Saturday, January 11, 2014

Financial audit of a hotel - key indicators of performance

Audit of a hotel is unique and the audit procedures carried out can be different from the audit of trading and manufacturing entities, which are more common in the economy. Of course, audit of each industry is unique.

Understanding how management measure the financial performance of the hotel helps the auditor to understand what is the key performance indicator measured / monitored by management closely. Auditor should consider the risk of management's manipulating the key performance indicator for their own interest (e.g. remuneration).

Generally, the following are the key indicators watched by hotel management closely:

a) Occupancy Rate:
Occupied Room / Total Avaiable Room

b) Average Room Rate

c) Revenue Per Available Room (i.e. Occupancy Rate x Average Room Rate)

d) Headcount to Room Ratio

Occupancy rate measures the volume of the business (i.e. number of rooms occupied by the hotel guests or other gueses). The occupancy rate fluctuates from time to time depending on the seasonality factor. For instance, a hotel may target on corporate customers as its marketing strategy. Based on general expectation, the occupancy rate is expected to be relatively lower as the volume for corporate customer is typically slower due to vacation.

Average room rate measures the room rate secured from the customer. A number of factors can affect the average room rate: pricing strategy of the Hotel, demand and supply for the room, volume secured etc. Every single dollar may have a significant impact on the bottom line.

Revenue per available room considers both the occupancy rate and average room rate.

Headcount to Room ratio measures the number of headcount employed divided by rooms available and/or rooms occuppied. This ratio measures the headcount efficiency as well as the proper planning of headcount based on volume.

It is important to analyse the above key indicators from month to month and compared the key indicators above to indsutry average. Significant discrepancies should be investigated.

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