Learn how to reduce operating expenses and boost profitability in your hospitality business with effective expense management strategies and software solutions.
Hospitality businesses must contend with operating expenses to stay afloat and thrive. These expenses are required to keep hotels, cafes, restaurants, nightclubs, and bars running and are found in all operating departments.
Be aware: tracking your hospitality company's operating expenses is vital to understanding its financial performance and identifying areas for improvement. Since gross operating profit is calculated by subtracting total operating expenses from total operating revenue, minimising those expenses is the clear approach to boosting profit.
So, in this article, we'll discuss operating expenses and how hospitality expense management software can simplify and optimise spending. Let's jump right in!
Understanding Hospitality Operating Expenses
Operating expenses in the hospitality sector typically include monthly staff salaries, utilities (electricity, heating, and water), property taxes, insurance, rent or lease payments, maintenance costs, software subscriptions, and marketing and guest acquisition costs.
Operating costs are essential to running any business in the hospitality industry.
These operating costs also include the costs of supplies and hospitality services, known as the cost of goods sold (COGS). Several factors can affect your operating costs, including your business's location, size, occupancy rate, and season.
Operating costs are either fixed or variable. Fixed operating costs, like rent and taxes, remain unchanged regardless of sales fluctuations. They may change over time but will have a minimal impact on your day-to-day operations.
Variable costs, on the other hand, fluctuate based on your company's productivity levels. For hotels, the occupancy rate decreases and increases directly affect operating expenses. Hourly wages will fluctuate on demand and must be managed to avoid overstaffing or understaffing, for example.
When calculating your gross revenue, it's essential to distinguish your operating costs from non-operating expenses like taxes and loan interests that aren't revenue-generating.
Why Managing Hospitality Business Expenses is Important
A clear understanding of your operating costs will facilitate more informed decision-making. For example, you could compare your hiring costs relative to their generated income or switch to a lower-cost utility provider.
It's especially important to monitor your variable costs. Higher daily expenses could hurt your profits, but with effective management, you should be able to optimise productivity and overall financial health. Adapting to variable costs based on current business volume and demand will contribute to more sustainable operations.
For hoteliers, there are several critical indicators to consider when calculating operating expenses, including:
- Cost per Occupied Room (CPOR): CPOR reveals the average cost for each occupied room in your hotel, allowing you to identify areas to reduce or optimise expenses. A lower CPOR indicates higher profitability. CPOR is calculated by dividing the total operating expenses by the number of occupied rooms.
- Revenue per Available Room (RevPAR): RevPAR helps your accounting team understand how much revenue is generated from available room inventory. Calculating and maximising RevPAR should increase revenue without significantly increasing costs. It's calculated by dividing total room revenue by the total number of available rooms.
- Gross Operating Profit per Available Room (GOPPAR): GOOPPAR considers room sales revenue after deducting operational expenses to indicate your hotel's financial performance. It's calculated by dividing the gross operating profit (GOP) by the amount of available rooms in your hotel (TAR). Remember that GOP represents total revenue without considering the hotel's total operating expenses.
Strategies to Reduce Business Expenses in Hospitality
There are several methods of controlling your operating costs without compromising on services or the number of staff you employ to ensure long-term benefits for your business:
Improve Staff Training
Staff salaries can account for half of your expenses, but simply cutting employees without considering demand will hurt morale and lead to unhappy customers. Instead, consider training staff on multiple duties to cover absent employees and meet higher demand. Reducing turnover with improved onboarding experiences and effective employee expense software can also help retain staff.
Centralise and Simplify Your Software
Software licenses can increase overhead costs and require hiring specialised personnel. Employees can feel overwhelmed between the POS system, PMS, channel manager, and revenue manager. Centralising your software with cloud-based employee and vendor invoice management software will enhance your security and seamlessly synchronise hotel operations.
Automate Time-Consuming Repetitive Tasks
It can be frustrating and time-consuming for your employees to submit stacks of paper receipts for expense reimbursements and for accountants to sift through expense data manually to gauge financial health. Automating these tasks with centralised AI-powered software will give you more accurate results, remove the risk of human error, and free up time to concentrate on improving customer experience.
Summit Expense Management Software for Hospitality Businesses
Summit's Vendor Invoice Management and Employee Expense Management offer solutions to monthly hospitality operating expenses and expense claims in centralised cloud-based software. Summit can integrate into your existing accounting platforms to streamline operations and give your team a clear picture of the company's financial health with instant customisable reports and expense approvals.
If you want to try Summit's expense management software to gain better control of your hospitality business' operating expenses, contact us to talk to one of our representatives. We'll start by scheduling a free demo and are always happy to answer any questions.
