Losing money in operation? How would you know?
What is meant by losing money?
1. Break even point
Every business wishes to continue earning revenues, incurring manageable expenses and retaining good profits. So, sustaining revenues over a period of years is critical as this is the top line (as it is known in the hospitality industry). However, what if you are not able to sustain revenues or your expenses are spiralling out of control. All this will have a negative effect on your bottom line. But, within your operation, you would certainly like to identify the business volume (or even revenue dollar level) at which your revenues and expenses draw level. In other words, you are breaking even. While total expenses are technically the correct way to determine break even, using fixed expenses is a powerful way of determining that break even level. Moreover, knowing your break even point allows you to determine whether your operation has potential for future revenues and profit growth. Hence, losing money means: are your revenues covering at least your fixed costs?
Why is this so critical?
2. Fixed costs
Fixed costs are those which will be incurred irrespective of your business volume. In fact, fixed costs will be incurred even if you had zero volume! This is why your revenues should cover at least your fixed costs. Why not variable costs? Variable costs are determined by your business volume. They will exist only if you have business volume. For example, if for some reason, your hotel occupancy is zero on a given day (there are not guests in your hotel), that would have no effect on your fixed expenses which would continue to be incurred. It is only variable costs which are related to business volume which will change when business volume changes.
3. Revenue Potential
Break Even point is a level of your business volume when your fixed expenses are equal to your revenues. For example, in the case of the rooms operation in a hotel, knowing at what occupancy %, your fixed expenses level with your revenues is critical. This is because it indicates whether there is room to grow revenues further. Break even tells you whether your revenues have potential to grow beyond your fixed costs. This is why knowing whether you are going to be earning profits is so important.
Check your monthly revenues versus your monthly fixed costs on an ongoing basis. This will indicate potential for earning profits. Your owners will be watching this closely.