REVENUES: THE

BEGINNING OF FINANCIAL
PERFORMANCE
Key Hotel Ratios That
Measure Financial
Performance
or (KPI) Key Performance
Indicators

REVENUE
(rooms sold x room rates)

PROFIT

EXPENSE

(revenue - expense)

(revenue - profit)

The POS system records all of this information and produces two types of
financial reports. First, it reports financial performance in daily revenue
reports. Second, it provides management with reports that are used as
management tools to operate the business.
When analyzing revenues, it is important to identify where increases or
decreases are coming from and what caused any changes.
Are there increases in the number of guests or increases in the
amount they are
spending/paying? In identifying causes, any of the
following might apply:
Did lower rates or prices produce higher volumes?
Did new competition lower volumes?

REVENUE
(rooms sold x room rates)

PROFIT

EXPENSE

(revenue - expense)

(revenue - profit)

the Rooms Department profit is calculated by adding

Transient, Group, and Contract revenues to identify total room
revenue. Then all direct expenses are deducted from total
revenue to calculate total room profit. The formula is as follows:
Total Room Revenue minus $500,000
Wage Expense
$60,000
Benefit Expense
$21,000
Other Operating Expenses $44,000
Equals Total Room Profit
$375,000

REVENUE
(rooms sold x room rates)

RevPAR is one of the first and most important

measurements used to evaluate financial
performance for hotels because it is an indication
of how well management is able to increase the
average rate and also achieve higher volume and
occupancy to maximize revenue.

ADR
(average daily rate)

DEMAND

RevPAR

(rooms sold)

(revenue per available

room)

SUPPLY

OCC
(rooms occupied / total
rooms)

(rooms available)
If only one of these measurements is
used, it will not be able to determine if a
hotel is maximizing room revenues.

REVENUE
(rooms sold x room rates)

DEMAND
(rooms sold)

SUPPLY
(rooms available)

if a hotel earned $100,000 in a year with 500

rooms occupied, its ADR would be $100,000/500 or
$200. ADR excludes rooms used for "house"
purposes (those occupied by hotel employees) and
usually complimentary rooms, depending on the
hotel.

ADR or ARR
(average daily rate or
average room rate)

OCC

RevPAR
(revenue per available
room)

(rooms occupied / total

rooms)
The ADR is useful to measure a
property's financial performance, as
well as to compare the hotel's
performance to its competitors.

this means the percentage of rooms

that are occupied at a given time

REVENUE
(rooms sold x room rates)

ADR
(average daily rate)

DEMAND

RevPAR

(rooms sold)

(revenue per available

room)

SUPPLY
(rooms available)

OCC
(rooms occupied / total
rooms)

PERFORMANCE: AGAINST
COMPETITIVE SET (COMPSET) HOTELS

benchmarking, market
penetration, pricing, demand,
positioning

What is the meaning / definition of Comp Set?

ACompetitive Set(or Compset) is a group of hotels that are seen as
direct competitors to your own hotel.
Hotels will often compare their performance against compset hotels,
in order to find ways to make their own offering more competitive.
Competitive sets are used for benchmarking purposes, market
penetration analyses and to help develop positioning strategies.
Many hotels uses rate shopping tools to compare their current pricing
with the ones of their competitors in order to make proper pricing
decisions.
What kind of hotels to put in your compset?
A hotel in any given area will not necessarily compete with all the
hotels in that area for the same sources ofdemand. For a hotel
market study, it is necessary to determine which hotels compete with
the subject hotel and to what degree, and it is likewise important to
eliminate those hotels that are not competing for the same demand.
To this end, all the lodging facilities in a market area should be
inspected and analyzed in order to support the selection of the
appropriate competitive

What is the meaning / definition ofARI?

ARI stands for: Average Rate Index
It is a HotelKPIthat measures the performance of theirADR
compared to their comp set during the same period (competitive set:
a group of other hotel brands and competitor that have similar
target marketand concept).
Formula:
ARI = Hotel ADR / Aggregated group of hotel's ADR
Calculation:
$150 / $ 120 = 1.25
(this means that your ADR is 25% better than the average of your
competitive set)
When:
ADR Index = 1.00 The hotel ADR is equal to the average ADR of their
comp set
ADR Index > 1.00 The hotel ADR is more expensive than the average
ADR of their comp set
ADR Index < 1.00 The hotel ADR is less expensive than the average
ADR of their comp set
Depends on theoccupancyrate, the hotel can choose to lower, equal

What is the meaning / definition ofMPI?

MPI stands for: Market Penetration Index
MPI is a calculation to measure your hotelsoccupancycompared to
the average market occupancy levels.

This tool helps the hotel to see its position and performance in
proportion to the competitors and the market in general.
Formula:
MPI = Hotel Occupancy % / Market Occupancy %

What is the meaning / definition ofRGI?

RGI stands for: Revenue Generation Index.
RGI compares your hotel'sRevParto the average RevPar in the
market. It is used to determine whether if a hotel is gaining a fair
share of revenue compared to itscompset.
Formula:
RGI = Your Hotel's REVPAR / Hotel Market REVPAR
When:
RGI = 1 The hotel RevPar is equal to the average RevPar of their
comp set
RGI > 1 The hotel RevPar is higher than the average RevPar of their
comp set
RGI < 1 The hotel RevPar is less than the average RevPar of their
comp set

PRODUCTS & SERVICES:

ROOMS ROOMS ROOMS
and the Market Segments

SINGLE
(rooms available)

TWIN
(occupancy)

DOUBLE

RevPAR

(rooms sold)

(revenue per available

room)

SUITE
(average daily rate)

DELUXE
(rooms revenue)

P&L, A&L, CASH FLOW: The

Three Main Financial Statements
DRR, IRR, ROI, PP

FORECASTING: VOLUME IS
THE KEY TO FORECASTING
Historical Averages, Current
Trends, and Market Condition

1. Historical averages are used to provide a starting point for

forecasting. This can be average rooms sold for each day of the
week for room revenues and average customers per day and meal
period for restaurants.
2. Current trends and market conditions are then applied to these
averages. If a hotel has been busier than usual for the last several
weeks, the revenue forecast prepared will probably be higher than
the historical averages. If a hotel has been slower during the
previous weeks, the historical numbers will be adjusted downward
when weekly forecasts are prepared. In each of these examples,
the operations managers will add or delete 5, 10, 20, or any
other number of rooms from the historical averages to reflect
current demand and market conditions.
3. Often forecasts are prepared for each market segment and then
added together to get the total room revenue forecast. For
example, transient rooms sold are forecasted based on information
from a yield management program, whereas group rooms sold are
forecasted based on group room blocks and the actual pickup of
rooms held in the room block.
4. The last step is determining an average rate to apply to each room
sold or average check to apply to each customer. Historical room
rates and average checks are the starting point, and then
adjustments are made based on any room rate increases or menu
price increases. This process can also be done by market segment

TOURISM RATIOS:
TOURIST ARRIVALS
and the Market Segments