Resource CenterRatios, metrics and KPIs, oh my! For anyone in a management level position, you hear these terms often and know your company's numbers by heart. In a hotel, management meetings will include extensive discussions on trends pertaining to ADR, RevPAR and Occupancy. These are top level metrics focused on the rooms department; and, for those companies that dig a little deeper, they look into calculations such as profit conversion, profit contribution, TRevPAR and GOPPAR.
Ratio Calculations
According to the USALI 11th edition “a ratio gives mathematical expression to a relationship between two figures, and it is calculated by dividing one figure by the other”. Simply stated, a ratio puts numbers into context. For example, a hotel may earn $550,000 in rooms revenue. One hotel may view this as a high number, while others see this as a very low number. Without putting the figure into context, such as dividing by the number of available rooms or total hotel revenue, no true comparisons can be made.
There are multiple ways to calculate ratios and the most popular include calculations based on the number of occupied rooms, available rooms and as a percentage of total revenue. It just depends on what numbers you are analyzing and what you want to discover. For example, calculating ratios based on the number of occupied rooms is a good way to measure variable costs. In the operating departments such as Rooms and Food & Beverage, it is best to analyze departmental operating expenses such as guest supplies and cleaning supplies by the number of occupied rooms or number of customers, respectively. This provides the property an insight as to how much their departmental expenses fluctuate based on the volume of business.
Secondly, ratios can be calculated on a fixed variable such as by the number of available rooms, number of seats in the restaurant or number of treatment tables in the spa. True, these numbers can change slightly over time; but, overall, they remain fixed from month to month. Why would you choose to utilize a fixed vs. a variable measurement? These types of calculations are often utilized when analyzing revenues and labor costs. Let's examine the case of TRevPAR (total operating revenue per available room). If you are trying to benchmark your hotel against the competition, you can determine how well your property produces revenue for each room available against your competitive set. More or less, comparing apples to apples.
Finally, you can also calculate ratios as a percentage of revenues. This could be by department or by total hotel revenue. In the case of departmental revenues you can look at what percentage of your departmental revenues are spent on labor costs or departmental operating expenses. More of a snapshot of that individual department. Or, you may want to view the big picture and develop ratios based on total operating revenue.
There isn't a right or wrong way to compute ratios, so each hotel and department must examine their needs and determine the desired output. In addition, for benchmarking purposes, management must determine what figures are readily available for comparison. For example, in the food & beverage department a property may be calculating ratios such as revenue per number of seats, revenue per square foot and revenue per customer. This property is computing multiple ratios while the competitors in their market may only be calculating revenue per number of seats in their establishment. By working with an established third-party benchmarking company, properties can determine what metrics are available in their market and the best ways to benchmark their establishment.
Making Comparisons
In addition to different ways of computing the various metrics, there are also multiple ways to make comparisons, comparisons to prior periods and other properties. At the hotel level, comparisons can be made for budgeted versus actual measurements. Every year, typically starting in late summer and ending months later, departmental managers and financial executives are pooling over projections and creating budgets for the upcoming year. Once these budgets are complete, they are not locked away; but are utilized as a management tool for meeting sales, labor and expense projections. When the budgeted marks are missed; or, more happily, exceeded, these discrepancies can be analyzed.
In addition to budgeted amounts, hotels can also make comparisons based on previous periods which are often the basis for budgeted amounts. Looking at figures on an annual basis generally will not provide the full picture, so it is important to digest the information by various time periods such as by the same month or quarter from the previous year. This comparison will account for fluctuations in high and low seasons for hotels such as winter in Alaska or summer in Houston, when these locations are a less desirable destination.
Comparisons can also be made to other properties or overall industry averages. In order to make accurate comparisons the right properties have to be chosen to benchmark against. When choosing a property to benchmark against, you should consider criteria such as location, size of property and revenue mix when choosing a comp set.
Criteria for Choosing a Competitive Set
- Similar size
- Age
- Location
- Revenue mix
- Chain-segment
- Ownership structure
- Management
- Facilities and services offered
- Amenities offered
- Union vs. Non-Union
- Centralized or Decentralized
By determining the right ratios for their property and finding a comparable competitive set, hotel operators can dig into the data and determine strategies to increase revenues, lower costs; and, ultimately, maximize profits.
