The Importance of Monitoring the Breakeven Point in the Hotel Industry

Are you a hotel professional willing to assess the potential profit of your property? As the hospitality industry has been severely impacted by the consequences of COVID-19 around the world, many hoteliers have been merely looking to breakeven in the best possible scenario until recent times. You probably have been experiencing the situation in which you were wondering what are the Average Daily Rate (ADR) and Occupancy you should be achieving to keep your hotel alive. Through determining the breakeven point, hotel analysts are able to have a better picture of the performance of their properties.

What is Breakeven Point (BEP) Applied to the hotel industry?

Breakeven point can be defined by the point in which the hotel’s total revenues equal to the total operating costs. In other words, it is the situation in which your hotel is operating at neither gain or loss and is making just enough profit to cover the total costs incurred by the property.

In the image found in an article about Breakeven and margin of safety (Links to an external site.) in the hotel industry from the accounting organization Acowtancy, you can identify the breakeven in the point in which the sales line crosses the total cost line:

Image taken from: https://www.acowtancy.com/textbook/acca-pm/cost-volume-profit-analysis/break-even-point-and-margin-of-safety/cbe

Understanding your Property’s Cost Structure to Determine the BEP

Before computing the breakeven point, it is important to understand your hotel’s cost structure. Indeed, the operating costs includes both fixed and variable expenses.

  • Fixed costs: can be defined by the costs that remain the same and that only could change because of inflation effects. These are expenses that are not impacted by the sales volume.
  • Variable costs: can be considered as the costs that varies depending on the occupancy level and facilities and amenities usage at your property.

Below are examples of what could your fixed and variable costs include:

Fixed Costs Variable Costs
·      General and Administrative Expenses

·      Marketing

·      Insurance

·      Property Taxes

·      Wages and Salaries

·      Machineries, Equipment and Software contract fees

·      Advertising fees

·      Interest

·      Utilities

 

·      Room expenses

·      Management fees

·      Food and beverage direct expenses

·      Housekeeping cleaning supplies

·      Guest supplies

·      Office supplies

The Hotel Financial Coach David Lund (Links to an external site.) gives an example of a list of variable expenses of a particular hotel per room with an ADR of $200 below:

Image taken from: https://hotelfinancialcoach.com/hospitality-financial-leadership-fixed-variable-costs-and-room-revenue-management/

Here is an example of a Profit and Loss Statement from the hotel Revenue Management Company Catala (Links to an external site.) in which you can find the list of fixed and variable expenses that are necessary data to find the breakeven point:

Image taken from: https://catalaconsulting.co.uk/how-to-hotel-break-even-analysis/

How to Apply the Breakeven Concept for your Property

As a hotelier, you will mainly apply this concept when wondering how many rooms, what revenues or occupancy level should be achieved to attain the point in which your hotel is able to cover the fixed costs incurred to operate your hotel in addition to the variable costs to maintain the guest rooms.

Here is an example of a breakeven application applied to a hotel case:

Let’s imagine a hotel has 400 guestrooms. The total fixed costs is $2.5 million and the variable costs are 45 dollars per room. The average daily rate is $260. From these data, you are able to determine the breakeven rooms, breakeven revenues and breakeven occupancy.

  • Using the formula as followed, you can find the number of rooms that must be sold in order to breakeven:

Breakeven units (rooms sold) = Total Hotel Fixed Costs/ (Selling Price per Unit – Variable Costs per Unit)

Breakeven rooms= $2.5 million/ (260-45)

= 11,628 rooms

  • Then, you can compute the breakeven revenues by multiplying the breakeven rooms*ADR (Average Daily Rate). These are the minimum revenues that should be achieved in order to cover all the hotel expenses.

Breakeven revenues= 11,628*260                                    =$3,023,280

  • Another crucial measure is the breakeven occupancy which is the occupancy that must be attained to breakeven. In order to obtain the breakeven occupancy, you can divide the breakeven rooms by the total number of rooms available during a year period. Here is how you can find the breakeven occupancy in this particular example:

Breakeven occupancy= Breakeven rooms/ Total Rooms Available

= 11,628/ (400*365)

= 11,628/146,000

= 7.9% occupancy

Now that you understand the notion of breakeven, you will have a better idea about your hotel’s profitability. Whether you are looking to better manage the room rates, reopen a property or develop your hotel business, knowing how to compute the breakeven will be very helpful for efficient revenue management and marketing strategies.