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Key Performance Indicators

Contents

1 Summary
2 Why should you use it?
The purpose of key performance indicators is to provide to decision makers in the organisation a measurable
indicators for measuring or judging the organisational performance and for measuring the achievements of
organisational objectives. KPIs are the tool for internal business analysis and for controlling the strategy
outcome. KPIs are critically important for a host of hospitality decision making situations and they can help
hospitality managers in their efforts to ensure efficient and effective management of resources and to achieve
the main objective of any organisation maximisation of the profit. Nevertheless the KPIs, as they are uniform
for all organisations, assure the managers a tool for benchmarking with other organisations in order to improve
their own performance.
3 Why has it been developed and who developed
it?
4 When should you use it?
Whenever the manager has to make a decision the KPIs are the right tool for him. The managers make
decisions on a daily basis. Most often they make decisions on organizations performance on monthly and
quarter of the year basis. The main decisions are made on the yearly basis.

5 How does it work?
Most of KPIs are financial measures. Why? This is because financial measures are based primarily on the
most fundamental common denominator in business, i.e. money. The critics argue that financial measures are
not perfect to direct and control the business. They argue that financial measures focus on symptoms rather
than causes (example: profit may decline because of declining customer service, therefore it would be more
appropriate for managers to focus on monitoring a quality of customer service) and that financial measures
tend to be oriented to the short-term performance of the past, which can hinder forward- looking, long term
initiatives. Therefore also some non-financial performance indicator (i.e. Balance Scorecard, rooms-related
performance measures) become more and more important for measuring a comprehensive organisational
performance.
The main source for financial measures is accounting information system and within the main products of the
accounting system i.e. financial statements Profit & Loss Account, Balance Scheet, Cash flow statement -
and cost information system.
The main groups of KPIs are:
Financial statement analysis
Operational measures
Cost volume profit analysis

5.1 Financial statement analysis
Financial statement analysis is used to analyse the financial performance and stability of organisation. Much of
the analysis can be conducted through the use of ratios, so it is frequently named also Ratio Analysis. Within
the financial statement analysis two distinct perspectives of organisational performance are conducted and
observed. First, the profit performance and second the financial stability. Operational measures, which
are also mostly conducted through the use of ratios (operational ratios) are used to measure day to day
operating issues. Many of operational ratios do not involve financial measures, but they represent important
performance indicators too. Cost volume profit analysis primary focus on projecting future levels of
profitability. It is a tool for managers to understand how much cost and profits will fluctuate following a change
in sales volume. The key performance indicators are presented in following Exhibit 1.
Exhibit 1: Key performance indicators
GROUP OF PERFORMANCE
INDICATOR
PERFORMANCE INDICATOR
FORMULA
PERFORMANCE INDICATOR WHAT DOES
IT SHOW?
FINANCIAL STATEMENT
ANALYSIS
a) PROFIT PERFORMANCE

Return on investment (ROI) ROI = EBIT / Total Assets
How much return (profit) from the assets
available has been generated by the
company managements performance in the
certain period of time.row 2, cell 3
Gross profit margin GPM = Gross profit / Revenue
The percentage of sales available to cover
general and administrative expenses and
other operating costs.
Profit margin PM = EBIT / Revenue How much profit has been earned on sales.
Assets Turnover
AT = Revenue / average
balance of total assets
How much profit has been earned on total
assets or employed assets.
Accounts receivable turnover
(ART)
ART = Credit sales / average
balance of accounts receivable
The percentage of credit sales on average
balance of accounts receivable.
Average number of days to
collect accounts receivable
Average number of days to
collect accounts receivable =
365 days / ART
How many days we need to collect the
accounts receivable.
Inventory turnover (IT)
IT = Cost of sales / average
balance of inventory
The percentage of cost of sales on average
balance of inventory.
Average number of days
inventory held
Average number of days
inventory held = 365 days / IT
How many days the inventory is held in the
company.
Fixed asset turnover
Fixed asset turnover = Revenue
/ Average balance of fixed
assets
The percentage of revenue on fixed assets.
b) FINANCIAL STABILITY

Current assets ratio
CAR = Current assets / Current
Liabilities
Whether the companys assets will cover its
liabilities that will fall due for payment in the
next 12 month
Financial leverage or Debt to
assets
Debt to assets = Total debt /
Total assets
The level of debts of the company.
Times interest earned
Times interest earned = EBIT /
annual interest payment
An extend to which interests charges are
covered by the companys level of profit.
The ability of the company to serve its debts.
OPERATIONAL MEASURES
ROOMS RELATED
PERFROMANCE MEASURES
Room occupancy
Room occupancy = (No. of
rooms let in hotel / Total rooms
in hotel) x 100
The percentage of rooms let in hotel.
Paid occupancy
Paid occupancy = (No. of rooms
sold / Total rooms in hotel) x
100
The percentage of rooms sold in hotel.
Average room rate or average
daily rate (APR)
ADR = Days revenue from
room letting / No. of rooms let in
the day
An average room rate, charged in the day.
Revenue per available room
Revpar = Total daily room
letting revenue / Total hotel
rooms or
Revpar = Occupancy level x
ADR
How much revenue has been earned by
every room available in the hotel.
Room yield
Room yield = Actual total room
revenue / Potential total room
revenue
An actual revenue as a percentage of
potential revenue.
Service cost per room
Service cost per room = Total
daily room servicing costs / No.
of rooms serviced in the day
The efficiency of room service expenditure.
COST VOLUME - PROFIT
ANALYSIS
Contribution margin CM = Revenue Variable costs

Contribution margin ratio CM / Revenue x 100

Break Even Analysis

EBIT Earnings before interests and tax
5.2 Operational Measures - Rooms related performance measures
1.Summary
Performance ratios that have more an operational focus for measuring day to day operations and especially
level of activity are so called operational measures. As in the hotel room represent the core business, most
operational ratios are related to room. Most commonly used rooms related performance measures are room
occupancy, average room rate, revenue per available room or room yield and service cost per room. However,
revenue per available room Revpar, is the most commonly used indicator for measuring sales performance
in the hotel, as it gives the most complete picture of sales performance.
2.Why should you use it?
The purpose of using operational ratios is to measure the day to day activity level performance of the hotel.
Hotels competing in the same geographical area frequently share information on each others occupancy level
as a tool for measuring their performance. Comparing achieved operational ratios with planed operational
ratios shows us, how successful we are implementing our strategy. As they are calculated on a daily or
monthly basis, they are a useful tool for managers to promptly react, when these indicators are lower than
planed and make decisions in a way that will improve their performance in order to achieve the strategic goals.
3.Why has it been developed and who developed it?
4.When should you use it?
Operational measures are mostly used on a day to day basis and they help managers by making day to day
decision on operation performance. They are used also for benckmarking comparisons across hotels and they
are useful tool for managers by creating pricing policy of the hotel.
5.How does it work?
The main rooms related performance indicators are:
Room occupancy
Average room rate
Revenue per available room - Revpar
Room yield
Service cost per room
As you will see below, the analysis of those indicators gives us a comprehensive picture of the hotels activity
and sales performance if we analyse them together not separately.
Room occupancy
Room occupancy is widely quoted performance indicator in the hotel industry. It is calculated as follows:
Room occupancy = (Number of rooms let in hotel / Total rooms in hotel) x 100
It shows us the percentage of rooms let in a certain period of time (day, month, year). This activity level
indicator could be a little misleading in those hotels that let out a significant number of complimentary rooms. It
that case, computing room occupancy by dividing number of beds let by number of total beds in hotel, would
be more appropriate. Or another option is to compute paid occupancy ratio as follows:
Paid occupancy = (Number of rooms sold / Total rooms in hotel) x 100
Further on, we have to have in mind, that a high paid occupancy percentage does not necessary signify a high
revenue from rooms. This is because not all room sales are made at rack rate (the rack rate is defined as the
maximum price that will be quoted for a room). According to that, a performance measure that indicates the
average room rate charged needs to be computed. This can be achieved by using an average room rate
(sometimes called average daily rate - ADR) performance indicator, which is calculated as follows:
Average room rate = Days revenue from room letting / Number of rooms let in the day
The room occupancy and the average room rate performance indicators, when considered independently,
represent incomplete measures of sales performance. A higher level of total revue from rooms will not result
from an increased occupancy level if the room rate has been disproportionately dropped. Similarly, a higher
level of total revenue from rooms will not result if an increase in the average room rates coincides with a
disproportionate decline in the occupancy level. For solving this incompleteness of both indicators, another
indicator has been developed revenue per available room (Revpar). It is calculated as follows:
Revpar = Total daily letting revenue / Total hotel rooms (both sold and unsold)
or
Revpar = Occupancy level x Average room rate
Revpar shows us room sales performance. It shows how much revenue has been earned by every room
available in the hotel. By bringing occupancy level and average room rate together, it can give us more
complete measure of performance. By using revpar managers concern to find an optimal balance between
maximizing occupancy levels and average room rates charged. As a performance measure, revpar is preferred
to total revenue as it facilitates benchmarking comparisons across hotels with different numbers of rooms.
However it should be noted, that maximizing revpar does not necessarily signify profit maximization. In a
situation of major room rate discounting, the higher revpar associated with an increase in occupancy could
result in lower level of overall profit if the increased total revenue does not outweigh the additional costs i.e.
housekeeping, energy costs, associated with the hotels increased activity.
The Revpar dimension of room sales performance can be measured slightly differently by viewing actual
revenue as a percentage of potential revenue. The ratio, measuring this dimension is so called room yield and
is calculated as follows:
Room yield = Actual total room revenue / Potential total room revenue
Revpar and room yield indicators give the same results. A high revpar will signify a high room yield.
Accordingly to that, there is no need to compute both performance indicators.
On the expense side of a hotels room sales activities, the efficiency of room service expenditure can be
monitored by calculating the service cost per room indicator:
Service cost per room = Total daily room servicing costs / Number of rooms serviced in the day

6.Related topics/tools
Pricing policy
Yield management
Rack rate
7.links/sources
Guilding, Chris (2005): Financial Management for Hospitality Decision Makers, First published 2002,
Burlington.
Owen, Gareth (1998): Accounting for Hospitality, Tourism & Leisure, 2.edition, Edinburgh.
5.3 Cost-volume profit analysis (CVP)
1.Summary
Cost Volume Profit Analysis is a valuable technique or tool for managers decision making, when
considering a decision to enter a new commercial activity or when considering the decision on improving
existing performance. The primary focus in CVP analysis concerns projecting future levels of profitability.
2.Why should you use it?
It is a tool for analytical approach that can enable managers to answer the questions about how to achieve or
maintain the target level of profitability.
3.Why has it been developed and who developed it?
4.When should you use it?
The CVP analysis is used when we have to answer to following questions:
a) When entering new business or commercial activity within an existing business:
How many units will we need to sell in order to break even?
How much will we need to sell in order to achieve our target
profit level?
b) With existing business:
What will happen to profit if we manage to increase sales
volume by 10%?
If we increase advertising by 10%, how much more would
we have to sell in order to maintain our current level of
profit.
5.How does it work?
The primary focus in CVP analysis concerns projecting future levels of profitability. Projecting profit requires an
understanding of how much costs and profits will fluctuate following change on sales volume. An
understanding a fixed and variable costs comes into account. Total revenue minus total variable costs is
generally referred to as contribution margin. The contribution margin highlights what proportion of revenue is
consumed by variable costs. It is important to recognize that because variable costs move in line with revenue,
this relationship is constant. For example: If 25% of sales revenue is consumed by variable costs, 75% of sales
revenue remains as contribution for covering fixed costs. Once revenue achieves a level that is sufficient to
cover all fixed costs, additional sales will contribute to the earning of profit. As the contribution is 75% of
revenue, once fixed costs are covered, profit will accumulate at the rate of 75% of every additional euro of
sales. Further on contribution margin ratio refers to the percentage of sales that is not consumed by variable
costs. The formula is as follows:
Contribution margin ratio = (Contribution margin / Revenue) x 100
Or
Contribution margin ratio = ((Revenue Variable Costs) / Revenue) x 100
The contribution margin format is useful as it enables us to quickly answer questions such as what will happen
to our profit, if revenue increases by certain amount. For example: If we take the contribution profit margin as
above 75% and if we want to find out what will happen with our profit if we increase the revenue by 200.000
EUR, we know that increased revenue by 200.000 EUR will add 150.000 EUR (0,75 x 200.000 EUR) to profit.
Break even analysis
Breakeven analysis shows us, how many units need to be sold to achieve target level of profit. Breakeven
analysis can be applied in different scenarios that signify varying degrees of complexity. In basic situation of
calculating breakeven it is presumed that only one service is sold.
By distinguishing between fixed and variable cost, we can determine the volume of sales necessary to achieve
breakeven. Breakeven is the level of sales where profit is 0. To conduct a breakeven analysis, we need to
consider contribution at the unit level. In the context of hotel, by unit is usually meant room. As contribution
margin refers to total revenue minus total variable cost, it follows that contribution margin per unit is calculated
as follows:
Contribution per unit = Unit sales price Unit variable cost
For better understanding lets see the following example for calculating breakeven point for Hotel X.
The main question for hotel manager is what level of occupancy must be achieved in order to avoid recording a
loss next year. The manager knows that the annual fixed costs are 2.190.000 EUR. The hotel has 200 rooms
and the average room rate charged is 67 EUR. The variable cost associating with providing one nights
accommodation is 7 EUR. Form this data we can calculate the contribution margin per room night sold, which
is 60 EUR (67 EUR 7 EUR).
At the beginning of the year, the hotel can be described as 2.190.000 EUR in the hole, due to the 2.190.000
EUR fixed costs, that will be incurred regardless of the number of room nights sold. Following the sale of the
first room night, the degree to which the hotel is in the hole will have declined by 60 EUR, as 60 EUR will
have been contributed to covering the 2.190.000 EUR fixed costs. The question is now, how many room nights
with a contribution of 60 EUR have to be sold to cover all the hotels annual fixed costs? As 36.500
contributions of 60 EUR provide 2.190.000 EUR (2.190.000 / 60), we can conclude that once hotel sell 36.500
rooms, it will have achieved breakeven. This line of logic has taken us through the following widely quoted
formula for determining breakeven:
Breakeven number of units to be sold = Fixed costs / Contribution per unit
This breakeven point at 36.500 room sold per annum can also be stated in terms of the occupancy level,
required to achieve breakeven. If the hotel is opened for 365 days per annum, it would have 73.000 room
nights available per annum (365 x 200 rooms). 36.500 rooms represent 50% of hotels annual available room
nights (36.500 / 73.000 x 100). We can therefore conclude that an occupancy rate of 50% will result in hotel
achieving breakeven. The occupancy breakeven formula is as follows:
Occupancy breakeven = (Number of room sales necessary for breakeven / Room nights available) x
100
From this calculations we can quickly find out in which cases the breakeven level of room sales would be
lowered. These are: Increase the average room rate above the actual one (67 EUR in our case) Reduce the
variable costs per room night sold below the actual one (7 EUR in our case) Reduce the level of fixed costs
below the actual one (2.190.000 EUR in our case).
Following exhibit presents a graphical representation of breakeven.














In this graph, sales activity is shown on the horizontal axis with euros in the vertical axis. If we draw in the total
sales revenue line and also the total cost line for all levels of activity, we can determine the breakeven level of
sales. A breakeven occurs at the activity level where total costs equal to total sales, breakeven is represented
by the point where the sales and total cost lines intersect. In the graph this breakeven point is highlighted by
the vertical dotted line. Any level of sales to the right of the dotted line will result in a profit. Any level of sales to
the left of the line will result in a loss.
On the basis of breakeven analysis we can answer also the following questions that can assure us more safety
performance:
By how many sales are we surpassing the breakeven?
How much would our occupancy level decline before we
would record a loss?
For answering those questions we use so called Safety margin, using the following formulas:
Margin of safety in EUR sales = Current EUR sales EUR sales required to break even
Or
Margin of safety in units sales = Current unit sales Unit sales required to break even
Or
% occupancy safety margin = Current occupancy % - Occupancy % required to break even

Some managers are interested in determining the level of sales necessary to achieve a profit target. A profit
target can be stated in terms of a before-tax or after-tax amount. If you are able to grasp the rationale for the
approach taken in the basic breakeven situation, understanding how to determine the level of sales necessary
to achieve a target profit will be relatively straightforward. The most simply way is just to add an amount of
target profit to the fixed costs in the breakeven formula. Accordingly the target profit formula is:
Rooms sales to achieve target profit = (Fixed costs + Target profit) / Contribution per unit
At the end it should be noted that several assumptions are made when applying CVP. The main assumptions
are:
Selling price is constant
Fixed costs are constant.
Total variable cost varies directly in proportion with sales
volume.

6 Related topics/tools
Balance Scorecard
Accounting information system
Financial statements
Cost management
Fixed and variable costs
7 links/sources
Guilding, Chris (2005): Financial Management for Hospitality Decision Makers, First published 2002, Oxford.

Examples of Hotel Management KPI That You Can Use
This will also aid you in choosing intentions that are based on those values and objectives. What you
will master recommendations time management and motivation and the like.

Also important could be the measurement of your healthiness, which will help you keep an eye on
your own health and fitness. You should also know about your relationship as outlined earlier. This
will help you in selecting, maintaining and developing relationships which can be functional and
enjoyable. Vocational skills should also be measured wherein you certainly will use practical individual
KPIs that may assist you develop and improve you professionally.

You can not forget about material competence which is synonymous to your financial records. You
will have enable you to understand the material aspects of life which will allow you to survive through
your economical and material needs. It's also wise measure your recreational competence which is
your ability to restore, recover and renew your own self. This is quite of importance to both
businessmen and standard people since both need free time to enjoy their lifestyle.
.
There are literally 1000s of hospitality business indicators that you can use right now. These
indicators are typically referred to as the hotel management KPI. For those who have an effective KPI
set for your hotel business, this removes the guesswork in regards to managing the hotel company.
What this does is which it checks the performance to your business through the figures or the figures
so the managers will be able to use the data in telling precisely what is really gong on within the hotel.
Before you get around and research about your hotel management KPI, to consider the difference
between that and also the hotel KRIs. These two are often compared to one another but they are
really diverse. The hotel KRIs don't focus on the good side of the performance of the corporation;
instead, you will obtain data precisely how risky your hotel pursuits are. Having said that will, they are
also very useful when it comes to tracking the health of your business.

Now, when looking for the most effective hotel management KPI for a business, you should not only
consentrate on the entire organization because it would very difficult to do this. You will need to divide
the KPIs inside different groups or classifications so that in other words for you to keep an eye on
them. Among the types of KPIs which you could utilize are the KPIs with regard to reception or front
desk efficiency, housekeeping, kitchen, sales, restaurant, store, maintenance and purchasing among
others.

Many places to stay nowadays offer housekeeping services for a clients. If the hotel you will be
managing provides such for your guests, it is essential that you keep an eye on its performance. This
is because many clients are meticulous when it comes to the cleanliness of their surroundings
especially their bedrooms. They are on a secondary so they expect themselves to be pampered and
not to be responsible for the task of cleaning their rooms. You can measure the efficiency of your
housekeeping services through KPIs like the number of available workers for cleaning, the feedback
of customers based upon the housekeeping services they have acquired and the total amount of time
required for cleaning among others.


- Quality ( in the broad sense - in relation to the customer, but also internal quality )
- Costs ( including material, personnel, ensurances, ..... )
- Timing ( in relation to the customer )

So for a maintenance environment I would follow things like:

Quality perception by the customer.
Number of complaints from customers.
Jobs that have to be redone because of poor quality.
Material costs.
Personnel costs.
Adherence to timing schedule.
Reaction time on problems.