A financial method called break-even analysis helps companies analyze their financial status. It helps them figure out how many rooms they must sell to recover their expenses.
Let us discuss how you can perform this methodology for your hotel.
Fixed costs are the permanent expenses that hotels bear regardless of the number of units sold.
These expenses include salary, rent, and many others.
Variable Costs refer to all the expenses that vary according to the number of units sold.
Laundry, meals, and cleaning supplies are some of these expenses.
The contribution Margin refers to the difference between the unit price and the variable cost per unit.
You should know your fixed costs, variable costs, and unit pricing to perform this analysis. A hotelier should try to control the costs of hotel operations to have a balanced break-even point.
Once you have this information, you can figure out where you’ll break even.
There are two types of Break Even Analysis:
It determines how many units of rooms hotels should sell to make a profit.
Break-even Point (units) = Fixed costs / (Unit price – Variable cost per unit)
It determines the minimum amount of income a hotelier must earn in dollars to break even on the hotel financial statement.
Break-even Point in dollars = Fixed expenses(costs)/ Contribution margin per unit.
Let’s take the case of a hotel:
The fixed cost of the hotel is $100,000 per year.
The variable costs of the hotel rooms are $50 per room.
The average room rate is $100.
Break-even point (units) = $100,000 / ($100 – $50) = 2000 rooms
It means that the hotel needs to sell 2,000 rooms to break even.
Break-even point (dollars) = $100,000 / ($100 – $50) = $200,000
Therefore, for the hotel to break even, it has to bring in $200,000 in revenue.
Keep the following points in mind while performing a break-even analysis for the hotel:
Using the historical data for calculating the will help you determine your break-even point more precisely.
Break-even points change from peak to off-peak season. Therefore, consider the changes in the hotel’s demand while performing a break-even analysis.
Your break-even threshold will fluctuate as your expenses and pricing do.
A hotelier can use various financial statements to perform the break-even analysis of their hotel. It helps to assess the success of a hotel business.
Some of these financial statements are:
This document lists all the revenues, costs, and profit or loss for a hotel for a certain period.
Break-even analysis uses the information from the profit and loss statement to determine the point at which a business’s total revenue equals its total cost, resulting in zero profit and loss.
This document displays the inflows and outflows of a hotel’s cash over time.
It also provides valuable insights into the hotel’s financial state to complement break-even analysis.
This document lists all assets, obligations, and equity of the hotel at a specific period.
It is an important financial statement that complements the break-even analysis.
The balance sheet offers insights into a company’s financial position at a specific point in time.
Hotel Break Even Analysis is a powerful technique that helps make informed decisions about pricing, marketing, and personnel.
Hoteliers may raise their chances of success in this competitive hospitality sector by learning their break-even points and margin of safety.
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