Do you want to start a hotel business? If YES, here are major ongoing expenses you should take note of while running your hotel. Tracking operating expenses is necessary for understanding your hotel’s financial performance, and it positions you to better manage costs in a bid to maximize profit.
Keeping hotel operating expenses under control is very important if you intend to run a successful property. High expenses and wasteful practices deplete profit margins and threaten a property’s financial health and long-term viability. While on the other hand, proper cost management primes your property for profitability and longevity.
In an ideal operation, hotel expenses are more or less aligned with demand so there’s never any waste. Your business would seamlessly balance efficiency with guest experience, always offering the level of service expected by guests without leaving any idle hands or holding excess inventory.
Hotel operating expenses include any costs and expenses associated with maintaining and running your hotel. These expenses can be broken down into two types: fixed costs (costs that remain the same regardless of changes in the volume of goods or services) and variable costs (costs that fluctuate in relation to the volume of goods or services provided).
Running a hotel is definitely not an easy task. Aside from hiring the right staff, and having exceptional organizational skills, you should also try to find a way to reduce your operating costs, in hopes of reaching the best possible return on investment.
While this is the goal of every business person, you need to know where exactly you can cut some costs, without sacrificing the quality of the services you are offering.
What are the Ongoing Operating Expenses of a Hotel Business?
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1. Labor Cost
Labor cost is a major proportion of a hotel’s operating expenses: roughly 50 percent, on average. Labour is indeed a place to begin looking for savings, but solutions tend to require creative thought and careful balancing. Note that you don’t want your staff overscheduled and underutilized, but at the same time, you don’t want to be caught short-staffed with unhappy guests and stressed employees.
Note that the first step in optimizing labor scheduling is to forecast staffing needs and plan accordingly—ideally on a timeline that makes sense with staff scheduling.
After that, consider cross-training employees so staff members can lend a hand in another role when needed. Cross-trained staff can extensively offer coverage during another staff member’s vacation or a staffing emergency (such as a sudden sick day), and they can pitch in during a rush in their secondary function or a lull in their primary function.
Experts note that training staff members in just one additional responsibility are best, as is cross-training staff members in skills they like. A waiter who enjoys his work, for example, may prefer cross-training in another customer-facing position, such as host, more than he would enjoy a groundskeeping role.
Indeed labor might be the highest operating cost of hotels, but according to industry reports, utilities are the fastest-growing. For instance, reducing energy usage has a direct impact on your bottom line. Hotels spend about 6% of operating expenses on utilities, of which 35% goes to lighting. Industry experts suggest you track energy performance with a free and easy benchmarking tool. Or, you can outsource the whole process by looking into energy audits in your state or region.
Note that certain programs provide energy audits for free, with no obligation. Audits may examine lighting, HVAC, insulation, and refrigeration systems, and make recommendations for reducing energy use. Other programs that vary by region provide rebates for purchasing energy-efficient equipment. Low-cost options to consider include:
- Switching to energy efficient light bulbs like compact fluorescent or LED
- Training staff to turn off lights, TVs, and heating or cooling in empty rooms
- Installing timers on bathroom heat lamps
- Installing occupancy sensors for lighting (Turning off fluorescent lights for 12 hours per day extends their calendar life—the time between replacements—by 75 percent, to nearly seven years! Note that compact fluorescent bulbs tend to start paying for themselves after nine months.)
According to the US Department of Energy, clogged HVAC filters can increase energy consumption by 15 percent. Note that maintaining your Hotel and every system is an operating expense that will minimize energy consumption, extend equipment life, and reduce the likelihood of a catastrophic breakdown.
System breakdowns or other maintenance issues are costly to the hotel, inconvenient to guests, and give the hotel the aura of an undesirable, hassle-filled experience. Most successful hotels tend to create and implement a schedule for maintaining their building’s equipment.
For the HVAC system, this might mean scheduling the replacement of filters every one to six months, inspecting fans, bearings, belts, and the area around the air intake every six months, and inspecting for leaks, and cleaning and testing dampers yearly.
Food and Beverages
Note that making F&B more efficient with restaurant and banquet menu options will help manage this operating expense in your hotel. That way, although two groups in two different event spaces might have settled on two different menus, some ingredients and prep work can be shared. You can also leverage your event management system to examine the menu requirements for each day and make prep sheets for cooks so that they don’t over-prepare.
Always pay attention to what your end-of-meal plates say about portion size. You don’t want to send people away dissatisfied, but consider scaling back if food is often left uneaten. For beverages, decide whether you want bartenders to use jiggers or free-pour. Either way, train your staff to the standard and review every so often to ensure they are pouring accurately.
Taxes and Insurance
According to reports, property taxes averaged 3.6 percent of total operating revenue, and insurance costs averaged 0.8 percent. To boost your profit margin, you will have to review your property assessment and your insurance. How does yours stack up? Are both valuing your business and property correctly? If your numbers are unexpectedly high, you may wish to contest your property assessment or investigate more affordable insurance options in your area.
Marketing is regarded as one of the biggest hotel variable expenses, most of which boil down to customer acquisition costs (CAC). Hoteliers strive to get bookings at the lowest possible CAC, which is often tricky. First, you will have to understand your CAC for each channel.
Leveraging OTA channels usually produces higher CAC than direct bookings. Howbeit, direct bookings, though commission-free, are more or less acquired with advertising costs using Google ads, Facebook ads, or metasearch.
Have it in mind that every hotel should diversify its marketing strategy, leveraging both inbound and outbound tactics, and also strategically distribute its inventory on several OTAs and online marketplaces. A well organised mix of OTA listings, metasearch advertising, social media promotions, email campaigns, partnerships with local businesses, etc. makes for a good approach.
Note that to fully optimize your marketing spend, start by installing Facebook Pixel and the proper analytics code (such as Google Analytics) so that you can track performance from clicks to conversions. When properly integrated into your hotel management system, you will have a full view of your efforts – and be able to leverage powerful tactics like remarketing and retargeting campaigns.
If you are using a digital marketing agency for your hotel, be sure to regularly review their engagement reports. It is easy to forget to check performance metrics when someone else is doing it. Operating expenses are those required to keep your hotel running, such as cost of food and beverage, commissions, and utility costs.
These expenses are found within all operating departments, which include rooms, sales & marketing, and property operations, to name a few. However, with sufficient planning and consistent execution, you can reduce your hotel’s operating expenses without sacrificing service. It is a win-win situation where profitability meets a more streamlined operation.