Hospitality Financial Management: A Complete Guide

On the surface, hospitality is about people. But creating the best customer experiences on the front end — a memorable meal, a comfortable stay, an on-time flight — requires effective financial management. Indeed, in an industry challenged by low profit margins and fluctuating sales, effective financial management is the linchpin to success for any hospitality business.

However, hospitality financial management is complex. Whether running a large hotel chain, a fledgling restaurant, a world-famous amusement park or a luxury cruise line, hospitality leaders must collect, analyze and report on volumes of financial data in order to make smart decisions, comply with regulatory requirements, optimize revenue and expenses and innovate on customer offerings. And in a dynamic, fast-paced hospitality market, leaders must be able to perform financial management tasks in an efficient, agile, accurate and compliant manner.

Effective financial management that enables continued operations and growth amid disruption has become an existential necessity for today’s hospitality industry. Those companies that have not already done so must evolve beyond manual processes, legacy technology systems and dated thinking to adopt financial management best practices to survive and thrive amid shocks and shifts in both demand and supply. As hospitality companies seek to bounce back from the ravages of the COVID-19 pandemic and better understand and manage the complicated calculus of revenue and costs and capacity and demand, financial management efficacy is more important than ever.

What Is Hospitality Financial Management?

Hospitality financial management involves the appropriate oversight of all the financial aspects of a hospitality business to enable proactive management, informed decision-making and effective customer experiences. On a day-to-day level, financial management for hospitality companies involves the preparation and analysis of financial statements and management reports; creation of business forecasts; development of pricing models and cost control systems; management of working capital; and creation and financing of future growth strategies. Some best practices for hospitality financial management include:

• Preparing and managing annual budgets.
• Regularly analyzing and distributing financial reports.
• Creating pricing strategies based on seasonality or market trends.
• Investing in forecasting and capacity management.
• Implementing financial management tools.
• Providing skills development.
• Performing recurring audits.

Key Takeaways

• Good financial management is critical to the success of companies across industries, and the hospitality industry is no exception.
• Hospitality companies, such as hotels, restaurants, convention centers and airlines, face a number of financial challenges, including thin profit margins, high operating expenses and fluctuating demand.
• Mastering the key principles of financial management, analyzing the right metrics and implementing effective technologies enable the financial insights that hospitality leaders need for informed decision-making.
• Adopting established best practices will help hospitality leaders across sectors, sizes and geographies better manage their companies’ finances.

Hospitality Financial Management Explained

The primary purpose of financial management is to balance incoming revenue and outgoing expenses for profit in the delivery of a product or service. Good financial management that enables profitable growth, as well as compliance with necessary regulations, requires both high-level planning and day-to-day execution.

The hospitality industry faces singular financial management challenges. With fluctuating sales and demand (often dependent on factors outside of a company’s direct control) and thin profit margins, the ability to forecast revenue and control costs is essential to profitability and returns. In addition, those who manage finances for hotels, restaurants, bars, amusement parks and other travel and tourism companies require accurate sales forecasts in order to schedule workers most effectively and make smart food-buying decisions. Failing to plan ahead can result in not only cost overruns, but also poor customer experience. Other large ongoing operating expenses and one-time expenses — a restaurant’s lease, a hotel chain’s property taxes, the purchase and maintenance of cruise ships and airplanes — are also major factors in hospitality financial management.

Hospitality is a people-focused industry, but delivering winning experiences depends on effective management of top and bottom lines. The best-run hospitality companies are constantly working in a financial management capacity to increase revenue and profits and drive down costs with the aim of delighting customers and growing the business. They invest in the kinds of processes, technologies and skills detailed below to provide the insight necessary to make better decisions, anticipate and respond to trends and cycles and deliver the kinds of experiences that hospitality customers expect.

Key Sectors in Hospitality

The hospitality industry is made up of a variety of companies, each with its own financial management goals and challenges — from hotels and homestay providers, to bars and restaurants, to casinos and amusement parks. They may be small to midsized businesses or giant international brands. Four major sectors make up the hospitality industry.

• Hotels and Lodging

  Hotels and other lodging companies all provide a place for customers to rest their heads, whether at a roadside motel or a five-star property. With respect to financial management, these companies must often manage complex contractual arrangements — franchising and management agreements, equipment leases, services contracts with customers, to name a few. They face challenges associated with revenue recognition, as hotels can only recognize revenue once a customer actually stays at a property, not when they book their reservation. Hotel and lodging companies also have significant investments in assets, which can impact their cost structures and break-even points. Then there are labor and food costs, which add to the financial management challenges. Some key financial management metrics in this sector are average daily rate (the average rental revenue per occupied room during a given period); occupancy rate (the percentage of rooms occupied during a given period); revenue per available room, or RevPAR (the amount of revenue generated by one room, whether booked or not); and gross operating profit per available room, or GOPPAR (the amount of gross operating profit generated by each available room).

• Food and Beverage

  This category includes restaurants, bars, catering companies and other food service businesses. These companies run the gamut from single restaurants to quick-service chains, Michelin-starred establishments to food trucks. Food and beverage service companies face similar financial management challenges to hotels in managing food and labor — their top two expenses. And those costs are rising. According to a 2023 National Restaurant Association survey, 92% of food service operators say the cost of food is a significant issue for their establishments. Some key financial metrics to help these companies run profitably are cost of goods sold, or COGS (the cost required to make each item on a menu); labor cost percentage (percentage of revenue that goes toward paying employees); prime cost (the sum of COGS and labor costs); and break-even point (how many units a business must sell to earn back what it has invested). Unlike hotel owners and operators, who often go to business school specifically to study hospitality, eight in 10 restaurant owners start their careers in entry-level positions, according to the National Restaurant Association, and may lack formal financial management training, adding to the challenge.

• Travel and Tourism

  This segment includes companies that operate modes of transportation involved in travel, such as airlines, trains and cruise ships. These hospitality companies share aspects of both hotels — cruise ships, for example, sell rooms to passengers — and food and beverage companies because these travel companies also serve meals, drinks and snacks to their customers. However, they also have to consider the purchase or leasing of their multimillion-dollar assets (jets, ocean liners, trains), the ongoing maintenance of these assets, the cost and impact of fuel and significant regulatory requirements in their financial models.

• Events and Recreation

  The hospitality industry also encompasses those who manage events and recreational facilities, from concert arenas and convention facilities to amusements parks and country clubs. This sector is expected to grow at a compound annual growth rate of 11.2%, reaching $1,552.9 billion by 2028. As with the hotel and food and beverage sectors, labor and food costs can be a primary concern for events and recreation businesses. Revenue in this category can come from a variety of sources, from tickets for admission, to food and drink, to merchandise and sponsorships. Events and recreation companies typically focus on maximizing revenue per guest or visit.

Key Principles in Hospitality Financial Management

Conrad Hilton, considered one of the founders of the modern hospitality industry, built a name for himself — and ultimately an international business — by buying struggling hotels and turning them into profit engines. The key was a new approach to forecasting and cost control. He and his managers studied their records and crunched the numbers to predict occupancy rates and schedule employees and purchases accordingly. Their aim was to improve cash flow and guest experience at the same time.

While technology has evolved in the decades since, the fundamentals of good hospitality financial management remain largely unchanged. Success, profitability and growth are built upon a foundation of effective revenue management, cost control, cash flow management, budgeting and forecasting and financial reporting.

1. Revenue Management

   The ability to sell the right product to the right customer at the right price is critical to success. This is especially true for hospitality companies, which can experience big swings in demand. Revenue management is the practice of analyzing data to predict demand and adjust pricing or other terms of sale to maximize revenue from a business’s inventory or capacity, whether those are hotel rooms, tables at a restaurant or seats at a ball game. There are three key factors in revenue management:

   • Pricing: One way to manage revenue is with an effective pricing strategy. Hospitality companies can approach this in a number of ways. Some may take an open pricing approach, whereby they can dynamically change prices based on demand or available capacity. Some may use seasonal pricing or segment pricing based on customer segment or length of stay. Other pricing approaches may involve setting prices in reaction to competitors or determining prices far in advance based on forecasted demand.
   • Forecasting: The ability to forecast demand is essential to revenue management. Using historical transactional data, customer insight and external data, hospitality companies seek to predict demand in order to determine pricing and other strategies to maximize revenue.
   • Inventory control: Another way to manage revenue is to hold back some supply. Instead of making every hotel room, dinner reservation, cruise ship cabin or concert ticket available for purchase, companies can retain some inventory for later to accommodate larger bookings — for example, a corporate event or a wedding.

2. Cost Control

   On the other side of the profitability equation from revenue is expense. And in the hospitality industry, costs can have an outsized impact on profitability. Managing spending effectively across the following three categories is a key aspect of revenue management for the hospitality industry.

   • Labor: Hospitality is all about people. Thus, labor is one of the top expenses for most hospitality firms. Managing labor costs effectively and using forecasting to help with scheduling is critical to financial management and profitability.
   • Food and beverage: When you’re taking care of folks, whether in a hotel, at a restaurant or convention or on an airplane, food is a significant cost. What’s more, it often has a limited shelf life. Careful management of spending vis à vis forecasted demand is essential to minimizing costs and waste.
   • Operating expenses: There are a variety of other expenses related to the day-to-day operation of a hospitality business, from energy costs to laundry, that companies must manage closely.

3. Cash Flow Management

   A solid understanding of cash flow is essential for any viable business, and hospitality companies are no different. At a basic level, cash flow refers to the money going into and out of a business. Positive cash flow — more money coming in than going out — is a healthy indicator. It gives hospitality companies the ability to run their companies smoothly day to day, including paying suppliers, employees and service providers. Positive cash flow also provides some cushion for tough times, as well as the ability to grow the business. Hospitality companies may have separate cash flow statements for different parts of the business, so having a holistic view into cash flow across the organization is critical. The best-run firms can access daily, weekly and projected cash flow for better decision-making.

4. Budgeting and Forecasting

   Budgeting and forecasting are integral to effective financial management in the hospitality industry. A budget lays out how much money a hotel and restaurant expects to earn and spend over a given period. A forecast uses historical, transactional and external market and industry data to project whether target budgets will be achievable in a given period of time. Most hospitality companies perform quarterly forecasts, but leading businesses have begun to adopt rolling forecasts to keep up with more frequent changes. A convention center, for example, may perform a monthly sales forecast and find that fewer trade shows are likely to be booked than the company had budgeted for. The forecast can, in turn, be used to inform shifts in sales and marketing to achieve the company’s target revenue for the period.

5. Financial Reporting

   Hospitality companies communicate the results of financial management through regular financial reporting. This may be done for internal purposes, external purposes or both. There are three fundamental financial statements that most businesses produce: the income statement (also known as a profit-and-loss statement), which presents operating results for a given period; the balance sheet (also known as a statement of financial conditions), which illustrates the company’s assets, liabilities and equity; and the cash flow statement, which presents cash flow from operations, investments and financing activities. Within the hospitality industry, specific segments may produce other tailored forms of financial reporting for management purposes.

Risk and Return in the Hospitality Industry

The financial management of hospitality companies comes with unique risks, which arise from a range of internal and external factors. To best manage and mitigate these concerns, hospitality companies must understand these factors, anticipate them and develop effective management strategies to address them. Importantly, many of these risk factors can also present inversely as rewards depending upon the circumstances. The key categories of risk and return that concern most companies operating in the hospitality industry include:

• Seasonality

  Many sectors of the hospitality industry experience cyclical demand with high and low seasons of activity. High-demand seasons bring greater revenue and, with the right financial management, increased profit. However, hospitality companies must also manage their cash flows effectively in order to ride out the leaner periods. Budgeting and forecasting play a key role in managing seasonality in the industry.

• High Operating Leverage

  In the realm of financial management, operating leverage is the ratio of a hospitality firm’s fixed costs (for example, rent or mortgage payments, equipment leases, full-time employee salaries, depreciation, insurance) to its variable costs (such as food and beverages, housekeeping supplies, utilities, temporary or hourly wages). Managing operating leverage is critical for hospitality companies to run their businesses profitably even as conditions change.

  Having a larger proportion of fixed costs relative to variable costs, as many in the hospitality industry do, is referred to as high operating leverage. Companies with high operating leverage can be more sensitive to fluctuations in demand — this can work in their favor when revenue is strong because increased inflows can bolster the bottom line. But when revenue is sparse due to slow seasons or downturns, hospitality companies can struggle to meet their fixed costs, which remain the same no matter how many guests are staying in their hotels or cruising on their ships. High operating leverage also means that hospitality firms may take longer to reach break-even points as more sales are required to surpass their total costs.

• Dependence on Economic Conditions

  Businesses in the hospitality industry depend to a great degree on consumers having extra cash in their pockets. When discretionary income goes down, so does consumer spending on vacations, restaurant meals and trips to the casino. Likewise, certain hospitality companies also rely on what can be seen as nonessential business spending for travel and entertainment. When times are tight, business travel budgets are often the first to be cut.

  Thus, the fortunes of hotel, food and beverage, travel and tourism and events and recreation companies are largely tied to economic conditions. In good times, they reap the rewards of greater business and consumer spending, but when economic conditions weaken, the industry suffers. Again, good forecasting can enable hospitality firms to make decisions best aligned with unfolding economic conditions.

• Susceptibility to External Events

  The COVID-19 pandemic is one of the most striking and recent examples of how external events beyond management’s control can negatively impact hospitality industry revenue. What’s more, the ensuing supply chain disruptions wreaked havoc on hospitality companies, which often rely on a complex supplier network for day-to-day operations. In addition to public health concerns, external events that can negatively affect hospitality companies include natural disasters, weather and environmental issues. Conversely, external events can also yield positive financial outcomes for hospitality companies. A good weather season, for example, can lead to more visitors to outdoor venues and entertainment complexes. And an influx of personnel responding to or reporting on a weather event can increase occupancy rates at hotels in the affected area.

• Currency Exchange Rate Risks

  For multinational hospitality companies, financial management can get complicated on a number of fronts. In the risk-and-reward category, currency and exchange rate fluctuations may impact costs, revenue, pricing strategy and financial stability — for better or for worse. Hospitality firms operating across borders must be skilled in managing and mitigating currency exchange rate risks. Manually converting foreign currency transactions within spreadsheets can be a time-consuming and potentially error-laden process. Hospitality companies can minimize risk and increase efficiency by investing in financial management software to automate the process of currency conversion and reporting. Such technology can update and consolidate currency exchange rate data in real time, recording any associated gains and losses automatically.

• High Staff Turnover

  As mentioned earlier, labor is a major cost for hospitality companies — one that becomes inherently more expensive when dealing with high turnover rates, as firms in service industries often do. As many in hospitality have experienced, labor shortages, as well as resulting wage inflation, impact not only the services that these companies are able to provide to customers, but also their bottom lines. In fact, more than half of the hotel CFOs recently surveyed by EY said labor shortages are the challenge causing the most strain on their organizations’ net operating income, with some adjusting amenities and outsourcing more often to try to reduce costs. Nearly all survey participants also said they plan to increase staff pay.

Of course, not all turnover is bad. Firing underperforming employees and replacing them with more skilled, engaged workers is a net win for any hospitality firm. But high levels of voluntary employee turnover result in significant costs, which some studies suggest may amount to as much as one-half to two times a worker’s salary.

• Commodity Price Risk

  For hotels, restaurants, travel providers and event operators, commodity prices can have direct and indirect effects on income statements. The cost of crude oil will impact an airline’s costs. If the price of wheat skyrockets, so might the price of goods offered at a neighborhood café. But the cost to deliver a hotel room or a restaurant menu item can also be indirectly affected by energy prices. When the cost of crude oil goes up, for example, so do the costs of many of the supplies necessary to run a hotel or restaurant. The inverse is also true, as hospitality companies may see lower prices from their suppliers when commodity prices fall.

• Technology and Innovation Risks

  Technology and innovation can be game changers for hospitality firms, helping them streamline operations, offer better customer experiences, expand their markets and grow their revenue. However, there are inherent challenges when investing in technology and innovation, including significant upfront costs, change management issues and potential lack of adoption. Without due diligence and effective planning, technology and innovation initiatives can cost hospitality companies dearly and fail to deliver expected benefits. For example, insufficient training or resistance to technology or process change can lead to system misuse or limited adoption, thereby reducing or potentially eliminating anticipated benefits and returns on what can be a multimillion dollar investment.

• Regulatory Risks

  Those operating in hospitality sectors are subject to a host of regulations around health and safety standards, employment law, alcohol licensing and more. And as more companies embrace digitalization, they must also comply with laws regarding data governance, privacy and security. Of course, all of this gets more complicated for global companies, which must comply with the regulations of multiple jurisdictions. Then there are finance-specific regulations, regarding everything from recurring revenue and recognition of revenue to lease accounting standards and financial consolidation. There’s no real upside to regulatory challenges other than the ability to continue normal operations by maintaining compliance. Failure to do so can lead to fines, legal issues and reputational damage. Investing in enterprise resource planning (ERP) and accounting systems designed to handle the complexities of compliance is recommended.

• Reputational Risks

  Any of the risks described above can have an impact on a brand’s or company’s reputation. And when it comes to an industry where people and businesses spend their discretionary dollars, image matters. Beyond the major issues described above, even a negative review can do damage to hospitality companies in the digital age, when bad news travels faster and further than ever. Responding to and recovering from reputational hits can have negative financial implications. Naturally, the opposite can also be true. Reputation-building events — a James Beard award for a restaurant or positive coverage of an airline’s environmental efforts — can have a positive impact on sales and revenues.

Financial Statement Analysis in the Hospitality Industry

Understanding and analyzing financial statements is an essential skill in the hospitality space. Literacy in the key elements of the three principal types of financial statements — income statement, balance sheet and statement of cash flow — empowers leaders and managers to assess the health of the business and make better decisions about how to optimize financial resources. Financial statements produced by hospitality companies involve nuances that are important to understand in order to best manage hospitality businesses. These include:

• Revenue Recognition

  In the hospitality industry, there is some complexity to revenue recognition, as accounting regulations state that a company can recognize revenue only after it is actually earned. That means, for example, that a motel may not recognize revenue when a reservation is made, but instead when the guest stays in the room. It may be tempting for a convention center to recognize revenue from booking a 5,000-person event when the big sale is made, but that would violate accounting principles. Hospitality leaders should understand that revenue in a given period’s financial report reflects only sales that have been fully realized, say, with a completed guest stay or a paid restaurant check.

• Seasonality

  As mentioned earlier, hospitality is a seasonal industry. Thus, a weak quarter doesn’t necessarily portend a bad year. Recognizing this can prevent panic when assessing financial statements during a period known for lower revenue.

• Operating Metrics

  Many of the primary operating metrics and key performance indictors (KPIs) for hospitality companies are industry- or segment-specific. A full grasp of these terms is necessary when reading and analyzing a company’s financial statements. Simple revenue or cost numbers do not give a full picture of financial health. For hotels and lodging companies, revenue per available room (RevPAR), average daily rate and occupancy rate are common parlance. If you’re in the restaurant industry, you’ll want to keep an eye on RevPASH (revenue per available seat hour, calculated by dividing revenue by available seats multiplied by opening hours), table turn rates (calculated by dividing number of parties served during a period by the total number of tables) and average spend per head (the amount of revenue earned per customer). In the airline sector, all eyes are on RASM (revenue per available seat mile, calculated by dividing total passenger revenue by total available seat miles) and load factor (the percentage of available seats filled by passengers). Special attention is paid to return on assets (ROA), or the per-dollar profits earned on planes.

• High Fixed Costs

  Many companies in the hospitality industry have significant fixed costs. Hotels, resorts, restaurants and event spaces have to make large financial outlays related to real estate, furnishings and equipment — sometimes through complex financing or lease arrangements, particularly in comparison with the lower level of operating inventories required. Recognizing that these companies often have both high fixed costs and high operating leverage — having a larger proportion of fixed costs relative to variable costs — is helpful when assessing their financial statements. Companies with greater fixed costs can be more sensitive to demand shifts and may take longer to break even.

• Depreciation

  Some of the fixed costs, such as property and equipment, described above can offer tax benefits in the form of depreciation, a way to smooth out the financial impact of these major purchases by writing off their costs over the course of their useful lives. Depreciation reflects the natural wear and tear on property and assets, and hospitality companies can claim depreciation as a tax deduction over a specified period of time. The cost of commercial property, for example, is expensed over a designated recovery period, per the U.S. Internal Revenue Service tax code.

  Depreciation is also reported on financial statements, though handled a bit differently. So-called book depreciation is recorded in a company’s general ledger and shown as an expense on a company’s income statement each reporting period as a non-cash expense with no direct impact on cash flow. Depreciation during a specified period thus reduces the income reported on the profit-and-loss statement. Accumulated depreciation also reduces an asset’s value on the company’s balance sheet. There are multiple accounting methods for depreciation, and hospitality companies will draw up a depreciation schedule for each of their assets — say, the commercial ovens purchased by a new restaurant. The schedule will include a monthly timetable of depreciation expense along with rolling net asset value, purchase date, acquisition price and depreciation method.

• Labor Costs

  Labor costs are one of the biggest expenses for any hospitality company, and one of the more complex to report on, given the number and types of employees these services businesses employ — many part-time or seasonal. As noted earlier, labor shortages and rising costs can have a large impact on net income, so it’s important for hospitality firms to include all labor costs and payroll numbers in monthly financial statements, budgets and forecasts.

• Non-operating Items

  Non-operating income is the portion of a hospitality company’s income that does not come from core business operations. This might include gains (or losses) from the sale of property or foreign currency exchange, as examples. Separating non-operating income from a hospitality company’s bread-and-butter earnings gives its leaders and managers a better picture of how effectively and efficiently the company turns a profit with its core business.

• Franchise and Management Contracts

  Accounting issues around franchise and management contracts come into play for larger hotel and restaurant chains. Franchise agreements are contracts involving the use of a brand, system and operating procedures of an established business by franchisees. Management contracts, on the other hand, are agreements between a hotel or property owner and a management company hired to run the day-to-day operations. In a franchise agreement, franchisees own the business, which they operate under the franchisor’s brand and system. In a management contract, the manager is responsible for a property’s performance but does not own it.

  The deals have different impacts on revenue, costs and liabilities. With franchise contracts, franchisors earn revenue through franchise fees paid by the franchisee, with an ongoing percentage of the franchisee’s revenue as royalties. Franchisors may cover costs like marketing, training and operations support. In terms of liabilities, franchisors must ensure that their franchisees keep up brand standards and quality, but operational guidelines can minimize legal liabilities for the franchisor.

  In a management contract, the management company earns fixed management fees (often a percentage of gross revenue) and sometimes performance-based incentives. The management company is also responsible for managing operating and marketing costs, though the latter may be shared with the property owner. The management company may incur financial liability if performance targets are not met. And, although the property owner maintains control of the business, it can be impacted by liabilities resulting from the management company.

Financial Benchmarking in Hospitality

Hospitality leaders track many of the same financial KPIs as businesses in other industries — net and gross profit margins, operating cash flow, working capital — to assess the financial and operational strength of their businesses. However, there are hospitality-specific metrics that provide greater insight into revenue, costs, profitability, liquidity and efficiency to guide strategy and day-to-day decision-making.

• Revenue Benchmarks

  The following are key revenue benchmarks in the hospitality industry:

  • Revenue per available room (RevPAR): This metric illustrates a hotel’s revenue per room, regardless of occupancy status. RevPAR enables hotel leaders to assess their revenue-generating performance and helps them price their rooms optimally.
  • Average daily rate (ADR): This average rate per occupied room reflects the value travelers put on a night’s stay and thus is another key indicator of financial performance for hoteliers.
  • Total revenue per available room (TRevPAR): This benchmark is more inclusive than RevPAR, including both room and non-room revenue, such as food and beverage sales. Hotel leaders look to TRevPAR as an overall gauge of their business’s revenue-generating ability.
  • Revenue per available seat hour (RevPASH): This is a restauranteur’s version of RevPAR; it indicates the revenue generated for each seat in an establishment per hour. Tracking RevPASH enables a restaurant to maximize sales as well as improve efficiency and service.
  • Average covers: Restauranters track this metric — the average number of customers served per day or per service (for example, breakfast, lunch, dinner) — to understand demand patterns for better staffing and inventory planning.
  • Revenue per available seat mile (RASM): Airlines calculate this by dividing operating revenue by seat miles (number of miles a plane is scheduled to fly multiplied by number of available seats on the plane). Generally, a higher RASM suggests greater profitability.

• Cost Benchmarks

  The following are key cost benchmarks in the hospitality industry:

  • Cost per occupied room (CPOR): Calculated by dividing the total operating costs (for example, housekeeping, maintenance, utilities) by the number of occupied hotel rooms during a given time period, CPOR helps finance teams manage profitability and enables operational teams to measure and control expenses.
  • Food cost percentage: Along with labor, food costs are one of the top two expenses for restaurants so understanding food costs as a percentage of revenue is an important metric. If a menu item is sold for $30 and costs $10 to make, the food cost percentage would be 30%. This metric helps restaurant owners assess the cost-effectiveness of menu items and optimize pricing strategy.
  • Labor cost percentage: Hospitality is largely people serving people, so optimizing labor expenses is key. Hotel and restaurant companies aim to keep their labor costs as a percentage of sales below a certain industry-standard threshold. Monitoring labor cost percentage also illustrates how much revenue a company must make to cover labor expenses.
  • Cost per available seat mile (CASM): Airlines measure cost efficiency by looking at the expense laid out to fly one aircraft seat for one mile. CASM is the operating cost of the airline (operating expenses, maintenance costs, administration and overhead) divided by available seat miles. Typically, a lower CASM suggests greater efficiency and profitability.

• Profitability Benchmarks

  The following are key profitability benchmarks in the hospitality industry:

  • Gross operating profit per available room (GOPPAR): Calculated by subtracting operating expenses from gross revenue to get gross operating profit and then dividing that result by total number of rooms available, this metric offers a picture of revenue vis à vis the costs incurred to generate them.
  • Net operating income (NOI): Similar to the EBIT metric (earnings before interest and taxes) used by many public companies, NOI is a pre-tax calculation that excludes principal and interest payments on loans, capital expenditures, amortization and depreciation to measure a real estate asset’s profitability. Recorded on income and cash flow statements, NOI is calculated by subtracting the necessary operating expenses from all revenue generated.
  • Break-even point: A central financial metric for hospitality companies with significant fixed costs, break-even point indicates the minimum revenue that a company needs to cover its total costs (both fixed and variable). It is usually expressed in units relevant to the sector. Break-even is calculated by taking the total fixed costs divided by the result of subtracting variable costs per unit from the selling price per unit. In a restaurant with fixed costs of $20,000, an average selling price for a meal of $35 and average variable costs for a meal of $15, the break-even point would be 1,000 meals. Knowing the break-even point gives leaders a clear understanding of how much they must sell to make a profit.

• Liquidity Benchmarks

  The following are key liquidity benchmarks in the hospitality industry:

  • Current ratio: This KPI is calculated by dividing current assets by current liabilities. Current assets are things like inventory, as opposed to long-term assets, such as property or equipment. Current liabilities encompass factors like salaries and wages and short-term equipment leases. The current ratio indicates how well the company can meet its short-term liabilities with its short-term assets. This metric is particularly important in hospitality, where companies have significant short-term liabilities and revenue is variable.
  • Quick ratio: The quick ratio is also a short-term liquidity metric, providing a more conservative measure of a company’s ability to convert liquid assets into cash to pay for short-term expenses. It is calculated by dividing quick assets (cash and cash equivalents) by current liabilities. Unlike the current ratio, the quick ratio does not incorporate factors that can’t be quickly liquidated, such as inventory.

• Efficiency Benchmarks

  The following are key efficiency benchmarks in the hospitality industry:

  • Occupancy rate: Hotel occupancy rates provide a high-level view of their ability to fill rooms and can be used to calculate other KPIs. It is simply the ratio of rented/occupied rooms to available rooms over a specific period of time.
  • Turn time: Also known as table turnover, this metric indicates the amount of time a customer spends at a table and helps restaurants understand how efficiently they’re managing seating capacity in order to optimize revenues. Turn time is calculated by dividing the total dining time for all parties by the number of parties served. If a restaurant had 40 parties dine for a combined total time of 60 hours, the turn time is 1.5 hours.
  • Employee efficiency: While not a specific metric, hospitality companies may want to know how productive their employees are. A basic calculation would involve dividing a company’s total revenue for a specific period by the total number of employees. For a specific role, they might calculate the average time taken to complete a task.

Hospitality Financial Management Best Practices

Because of the unique characteristics of the hospitality industry, good financial management is essential to meeting both short-term challenges and long-term goals. There are several best practices that can help hospitality companies across sectors, sizes and geographies better manage their finances.

1. Prepare a budget and manage it properly.

   Creating a realistic budget is an essential first step to effective financial management. Having employees participate in the development of the budget can be helpful in getting them more engaged in financial management, which should be a big part of every manager’s role. Equally important as creating the budget is managing it over time. As described, hospitality is a dynamic sector, and static budgets will go only so far.

2. Know what pricing strategy works for what time of year.

   Seasonality is both a challenge and an opportunity for hospitality companies. A solid pricing strategy is the core of any company’s financial management, but hospitality companies in particular need to invest time and effort to determine what pricing strategies work best when.

3. Regularly analyze financial reports.

   The best way to keep tabs on how the business is doing is to regularly review financial reports. Understanding and analyzing key financial statements — the income statement, balance sheet and statement of cash flow — enables leaders and managers to monitor financial health and make better decisions about how to optimize financial resources as circumstances change.

4. Invest in forecasting and capacity management.

   Together, forecasting and capacity management enable those in the hospitality field to better balance supply and demand in a fluctuating market. Forecasting refers to the analysis of past transactions and emerging trends to predict demand. Capacity management is the process by which companies ensure that they have the resources — people, equipment, space — to meet that demand. Investing in the tools and processes to perform effective forecasting and capacity management allows hospitality companies to optimize their revenue-producing resources, using the best pricing strategies, to increase profitability. It also ensures that hospitality companies can provide a good experience for their customers, avoiding issues like overbooking or poor service.

5. Use segmentation to your advantage.

   Incorporating segmentation into financial management enables hospitality companies to make informed decisions, streamline operations and allocate resources strategically, resulting in improved profitability and sustainable financial growth. For example, by segmenting customers based on their spending habits, preferences and behaviors, hospitality companies can tailor pricing strategies and packages to maximize revenue and identify which services or amenities are most valued by specific customer groups. Segmentation also allows for more granular financial reporting. Hospitality companies can analyze financial performance across different customer segments, enabling them to make data-driven decisions on pricing adjustments, marketing strategies and resource allocations.

6. Adopt the right technology.

   There is a tremendous amount of data involved in hospitality financial management, so making sure those volumes of data are clean, accurate, secure and up-to-date is critical to effective analysis and insight. Investing in good data management processes and tools and implementing leading financial management software can streamline the work of financial management. The right enterprise technology can also serve as a platform for sharing financial insight throughout the organization.

7. Train staff in financial management.

   Of course, those in finance and accounting will be well-versed in the principles and practices of sound financial management, but there is a benefit to upskilling others in the organization. Those charged with financial management should receive regular training in new technologies and processes as they become available. Others in the business — line managers, front-line workers, operations leads — can also be trained in financial management so that they understand the impact they have on the financial health of the company.

8. Implement a robust revenue management system.

   Replacing legacy financial systems with a modern revenue management system will offer returns on many levels for hospitality companies. Revenue management software helps those in the hospitality industry to sell the right product or service to the right customer at the right price, considering variables like demand trends, channels and capacity to maximize profitability. A revenue management system can analyze historical and market data to create demand forecasts, use predictive analytics to recommend prices based on customer segment or product type and even empower dynamic, real-time pricing.

Make Your Guests Happier With Better Business Management Software

The low margins, fluctuating demand and high operating costs of the hospitality industry make effective financial management essential to profitability and growth. Companies in this sector, including restaurants, airlines and hotels, need the ability to collect and analyze large volumes of financial data to develop accurate forecasts, create effective pricing strategies, meet compliance requirements, manage labor and food costs, understand their cash flow and manage their capacity in a way that minimizes risk and maximizes revenue.

Many businesses in the hospitality industry have a collection of point solutions — point-of-sale systems, HR software, inventory management tools, financial systems — that they’ve put in place over time. These systems, however, may prevent them from creating a full, accurate and timely picture of their financials. NetSuite’s single suite of business management software for hospitality companies can provide an integrated foundation for better financial management. NetSuite’s solution includes finance and accounting, procurement, restaurant inventory, fixed-asset management, franchise management and guest service and marketing. Such a business management platform, designed specifically for the needs of the hospitality industry, eliminates many manual processes, streamlines reporting and increases transparency for important KPIs. In addition, it can be a springboard for profitable growth, offering analytics to help build better pricing strategies, control labor and food costs, forecast demand, explore new delivery models, enter new markets and improve the customer experience.

The financial management of hospitality businesses is not for the faint of heart. The challenges can be daunting — from low margins and high labor costs, to seasonal demand shifts and economic swings, to massive capital and operating expenses and regulatory risks. But with sufficient investment in skills, technology and processes designed specifically for the financial particulars of this sector, hospitality leaders can weather the ups and downs inherent in the industry and make better day-to-day and long-term decisions to drive greater profitability and growth.

Hospitality Financial Management FAQs

What is financial management in the hospitality industry?

At a high level, the purpose of financial management in the hospitality industry is the same as in any other well-run business: to manage revenue and expenses in a way that promotes profitability. Financial management includes revenue management, cost control, cash flow management, budgeting and forecasting and financial reporting.

What financial management challenges are unique to the hospitality industry?

While the basics of financial management are the same for almost any business, those operating in the hospitality industry face some unique challenges. Great fluctuation in sales and demand (often resulting from external events or factors), seasonality, small profit margins, significant labor and food costs and hefty capital and fixed operating costs are some of the most common ones. Those who manage finances for hotels, restaurants, bars, amusement parks and other hospitality firms must be adept at cash flow management, budgeting and forecasting to make good decisions in the service of profitability.

What role does sustainability play in hospitality financial management?

Leaders in the hospitality industry, like many other business executives, seek to embrace more sustainable practices. One way they can accomplish this is by integrating sustainability into financial management — considering the sustainability impact of day-to-day and long-term financial decisions along with other relevant factors.

How can a hospitality business improve its financial performance?

There are a number of ways that companies in the hospitality industry can optimize their financial performance. In the realm of revenue management, they may adopt new pricing strategies, implement inventory controls or improve their financial forecasting ability. They might also develop better cost controls, particularly around labor, food and other major operating expenses. Strong budgeting and cash flow management capabilities also play a role in the financial performance of a hospitality company. Finally, regular financial reporting can give leaders and management the data and insight to make better decisions that improve the company’s financial performance over the long term.

What are the four different types of hospitality management?

The hospitality industry is diverse, including many different types of companies offering a broad range of services to individuals and groups. There are four primary segments within this industry:

1. Hotels and lodging: These companies provide a place for customers to sleep along with many ancillary services, such as meals, spa services, office facilities, recreational activities and more.
2. Food and beverage: This category includes restaurants, bars, caterers, food trucks and others providing food and beverage services, from quick-service restaurants to fine-dining establishments.
3. Travel and tourism management: This sector encompasses travel agencies, tourism boards, tour operators and the like that, sometimes in conjunction with others in hospitality, plan, promote and sell travel packages and other experiences.
4. Events and recreation: Those that manage events and recreational facilities, such as convention halls, performing arts venues and amusement parks, make up this part of the hospitality industry.