Rising hotel operating costs can significantly affect your bottom line. Managing expenses, therefore, is critical in ensuring long-term financial health and improving your hotel’s success. If your property is losing large amounts of money through avoidable expenses, you need to take proactive steps to control costs.
Most successful hotels keep track of operating costs to ensure that expenditure is associated with income generation. Since businesses seek to maximize profits, they need to optimize operating costs to increase revenue. Reducing spending is the most viable solution to boost profitability. However, excessive trimming of expenses can reduce productivity and hurt your hotel's bottom-line in the long run.
Let’s dive into hotel operating expenses and the best strategies to optimize them.
What are hotel operating costs?
Your hotel's financial health relies on cash inflow and outflow. The money you need to keep the lights on and run day-to-day operations is the business operating cost. You can’t calculate profits without knowing the costs associated with generating your income. Therefore, operating costs are a significant part of the income statement, which provides a review of financial health indicators.
Operating costs cover expenses needed to keep your hotel running, like lease or rent payment, wages and utility expenses. The costs also include buying supplies and providing hospitality services, often referred to as the cost of goods sold (COGS). When determining your services' pricing strategy, you need to understand the operating costs implication to ensure your revenue can cover all the expenses.
When generating gross revenue numbers, you should deduct operating costs from the income. Apart from the COGS, the operating costs include sales, marketing and administrative expenses directly associated with income-generating activities. However, there is a distinction between operating costs and non-operating expenses, and mixing up these costs can lead to misleading reports and misrepresenting your hotel's actual financial health. Non-operating expenses relate to financing costs, such as interest on loans, investment expenses and taxes.
Business owners can make smarter decisions if they have a clear picture of the amount spent on running the hotel. For instance, they can determine costs associated with hiring and whether it is proportional to the income generated. If you want to make better decisions for your hotel, you must understand each operating cost and its implication to your property.
What kinds of operating costs exist in the hotel sector?
The costs of running and maintaining hotels can either be fixed or variable. Let’s look at the implications of these costs to your business.
In hotel operations, fixed costs have little relationship with changes in sales volume or occupancy levels. That means they don’t change significantly whether your hotel is flourishing or struggling to stay afloat. Fixed costs are often confused with static or unchanging expenses. However, they may change after a period, but they have little implication on the day-to-day operations.
Unfortunately, fixed costs cannot reflect your hotel’s productivity because you must continue to pay them regardless of the performance. Some of the fixed costs in hotels include:
- Mortgage, rent or lease expenses
- Taxes and insurance costs associated with property
- Staff salaries
- Fixed utility bills
- Health premiums for employees
- Fixed maintenance charges for equipment and software
You can spread out fixed costs to allow for economies of scale. In the case of many fixed costs, a company can reduce the average cost per unit and increase productivity. Unfortunately, hoteliers do not have that luxury since a majority of their operating costs are variable.
Variable costs fluctuate depending on productivity levels, as they are directly related to business volume and hotel occupancy. When occupancy scales, you will incur additional operating expenses and vice versa. Hoteliers have to make daily decisions to manage the costs and maintain operational efficiency. Some examples of variable costs include:
- Hourly wages: While you can keep salaries fixed, hourly wages for part-time or overtime change workers depend on the demand. You have to match the costs to demand to avoid overstaffing or understaffing.
- Advertising and marketing costs: Your marketing expenses will increase when bookings are high due to commissions. Also, you have to spend more on advertising when your occupancy rate is low to attract customers.
- Food, beverage and housekeeping supplies: When the occupancy is high, you need additional supplies to cater to your guests and vice versa. However, excessive supplies can increase wastage and negatively affect your bottom line.
- Utility costs: While you can find fixed plans for internet and cable, other utilities vary depending on the usage. For instance, HVAC systems depend on the weather, and electrical costs will increase when your occupancy is high and vice versa.
It is important to remember that variable costs can make or break a hotel. If the daily expenses are high, the business will have a hard time breaking even. However, monitoring the variable expenses can maximize productivity and improve financial health.
How to reduce hotel operating costs
Hoteliers rely on high-quality customer services to succeed. However, controlling costs without affecting service provision is a significant challenge. How do you limit operating costs and ensure long-term benefits to the hotel?
1. Utilize training and scheduling to optimize labor costs
Staff salaries and hourly wages account for up to 50% of hotel expenses, depending on the size. This makes it the first target when you are trimming hotel costs. However, if you do not balance demand with labor requirements, you will have unhappy guests and frustrated employees. Proper scheduling can optimize labor costs since you can use the forecast to determine occupancy rates and match demand with staffing needs.
Hoteliers should also train staff to perform various duties. That way, if an employee is on leave, other staff can take on their duties without having to incur extra costs to hire an extra employee. If you keep a solid base and play with scheduling in advance, many events can be covered by the existing hotel staff. Reducing employee turnover can also minimize labor costs. Research shows that a business is likely to spend 33% of an employee’s salary during the recruitment process. Therefore, you should improve the onboarding experience and benefits to reduce turnover.
2. Reduce utility expenses
Keeping your utility costs low goes a long way to reduce expenses and build customer goodwill. First, you need to track energy consumption to discover creative ways to slash costs. Some of the recommendations to reduce utility expenses include:
- Using energy-efficient bulbs and installing occupancy sensors to ensure they turn off when guests leave the room
- Staying on top of maintenance – for example, faulty HVAC increases energy consumption by 15%
- Using solar heaters for pools
3. Rethink your software needs
On-site software can increase overhead costs due to software licences and recurring maintenance fees. These costs will of course depend on the property you have. Plus, most likely you will have to hire someone who is capable of managing this software. Most (if not all) hotels will need a PMS, a channel manager, a revenue manager (whether that be a software or a person), and a POS if your hotel has a restaurant. However, you can reduce your costs by finding software that bundles various functionalities into a single suite.
Fortunately, cloud-based solutions like Mews PMS software can trim your costs significantly by centralizing all the services. The platform eliminates overhead expenses related to managing on-site software and provides seamless synchronization of all hotel operations. You will also enjoy advanced security from cloud-based PMS, unlike a physical server, which unauthorized people can break into and access valuable information.
That being said, to keep up the hotel standards you will still need to hire people in order to keep the property up and running, as software doesn’t yet replace good human resources (at least not yet).
4. Take advantage of automation
Automation is the future (and the present) of the hotel industry. The best part is that it improves efficiency and optimizes costs while ensuring your guests are happy. For instance, you can manage reservations and allow guests to check-in remotely instead of queuing at the front desk. Mews’ property management system also comes in handy in managing housekeeping via a dedicated app. The software will help you to improve efficiency and utilize real-time reporting to schedule staff.
Moreover, automation can reduce administrative tasks and free up time to concentrate on the customer experience. You can also use the software to collect data on guests and provide a personalized experience. With automation data, the collection is seamless and aids in informed decision-making.
5. Limit your marketing costs
Marketing expenses can burden a business, especially if the cost of commissions is high. Hoteliers can keep advertising fees at a minimum by getting commission-free bookings. You can increase direct booking through optimizing your website for search engine traffic, or by paying for search engine or social media ads (which still brings in more revenue than an equivalent OTA booking).
Despite the significance of optimizing costs, you should not reduce them at the expense of your customers. If your customer services are below a guest’s expectations, negative reviews will harm your hotel business.
For this reason, it’s essential for the staff and the General Manager to know and understand how the hotel functions like the back of their hand, so that they can more easily see where there’s room for reducing costs. Without this knowledge, there’s a risk of making decisions that will negatively impact the hotel’s operations.
Therefore, as you contemplate the best strategies, remember to maintain a balance. With a little creativity, you can streamline your hotel operations and improve profits.
Embracing the Metrics that Matter
Operating costs are only one of dozens of important metrics that your property should be tracking. Want to know the rest?
Download The Metrics that Matter, our guide to the new generation of hospitality metrics that will encourage you to think differently about your property and ultimately boost revenues.
Albert Arranz | 19 February 2021
A Barcelona-native with a true passion for hospitality, Albert has experience across hotel management, sales and marketing, revenue, customer service and more. Call him Mr Hospitality.
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