplementing with skilled freelance staff when high-demand times arrive.
Bring down the energy bill
High electricity costs are another major contributor to soaring operating expenses. According to research from EnergyStar, the average hotel spends $2,196 per room on energy each year. The good news is that there are cost-effective changes hotels can make to address this issue.
For starters, make sure that you have data on energy use in your hotel. Keeping track of average energy usage, peak times, patterns that lead to high energy bills, and more is essential in forming a comprehensive solution.
Implementing new technologies designed to be more energy efficient is the next step. LED light bulbs not only use less than a quarter of the energy that traditional bulbs use, but they also last longer. This means hotel managers will experience a dip in the energy bill and maintenance costs as bulbs need to be replaced less frequently. Installing timers on bathroom lamps and occupancy sensors in rooms are two more strategies that compound to lower costs.
Make the menu work for you
From room service to the in-house restaurant and more, providing guests with high-quality meals elevates their experience. But food and beverage costs can quickly add up. To keep them under control, reevaluate the banquet and restaurant menus to see where changes can be made.
For instance, create meal options on both menus that require the same ingredients to be prepared. This crossover allows you to buy ingredients in bulk and reduce waste as ingredients that don’t get used for banquet meals can be repurposed for restaurant meals (and vice versa). Cutting down the menu size based on item popularity is also a smart step.
Another way to reduce waste is to carefully track what amount of food is used and thrown away on a regular basis. Adding information on reducing waste to your restaurant employee training manual is also a wise idea. With accurate information about how much food is needed, cooks can create the right amount and avoid tossing out perfectly good ingredients. Did someone order an improved food and beverage process? Coming right up!
Negotiate with suppliers
When profits are low, getting creative about saving costs is key to staying afloat. Take some time to evaluate the current contracts your hotel has with suppliers and service providers. Are there certain services that you can cut back on at this time? Or are there companies willing to negotiate a better price for you during this low profitability period?
If you’ve developed relationships with providers over the years, consider reaching out and proposing an agreement update that saves you money but also poses a benefit for the other party. Offering the company an advertising slot at the next conference your hotel hosts or agreeing to refer others in the industry to their services are just two examples of benefits you can propose to the organization. Think creatively about what you can provide to them in exchange for a reduced service rate.
If negotiations lead nowhere, consider other suppliers in the area. You may be able to find more competitive rates elsewhere that will help you lower operating costs.
Bring down your hotel labor expenses with Qwick
Operating costs are something that every hotel manager needs to keep a careful eye on. Knowing what’s contributing to your expenses is the first step. But working to manage costs and increase operational efficiency is just as important. Qwick connects you with skilled hospitality freelancers, so you can staff your business without incurring the extra costs that hiring a full-time employee entails.