The Importance of Variance Analysis in a Hospitality Business
Variance analysis means comparing the actual performance results of a hotel -- including revenues, expenses, and metrics specific to the hospitality industry -- to the numbers that were forecast or the results of the previous year. The hotel owner uses variance analysis to determine how well his business is performing compared to his expectations and to his competition. Variance analysis reports are usually prepared and reviewed monthly by the hotel owner, the hotel controller and department managers such as marketing and housekeeping.
In the hospitality business, the major performance measurement metrics are occupancy percentage, average daily room rate and revenue per available room. Occupancy percentage means the number of hotel rooms that were sold for the period divided by the total number of rooms available. Average daily room rate -- commonly called ADR -- is calculated by dividing total revenue by the number of rooms sold. Revenue per available room -- referred to as RevPAR in the industry -- is ADR multiplied by occupancy.
When preparing the hotel’s strategic plan, the hotel owner identifies his most important customer segments -- or target markets -- and devises strategies to increase revenues within each targeted customer segment. These segments may include business travelers, leisure travelers, convention and meeting guests or even more narrowly defined groups such as wedding parties or golfers. The hotel’s accounting system generates reports that show the actual number of guests and room nights for each of these customer segments. Variance analysis involves more than looking at aggregate numbers such as total revenues or total occupancy for the hotel; it means analyzing how each segment performed in relation to the goals that were set for it during planning. Variance analysis reveals which segments are not performing up to plan.
To build guest traffic, a hotel owner may offer discounted room rates during slower times of the year or packages that include the room, a meal and an activity such as a round of golf. She might also change the theme of her advertising from offering the lowest room rates to focusing more on the amenities the hotel has that differentiate it from competitors. The actual results -- the changes in revenue and occupancy percentage -- tell the owner whether the change in strategy was successful.
A hotel owner can obtain market research reports that show how other hotels are performing in the local area. He compares his property's key performance metrics to comparable hotels that are his chief competitors. If his hotel is midprice, he would compare its results to others in the midprice segment of the market, not to luxury properties. Adjustments to his marketing strategies might be necessary if he finds, for example, his occupancy rate lagging behind the competition.
For variance analysis to be effective, a hotel owner needs to go beyond looking at the financial data and analyze the reasons behind significant variances. If revenues were down 20 percent in July compared to the previous year, she should determine if this indicates a trend or results from a one-time event, such as a convention being canceled that is normally held in July. Persistently negative variances can be an indicator that the forecasting assumptions she used were flawed. She may have been overly optimistic about the occupancy percentage or ADR she could earn given the competitive conditions or about the overall growth of the hospitality industry in her market. The hotel owner may decide midyear to reforecast the remainder of the year to reduce the variances that are occurring.