Earnings before interest, taxes, depreciation and amortization, or EBITDA for short, is a KPI that is becoming increasingly prevalent in hotel management. Sometimes referred to as operational cash flow, the metric can be used to determine the operational profitability of a business, taking into account only its key daily running costs.
Why is EBITDA Important?
EBITDA has emerged as an important metric for certain types of businesses, including those in the hotel industry, to keep track of, because it is a way of assessing basic day-to-day operational profitability. The elimination of expenses like interest, taxes, depreciation and amortization from the metric means that performance can be viewed away from accounting, financing and political decisions, which can otherwise distort financial results.
The earnings before interest, taxes, depreciation and amortization KPI can be calculated with the following formula:
EBITDA = Total Revenue – Expenses (excluding interest, taxes, depreciation and amortization).
Uses and Limitations
EBITDA is useful for large businesses, especially those with a large number of assets, and is also popular among companies with significant debts. This is because it shows creditors the amount of money available to pay interest, and demonstrates potential profitability when accounting and financing decisions are removed.
It is also useful for comparing financial performance against businesses in other regions or industries, where taxes and expenses may be significantly different, which is why it has taken off as a KPI in the hotel industry.
With that being said, EBITDA is not yet recognised as one of the generally accepted accounting principles (GAAP). It is also possible to manipulate the metric to make a hotel look more profitable than it actually is, meaning the KPI may not present an accurate picture of true financial performance.
More Revenue Management KPI’s
KPI stand for Key Performance Indicator. With KPI’s you can measure and identify areas of success and failure, as well as trends related to demand and customer behaviour. Besides EBITDA, other important Revenue Management KPI’s are Occupancy rate, RevPAR, RevPOR, ADR, TRevPAR, NRevPAR, ARPA and GOPPAR.