Hotel profit margin: what goes into it, and how to work out yours

• Gross operating profit, or GOP, is total revenue less the costs of running the hotel. EHL Hospitality Business School describes it as total revenue minus total operating expenses. The gross operating margin is that profit divided by total revenue, multiplied by 100.
• Net profit is what is left after the owner's costs too: rent or lease, loan interest, depreciation, insurance, property tax and income tax. The net margin is net profit divided by total revenue, multiplied by 100.

The first shows how well the hotel is run. The second shows what the owner keeps. A hotel can run well and still keep little, if it carries a large loan or a high rent, and the two margins tell you which problem you have.

• Rooms: what guests paid for rooms, without GST.
• Food and drink: the restaurant, room service, breakfast sold apart from the room, banquets.
• Other income: laundry, transfers, tours, spa, parking, hall hire, extra beds, cancellation and no-show fees you collected.

Count revenue before booking-site commission, and count the commission as a cost. That way a room sold through a site and a room sold on your own website start from the same price, and you see what the site took. GST is never your revenue: it is the government's money that passes through your hands.

Without input tax credit, the GST you pay on what you buy for those rooms, from linen to repairs to the booking sites' commission, can no longer be set off against the GST guests pay you, so it becomes part of your costs. Above that price the rate is higher, as Booking.com's tax page for its Indian partners sets out. How it applies to a hotel with rooms on both sides of the line is one for your accountant.

Group your costs the way the money is spent, so that you can see which part of the hotel each one belongs to. Above the line for gross operating profit:

• Rooms: housekeeping and front desk wages, laundry, guest supplies such as soap, water bottles and tea, linen and towels as they wear out.
• Food and drink: ingredients, gas, kitchen and service wages.
• Selling: booking-site commission and the GST on it, payment charges, your booking engine and channel manager, advertising, photography.
• Running the building: electricity, water, diesel for the generator, repairs, yearly maintenance contracts for lifts, air conditioners and pumps.
• Office: accounts, software, telephone and internet, licence renewals, bank charges.
• Staff costs beyond wages: PF, ESI, staff meals and rooms, uniforms, festival bonuses.

Below that line, the owner's costs: rent or lease, loan interest, depreciation, insurance, property tax and income tax. Put a yearly bill into each month as its share, so that the month it is paid doesn't look like a loss and the others like profit.

A booking through a site arrives with deductions that have nothing to do with how you run the hotel. Know which are costs and which you can claim back:

• Commission, at the rate in your contract with each site, and more for the programmes you join. It is a cost. Our guide to booking-site commission sets out what each site says about its own.
• GST on that commission. It is a cost when you can't claim input tax credit.
• Tax collected at source (TCS) and tax deducted at source (TDS) by the sites. These are not costs: MakeMyTrip's help says you see the TCS credit on the GST portal under GSTR-8 and can set the TDS off against your income tax, and Booking.com says its deductions show in your Form 26AS on the TRACES portal. They delay cash, so plan for them.

1. 1Choose a month that has ended, and use the same month's figures throughout.
2. 2Add up the revenue for the month by part of the hotel: rooms, food and drink, other income, all without GST.
3. 3Add up the month's running costs from the list above, with each yearly bill's share for the month.
4. 4Take the running costs away from the revenue. What is left is your gross operating profit.
5. 5Divide it by the total revenue and multiply by 100: that is your gross operating margin.
6. 6Take away the owner's costs for the month. What is left is your net profit.
7. 7Divide the net profit by the total revenue and multiply by 100: that is your net margin.
8. 8Write both in the same sheet every month, beside the same month last year.

If the owner or the family works in the hotel without a wage, note what that work would cost to hire. Otherwise the margin looks higher than a buyer, a bank or a manager would ever see.

Margins over a month hide what each room night earns. EHL Hospitality Business School describes three ways to see it:

• GOPPAR: gross operating profit divided by the rooms you had to sell. Unlike RevPAR, it shows whether the revenue reached the bottom line.
• Cost per occupied room: the costs of the rooms, such as housekeeping, guest supplies, utilities and laundry, divided by the rooms sold. EHL says that beside your average room rate and occupancy it shows the lowest price at which a room is worth selling.
• Flow-through: the change in gross operating profit divided by the change in total revenue, against the same month last year. It shows whether more revenue brought more profit, or more costs.

Then work out what a room night leaves you on each site: the price without GST, less the commission and the GST on it, less your cost per occupied room. Compare it with the same room booked on your own website, less your booking engine's and payment charges. The difference is what a direct booking is worth to you.

A published average mixes hotels of every size, place and kind of ownership, with different costs and taxes. Read it as a rough mark, not a target:

A small hotel that owns its building has no rent but may carry a loan; a family-run one may pay less in wages and more in owners' time. Your own margin, month by month, against the same month last year, says more than any average.

• Sell more rooms direct, so that less of each booking goes in commission (see our guide on getting more direct bookings).
• Price your busiest nights for how busy they are, rather than discounting the whole year.
• Sell more to the guests you already have: meals, transfers, late check-outs (see our guide on upselling to hotel guests).
• Cut no-shows and late cancellations, and mark each one on the booking site in time so that you don't pay commission on a stay that never happened (see our guide on no-shows and late cancellations).
• Check every booking site's invoice against your own register before you pay it.
• Plan staff hours by the rooms you expect to sell, and train people to cover more than one job in quiet months.
• Read the electricity and diesel bills against occupancy each month: a bill that stays the same when the hotel is half empty shows waste.
• Buy supplies by the month against a list, rather than when they run out.

• Counting GST as revenue.
• Counting what a booking site paid you, after commission and tax, as the room's revenue, so that commission never shows as a cost.
• Counting money in the month it arrived rather than the month the guest stayed.
• Leaving yearly bills, such as insurance and maintenance contracts, in the one month they were paid.
• Leaving out the owner's and family's unpaid work.
• Calling a month good because the hotel was full, without checking what each room night left.