Like any business, the success of a hotel is determined by its ability to create sustainable profit. From hotel management companies to property owners and departmental managers, understanding the level of profit obtained is essential to measure whether goals have been achieved, the planning of strategies and identifying the amount of financial resources available.
At the heart of identifying a hotel’s profitability is the profit & loss (P&L) statement. It is what forms the basis of a hotelier’s ability to make informed decisions on the direction their business should take to ensure both short and long-term success. Using a P&L statement crucially also guides businesses on what improvements need to be made to prevent financial losses.
With much at stake, understanding exactly what a P&L statement is, when to use it and how to leverage its data should be treated with the utmost priority by any hospitality industry-based business. Only by achieving a firm grasp of its various data fields and implications can hotels work to safeguard and grow their bottom line.
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What is a hotel P&L statement?
Although as essential to running a lodging industry business as ensuring sufficient inventory levels, many professionals can become perplexed over what a hotel P&L report is. Essentially, a P&L statement provides a detailed analysis of the performance of a property’s various revenue streams and outgoing expenses at a set point in time.
By subtracting the amount of expenses from a property’s incoming revenue, P&L statements are able to demonstrate operating profit. Yet much more than simply providing the sum of a property’s financial profitability, P&L reports offer you a crucial opportunity to understand your hotel and its various strengths and weaknesses.
From the portfolio level to individual properties and departments, P&L statements are routinely used to evaluate whether revenue goals have been met, exceeded or have underperformed. Such financial statements are also utilized to determine if expenses are outweighing incoming revenue and as a result, whether such costs are eating into business profit margins.
This ability to compare and contrast revenues versus expenses is what should form the core of informed decision-making. It is what allows hoteliers to determine if a previously decided course needs to be re-evaluated, for example, as a result of a reduction in demand for a service offering. Alternatively, it also reveals if an increase in demand requires additional investment.
Without an accurate P&L statement to rely on, the identifying and resolution of problem areas or acting on opportunities devolves into a risky attempt at guesswork, with hoteliers exposing themselves to drastic swings in profitability and guest satisfaction rates.
What is included in a P&L statement?
Regardless of hotel type or size, P&L statements follow the Uniform System of Accounts for the Lodging Industry (USALI). This provides a standardized financial accounting process and offers hoteliers a greater sense of familiarity in understanding what metrics are included.
Broken down into several fields, the first section deals with where a hotel’s revenue is coming from:
Operating profit
Usually itemized into individual sources of revenue, operating profit certainly includes details on guestroom reservations. Depending on the hotel, other revenue streams recorded under operating profit can include results from F&B, spa services, events and catering, as well as amenity rentals.
Operating expenses
With offering any service comes an operating expense to ensure its availability. Examples include purchasing F&B inventory, housekeeping or maintenance supplies labor utilization and utility fees. These costs can either increase or decrease depending on fluctuations in demand for a particular service offering.
Undistributed expenses
Also known as overhead costs, undistributed expenses are necessary for the daily running of a hotel business but are not directly linked to a revenue source as is the case with operating expenses. These frequently include items such as anything required for general administration as well as IT and telephony systems.
Fixed expenses
Unlike the other two categories, fixed expenses remain constant and represent a predictable set of costs that a hotel must routinely address. Examples include taxes, insurance and routine maintenance.
How to read a hotel P&L statement
Using this consolidated financial representation of business performance and expenses, hotel operability can be much more seamlessly managed according to the level of income that remains at disposal.
GOP
With financial accounting fully depicting both hotel profit and losses, hoteliers can next subtract their operating and undistributed expenses from revenue to arrive at their gross operating profit (GOP). Using GOP, operators can importantly demonstrate how successfully they are managing a hotel, department or portfolio of properties.
GOP is what is used to measure the success of business strategies, service and promotional offerings as well as how effectively a hotel is managing revenue sources in light of any outgoing expenses. This is the essential analytic that is widely used to determine if a change of course is required.
With GOP, hoteliers can determine if additional resources need to be diverted to a specific department or offering as a result of an increase in guest demand, preventing inventory levels from dwindling to a point to where service expectations cannot be met. This can not only translate into reduced satisfaction but also leads to lost opportunities to maximize revenue.
On the other hand, identifying a property’s GOP is also vital to preventing revenue from being spent unnecessarily. With GOP, accounts for the lodging business sector can reveal a decline in popularity for a particular offering such as an F&B menu item. By proactively identifying this lapse in demand, financial resources can be redirected to areas that will increase revenue.
NOI
At the end of a revenue and cost analysis comes net operating income (NOI). This analytic is created by deducting fixed as well as operating and undistributed expenses. Using NOI, hoteliers can determine the true financial performance of their property.
By including all business earnings and deductions, NOI crucially allows hoteliers to assess what income is available to further fund business operations, how much they can spend on marketing efforts, what remains to invest in new services and finally, what at the end of the day can be marked as a property’s profit margin.
Wrap-up
The complexity of a hotel business will ultimately play the deciding factor over the frequency that a profit and loss statement should be generated. Typically, hotel P&L reports are created on a monthly, quarterly or yearly basis. For busier properties or for those that simply desire greater insight, weekly or daily reports are certainly not unheard of within the lodging industry.
A good rule of thumb for those who remain uncertain over how often a revenue and cost assessment should be performed is to at least generate a monthly P&L report. Anything that extends beyond one month risks missing opportunities or warning signs that will result in decreased profits or even lead a business into the red.
Hotel P&L statement examples
P&L reports typically come in the form of a spreadsheet that lists a hotel business’ various income flows and expenses by segmenting data according to the previously discussed categories. To provide a visual representation, a profit loss template often looks something like the below-simplified example:
A loss statement template will usually appear in a format not too dissimilar from the beneath illustration:
By generating such reports on a routine basis, hoteliers can significantly begin to uncover patterns in performance that will point to how their business strategies should be structured in order to maximize sustainable growth. Just as critical, they can identify any areas that are resulting in a greater expense versus revenue generated to prevent long-term financial losses.
Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at UpStay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.
