1 COLLEGE CONCEPT OVERVIEW Hospitality Accounting Hotel Financial Management Overview Hotel owners have invested huge amounts of money in their properties: they have paid for the buildings, furniture,...

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1 COLLEGE CONCEPT OVERVIEW Hospitality Accounting Hotel Financial Management Overview Hotel owners have invested huge amounts of money in their properties: they have paid for the buildings, furniture, fixtures, equipment, staff, supplies, marketing, insurance, taxes, and so on. They are willing to risk all that money because they know that if the hotel is marketed and operated effectively and efficiently, they will be rewarded with profits. These profits are referred to as the owners’ return on investment (ROI). To earn expected profits, the hotel’s leadership team must practice strong and sustained financial management. Reduced to the simplest terms, the hotel’s incoming funds (revenues/sales/fees/gross income) must exceed outgoing funds (expenses/costs) on a continuing basis or the hotel will experience losses and possible bankruptcy. The manager at a typical small, limited-service hotel hires a bookkeeper, who gathers pertinent information (bills to pay, for example, or employee hours worked) and forwards the information to the hotel owner’s central office, where the information is processed. A medium-size hotel’s general manager, on the other hand, traditionally employs an accountant or accounting manager, who gathers the information and processes it at the hotel level. A full-service hotel GM hires an on-site controller, the department head of the accounting department, who oversees accounting operations, purchasing, budgeting, and maintenance of information technology. Controller Functions The controller (aka financial manager) is responsible for providing financial guidance to the hotel’s management team by producing periodic financial reports, maintaining an adequate accounting system, and setting up a comprehensive set of controls, budgets, and audits designed to mitigate risk, ensure the accuracy of the hotel’s reported finances, and ensure that reported results are consistent with generally accepted accounting principles (GAAP) and the Uniform System of Accounting for the Lodging Industry (USALI), the standard financial classification system for the hotel industry. The controller has one overarching goal: to assist in every legal way to improve net profits, thereby increasing the return on the owner’s investment. The controller is also deeply involved with hotel operations, frequently asking department heads such questions as “How can more hotel revenue be generated on a nightly basis?” or “Are hotel products and supplies purchased from the best possible vendor and at the best possible price?” The controller also has the following major responsibilities: • Developing and administering plans and procedures that will assist the general manager and department heads in achieving profits • Ensuring that accurate accounting records are kept for all revenues and expenditures • Assisting management in implementing and monitoring operational standards • Training and motivating department heads to meet or exceed budgets • Producing and analyzing financial information, such as the monthly profit-and-loss statement, the balance sheet, and the cash flow statement • Calculating variances from the budget and reporting significant issues to management 2 COLLEGE CONCEPT OVERVIEW • Overseeing the accounting and business office and information technology • Conducting internal audits and monitoring risk/loss exposure • Complying with local, state, and federal government reporting requirements and tax filings The Importance of Financial Statements The profit-and-loss statement (P&L) is a financial document that hotel GMs and department managers need to understand completely. The consolidated P&L statement, also called an income statement, is a summary P&L that lists department totals for three key metrics: revenues (i.e., sales, fees, income), expenses (also called costs), and profits (revenues minus expenses) or losses. Hotels generate a tremendous amount of financial data, and proper accounting requires the maintenance of accurate, timely records for all of the hotel’s financial activities. The major category headings on the P&L can be summarized as follows: • In effect, there are only three categories on the statement: income, expenses, and net profit (income – expenses = net profit). • Revenues are also known as sales, gross income, or gross earnings. To ensure maximization of revenues, every sale of rooms, food, beverages, and other hotel products and services must be recorded (in accordance with GAAP). Whether described as sales, income, or revenue, the money paid by guests must be collected and safeguarded. • Expenses are costs for payroll, products, and other expenses incurred to create the income. Every operating expense, including salaries, wages, food products, linens, and supplies, must be carefully recorded, monitored, and managed. • Net profit (net income) or loss is calculated by subtracting total expenses from total revenues. Financial statements (see above) are used to measure the performance of each department (i.e., front office, housekeeping, and maintenance) and its manager, who has responsibilities to budget, monitor, and achieve revenue and/ or expense goals. The controller works with each department head to analyze and eliminate shortfalls (i.e., less revenue or more expenses than budgeted) shown on the financial records. The profit and loss statement is the key tool used to track incoming revenues and outgoing expenses. Revenues (sales or fees) are received and recorded by several hotel departments and all hotel retail outlets using cash registers or point-of-sale (POS) systems. These departments (i.e., front office or food and beverage) and outlets (e.g., gift shops, spas) are referred to as revenue centers, as they receive and record revenues from guests. Expense centers are the departments that support the revenue-generating departments, including sales and marketing, housekeeping, human resources, engineering, and accounting. While these departments are critical to the day-to-day sales, upkeep, and maintenance of the hotel, they do not generate revenue or profit, and their budgets include only expenses (e.g., salaries and wages, benefits, and supplies). There are four major expense categories recorded on a hotel department P&L: cost of sales, labor cost, direct operating expenses, and fixed costs. Cost of sales is a major variable expense for most revenue departments; it can be defined as the cost of anything served to, sold to, or consumed by guests. Food cost of sales can range between 25 percent and 35 percent of all costs in restaurants and banquet departments; beverage costs can total between 20 percent and 30 percent of all costs in restaurant and beverage departments; and costs of merchandise can range between 45 percent and 55 percent of all costs in gift shops. Because cost of sales is one of the larger expenses listed in department P&L statements, department managers (with the assistance of controllers) pay considerable attention to understanding and controlling it. Labor cost (Salaries and wages and benefits) represents the largest expense in most hotels and requires daily monitoring to ensure that these costs do not exceed the allocated budget amount. Salaries and wages include management salaries, hourly wages, and overtime. Benefits associated with payroll include mandated health insurance and social security and optional programs paid at the discretion of the owner, such as 3 COLLEGE CONCEPT OVERVIEW 401(k), holiday pay, bonuses, or education reimbursement. The total benefit package can equate to as much as 40 percent of the salaries and wages. To put it in perspective from an owner’s point of view, when an employee is paid a wage of $12 per hour, the employer is actually paying $12 plus as much as an extra $4–$5 for benefits, so the actual labor cost (aka labor burden) may be $16–$17 per hour. Direct operating expenses are essential in providing products and services to hotel and restaurant guests; they are listed below: • Rooms: reservation costs, guest supplies, cleaning supplies, and uniforms • Restaurants and banquets: china, glass, silver, linen, paper supplies, and uniforms • Beverage: glass, paper supplies, uniforms • Gift shop: paper supplies, office supplies, and freight Exhibit 1: Typical Profit and Loss Statement Using USALI Accounts Key Statistics and Revenue by Department Expenses by Department Costs Relating to Capital and Long-term Investment Expenses that Span Departments and Profit Calculations 4 COLLEGE CONCEPT OVERVIEW The fourth major expense category on the consolidated P&L is fixed costs/expenses, which means that, as the name suggests, the fixed expenses are paid regardless of hotel occupancy levels. They include bank loan payments, taxes, insurance policies, lease expenses, licenses and fees, and depreciation. Hotel management has little control over these expenses, which are already set by ownership and have to be paid regardless of the hotel’s economic health. The hotel’s P&L statements provide ways for managers to measure specific components of the financial performance of various departments by comparing the actual monthly operations to the budget established for the month, to the most recent forecast, to last year’s monthly performance, and to the previous month’s performance. Department managers should focus on larger expensive categories and the widest variations of actual expenses compared to budget. The Financial Management Cycle The P&L information guides hotel managers in all four steps of the financial management cycle: 1. Operating the departments that provide products and services to guests and produce revenues, expenses, and profits. 2. Ensuring that accounting numbers are correct and consistent so that the resulting financial reports are accurate and useful. 3. Reviewing, analyzing, and discussing department operating numbers to determine how well hotel operations are meeting the desired goals, budgets, and forecasts; and providing critiques and details of operations that can assist in determining how to correct or improve the departments’ operations. 4. Implementing changes to improve operations and to correct inefficiencies. Achieving Profitability Each department manager is responsible for ensuring that information submitted to the accounting department is accurate and timely. They need to understand their POS systems and the payroll systems used to track labor costs. They must also efficiently order materials and supplies so that inventories and expenses are kept to a minimum. To meet budgeted productivity levels and profit margins, operations managers must be able to monitor and control all of their purchases, inventory levels, and expenses. The monthly department