Business

Top Finance KPIs Every Hotel Business Must Measure In 2020

Hotel reception

Anyone who manages a hotel, or a chain of hotels, should understand that there are a lot of different moving parts that you need to keep track of if you want to make things a success.

Getting the most out of your business means regularly measuring a range of different essential KPIs – things that will give you the basic picture of how your hotel is performing and what you could do to make improvements.

Remember, you can only analyse your hotel KPIs if you’re tracking the right information in the first place. All the financial details of running your hotel should be meticulously recorded. This means you need to be invoicing your suppliers and contractors properly – read this article for more information on invoice meaning – filing your receipts properly and, most importantly, using hotel management software to help you crunch the numbers.

Average rates

Average daily rate (ADR) and average room rate (ARR) are two of the most basic financial KPIs that all hotels must start with. Quite simply, they tell you how much money your business is actually able to pull off. The ADR is a measurement of the average amount of money that a room in your hotel can earn on any day. It is used to help you understand and calculate some of the other, more complex metrics to make sure you’re keeping track.

ARR is similar, but it can tell you the average income per room over different time periods – for instance, annually or quarterly. These measures are calculated quite simply: total room revenue divided by number of occupied rooms. Any good financial management software that you use for your business should allow you to keep track of this.

Revenue per available room (RevPAR)

Revenue per available room, or RevPAR, is also a crucial KPI. It’s calculated by dividing your total room revenue by the number of rooms that you have available – that includes both occupied and empty rooms. It can be used to help you better understand how well your property is performing in terms of filling rooms at the current average rate.

View of hotel room through door

It’s an important tool that, when combined with data about your RevPAR, can help you with your yield management strategy. Your yield management strategy is how you determine the right pricing for your hotel rooms. It typically means adjusting your rate based on a variety of factors that affect demand, such as seasonal fluctuations or events in the local area. If you’re measuring your ADR and RevPAR correctly, though, you can go one step further by looking at which rates have given you maximum revenue in the past.

Total revenue per available room (TrevPAR)

Despite being very similar to RevPAR, the total revenue per available room metric (TrevPAR) is actually a different KPI, worthy of its own spot on the list. While RevPAR is specifically focussed on revenue from the rooms themselves, TrevPAR also factors in your other money-making activities. This could mean anything from the bar and restaurant to parking charges.

The difference between your RevPAR and TrevPAR KPIs can help you to understand how much money your making from those additional activities, and whether it might be time to bring in more additional services.

Gross operating profit per available room (GOPPAR)

Aside from considering the revenue that’s brought in from your rooms, you also need to be thinking about the costs associated with running them. A lot of resource can go into keeping your hotel at a standard that guests enjoy, and all of that costs money.

hotel bar lounge with big lights an illumination in 50s style

Your revenue management team need to be regularly reviewing the gross operating profit per available room (GOPPAR) because it shows you the bottom line: how much money is your hotel actually making once costs have been factored into the equation? And is this number growing?

Calculate it by taking the hotel’s gross operating profit and dividing it by the number of available rooms.

Annual run rate (ARR)

Calculating your run rate allows you to take data for a short period of time – a month or quarter, for instance – and turning it into an annual figure. It’s calculated very simply, by taking the revenue over a certain period of time and multiplying it by the number of that period in one year. So your profits from one month can be multiplied by twelve to get the annual run rate.

It’s particularly helpful for new companies that don’t have a lot of data to work with, or if you’ve become newly profitable. It’s also useful if you’ve recently made substantial changes to the running of your hotel and can no longer trust your previous years’ figures.

Consider it as an internal metric that can help you set goals for your team and determine how much to spend on future customer acquisition. However, be cautious because your annual run rate is a very rough calculation. It doesn’t account for things like seasonal fluctuations – particularly significant in the hospitality industry – or one-time sales.

Occupancy rate

Occupancy rate allows you to analyse how much of your available space is actually being used, and it’s a crucial part of your revenue management strategy. The number of occupied rooms divided by the total number of available rooms gives you your occupancy rate, which should be expressed as a percentage.

Breakfast in bed, cozy hotel room

A higher occupancy rate indicates that you are using your space more efficiently. However, you’ll need to combine it with data about your average daily rate (ADR) to see the full picture. That’s because hotels that cut their rates dramatically in order to secure 100% occupancy may find that they’re making less money than if they had reached a slightly lower occupancy rate at a higher price.

Average rate index

Aside from understanding your own financial performance, you’ll also need to know how it compares to that of your competitors. The average rate index is used to understand how you rank against other, similar hotels, and can be a great tool to help you understand if your undercharging or failing to make the most of different opportunities.

You can get your average rate index by taking your average daily rate and dividing it by the consolidated market daily rate. Then, multiply the number by 100. This will give you an index figure – a number out of 100 that shows you how close you’re coming to reaching the market average. An index of 80, for instance, would show you that you’re reaching 80% of the rate that your competitors are getting.

Man with suitcase walking through hotel lobby

These are not the only financial KPIs that hotel chains should use, but they’re a great set to start with, giving you a strong overview of your own performance and hot it ranks against others in the industry. Don’t forget to consider other types of KPI, too – measuring customer satisfaction, for example, is just as important as understanding how much profit you’re making.

Take some time to reflect on your current business practices and consider whether you could improve things by measuring your KPIs more effectively. If you’re not tracking the different metrics in this list already, then there is lots of technology and further guidance out there, making it easier than ever to get started.

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