Financial Vs Operational Analysis
Before we dive headlong into what financial analysis is and what operational analysis is, let us see what analysis means.
If you arrived at this post directly, you may want to visit Market Segmentation Reports – Road Map to Revenue Results and 5 Myths about Financial Analysis, to catch the thread of related posts. These are key to operational analysis, a powerful compliment to effective financial analysis.
Meaning of analysis
The word analysis is generically defined as follows:
"The examination and evaluation of relevant information to select the best course of action from among various alternatives"
From the definition, we can clearly see that analysis is very closely linked to relevant information and decision making.
In short, making informed decisions.
Informed Decision Making Model
Informed decision making requires that that we ask a particular sequence of questions:
What are we trying to achieve?
What information do we have?
Did we achieve what we wanted?
Keeping this concept of informed decision making in mind and before we dive into the exciting world of financial analysis, it is only fair to visit an area which is equally, if not, more important. This is the world of operational analysis.
What is Operational Analysis?
Operational analysis is the study of the operation or service delivery process on which the entire business is built. There can neither be any operational analysis nor any financial analysis without the existence of this operation.
So, what then is the operation?
In the case of a hotel or resort, the operation refers to the entire process beginning with the guest room reservation, check in at the front desk, use of the facilities in the hotel including food and beverage, laundry, transportation, business centre, health club etc., and ending with the checking out of the guest after settling his or her room charges.
We shall be dealing with the hotel industry when discussing with financial or operational analysis in these series of blog posts.
Quantitative financial Vs Qualitative operational analysis
Financial Analysis mainly deals with the financial statements and related reports that are generated on a monthly basis like the Profit and Loss Account, Balance Sheet, Cash Flow and Capital Expenditure Statement.
In a manner of speaking, financial analysis looks at the end result or the output of any operation or service. By virtue of looking at the output, financial analysis may not reveal qualitative aspects of the operation or service. For instance, the monthly Profit and Loss Account may show a good profit for the month, but it will not be able to say whether customers were happy with the service provided. It is conceivable that customers are unhappy with the service or facilities and decide not to patronize the organization in future.
Operational analysis on the other hand goes behind the financial statements and takes a look at the processes that contribute to the key elements in those statements, namely revenues and expenses. Often, they emphasize the qualitative aspect of a financial index which is related to revenues and expenses and may relate to functions like human resources, training, engineering, etc.,
In the informed decision making set of questions we looked at earlier, one of the questions was what information do we have. Operational analysis provides that basic information which we must have before we conclude anything on the basis of financial analysis. In short, an operational analysis is a pre-requisite for effective financial analysis.
While operational analysis deals with a myriad of indices that are studied and reported upon, we shall be listing a some key ones that throw significant light on the performance of the hotel operation. These complement the financial analysis process perfectly providing a comprehensive picture of the business results of the hotel.
What are the Key Indices of an operational analysis?
The following are the key operational indices that we shall be looking at in these blog posts. These cover various areas of the hotel operation (rooms, food and beverage, other operating departments etc., as well as other functions like sales & marketing, human resources, training, engineering:
Market Segmentation Reports (including demographics, geographical origin, reservation source reports etc)
Repeat Guest Ratio
Average Length of Stay
Staff to Room Ratio
Table Turnover Ratio
Meal Period analysis
Staff Opinion Surveys
Employee Turnover Ratio
Personnel Development Cost as % of Total Basic Pay
Training Hours per Employee
Credit Card as a % of Gross Revenue
Utility Consumption per occupied room
Up-selling Niche facilities
In our next post in this series, we will be looking at Market Segmentation Reports and how they contribute not only to operational analysis but significantly also to financial analysis carried out on monthly financial statements.
