March 13, 2023
Adam Hoeksema
The IRS publishes tax return data each year on the roughly 28,000,000 sole proprietorships in the U.S. We analyzed the 61,974 tax returns that were filed in the Hotel industry to pull out some key statistics and insights to help our customers ensure that they are creating realistic financial projections for their hotel.
We hope that this data will be helpful for you as a “reality check” for your financial projections and Hotel business planning process. We hope you create a forecast for your unique situation and plan, and then use this data to make sure your projections seem reasonable based on industry averages.
Here is what we will cover in this article:
Learn How to Use this Financial Data
If you are creating projections for your startup business, or you just want to see how your existing business stacks up to industry averages, you can take your income statement and compare key ratios and percentages for your business compared to this industry average data.
How many Hotel businesses in the US are sole proprietorships
There are approximately 62,000 Hotel businesses in the US organized as sole proprietorships. We specifically analyzed 61,974 companies based on the 2019 IRS tax return data.
Average annual revenue for Hotels
The average annual revenue for all sole proprietorship Hotel businesses in the U.S. was just $94,464.
While this number might seem low, you need to remember that many Hotel hosts are just operating a small boutique hotel, not a full scale hotel with event center spaces, restaurants on premise etc.
This underscores the importance of actually creating your own hotel projections based on your business model:
Average annual expenses for a Hotel
The average annual expenses for all sole proprietorship Hotel businesses in the U.S. was $96,064.
It should jump out to you immediately that average annual expenses for a Hotel business are greater than total revenue. The specific dollar amount of expenses isn’t all that important, but the ratio of expenses to revenue can be informative for what you might experience with your property.
Average net profit margin for a Hotel business
The average net profit margin for an Hotel business was -2%.
This might seem shocking that the average hotel loses money, but you need to keep in mind a couple of things.
- Once you add back in depreciation which amounted to 12%, Hotel businesses are actually profitable on average.
- You also need to consider the appreciation in value of the property. So if the property increased in value by 7% per year, your total return as an investor looks much different than the simple net profit margin calculation.
How much can I make by owning an Hotel business?
In order to calculate the earnings potential of a hotel you can take the following assumptions:
- Number of rooms
- Average rate per night
- Vacancy rate
These assumptions will allow you to come up with a revenue forecast. From there you can apply the -2% profit margin and add back the 12% in depreciation to come up with a reasonable cash flow percentage of 10% that you might expect.
Top 9 expenses for an Hotel business
Based on the tax returns of roughly 62,000 sole proprietors operating in the Hotel industry, the following were the 9 largest business expenses as a percentage of revenue.
Average depreciation expense for a Hotel business
The average Hotel sole prop spent 12% of revenue on depreciation.
As a reminder, depreciation is a non cash expense, so from a cash flow perspective you can add back depreciation to your net profit which brings the average Hotel business to roughly a breakeven level.
Average salary expense for a Hotel business
The average Hotel business spent 12% of annual revenue on salaries and wages.
Average interest expense for a Hotel
The average sole proprietor Hotel business spent roughly 7% of annual revenue on interest expense.
Keep in mind that many hotels are going to be financed with variable interest rate loans or loans that are fixed for a period of time but will then adjust. Given this is based on 2019 data when interest rates were lower, I would expect that hotels are now spending a higher percentage of revenue on interest expense.
Average consumables expense for a Hotel
The average sole proprietor Hotel company spent roughly 13% of annual revenue on material costs. This would be for consumable items like snacks, drinks, paper products, cleaning products, etc.
I thought this seemed pretty high, but keep in mind that many businesses that might categorize as a hotel may also have a restaurant or breakfast that is offered to guests in which case the food cost would show up in this category of expenses.
Average utility cost for a Hotel
The average Hotel spent roughly 7% of annual revenue on utilities.
Average repair cost for a Hotel
The average Hotel host spent roughly 5% of annual revenue on repairs to the property.
Important Details about the Data
I want to point out a few key items about the data:
- You can download this data for free from the IRS website.
- The data includes 61,974 Hotel sole proprietorships in the U.S. in 2019.
- This data will include businesses that operate full time, and businesses that only operate on a part time basis.
- Because of this, you should take the raw numbers for revenue, expenses and profit with a grain of salt, but the percentages can still be quite valuable when trying to forecast expenses for your business.
- This data includes businesses from all across the country, keep in mind that revenue and expenses can vary greatly based on your specific geographic location.
- We used 2019 data because we felt it was most likely to be representative of a “normal” environment for the industry. COVID-19 caused disruption to almost every business in 2020 and 2021, so we wanted to utilize “normalized” data.
If you have any questions about the data or how to utilize the data in your financial forecasting process please don’t hesitate to reach out to us!
