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Room Revenue ($) (in a month): This is the total revenue from selling rooms in a chosen period. We’ve taken a month. Just pull the room revenue number from the previous month. Yes, just room revenue; don’t include F&B, spa, or other revenue.
Rooms Sold (in a month): The number of rooms actually occupied during a period (let’s take the previous month). You need to add the number of rooms occupied on each day of the previous month. For example, let’s say 15 rooms were occupied on day 1, 20 rooms on day 2, and 25 rooms on day 3…, so to calculate rooms sold, you need to add 15 rooms, 20 rooms, 25 rooms and so on…. Got it? Yes, for each day of the previous month.
Variable Costs ($) (in a month): All costs that fluctuate based on the level of hotel operations or activities, like laundry, cleaning supplies, utilities, etc. During high occupancy, variable costs go up, and during low occupancy, variable costs go down. Hence, the name “variable”. Pull this cost for the previous month.
Fixed Costs ($) (in a month): All costs that remain constant or don’t change based on hotel operations or occupancy, like salaries, rent, insurance, etc. Pull this cost for the previous month.
Total Number of Rooms: The total number of hotel rooms available for sale. For example, a hotel with 50 rooms. Here, 50 is the total number of rooms available.
Break-Even Occupancy Rate: This is the minimum percentage of rooms that must be occupied to recover all costs and start generating profit. In our example above, it’s 39.34%. That means at least 39.34% of rooms (50 in our example) must be occupied to generate profit.
Break-Even Rooms: This is just the break-even rate converted into numbers for better understanding. This is the minimum number of rooms that must be occupied to recover costs (break-even) and generate profit.
Owners and managers running a hotel want to make sure that they are recovering all costs and generating profit. The best way to do this? Calculate the break-even occupancy rate and ensure your actual hotel occupancy rate stays above the break-even rate.
So, if the break-even rate is 39.34%, make sure the actual occupancy rate stays above to recover all costs and generate profit.
Step 1: To start with, we first need to calculate the ADR (average daily rate). This is the average daily rate at which each room is sold. The best way is by taking the previous month’s room revenue number and dividing it by rooms sold over the previous month. As explained earlier, to calculate rooms sold, you need to add the number of rooms sold on each day of the previous month. For example, if on average 40 rooms were occupied each day of the previous month of 30 days, that means rooms sold is 1200 (40 rooms x 30 days).
ADR = Room Revenue / Rooms Sold
ADR = 150000 / 1200 = $125
Step 2: Next up, we need to calculate the contribution margin or profit per room per day. This is the profit left per room per day after recovering variable costs per room per day from ADR.
Contribution margin/profit = ADR - Variable cost per room per day
Contribution margin = ADR - [(Variable costs / 30) / Total number of rooms]
Contribution margin = $125 - [(35000 / 30) / 50] = $101.67
Note that ADR is already a daily average price per room, so to calculate contribution profit per room per day, we need to divide the total variable costs for the month by 30 and the total number of rooms to get the variable cost per room per day.
Step 3: Finally, we can calculate the break-even rooms by dividing the fixed cost per day by the contribution margin/profit per room per day (that we calculated in step 2). The logic is simple here. The remaining amount from the price (ADR), after deducting variable expenses, helps recover fixed costs. To cover daily fixed costs, how many rooms need to be occupied if each room contributes $101.67 daily?
Break-even rooms = Fixed cost per day / Contribution margin per room per day
Break-even rooms = [Fixed cost (in a month) / 30] / Contribution margin per room per day
Break-even rooms = ($60000 / 30) / $101.67 = 20 rooms (approx.)
Break-even occupancy rate = (Break-even rooms / Total number of rooms) x 100
Break-even occupancy rate = (20 rooms / 50 rooms) x 100 = 39.34%