Making Profits in Hotels and Restaurants

13-Jan-2016
Business, Hotels, Restaurants

If making profits in hotels and restaurants was that easy, no-one would have a line on their financial statement that reads ‘profit/loss’!  And there is a section on this site dedicated to maximising profitability in both hotels and restaurants.

There is also an excellent formula that serves as a wake-up call for investors, owners, managers, supervisors and employees whose interest is making profits in hotels or restaurants, or at worst, breaking even!

This formula will allow you to calculate how much you need to sell to make the profit that you need and to get a decent return on your investment. It also allows you to calculate what your break even sales is so that you can benchmark your current sales level against both.

This formula is: Q (P-V) = F + Profit

This little recipe for success is still a recipe for which the most important ingredient is experience. Once you have identify the gap between current and target sales, look at the areas that causes under-performance and develop solutions to fix them.

Here is my explanation for this simple exercise that asks: ‘How many do I have to sell at this price to cover my fixed costs and reach my desired annual profit of £X?’.

This can apply to anything but in my line of work it usually applies to bedrooms or restaurant covers.

Here is the translation of the Qs, Ps, Vs and Fs:

  • Q = How many units, (or quantity) do I have to sell to make the profit I want?
  • P = Price… what is my average sales price for the item to be analysed?
  • V = Variable Costs… what is the Variable cost per item sold?
  • F = Fixed Expenses… what are the annual Fixed Costs that have to be covered anyway regardless of amount sold?

There are four cost areas which need explaining – this is critical information that as an entrepreneur you should have at your fingertips. If you do not have this data ready available, and if it is not part and parcel of your day-to-day review discipline, start to incorporate it immediately to leverage your chances of making profits in hotels and restaurants that you own.

Understanding these costs is critical to be making profits in hotels and restaurants continuously and sustainably.

  • Variable Costs – what are truly variable costs per unit? Is that enough? Could more be variable? What systems are in place to ensure variability? What can reduce the variable costs?
  • Fixed Expenses – what are truly fixed expenses? Should some be more variable? Are too many expenses considered fixed?
  • Price – do you have an open pricing strategy? How do you position price during peak periods?
  • Quantity – how do we get from present volumes to the needed volume to reach our goal? What strategies need to be changed? Are you optimising online and offline distribution opportunities? Do you know your customer segments inside out? What percentage of total revenue is from the sales of secondary/complementary products and services?

If you know where you are going and have a good plan, there is a good chance you will get there. Having all the right data and know-how is very important to making profits in hotels and restaurants.

I have written a simple example below: –

Example:

  • What is the Price? The Average price is, say, £120.
  • What are the Variable Costs? After careful analysis, the answer is say, £27.50
  • What are the Fixed Costs? After a line by line analysis, the answer is say, £3,500,000
  • What profit does the owner expect? The answer is, say, £2,000,000

The formula now looks like this:

Q (£120-£27.50) = £3,500,000 + £2,000,000

Which when extended, looks like this,

Q (£92.50) = £5,500,000

Which means – how many times does £92.50 go into £5.5 million?

The answer is 59,459, which is 163 room nights per day. This means that we need to sell an average of 163 rooms per day in order to make a profit of £2 million. In order to Break-Even (leave the profit out of the equation) you need to sell 104 rooms per day (Q (£92.50) = £3,500,000 = 37,838).

Now the real work starts! For real help making profits in hotels and restaurants contact us at HBD

Would you like to know more?

Download our latest White Paper entitled “Why Return on Hotel Investment Can Significantly Underperform” or contact me, Lucienne Mosquera (Managing Director) for an informal conversation about your Investment.

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