The Hotel Industry (#243)
/In this podcast episode, we discuss accounting for the hotel industry. Key points made are noted below.
Cost Tracking and Capacity Usage
What is so special about hotels that they present a challenge for the accountant? The main issue is not any special accounting standards – there aren’t any. Instead, it’s all about tracking costs and capacity usage. For example, a lot of hotels are located in tourist areas where there’s a lot of seasonal variation from month to month. The accountant needs to separate out the fixed and variable costs of the hotel, and report on the fixed cost base for every month of the year. By doing that, management can figure out if it might make more sense to shut down the hotel during the off season.
Or, knowing the breakeven point of the facility, they can decide just how low they’re willing to drop prices during the off-season in order to pull in enough cash to offset their monthly operating costs. This is not a minor issue, since a hotel can easily go out of business if there isn’t someone available who can monitor the flow of revenues and expenses from month to month.
Discounts Granted
The accountant is also probably going to report on the discounts being given from the standard price for a hotel room. This standard price is called the rack rate, and it’s the price quoted to customers who request a same-day reservation without having made a prior reservation. This rate is usually discounted for people who reserve in advance, or who are preferred customers, or who buy rooms through a discounter. There can be a lot of discounting, since there’s not much variable cost associated with someone renting a room for a night. The price is nearly all profit, so there’s a temptation for the hotel manager to offer some pretty deep discounts in order to fill up the hotel. The accountant needs to keep track of the balance between offering discounts to attract customers, and being able to pay for all the fixed costs each month. So the accountant can maintain a model that shows how extra discounts increase the room utilization rate, but don’t generate as much revenue per room. This model should show a sweet spot where the prices are set at a level that maximizes profits, which probably also results in some rooms not being booked.
Ratio Analysis
The accountant can keep track of a few ratios that will give management a good idea of the hotel’s performance. For example, there’s the paid occupancy percentage, which states the portion of rooms sold in comparison to the number of rooms available for sale. Another measure is the average room rate, which is the total room revenue for the day, divided by the number of rooms sold. Or, the accountant could keep track of the complimentary occupancy percentage, which tracks the number of rooms occupied for free, divided by the number of rooms available for sale. I never seem to get those rooms.
Labor Cost Tracking
Another issue for the accountant is to track labor costs being incurred during the day. Hotels tend to need a lot of labor during very specific times, usually during check-in and check-out, and for room cleaning in the morning. The rest of the time, management needs to know when it can let employees go for the day, so that the hotel doesn’t rack up unnecessary labor expenses during low-activity periods.
Profit Center Tracking
And yet another issue is that the accountant needs to track the performance of every profit center within the hotel. It’s not a single, monolithic entity that earns a profit. Instead, there’re profit centers for the vending machines, and in-room movies, and the hotel restaurant – if there is one – and for any stores located within the facility.
Unusual Financial Statement Line Items
In terms of what’s different in the financial statements, a hotel can have separate line items on its income statement for sales related to rooms, and food, and vending, at least. The expenses can look a bit different, too, and may include line items for things like cable television fees, cleaning supplies, grounds and landscaping, laundry, linen, and uniforms. And, of course, consumables – that’s those little bottles of shampoo and conditioner in the bathroom.
Payroll Accounting
And then we have the accounting for payroll. In the hotel industry, nearly everyone is paid wages, not a salary. Wage tracking takes much more time than paying a salary, so payroll is a disproportionately large part of the work in the accounting department.
Fixed Asset Tracking
Fixed asset tracking can also be much larger than usual, for obvious reasons. It’s not just the construction cost of the hotel facility. There’re also fixed assets in the restaurant area, and the massive amount of furniture and fixtures in all the rooms and common areas. And on top of that, there are land improvements that need to be tracked. And, as the hotel ages, a lot of these assets are retired and replaced with new ones, which also have to be tracked as fixed assets. And on top of everything else, constructing a hotel takes months or years, and during that time the cost of the interest associated with the funding for the hotel can be capitalized.
Maintenance Tracking
A hotel is going to need maintenance – all the time. The facility is being heavily used, so equipment and fixtures will wear out. The accountant needs to keep track of the incoming maintenance requests, classify them in terms of what’s critical, and then recommend to management which issues can be fixed right now. In some cases, the cash flows of the hotel just won’t allow for immediate maintenance, so some issues have to be delayed. And this is not just a cash flow issue. In a high-end hotel, the facilities are supposed to look great all the time, so delaying maintenance can lead to reduced bookings, which reduces cash flows, which makes it even more difficult to keep up on the maintenance.
Fraud Issues
There can be a few fraud situations that are unique to hotels, and they’re most likely to occur when someone pays cash for a room. For example, the clerk at the front desk could charge a customer the room rate for a better room, check him into a lower-priced room, and then pocket the difference. Or, the clerk could pocket the cash from a customer payment and then charge the person’s room to a corporate account – which works pretty well when there’s a lot of volume running through the corporate account, so that no one will notice an extra charge or two.
Summary
So in short, the main issue with hotel accounting is that you’re optimizing the use of a massive asset. The accountant needs to assist in tracking costs, prices, and utilization levels, which can vary a lot by time of year. The job is like a giant balancing act, trying to work with lots of variables to keep the hotel profitable.