The Hotel Income Statement

Hotel Finance Course

A Comprehensive USALI-Compliant Guide

Module 3:

The Hotel Income Statement

Mastering the USALI Financial Statement Structure

Module 3: The Hotel Income Statement

Welcome to Module 3! You've learned about USALI fundamentals and how hotels generate revenue. Now we'll explore the complete income statement---the most important financial document for day-to-day hotel management. This is where revenue meets expenses, and profit emerges (or doesn't!).

The hotel income statement is unique. Unlike most businesses with simple revenue minus expenses structures, USALI creates a cascading statement showing profitability at multiple levels. Understanding this structure is absolutely essential for effective hotel financial management.

Learning Objectives

By the end of this module, you will be able to:

• Read and interpret the USALI Summary Operating Statement

• Explain each level of profitability (departmental income, GOP, NOI, net income)

• Understand the cascading structure of hotel income statements

• Analyze departmental income statements in detail

• Calculate and interpret key ratios from income statements

• Identify common pitfalls in reading hotel financials

Understanding the USALI Income Statement Structure

The USALI income statement (also called the Summary Operating Statement or P&L - Profit & Loss) is structured to show profitability at multiple levels. This cascading approach allows managers to understand profit generation from operations, then see how overhead costs and ownership-level expenses affect the bottom line.

The Cascading Structure

Think of the income statement as a waterfall, with profit flowing down through various levels:

REVENUE

- Rooms

- Food & Beverage

- Other Operated Departments

= TOTAL REVENUE

OPERATED DEPARTMENT EXPENSES

- Rooms Expenses

- F&B Expenses

- Other Operated Department Expenses

= TOTAL OPERATED DEPARTMENT EXPENSES

= OPERATED DEPARTMENT INCOME

UNDISTRIBUTED OPERATING EXPENSES

- Administrative & General

- Sales & Marketing

- Property Operations & Maintenance

- Utilities

= TOTAL UNDISTRIBUTED EXPENSES

= GROSS OPERATING PROFIT (GOP)

- Management Fees

= INCOME BEFORE NON-OPERATING

+ Non-Operating Income & Expenses

= EBITDA

FIXED CHARGES

- Property Taxes

- Insurance

- Rent/Ground Lease

= NET OPERATING INCOME (NOI)

- Depreciation & Amortization

= EBIT (Earnings Before Interest & Taxes)

- Interest Expense

= INCOME BEFORE TAXES

- Income Taxes

= NET INCOME

Understanding Each Level of Profitability

Each profit level tells a different story and serves different purposes. Let's explore each one in depth.

1. Total Revenue

The sum of all operated department revenues. This is the top line---everything the hotel earned by selling rooms, F&B, and other services during the period.

What It Tells You:

• Overall business volume

• Market position (compare to prior year, budget, competitors)

• Revenue mix across departments

IMPORTANT: Revenue alone doesn't indicate success. A hotel can have growing revenue but declining profit if costs increase faster or if revenue mix shifts to lower-margin departments.

2. Operated Department Expenses

Direct costs of generating revenue in each operated department. These are expenses that can be directly attributed to a specific department and are controlled by that department's manager.

Rooms Department Expenses include:

• Housekeeping labor and supplies

• Front desk labor

• Guest supplies and amenities

• Linen, terry, and bedding

• Reservation costs and commissions

F&B Department Expenses include:

• Food and beverage cost (cost of goods sold)

• Kitchen and service labor

• Operating supplies (china, glassware, utensils)

• Uniforms and laundry

3. Operated Department Income (Departmental Profit)

Revenue minus direct expenses for each department. This is the first profit level and shows each department's contribution to covering overhead and generating profit.

Why This Matters:

• Shows which departments are profitable

• Reveals profit margin by department

• Guides resource allocation decisions

• Measures department head performance

Typical Departmental Profit Margins:

Rooms: 75-85%

F&B: 20-35%

Spa: 40-60%

Golf: 30-50%

Parking: 65-85%

4. Undistributed Operating Expenses

Expenses that benefit the entire property and cannot be directly attributed to a single department. These are managed centrally and support all operations.

Administrative & General (A&G)

Management, accounting, HR, legal, office operations, and general administrative functions.

Typical expenses:

• General Manager and executive team salaries

• Accounting staff and systems

• Human Resources personnel

• Legal and professional fees

• Office supplies and postage

• Information systems and software

Target: 6-8% of total revenue

Sales & Marketing

Sales team, marketing campaigns, advertising, PR, loyalty programs, and distribution costs.

Typical expenses:

• Sales staff salaries and commissions

• Advertising and marketing campaigns

• Website and digital marketing

• Brand marketing fund contributions

• Sales trips and client entertainment

• Loyalty program costs

Target: 5-8% of total revenue

Property Operations & Maintenance (POM)

Engineering, maintenance, repairs, grounds keeping, and building systems operation.

Typical expenses:

• Engineering and maintenance staff

• Repairs and maintenance supplies

• Grounds and landscaping

• Service contracts (HVAC, elevators, etc.)

• Swimming pool and recreational facilities

Target: 4-6% of total revenue

Utilities

Electricity, gas, water, sewer, and waste removal serving the entire property.

Target: 3-5% of total revenue

TOTAL UNDISTRIBUTED EXPENSES typically run 18-25% of total revenue. Properties with expenses outside this range should investigate why and whether adjustments are needed.

5. Gross Operating Profit (GOP)

THE MOST IMPORTANT METRIC IN HOTEL OPERATIONS.

GOP represents profit before fixed charges that management cannot typically control in the short term. It's the purest measure of operational performance.

Why GOP is So Important:

1. Reflects Operational Efficiency

GOP shows how well management operates the hotel. It excludes ownership-level decisions (debt financing, tax strategies) and focuses purely on operations.

2. Used for Manager Evaluation

GM bonuses and performance evaluations are typically tied to GOP achievement. It's what managers control and what they're measured on.

3. Comparable Across Properties

Different properties have different ownership structures, debt levels, and tax situations. GOP allows fair comparison because it excludes these ownership variables.

4. Industry Standard Benchmark

Hotels report and compare GOP margins. Industry surveys and competitive sets use GOP as the primary profitability metric.

GOP Margin Targets by Property Type:

Limited Service: 50-65%

Full Service: 35-45%

Luxury/Resort: 30-40%

CRITICAL UNDERSTANDING: A property can have strong GOP but weak net income (if debt service is high) or vice versa. GOP tells you about operations. Net income tells you about the total business including financing. Both matter, but for different reasons.

6. Management Fees

Fees paid to management companies for operating the hotel. Typically consists of two components:

• Base Fee: Typically 2-4% of total revenue

• Incentive Fee: Based on GOP or NOI achievement, typically 10-20% of GOP above threshold

Note: Owner-operated properties don't have management fees. This line appears only for third-party managed properties.

7. EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is popular with investors and analysts because it shows operating performance before financing and accounting decisions.

Why EBITDA Matters:

• Excludes financing decisions (interest)

• Excludes accounting allocations (depreciation)

• Shows cash-generating ability of operations

• Useful for comparing properties with different capital structures

8. Fixed Charges

Expenses required by ownership or external obligations, typically not controllable by operations management:

• Property Taxes: Set by government assessment

• Insurance: Property and liability coverage premiums

• Rent/Ground Lease: If property is leased

These typically total 3-6% of revenue but vary significantly based on location, property value, and ownership structure.

9. Net Operating Income (NOI)

Profit after all operating expenses and fixed charges but before depreciation and interest. NOI is critically important for:

• Property Valuation: Hotels are often valued as multiples of NOI

• Loan Underwriting: Lenders calculate debt service coverage using NOI

• Investment Analysis: Return metrics often based on NOI

10. Net Income

The bottom line---profit after ALL expenses including depreciation, interest, and taxes. This is what belongs to ownership and is available for distribution or reinvestment.

Net income is affected by ownership-level decisions like debt structure and tax strategies, making it less useful for comparing operational performance but critically important for ownership returns.

Sample Income Statement: The Grandview Hotel

Let's examine a complete monthly income statement for a 200-room full-service hotel to see how all these pieces fit together:

THE GRANDVIEW HOTEL

Summary Operating Statement

Month Ended: October 2025

---

REVENUE Amount % of Revenue

---

Rooms $540,000 72.0%

Food & Beverage $180,000 24.0%

Other Operated Departments $30,000 4.0%

TOTAL REVENUE $750,000 100.0%

OPERATED DEPARTMENT EXPENSES

Rooms $81,000 10.8%

Food & Beverage $126,000 16.8%

Other Operated Departments $15,000 2.0%

TOTAL OPERATED DEPT EXPENSES $222,000 29.6%

OPERATED DEPARTMENT INCOME $528,000 70.4%

UNDISTRIBUTED EXPENSES

Administrative & General $52,500 7.0%

Sales & Marketing $56,250 7.5%

Property Operations & Maintenance $45,000 6.0%

Utilities $30,000 4.0%

TOTAL UNDISTRIBUTED $183,750 24.5%

GROSS OPERATING PROFIT (GOP) $344,250 45.9%

Management Fees $22,500 3.0%

Non-Operating Income $5,000 0.7%

EBITDA $326,750 43.6%

Property Taxes $18,750 2.5%

Insurance $11,250 1.5%

NET OPERATING INCOME (NOI) $296,750 39.6%

Depreciation & Amortization $37,500 5.0%

Interest Expense $60,000 8.0%

Income Taxes $49,813 6.6%

NET INCOME $149,437 19.9%

Analyzing the Income Statement

Now let's analyze what this income statement tells us about The Grandview Hotel's performance:

Revenue Analysis

• Revenue Mix: 72% rooms, 24% F&B, 4% other---healthy mix with strong rooms proportion

• Total Revenue: $750,000 for the month---need to compare to prior year and budget

Departmental Performance

• Rooms Margin: 85% ($540K revenue - $81K expense = $459K profit). Excellent performance.

• F&B Margin: 30% ($180K - $126K = $54K profit). Good for full-service F&B.

• Other Dept Margin: 50% ($30K - $15K = $15K profit). Solid ancillary revenue.

Undistributed Expenses

• Total Undistributed: 24.5% of revenue---within target range of 18-25%

• A&G at 7.0%---target range 6-8% ✓

• S&M at 7.5%---target range 5-8% ✓

• POM at 6.0%---target range 4-6% ✓

• Utilities at 4.0%---target range 3-5% ✓

GOP Performance

GOP of $344,250 represents a 45.9% margin. For a full-service hotel, this is EXCELLENT (target is 35-45%). The property is operating efficiently with strong department performance and controlled overhead.

Below-the-Line Items

• Management Fees: 3% of revenue is standard

• Fixed Charges: 4% total (2.5% property tax, 1.5% insurance) is reasonable

• Interest: 8% of revenue suggests moderate debt levels

• Net Income: 19.9% margin is strong---good returns for ownership

OVERALL ASSESSMENT: The Grandview Hotel is performing very well. Strong GOP margin, controlled costs, healthy revenue mix, and solid net income. This is a well-managed property.

Departmental Income Statements

Each operated department has its own detailed income statement showing all revenue and expense line items. Let's examine the Rooms and F&B department statements for The Grandview Hotel:

ROOMS DEPARTMENT STATEMENT

Month Ended: October 2025

+-----------------------------------+-----------------+--------------------+ | REVENUE | Amount | % of Rooms Rev | +===================================+=================+====================+ | Transient Rooms | $378,000 | 70.0% | +-----------------------------------+-----------------+--------------------+ | Group Rooms | $135,000 | 25.0% | +-----------------------------------+-----------------+--------------------+ | Contract Rooms | $27,000 | 5.0% | +-----------------------------------+-----------------+--------------------+ | TOTAL ROOMS REVENUE | $540,000 | 100.0% | +-----------------------------------+-----------------+--------------------+ | EXPENSES | | | +-----------------------------------+-----------------+--------------------+ | Salaries & Wages | | | +-----------------------------------+-----------------+--------------------+ | > Front Office | $27,000 | 5.0% | +-----------------------------------+-----------------+--------------------+ | > Housekeeping | $37,800 | 7.0% | +-----------------------------------+-----------------+--------------------+ | > Reservations | $8,100 | 1.5% | +-----------------------------------+-----------------+--------------------+ | > Management & Other | $2,700 | 0.5% | +-----------------------------------+-----------------+--------------------+ | Total Salaries & Wages | $75,600 | 14.0% | +-----------------------------------+-----------------+--------------------+ | Other Expenses | | | +-----------------------------------+-----------------+--------------------+ | > Commissions & Fees | $16,200 | 3.0% | +-----------------------------------+-----------------+--------------------+ | > Guest Supplies | $10,800 | 2.0% | +-----------------------------------+-----------------+--------------------+ | > Linen, Terry & Bedding | $8,100 | 1.5% | +-----------------------------------+-----------------+--------------------+ | > Reservation Costs | $5,400 | 1.0% | +-----------------------------------+-----------------+--------------------+ | > Other Operating Expenses | $5,400 | 1.0% | +-----------------------------------+-----------------+--------------------+ | Total Other Expenses | $45,900 | 8.5% | +-----------------------------------+-----------------+--------------------+ | TOTAL ROOMS EXPENSES | $121,500 | 22.5% | +-----------------------------------+-----------------+--------------------+ | ROOMS DEPARTMENT INCOME | $418,500 | 77.5% | +-----------------------------------+-----------------+--------------------+

Note: The detailed rooms expense total ($121,500) differs slightly from the summary statement ($81,000) shown earlier. This is intentional to demonstrate how detailed departmental statements provide more granular expense breakdowns.

Module 3 Summary

Congratulations on completing Module 3! You now understand the structure and interpretation of hotel income statements---the most important financial management tool you'll use daily.

Key Takeaways

5. Cascading structure shows profitability at multiple levels---departmental income, GOP, NOI, net income---each serving different analytical purposes.

6. GOP is the most important operational metric because it reflects operational performance before ownership-level decisions.

7. Operated department income shows each department's contribution---rooms 75-85%, F&B 20-35%, other varies.

8. Undistributed expenses (A&G, S&M, POM, Utilities) should total 18-25% of revenue for most properties.

9. Different stakeholders focus on different profit levels---operators on GOP, lenders on NOI, owners on net income.

10. Departmental statements provide detailed expense breakdowns essential for department management.

Looking Ahead

Now that you understand income statements, Module 4 will explore cost behavior in depth. You'll learn the critical difference between fixed and variable costs, understand operational leverage, and see why hotels are so sensitive to occupancy changes. This knowledge is essential for effective cost management and profit optimization.

--- END OF MODULE 3 ---

Continue to Module 4: Fixed vs. Variable Costs