Key Performance Indicators - Failte Ireland

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Key Performance IndicatorsA guide to help you understand the key financialdrivers in your businessRunning any business effectively requires good decision making which is based ongood and timely management information. All businesses need to monitorprofitability and cash-flow carefully and they use management accounts for thispurpose. But to boost profitability and cash-flow, you also need to understand thekey ‘drivers’ of your business. A driver is something which has a major impact onbusiness performance.Key Performance Indicators (KPIs) or ratios are based on the key drivers of yourbusiness and they reflect the performance and the progress of your business. KPIsgive a mathematical expression to a relationship between two figures.It is good practice within the hotel industry especially, and the hospitality andtourism industry generally, to use a series of standard Key Performance Indicatorsto monitor and to benchmark performance.

Key Performance IndicatorsThe following table outlines the primary KPIs in use in the industry:AccommodationAverage Room Rate;Bedroom Occupancy Rate;Revenue per Available Room;Cost per Occupied Room;Labour Cost Ratio.ProfitabilityOperating Profit Ratio;Net Profit Ratio.FoodCost of Sales Ratio;Gross Profit Ratio;Average Spend per customer;Labour Cost Ratio.BeverageCost of Sales Ratio;Gross Profit Ratio;Average Spend per customer;Labour Cost Ratio.LiquidityCurrent Ratio;Average payment period.Average collection period.

Key performance indicators1. AccommodationAverage room rateAlthough room rates may vary depending on market segment, many lodging property managers calculate anaverage room rate (“ARR”). The average room rate reveals the average rate charged per paid room occupiedand is calculated by dividing rooms revenue by the number of paid rooms occupied, as follows:Average Room Rate ("ARR") rooms revenue (net of VAT)number of rooms soldBedroom occupancy rateThis operating ratio compares the number of rooms sold to the number of rooms available. Managers rely onthis ratio in determining whether, or not, the premises are being utilised efficiently and whether expansion ispossible. Bedroom occupancy rate is calculated by dividing the number of rooms sold by the number of roomsavailable, as follows:Bedroom occupancy ratenumber of rooms soldnumber of rooms available x 100 %Revenue per available roomThis operating ratio compares rooms revenue to the number of rooms available. Revenue per availableroom (“REVPAR”) is calculated as follows:Revenue per available room rooms revenue (net of VAT)number of rooms availableor ARR x rooms occupancy rateCost per occupied roomThis operating ratio compares the cost of the rooms department to the number of rooms sold. Managers relyon this ratio to determine whether, or not, room costs are reasonable. Occupied room cost is calculated bydividing the cost of the rooms department by the number of rooms sold, as follows:Cost per occupied room total rooms department costnumber of rooms sold

2. Food and BeverageFood cost of sales ratioThis operating ratio compares the cost of food sales to food revenue. Food service managers rely on thisratio to determine whether, or not, food costs are reasonable. The Food cost percentage is calculated bydividing the cost of food sales by food revenue, as follows:Food cost of sales ratio %cost of food sales x 100food revenue (net of VAT)Beverage cost of salesThis operating ratio compares the cost of beverage sales to beverage revenue. Beverage service managers relyon this ratio to determine whether, or not, beverage costs are reasonable. The Beverage cost percentage iscalculated by dividing the cost of beverage sales by beverage revenue, as follows:Beverage cost of sales %cost of beverage sales x 100beverage revenue (net of VAT)Food average spendThis operating ratio identifies the amount of the average food spend per cover and is calculated by dividingtotal food revenue by the number of covers. Covers refers to guests served in the food operation during theperiod. The average food spend can be calculated as follows:Food average spend food revenue (net of VAT)number of coversBeverage average spendThis operating ratio identifies the amount of the average beverage spend per cover and is calculated bydividing total beverage revenue by the number of covers. Covers refers to guests served in the beverageoperation during the period. The average beverage spend can be calculated as follows:Beverage average spend beverage revenue (net of VAT)number of covers

3. Labour costsThe largest expense for most lodging properties is labour. Labour expense includes total payroll and relatedexpenses for all departments and operational areas of the property.Food and beverage labour costThe food and beverage labour cost percentage is calculated by dividing food & beverage payroll and relatedexpenses by total food and beverage revenue, as follows:Food and beverage labour cost % food and bev payroll & related exps x 100total food and beverage revenueRooms labour costThe rooms labour cost percentage is calculated by dividing room payroll and related expenses by total roomrevenue, as follows:Rooms labour cost %rooms payroll & related exps x 100room revenue (net of VAT)Total labour costThe total labour cost percentage is calculated by dividing total payroll and related expenses by totalrevenue. This general labour cost percentage is simply a benchmark for making broad comparisons. Forcontrol purposes, labour cost percentages should be calculated and analysed for each department andoperational area of the property. The total labour cost percentage can be calculated as follows:Total labour cost %total payroll costs & related expstotal revenuex 100

4. Profitability ratiosRatios (based on ex tracts from the profit and loss account and balance sheet )Gross Operating Profit margin ratioThis ratio measures management’s overall ability to realise profits by generating sales and controlling theexpenses for which it has direct responsibility (all departmental and undistributed expenses). This is a keyindustry benchmark. The profit margin ratio can be calculated as follows:Profit margin ratiogross operating profittotal revenue %x 100Net Profit ratioThis ratio measures the profitability of the business after the deduction of tax.Typically, the profit corresponds to the Gross Operating Profit less any fixedexpenses of the business over which management have no, or limited, control(e.g. loan interest, depreciation, rent, insurance and tax). The ratio can becalculated as follows:Net Profit ratioprofit after taxtotal revenue %x 100Activity ratiosThese ratios measure the number of times stock turns over during the period (the number of times thattotal stock needs replaced). Generally, the greater the number of times that stock is ‘turned over’ the bettersince stocks can be expensive to maintain. Stock turnovers are usually calculated separately for food andbeverage items.Food stock turnover ratioTo calculate food stock turnover it is necessary to determine the average stock. This is accomplished byadding inventory at the beginning and end of a period and then dividing that figure by two. The food stockturnover can be calculated as follows:Food stock turnover ratio food cost of salesaverage food stock-holdingBeverage stock turnoverTo calculate beverage stock turnover it is necessary to determine the average stock. This is accomplished byadding inventory at the beginning and end of a period and then dividing that figure by two. The beveragestock turnover can be calculated as follows:Beverage stock turnover ratio beverage cost of salesaverage beverage stock holding

5. Liquidity ratiosCurrent ratioThe most common liquidity ratio is the current ratio, which is the ratio of total current assets to total currentliabilities. It reveals the amount of current assets for every Euro of current liabilities. It reflects the ability ofthe business to manage its working capital and its day to day operations (ideally the ratio should be between150% and 200%). The current ratio can be calculated as follows:Current ratio current assetscurrent liabilitiesx 100%Acid-test ratioThe acid-test ratio measures a property’s liquidity by considering “quick assets” – current assets minusstocks and prepaid expenses. This is often a more stringent measure of a property’s liquidity because it maytake several months for many properties to convert their stocks to cash. It reflects the ability of the business topay its debts by comparing cash, or near cash, assets with short-term liabilities (ideally the ratio should be100% or above). The acid-test ratio can be calculated as follows:Acid test ratio current assets – stockcurrent liabilitiesx 100%Trade debtors can be the largest current asset of lodging properties because credit is often extendedto clients. Therefore, any examination of a property’s liquidity must consider how quickly trade debtors areconverted to cash.Average Collection PeriodThis ratio reveals the average number of days taken by the company to collect trade debts, or the averagenumber of days’ credit allowed to debtors by the company. The average collection period is calculated bydividing the trade debtors by the sales in the year. The result is multiplied by 365 days. The Averagecollection period can be calculated as follows:Average collection period(or 'Debtor's Days') trade debtorssales (inc VAT)x 365

6. Solvency ratiosInterest cover ratioThis ratio expresses the number of times interest charges can be covered from profits. Thegreater the number of times interest is earned, the greater the safety afforded creditors andlenders. The interest cover ratio can be calculated as follows:Interest cover ratio (x times)profit before interest and taxinterest charges

This guide has been provided to you aspart of Fáilte Ireland’s suite of guides andtemplates in the Business Tools resource.Please note that these resources aredesigned to provide guidance only. Noresponsibility for loss occasioned to anyperson acting, or refraining from action, asa result of the material in this publicationcan be accepted by Fáilte Ireland.The user shall not market, resell, distribute,retransmit, publish or otherwise transfer orcommercially exploit in any form any of thecontent of this guide. For a full version ofthe disclaimer, go to the Fáilte Irelandwebsite.Fáilte Ireland88-95 Amiens StreetDublin 1www.failteireland.ie Fáilte Ireland 2013BT-KPI-C6-0913-49

key ‘drivers’ of your business. A driver is something which has a major impact on business performance. Key Performance Indicators (KPIs) or ratios are based on the key drivers of your business and they reflect the performance and the progress of your business. KPIs give a mathematical expression to a relationship between two figures.

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