Chapter 5 Accounting

The Accounting Function Facility Engineering & Maintenance Controller: The individual responsible for recording, classifying, and summarizing the hotel’s business transactions. Purpose of bookkeeping: Record and summarize financial data Purpose of accounting: Development of systems to collect and report financial information Analyzing this same information Making finance-related recommendations to assist management decision making Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

The Accounting Function (cont.) Centralized accounting systems: Financial management system that collects accounting data from an individual hotel(s), then combines and analyzes the data at a central site Prevails in chain-operated or multiproperty hotel companies; company will likely employ CPA for data analysis Decentralized accounting systems: Financial management system that collects accounting data from an individual hotel site and combines and analyzes that data at the same site GM and controller take larger role in preparing financial documents Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Forecasting: Rooms Revenue Rooms revenue forecast should include at minimum: Rooms available for forecasted period Estimated rooms for the period Estimated occupancy rate for period Total rooms sold/total rooms available = occupancy percent (%) Estimated ADR (average daily rate) for period – Total room revenue / Total number of rooms sold = ADR RevPar (revenue per available room) for forecasted period – Occupancy % X ADR = RevPar Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Forecasting: Food & Beverage Revenue Number of guest rooms sold directly impacts amount of Food and Beverage sales volume Controller will forecast sales generated from: – Room service – Banquets – Meeting room Food and Beverage revenue – Audio visual equipment rental – Service charges Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Revenue Forecasting: Other Revenue Typical examples of other revenue sources include: Pay-per-view movies Parking charges Internet access charges Gift shop sales of newspapers, cigarettes, candy, lotion, soda, etc. Telephone (local/long distance calling) Guest laundry Coat check fees Golf fees Tennis fees Health club usage fees Pool fees Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Important functions of a budget: Budgeting Important functions of a budget: Allowing management to anticipate/prepare for future business conditions Providing communication channel whereby hotel objectives are passed to various departments Encouraging department managers who have participated in budget preparation to establish their own operating objectives, evaluation techniques, and tools Providing GM with reasonable estimates of future expense levels and serving as tool for determining future room rates Helping controller and GM to periodically evaluate hotel and its progress toward financial objectives Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Budgeting (cont.) Long-Range Budgets Encompass relatively lengthy period, generally 2–5 years or more Useful for long-term planning, considering wisdom of debt financing, refinancing, and scheduling of capital expenditures Annual Budgets Must be produced by individual hotels and submitted to central office for review in large, multiunit hotel companies Developed to coincide with calendar year Monthly Budgets Helps determine whether maintaining progress toward goals developed in annual budget Great use for seasonal hotel In text, refer to figure showing Waldo hotel property operations and maintenance department operating budget for January Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Income Statement Key financial documents: Income statement Balance sheet Statement of cash flows Income statement: Known as profit and loss statement Lists hotel’s revenues, expenses, GOP, and fixed charges for specific time (month, fiscal quarter, or year) In no case should this period exceed middle of next reporting period Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Income Statement (cont). Income Statement Information This Period’s Actual Revenues Less Direct operating expense Equals Department operating income Overhead (undistributed) expense Net income (GOP) Fixed expense Income before taxes GM can answer: How did hotel perform during this period? Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Income Statement (cont). Tricolumned Income Statement This Period’s Actual This Period’s Budgeted Last Year Same Period Actual Revenues Less Direct operating expense Equals Department operating income Overhead (undistributed) expense Net income (GOP) Fixed expense Income before taxes GM can answer: Hotel performance during this period? Hotel performance compared with performance estimate (budget)? Where did estimates vary significantly? How did hotel perform compared with same period last year? Where were significant changes from last year evident? Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Income Statement (cont.) Functions of balance sheet: Provides a point-in-time statement of overall financial position of hotel “Snapshot” of financial health of hotel Captures the financial condition of hotel on day it is produced, rather than telling how profitable the hotel was in a given accounting period Limitations of balance sheet: Of all assets, none consider relative value/worth of staff, including the GM, actually operating hotel Value of experienced, well-trained staff not quantified Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Balance Sheet Waldo Hotel Balance Sheet Assets Cash $75,000 Accounts receivable 50,000 Inventories on hand 25,000 Prepaid expenses 10,000 Total assets $160,000 Property and equipment $7,000,000 (Less accumulated depreciation) 500,000 Net property and equipment 6,500,000 $6,660,000 Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Balance Sheet (cont.) Waldo Hotel Balance Sheet (cont.) Liabilities and owners’ equity Current liabilities Accounts payable $75,000 Wages payable 25,000 Total current liabilities $100,000 Long-term liabilities Mortgage payable $6,300,000 Total liabilities $6,400,000 Owners’ equity 260,000 Total liabilities and owners’ equity $6,660,000 Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Financial Statements: Statement of Cash Flows It is critical that the hotel not only is profitable, but also that it maintains solvency. It shows cash effects of hotel’s operating, investing, and financing activities. Statement of cash flows can answer the following: How much cash was provided by hotel’s operation during accounting period? What was hotel’s level of capital expenditure for that period? How much long-term debt did hotel commit to during that period? Will cash be sufficient for next few weeks, or will short-term financing be required? Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Daily Operating Statistics: Manager’s Daily Sales Report The “Daily” Controller’s office should provide GM with a timely recap of prior day’s rooms, Food and Beverage, and other revenues Prepared from data supplied nightly by PMS The Daily includes the following: For rooms: – Number of rooms available for sale, number of rooms sold, occupancy rate, ADR, RevPar, and other rooms revenue information For Food and Beverage: – Restaurant sales, bar and lounge sales, meeting room rentals, banquet sales, and other Food and Beverage revenue information For other income: – Telephone revenue, in-room movie revenue, no-show billings, and other income The more detail you desire, the longer the Daily! Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Daily Operating Statistics: Detailed Room Revenue Statistics Documentation and verification of night auditor’s report is an important function of the controller’s office. Night auditor report provides a wealth of info. on room sales. Detailed room revenue report includes: Rooms available Total rooms occupied Rooms occupied by guest type Occupancy percent Total ADR ADR by guest type Total RevPar Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Daily Operating Statistics: Adjustments and Allowances Reduction in sales revenue credited to guests because of errors in properly recording sales or to appease a guest for property shortcomings. Adjustment Voucher ADJUSTMENT NO 348685 (1) DATE (2) 200xx NAME (3) ROOM OR ACCT.NO. (4) EXPLANATION (5) SIGNATURE X (6) 11-09-0199 (7) Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Daily Operating Statistics: Adjustments and Allowances (cont.) Importance of completion of allowance & adjustment voucher: Employee error in charges – Employee training program, cash sales systems, or guest service techniques Hotel-related problems – Equipment inspection programs, guest service training Guest-related problems – Total monthly allowance and adjustments / total room revenue = room allowance and adjustment % – This percentage varies based on hotel age, quality of staff and training programs, and type of guest typically served Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Cash Credit card-related techniques used to defraud guests: Charging guests’ credit cards for items not purchased, then keeping money from erroneous charges Changing totals on credit card charges after guest has left, or imprinting additional credit card charges and pocketing cash difference Mis-adding legitimate charges to create higher-than-appropriate total, with intent to keep the overcharge Charging higher-than-authorized prices for products/services, recording proper price, and keeping the overcharge Giving/selling credit card numbers to unauthorized individuals outside hotel Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Cash (cont.) Methods of evaluating cash control systems: Cashier training programs Sales revenue recording systems Cash overage/shortage monitoring systems Enforcement of employee disciplinary procedures for noncompliance Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Accounts Receivable Facility Engineering & Maintenance Accounts Receivable (AR): Money owed to hotel because of sales made on credit. Facility Engineering & Maintenance Direct Bill: An arrangement whereby a guest is allowed to purchase hotel services and products on credit. Guest seeking credit would complete a “Direct Bill Application” (refer to figure in text). Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Accounts Receivable (cont.) Controller’s job to establish: Which guests are allowed to purchase goods/services on credit How promptly those guests will receive bills What is total amount owed to hotel, and how long have those monies have been owed Facility Engineering & Maintenance A controller, together with a GM, should establish credit policies that maximize number of guests doing business with hotel yet minimize hotel’s risk of creating uncollectable accounts receivable. Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Accounts Receivable (cont.) Accounts Receivable Aging Report Waldo Hotel: Accounts Receivable Aging Report for January, 200X Total amount receivable $100,000.00 Number of days past due Less than 30 30–60 60–90 90+ $50,000 $30,000 $15,000 _____ $5,000 Total % of Total 50% 30% 15% 5% Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Accounts Payable Accounts Payable (AP): Charge for goods/services used by hotel, invoiced by vendor, not yet paid Sum total of all invoices owed by hotel to its vendors for credit purchases made by hotel Four major concerns in AP systems: Payment of proper amounts Payments made in a timely manner Payment records properly maintained Payment totals assigned to appropriate departments Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Accounts Payable (cont.) Payment of proper amounts: Ensure legitimate invoices are paid only for amount actually due Invoices, and payments for those invoices, should be checked by at least two people Payments made in a timely manner: Maintain good relations with vendors by prompt payment of invoices Take advantage of discounts offered by vendors for prompt payment Payment records properly maintained: Create system whereby total payments to vendors match vendor billings exactly Payment totals assigned to appropriate departments: Use a system of coding to assign actual costs to predetermined cost centers Implement functioning expenses coding system Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Purchasing and Receiving Ensuring payment is made to vendors only for goods/services actually received Payment should be withheld if all services have not been performed Before AP invoice is paid, check terms of sale, product prices quoted by vendor, and list of products against actual vendor’s invoices Devise payment system that ensures member of property management team has: – Preauthorized work – Confirmed cost of work – Verified work is satisfactorily completed Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Inventories Facility Engineering & Maintenance Secure accurate inventory from each department where monthly inventories are taken (refer to monthly income statement). Beginning period value of towel inventory + Towel purchases = Cost of towels available – Ending period value of towel inventory Cost of towels used in period Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Internal Controls: Payroll Proper payment of employees’ salaries and wages is an important function of the controller’s office Keep detailed, department-specific (individual) payroll info. – Important due to fluid nature of labor usage in hotel Advice to GM about prevailing wage rates, worker productivity, variation from budget, and future labor needs Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458

Facility Engineering & Maintenance Audits Facility Engineering & Maintenance Auditor: The individual conducting independent verification of financial records. Independent verification of financial records performed by organization operating hotel Cost-effective in multiunit hotels Internal Audit External Audit Independent verification of financial records performed by accountants employed by organization operating the hotel Hotel Operations Management, 2nd ed. ©2007 Pearson Education Hayes/Ninemeier Pearson Prentice Hall Upper Saddle River, NJ 07458