Hotel operating department ratios

Rooms department ratios

The rooms department for most lodging operations is the largest profit center and the most
profitable for the hotel. Given its importance, ratios may effectively be used to measure its
operating performance.

Occupancy

The most common ratio used to measure the guest activity is paid occupancy percentage. This
ratio is calculated by dividing the number of rooms sold by the number of rooms available. The
number used in the numerator is fairly straightforward as only the number of rooms sold is used.
The denominator is more challenging, that is, how is the number of available rooms determined?
An out of order room cannot be sold neither can a room which is being renovated. How should
complimentary rooms be treated in this calculation?

The Uniform System of Accounts for the Lodging Industry (USALI, 1996) recommends the
number of rooms available be determined by subtracting the number of guest rooms removed
from the saleable inventory of guest rooms from the total number of guest rooms in the hotel.

An example to demonstrate the calculation of this ratio is as follows:

Separate paid occupancy percentages may be calculated for various markets, such as transient:
regular, transient group, and permanent guests. In addition, an occupancy percentage should be
determined for complimentary rooms by dividing the number of complimentary rooms by the
rooms available. Using the example above and assuming five rooms were provided to guests on a
complimentary basis, the complimentary occupancy percentage is calculated as follows:

Average room rate

The average room rate (ARR), often referred to as the average daily rate (ADR), is determined as
follows:

RevPAR

Another ratio that focuses on revenue, but also includes occupancy, is revenue per available
room (RevPAR). This ratio reflects the amount of revenue per available guest room. It may be
determined either by dividing net room revenues by the number of available guest rooms or by
simply multiplying paid occupancy % by the ARR. Thus, the significance of the RevPAR ratio is
that it takes account of both room occupancy percentage and average room rate, thereby
providing a more balanced indicator of room sales performance.

Expenses

A number of room ratios should be calculated in relation to expenses of the rooms department.
First and foremost are ratios in regards to labor, since labor costs are generally the largest
expense of a rooms department. Labor ratios include salary expense %, wages expense %, and
employee benefits %. Each expense category should be divided by total net room revenue. In
addition, each operating expense of the rooms department should be compared with total net
room revenue and a ratio, expressed as a percentage, should be calculated. The suggested rooms
department schedule according to the USALI (1996) lists 4 other expenses, such as operating
supplies, commissions, training, and uniforms. For example, the determination of operating
supplies % would be as follows:

Generally, the various occupancy ratios and room revenue ratios are computed as often as daily.
The expense ratios should be determined as frequently as the expense information is avail able.
For many hotels their expense ratios will be calculated monthly.

Finally, these calculated ratios should be compared with a standard. The best standard is the plan
for the period followed by the same ratio calculation for the prior periods.

Food and beverage department ratios

The food and beverage departments of full service lodging properties are often busy departments,
but have relatively low profit margins. Therefore, it is important to measure the activity of these
departments and to control their expenses.
The Uniform System of Accounts for the Lodging Industry (USALI, 1996) treats the food and
beverage operations of full service lodging operations as two separate departments. Many hotel
operators continue to treat them as a single department. Of course, differences will result in some
ratios whether the two departments are treated separately or as one. This discussion will follow
the USALI (1996) and treat them as separate departments.

The food and beverage ratios to be presented include ratios measuring activity, revenue (sales)
and expenses. First, the foodservice seat turnover measures the activity of the food department. It
is calculated as follows:

This ratio should be calculated by meal part, generally breakfast, lunch, and dinner, and also by
day of the week. In general, the greater the seat turnover, the greater the activity.

Financial ratios focusing on revenues include average foodservice and beverage checks. These
ratios are determined by dividing revenue for each area by the number of servings. The ratios,
especially foodservice, should be calculated for each meal period and each day of the week. In
general, the higher the ratio, the better from a revenue perspective, though one must consider the
price elasticity of demand for an operations food and beverage sales.

Cost of goods sold

The next two ratios are cost of goods sold percentages. For a beverage department, the beverage
cost percentage is determined by dividing the cost of beverages sold by the total beverage sales.
Many establishments compute separate percentages for their various beverage offerings, such as
cocktails, beer, and wine. The food cost percentage is determined by dividing the cost of food
sold by total food sales.

Labor

Next, labor cost percentages should be computed for each department. The labor cost
percentages should be calculated separately for salaries, wages, and employee benefits for each
department. These percentages are determined by dividing the expense, such as foodservice
salaries expenses, by total foodservice revenue. The major reason for separating salaries and
wages is due to the amount of control management is able to exercise. Salaries generally are
fixed while wages are variable. Thus, as sales increase the salaries expense percentage will
decrease, while the wages expense percentage should remain constant in regards to sales when
wages are truly a variable expense. It may be desirable to separate employee benefits between
the cost of benefits and the payroll tax expenses. Further, it may be useful to further separate
these expenses on the basis of the amount of control exercised that is these expenses as they
relate to salaries and wages.

Expenses
Finally, all other expenses of the food and beverage departments should be compared
individually with the total revenue of each department. Since the accounting department
normally reports the expense numbers on a monthly basis, all the expense ratios should be
computed monthly. These ratios should be computed as frequently as it is practicable so as to
enhance management control over expenses in the food and beverage departments.