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 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.
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.