Financial compass for hoteliers: Avoiding mistakes and misunderstandings

Reports and accounting

1. Cash Basis Accounting / Accrual Basis Accounting

- Cash Basis Accounting: An accounting method in which income and expenses are recognized only when money is actually received or paid.

- Accrual Basis Accounting: An accounting method in which income and expenses are recognized at the time of their occurrence, regardless of the actual cash flow.

2. P&L (Profit and Loss) / Cashflow

- P&L: This is a report that shows how much money the company earned and spent over a certain period of time. It includes income, expenses, and net income.

- Formula: revenue minus cost of goods sold and operating expenses equals net profit.

- Cashflow: This is a report that shows the company's cash flow. It includes cash inflows and outflows.

- Formula: The initial cash balance plus cash receipts minus cash disbursements equals the final cash balance.

Assets and liabilities

1. Assets / Liabilities

- Assets: This is everything that belongs to the company and has a value, including cash, equipment, and real estate.

- Liabilities: These are all the company's debts and obligations to third parties, such as loans and debts to suppliers.

2. Equity / Debt

- Equity: This is the company's equity, which is calculated as the difference between assets and liabilities.

- Debt: This is the amount that the company owes to creditors, including loans and bonds.

Income and expenses

1. Revenue / Income

- Revenue: This is the total amount of money received from the company's core business, such as selling goods or services.

- Income: This is the total amount of all receipts, including non-operating income such as interest and dividends.

2. Operating Expenses / Capital Expenditures

- Operating Expenses: These are current expenses for running a business, such as rent, salaries, and utilities.

- Capital Expenditures: These are investments in long-term assets, such as the purchase of equipment or the construction of buildings.

Performance indicators

1. Gross Profit / Net Profit

- Gross Profit: This is the difference between revenue and the cost of goods or services sold.

- Formula: revenue minus the cost of goods sold.

- Net Profit: This is the net profit after deducting all expenses, taxes and interest.

- Formula: gross profit minus operating expenses, taxes and interest.

2. Margin / Markup

- Margin: This is the difference between the selling price and the cost price, expressed as a percentage.

- Formula: (sales price minus cost price) divided by the sales price multiplied by 100%.

- Markup: This is the percentage increase in cost to determine the selling price.

- Formula: (sales price minus cost price) divided by cost price multiplied by 100%.

3. Return on Investment (ROI) / Return on Equity (ROE)

- ROI: This is an indicator of investment efficiency, expressed as a percentage.

- Formula: (net return on investment minus cost of investment) divided by the cost of investment multiplied by 100%.

- ROE: This is an indicator of the company's profitability relative to its equity.

- Formula: net profit divided by equity multiplied by 100%.

Specific to the hotel industry

1. RevPAR (Revenue Per Available Room) / ADR (Average Daily Rate)

- RevPAR: This is the revenue per available number, calculated as the product of the average daily rate and the load factor.

- Formula: total room revenue divided by the total number of available rooms.

- ADR: This is the average daily rate and shows the average price at which rooms are sold.

- Formula: total room revenue divided by the number of occupied rooms.

2. Occupancy Rate / Vacancy Rateunoccupied)

- Occupancy Rate: This is the percentage of occupied rooms from the total number of available ones.

- Formula: number of occupied rooms divided by the total number of available rooms multiplied by 100%.

- Vacancy Rate: This is the percentage of available rooms from the total number of available ones.

- Formula: number of available rooms divided by the total number of available rooms multiplied by 100%.

3. Direct Booking / OTA Bookingonline agencies)

- Direct Booking: This is a reservation made directly through the hotel's website or by phone, without intermediaries.

- OTA Booking: This is a booking made through online travel agencies such as Booking.com or Expedia, which charge a commission.

4. GOP (Gross Operating Profit) / NOI (Net Operating Income)

- GOP: This is gross operating profit, the difference between operating income and expenses.

- Formula: operating income minus operating expenses.

- NOI: This is net operating income, accounting for all operating income and expenses, excluding taxes and interest.

- Formula: gross operating profit minus taxes and interest.

5. F&B Revenue / Room Revenue

- F&B Revenue: This is the income received from the sale of food and beverages in the hotel's restaurants and bars.

- Room Revenue: This is the income received from renting out hotel rooms.

6. Upselling / Cross-selling

- Upselling: This is the sale of more expensive services or upgrades, such as superior rooms.

- Cross-selling: This is the sale of additional services, such as spa treatments or excursions.

7. Seasonal Pricing / Dynamic Pricing

- Seasonal Pricing: This means setting prices based on the season, for example, raising prices during high season.

- Dynamic Pricing: This is a real-time price change based on supply and demand.

Conclusion

In conclusion, understanding and correctly using financial indicators and terms is a key element of successful management in the hotel industry. Knowing the differences between ADR and ARR, RevPAR and TRevPAR, and other important metrics allows hoteliers to make better informed decisions, optimize revenue, and improve the overall financial health of the business. In an environment of high competition and constantly changing market conditions, financial literacy becomes not just an advantage, but a necessity. We hope that this guide will help you navigate the financial landscape with confidence and reach new heights in your business.