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The hotel industry is a highly competitive market, and it’s vital for hotels to keep their variable costs low in order to remain profitable. Variable costs are those expenses that change with the number of occupied rooms. In this article, we will discuss what variable costs are, how they are calculated, and how they can be managed to increase profitability.
Definition of variable costs
First, let’s define what variable costs are. Variable costs are expenses that vary directly with the number of occupied rooms in a hotel. These costs are typically associated with the hotel’s operations, such as food, beverages, laundry, and housekeeping. In contrast, fixed costs are expenses that do not change with the number of occupied rooms, such as rent, salaries, and insurance.
To calculate the variable cost per occupied room, you must first determine your total variable costs for a specific period of time, such as a month. Then, divide the total variable costs by the number of occupied rooms for that same period. This will give you the average variable cost per occupied room.
For example, if your total variable costs for a month are $50,000, and you had 2,000 occupied rooms during that month, your variable cost per occupied room would be $25.
Examples of variable costs in a hotel:
- Food & Beverage
- Energy consumption
- Maintenance and repairs
- Marketing expenses
- Staffing expenses
Importance of managing variable costs
Tracking variable costs is an essential part of managing a hotel’s finances and ensuring profitability. By keeping track of variable costs, hotels can identify areas where they are spending more than expected and take steps to lower those costs. Additionally, by comparing actual costs to budgeted costs, hotels can determine if they are on track to meet their financial goals.
There are several ways to track variable costs in a hotel. One method is to set up a budget for each expense category, such as food and beverages, laundry, and energy consumption. Then, on a regular basis, hotels can compare actual costs to budgeted costs to identify areas where they are overspending. This can also help to identify any areas of potential cost savings.
Another way to track variable costs is to use accounting software, which can help to automatically record and track expenses. This can provide valuable insights into where a hotel’s money is being spent and can help to identify areas where costs can be reduced.
Once variable costs have been tracked, hotels can use the data to make informed decisions about how to reduce expenses. For example, if a hotel notices that it is spending more than expected on energy, it can investigate ways to reduce energy consumption and lower those costs. Additionally, if a hotel is overspending on food and beverage, it can investigate ways to lower food costs or reduce waste.
Ultimately, tracking variable costs is an important aspect of managing a hotel’s finances and ensuring profitability. By keeping track of variable costs, hotels can identify areas where they are spending more than expected, make informed decisions about how to reduce expenses, and stay on track to meet their financial goals.
Strategies for managing variable costs
Managing variable costs is crucial to increase profitability and remain competitive in the hotel industry. One way to manage variable costs is through cost control measures. This can include negotiating better deals with suppliers, reducing waste, and implementing energy-efficient practices. These cost-control measures can lead to significant savings in areas such as food and beverage, laundry, and housekeeping, which are major contributors to a hotel’s variable costs.
Another way to manage variable costs is by implementing a yield management system, which helps the hotel to adjust room rates based on demand, thereby increasing revenue and ultimately reducing the cost per occupied room. Yield management systems use sophisticated algorithms to analyse data such as occupancy levels, booking patterns, and competitors’ rates to determine the optimal room rates. This helps hotels to maximize revenue while keeping variable costs low.
Another key area to optimize is operations, an example is implementing automated systems for tasks such as laundry and housekeeping, which can reduce labour costs. Implementing a property management system (PMS) can also be a good idea. A PMS can improve the efficiency of your hotel’s operations, by automating functions such as bookings, room assignments and billing, this can lead to cost savings in areas such as front desk, housekeeping, and maintenance.
Keeping an eye on your occupancy levels is another way to manage variable costs. By monitoring your occupancy levels, you can ensure that your hotel is fully booked during peak seasons, which will reduce your variable costs per occupied room. Additionally, you can use occupancy data to adjust pricing strategies and optimize your marketing efforts to attract more guests during slow seasons.
Strategies to lower variable costs:
- Purchasing in bulk to save on supplies
- Implementing self-service options to reduce labour costs
- Implementing green initiatives to reduce energy costs
- Utilizing technology to automate tasks and reduce labour costs
- Reviewing contracts with suppliers to negotiate better deals
- Auditing inventory and eliminating unnecessary items
- Implementing preventive maintenance to reduce repair costs
- Reviewing staffing levels and adjusting as needed
The role of hotel management in controlling variable costs
Hotel management plays a critical role in controlling variable costs and ensuring profitability. The management team is responsible for setting the overall strategy and direction for the hotel, and for implementing cost-saving measures to reduce expenses.
One of the most important roles of hotel management is to understand the importance of variable costs and to develop a cost-conscious culture within the hotel. This means making sure that all staff members understand the importance of controlling costs and that they are aware of the hotel’s financial goals.
In addition to setting the overall strategy, management should also be involved in implementing cost-saving measures. This can include things like negotiating better deals with suppliers, reducing waste, and implementing energy-efficient practices. Management should also be involved in implementing systems and processes to track variable costs and to identify areas where costs can be reduced.
Another critical role of hotel management is to involve staff in cost control efforts. By inviting staff to suggest cost-saving ideas and by recognizing and rewarding employees for their contributions, management can create a culture in which staff members are engaged and motivated to help the hotel reduce expenses.
Finally, management should hold regular meetings to review variable costs and identify areas for improvement. This will help the management team stay on top of costs and ensure that the hotel is on track to meet its financial goals.
The hotel management team plays a crucial role in controlling variable costs. By setting the overall strategy, implementing cost-saving measures, involving staff, and holding regular meetings to review costs, management can ensure that the hotel is able to reduce expenses and increase profitability.
In conclusion, variable costs per occupied room are an important metric for hotels to understand and manage. By keeping variable costs low, hotels can increase profitability and remain competitive in the industry. By understanding variable costs and implementing cost control measures, optimizing operations, and monitoring occupancy.