Maximizing Profits By Calculating Your Hotel's Break-Even Point

By James Downey Professor, Program Coordinator MBA Hospitality & Event Management, Lynn University | January 21, 2018

The notion behind break-even analysis or more formally known as cost-volume-profit (CVP) analysis centers around calculating your operations fixed and variable costs. One can catagorize fixed costs as a hotel general manager's enemy and variable costs as a financial friend.

This is so because a salaried employee's pay does not vary typically over one year offering no ability to lower its impact on the bottom line while a wage earners pay can be adjusted up or down depending upon the hours worked

Fixed Costs 

Fixed costs are the hotel manager's nemesis because they do not change in the short run. (under one year) Why are they considered a nemesis? Because they do not change regardless of increases or decreases with actual sales revenue or volume. A primary example of a fixed cost is a manager's salary at any level. Other fixed costs may include insurance, depreciation, rent, property taxes and income taxes, among others.

Variable Costs

Unlike a fixed cost, a variable cost is the hotel manager's friend because it changes in relation to sales revenue or volume. A primary example of a variable cost is cost of sales for the food and beverage department. If food and beverage sales go up, more costs increase proportional to purchase those food and beverage items. Another example is the wage a worker receives. These workers are "on the clock" and can be a taken off the clock at any time. Unlike salaried personnel who earn an amount the entire year whether they work short or long hours, wage earners can save the operation money simply by utilizing them on a need only basis.

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Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.