Hi, in this video, we will look at the p&l and expenses and contribution margin of the individual router. So, this is a sample of overall p&l since we are discussing the high level strategy course, we will not go into deep details of each line item in the p&l or individual PNS. What we are trying to understand is which Where are the major things where as a strategic owner or as a strategic person who is analyzing the p&l should look for. So, in the p&l normally there are two big two major costs, one is labor cost and one is another cost. So, normally in the PnL we split the total cost for example, as an example, I have shown you here, payroll related expenses and other expenses. Since payroll expenses are fixed, it may not increase or reduce as per the business levels.

So, if the payroll expenses are increasing significantly compared to the business levels There is a problem or even if it's not reducing as per the this as per the lower business level, there's not really much that hotels can do usually because most of the labor is fixed, except in certain countries where they are allowed to hire more casual labor or contract labor, but in certain locations, the labor is very fixed. And you may hide it doesn't matter if you have a short spike in the business or lower business levels, you may not be able to reduce labor costs in a very short term and it is not advisable as well to reduce the labor costs in the short term because labor comes with a very expensive training very expensive, morale, motivation, staff benefits. So these are all not so easy to maintain. So if you even if so the the outlook is on to look at longer term of the business as we did earlier.

We have to look at the future business possible potential, not on the past even if the business has been down in the past or if it's what we need to look at it what's going to happen in the next six to six months to one year so that we can make certain decisions on the labor costs. If the business is estimate to bounce back, then you have to accept the labor because if you drop the labor for six months, the cost of retraining costs of rehiring may be much more than that what how much you can save. Then the other expenses which are mostly related to the other, they are related to the revenue and the business level. So, in this case, for example, we see that other expenses are all 13% of the total revenue, which is making sense because the most of the other expenses are related to the business level the stationery the complimentary services in the rooms revision So, in the rooms division, mostly Do you have complimentary expenses commission operating supplies, cleaning expenses, those are all related to the occupancy levels in the hotel, for example, TV channels, they are not related to the occupancy of the hotel area you have a fixed subscription.

So, even if the business drop you normally are not able to reduce this cost, how However, you may be able to negotiate with the service provider for a short term discount or some other measures to reduce the cost related to the short spikes in the business or you will negotiate the deal that you may pay higher amount when you have a higher occupancy you may pay a lower amount in lower activity. So, these are in commission for example, it may not be real may not vary as the business level because those are depends on what kind of business segment we are getting. If you are getting mostly over online travel agents, you may have to pay a commission if there is a drop in less a group business, so the commission expense will not drop Because the expenses are still the if the other business coming from the online travel is the thing.

So, you cannot see every expense as a percentage of revenue some expenses are depend on the type of business segment. So, before we jump into the conclusions of analyzing the revenue as a percentage of revenue or as a project is to occupied nice, we really need to see what are the major expenses What are how are they related to a particular segment, if they are related to a particular segment, we need to measure them only but as a relative as a ratio to that particular segment. Otherwise, you may get a wrong analysis and wrong decision. In FMB, mostly business mostly all the other expenses which are of importance other than the labor is menu expenses, mainly mainly menu and beverage costs, operating supplies and entertainment. These excesses are not directly related to the labor to the This is nervous because entertainment is sometimes mostly fixed, you have to pay the entertainment expenses, you have business or you may not have a business menu a menu depends on the quality of menu in the hotel, if they are damaged, you cannot say we have a low business or we need to be we do need to change the menu you still have to change the venue because it's the brand the brand awareness or the brand value or the hotel and his image when you have the hotel operating supplies goes by the same if the glasses are broken, doesn't matter if you have occupancy or you don't have occupancy, you still need to maintain the power level.

So there are power level reports there are inventory reports which usually we are looking at when we are assessing the business performance, but also we are looking at who is actually consuming those expenses. And isn't that they are electricity at that particular segments business is in line with the expenses or not Then only we can analyze these expenses. So labor we normally, since it's a fixed cost most of the time we measure the labor by the labor productivity. So, what is labor productivity? labor productivity is output produced per XP. So labor productivity means how many rooms we are cleaning for.

So what is output? output? Maybe the number of rooms cleaned by housekeepers, it can be cover sir, it can be the laundry kilograms washed by a particular notary. So labor productivity is usually measured in full time equivalents if let's say the hotel is hiring casual laborers contract laborers. So instead of directly saying that we need to reduce if the business is reduced by 20%, we need to reduce labor by also 20% not not that way. Because there are minimum level of staff that you need, meaning we need a minimum level of managers, supervisors, but we can definitely look at the productivity level of the Other software by comparing them to the output that are they are producing.

So you can manage your leaves you can manage them to go on the unpaid leaves or you can send them on compulsory paid leaves to save on the other expenses in line with the expected productivity expected output that is going to be generated. So labor productivity will help us to roster our employees in a way so FTP is normally inclusive of permanent casual, overtime and minus the least so in order to maintain the FTP you know, because the job of the labor productivity reports is also to may enable us to roster the future so you can easily manage your casuals, your overtime and then the leaf so that you can manage your FTP permanence also, we can we can reduce if there is a longer downturn in the business Productivity comparison usually the hotels have their own benchmarks based on the history or based on the based on industry standards.

So productivity is always compared with some some sort of standards and benchmarks which The hotel has to identify. Otherwise you can use the industry comparable there are now industry comparable reports available in the market for example, housekeeping group a number of rooms clean, industry standard is 12 or 13. For city hotel and maybe 10 or 12 for resort hotels, depending on the size of the room as well. Because the size the larger the room the longer it will take to clean it and more furniture or more do stains in the room the longer it will take the more complicated furniture in the room the longer it will take to clean so the room number this industry standards when you are applying you need to compare the former Apple to Apple Otherwise, the productivity standards may not line in line align with the with the actual product and it may again give to a wrong decision and also the previous trends.

Finally, there are other expenses which also need to be managed and distribute expenses which are normally called advertising expense at marketing expense, administration expense and utility. Here also we can divide them into two parts payroll and other expenses. Usually most of these expenses are fixed. payroll is fixed utilities are 80% fixed because you still need to run the most of the hotels have fixed big equipments which they still need to run, even if there's no occupancy, for example, central air conditions. If the hotel has individually a condition, then it's a different story, you can still manage the expenses. So it depends what kind of expenses what kind of folder structure we have.

So normally we split the expenses between labor and non labor and then Marketing and made an expenses we normally cannot compare with the revenue generated because marketing is done for future revenue not for the past revenue. So is you still need to spend money on marketing even if the past has not been very good because if you don't spend the money now, the future business will also not come. Maintenance expense also does not matter with revenue it matters with the conditions of the property. So, as an owner you should we should not be focusing to control the marketing and maintenance expenses so much because it may affect the future performance. I have seen most of the time a lot of GM days in the revenue is rock the the first and easiest way to cut down the expenses and improve the profitability is cut down on the marketing expense cut down on the maintenance expense.

However you need to really see the situation for the future are these expenses really needed for future sustainability? If we cut it down to a marketing expense or a maintenance expense in the future, lack of marketing will will lead to lower revenue lower revenue will lead to lower marketing expenses. So, it can be a spiral. So, marketing expense maintenance expense, we still have to compare, we still have to spend depending on the features issue feature outlook, but also but definitely you can look at what are the promotions plan, what are the revenue generation or what are the permissions plan, what are ROI generated from those particular promotions are those promotions has been working or not, what are the returns generated from that so, that you can make a bigger proper guess or proper judgment that certain promotion should continue or not. Same goes for the maintenance activities we need to have plan within these activities because that depends on otherwise the property may run down very fast and the cost of innovations can be very In the future, you can definitely look at the nice to have things which are for example, not necessary now or maybe, but you still need to maintain the expense, maintain the property, maybe energy efficiency, those kind of things, you still need to continue doing that depending on the ROI.

Otherwise, the properties may have other in the future it can increase and will be difficult to control. utilities are usually fixed, but we need to run the energy saving initiatives you can think of the future long term strategy rather than a short term spending. Otherwise the hotel's profitability in the short term may be better, but in the future long term, it will suffer. There are other expenses compared going down the long term because when we are learning the ROI, we need to look at other expenses as well. For example, foreign exchange rental of a property property tax insurance. So these are the other expenses, which is property rental is not operating expense because it doesn't matter.

We have the property owned by us or rental by somebody else, the operating performance of the hotel does not really matter. So that's why it's a non operating expense. But we need to look at that property rental if it's related to the revenue the calculations need to be correct. Insurance is also a very important aspect. Because it's important for to do the property insurance to do the business interruption insurance to to the public liability insurance to save the cost you cannot cut down on these expenses. Public liability is usually operational expense because it depends on the number of guests property damages and operating expense depreciation to improve the profitability.

Sometimes hotels are not charged not charging data position correctly, which means you may be paying a higher tax, which is not a good idea. And also deposition charging is important so that you charged correctly so that you have enough money for investment because if the deposition is not charged properly is charge less than it used to be, the distribution of the money will be higher, which means that you may not have enough money for reinvestment into the property or replace the fixed assets at a time when they are actually needed. So this is all about the overall p&l of the hotel. In the future videos we're going to be learning on the other aspects of performance