Break Even Point - Analysis of Survival During Tough Times

Would You Know If You Are Losing Money During Low Business Volumes?

By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | April 05, 2015

Business owners are obsessed with revenue generation and profit retention and hospitality stake holders are no exception. A sustained stream of profitability is what these investors like best. And so management has its work cut out. The problem is unless management is clued in on the direction their enterprise is taking, often, they are confronted with nasty surprises. One of the most critical pieces of information for management on their business performance is whether they are "losing money" as the often-ambiguous term goes. But knowing this is easier said than done. Enter the principle of break even.

What is Break Even Point?

If profitability is the holy grail of business performance, then keeping it sustained becomes the paramount goal. However, a key point often overlooked is how you will recognize if you are losing money. Here losing money is used in the context of determining whether you are on path for profits or are likely to suffer losses.

Losses can be roughly called: Revenues minus expenses, when expenses are higher than revenues. How is this related to the break-even concept? Break even broadly measures at what level of business volume in your operation do your revenues equal expenses. Why is this so important?

One of the most fundamental of concepts in performance measurement in general and profitability in particular is determining at what level of the capacity does the operation break even - that is, revenues and expenses are level. This is simply because, the higher the level of capacity an operation breaks even, the less the potential for future profits there is.

Let us use an illustration:

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.