How to Determine a Profit Margin for a Small Hotel

A business’ profit margin measures how much is left from each dollar of revenue after covering expenses and taxes. Hotels calculate profit margin in the same manner as any other company, although the metrics small hotel managers track might differ from those relevant to other industries. Determining the profit margin for a small hotel and the contribution of various revenue streams helps ownership make profitable operating choices.

Profit margin provides an overall view of a boutique hotel’s profitability. A back-of-the-envelope calculation for profit margin involves subtracting all expenses from revenues and dividing by total revenues. Expenses might be directly incurred by a particular guest, such as replacing complimentary bath items, or shared over the entire building like depreciation. Managers should be cautious when looking for ways to improve profit margin, because it measures efficiency, not volume. Knowing that two hotels have profit margins of 25 percent and 5 percent does not indicate which hotel brings in more profit.

Hotels, especially smaller boutique hotels, typically bring money in from one source — guests. Especially if your hotel doesn’t have a banquet hall, \heads in beds will bring in the majority of the money. Segregating the direct costs from each way a guest spends money at the hotel -- room fees, in-room entertainment, or convenience store, for example -- allows small hotel managers to analyze how much each revenue stream contributes to the overall profit.

Comparing the performance of the revenue streams can guide managers setting the strategic vision for finding a profitable niche. For example, boutique hotels often don't have the space or can't afford to provide 24-hour room service and instead adopt strategies like partnering with local restaurants to sell "brown bag" meals. The hotel can continue offering food to guests, but in a way that has fewer associated costs and contributes more per each sale.

Managers can't allocate every cost to a revenue stream. Many of the largest expenses a hotel has are specific to the building, rather than a particular offering within it. Advertising, depreciation, and custodial services are all shared costs that should be ignored when analyzing the contribution of each revenue stream. While indirect costs might not provide much guidance on increasing the efficiency of revenue streams, they are important to study for ways to improve profitability by finding fixed costs on which to save.