Controlling your costs
This Controlling your costs Info Guide provides practical cost control information for hotels, including a handy Cost Control Checklist for controlling overheads costs, and Rooms, Food and Beverage departments costs.
Your total costs are your variable costs plus your fixed costs.
Variable costs
Variable costs are only incurred if sales are made. They change in proportion to the quantity of a good or service that a business provides. As your sales increase or decrease, your variable costs will increase or decrease.
| Variable costs: Examples |
| Food |
Beverage |
Accommodation |
| Food cost |
Beverage cost |
Room supplies (eg toiletries) |
| Service staff payroll / training costs |
Service staff payroll / training costs |
Accommodation service staff / room assistants |
| Kitchen staff payroll / training costs |
China, glassware, silverware and linen costs |
Cleaning supplies |
| China, glassware, silverware and linen costs |
Laundry and dry cleaning costs |
Laundry / linen costs |
| Laundry and dry cleaning costs |
Music and entertainment |
Satellite TV costs and stationery costs |
| Music and entertainment |
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Fixed costs
Fixed costs don’t fluctuate with sales quantity. They cannot be apportioned directly to any particular product or service, or to any specific department.
| Fixed costs: Examples |
| Overheads |
Rent, rates, insurance and bank interest |
| Undistributed operating expenses |
Fixed budgets for salaries, fixed contracts, professional services etc in general management, administration, sales and marketing and property maintenance |
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Semi-variable costs
Some costs are a mixture of fixed and variable elements. To get a clear idea of your cost-structure and its relationship with profits, you need to identify as accurately as possible the separate fixed and variable elements of your semi-variable costs. If you can’t accurately identify the fixed and variable elements, an approximation will do, eg, 80% fixed, 20% variable.
| Semi-variable costs: Examples |
| Payroll |
- The minimum staffing requirement for a hotel to open for business, regardless of the volume of business – at reception, in the kitchen and restaurant, as well as in the management structure.
- Pay costs of staff above this minimum level represent the variable element of the total payroll cost.
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| Energy |
- Electricity and heating costs incurred in order for a hotel to open for business – in public areas, in the kitchen around mealtimes, etc.
- Energy costs above these minimum levels comprise the variable element of energy costs bills.
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Inefficiencies slow down the profit potential of your hotel business. You can make savings across your business by:
- using proper portion control in the kitchen.
- carrying out an energy audit and cutting down on utility bills.
- keeping waste and refuse charges to a minimum.
- analysing the effectiveness of your promotional spend. Is that ad in the newspaper really delivering results? Remember that by far the best and cheapest form of promotion or marketing is word-of-mouth.
- checking all spend areas, including consultancy.
Remember!
During an economic downturn it can be difficult to roll-back on some inefficiencies as management may focus more on maximising income than on implementing new cost-efficient technologies and processes but remember - efficiency is a key aspect of controlling costs.
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1. Making the wrong cost-cuts
Almost every cost cut has a potential disadvantage which can damage your business. Avoid cutting down on the wrong things. Don’t cut costs that contribute to revenue. For example, cutting marketing, advertising and staff-training can lead to a fall-off in sales.
2. Compromised quality and customer care
Before making across-the-board cuts, check that your quality and customer care standards are not compromised. Reduced service levels may lose you business.
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Use this Three-Step Cost Control Programme to regularly assess your costs:
Step 1 Allocate all costs directly to departments.
Once you have allocated your costs as accurately as possible to activities or departments, it will be easier to follow a routine for controlling these costs.
Step 2 Examine all costs by department
Examine all costs by department to identify possible savings and efficiencies. Focus on reducing these costs first:
- Costs that offer easy savings and which can be reduced with little impact on quality, eg, check supplier invoices for overcharging.
- Unnecessary costs, eg, unused telephone lines, heating rooms with windows open.
- Excessive costs, eg find alternatives to high-priced suppliers or ask for discounts.
- Inefficiencies such as placing frequent small orders which mean that you miss out on discounts.
- Large costs that you may be able to change in the short-term.
Use our Cost Control Checklist to spot opportunities to control costs
Step 3 Monitor all costs on a routine basis.
Cost control is the responsibility of everybody working in your business. Ensure that your staff are aware that cutting costs will benefit the business.
How do I monitor my departmental profitability?
How do I monitor my pay costs?
How do I monitor my gross margins?
How do I monitor my overheads?
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