Measure the Cost

Posted By Andrew Morgan

Profit may not be what a business is all about, but it is what it survives upon. No profit means no business. It simply cannot survive. Any business owner or operator knows what is needed to achieve a profit beyond the breakeven point.

When a product or service is offered for sale, what it costs a business to purchase then get that product or service to the market in a position to sell is the breakeven point. In the case of accommodation, the room rate (selling price) less cost to get that room to the market and available to rent (cost) equals the profit margin.

By understanding where the breakeven point is and what the product or service can be sold for in the market, one is able to know the profit level, the volume of sales required to make a profit, the impact on profit of declining tariffs/prices or sales volumes, and the level sales can afford to reduce to before a loss is incurred.

The addition of a mark-up to make a profit and still be competitive determines the price the product/service can be offered at. The product of the motel room and associated service costs to the business to rent the room includes wages, cleaning products, pay tv, laundry/linen, electricity, insurance, wear and tear, rent, bank interest, council rates, and much more. A combination of fixed and variable costs. If the total cost including these expenses and others are unknown, how can the price be set to ensure the business is not losing money on the sale. If a motel is selling a high number of rooms at a solid occupancy rate however at the end of the month there is no money in the bank account, then one primary source to consider is the product price/room rate. Accurate costs to rent a motel room offers a very useful tool of measurement. As does an empty bank account!

Each different accommodation business will have a different cost base. The reasons why can be due to several factors that affect this figure such as property specifics, business operation and utilities.

Property Specifics

Unit Size – the square metre area that the unit occupies. A standard studio unit costs less to occupy than a 2 bedroom family unit.
Self-Contained – the cleaning costs alone to rent a self-contained unit can be substantially higher
Age of Property – how old the property is may determine how much upkeep is required to the buildings
Standard of Property – if a motel is in disrepair it will require more expense to maintain
Location – sea air may increase corrosion of buildings such as metal staircase hand rails, roofing, etc. Building movement in some areas may create brickwork and concrete cracking and other issues.
Unit Fit Out – what condition is the furniture and fittings in? Does the high level of humidity require tiles rather than carpet? Are blinds or block out curtains required?
Restaurant – a restaurant will substantially increase many costs, however this is a separate income department where the same considerations on what it costs to produce that product are relevant
General Services/Facilities – a lift, trees and gardens, swimming pool, spa or sauna are all services/facilities that contribute to the cost base

Business Operation

Lease/Freehold – Is the tenure leasehold with a rental to be paid each month, or is it freehold where mortgage repayments and bank interest are due? Interest rates will rise and fall changing repayment amounts. Interest payments will be applicable with leasing as well however the level of borrowing will be generally lower than a freehold purchase.
Type of Clientele – the motel’s business could be corporate customers, tourists, families, contractors, etc.
Laundry – is the linen cleaned onsite or offsite at a commercial laundry?
Employees – are employee levels correct or is the business over or under staffed?
Owner/Operator or Under Management – the cost of management wages will increase the cost to rent a motel unit. Although owners should expect to pay themselves a wage for their time anyway.
Consumables – what type of soaps, tissues, shampoos, etc are included within the unit?
Cleaning – are the cleaning products the most cost effective? How long are the cleaners allocated to clean each room, e.g. 20 minutes, 30 minutes, or unlimited?
Eftpos/Credit Card Fees – the fees charged by some card operators are higher than others.
Marketing – is the motel a member of a chain? The fees paid to a motel chain form part of the cost to rent a motel room, as does the commissions for booking sites and any other marketing initiatives.

Utilities

Council Rates - coastal motels may include much higher council rates than an inland motel where the land value is not as high.
Electricity/Gas – the costs of electricity have risen substantially over the past 10 years.
Land Tax – Is land tax paid by the property owner, Lessee or is it not applicable?
Insurance – the cost to insure properties has more than doubled in some areas over recent years.

Operating costs compound when not contained. Therefore, having an accurate cost base for the product or service being sold allows a business operator to be confident in the price of their sale price position and profit margin.