What’s possible in the future with hotel financial statements

hotel financial statementsI am a big fan of the Uniformed System of Accounts for the Lodging Industry (USALI), or as she is affectionately called “You Sally.” It has been the guide that our industry uses to properly present financial information for a long, long time – in fact almost 100 years. It lays out the format for our financial statement presentation and essentially acts as a referee if you like, to tell us what goes where. What revenues, costs of goods, expenses, and payroll belong to which department.

Having a guidebook in its 11th edition that details where it goes and what it looks like are a gift. I know many industries struggle with this kind of calibration and we are extremely fortunate to have had a dedicated association put its collective efforts together to produce this text, especially the early versions. I am also sure there was a great deal of lively and spirited debate about what goes where.

I know firsthand about the conflict that arises in hotels when department managers discover that certain expenses are being charged to their area. They come to make their case and passionately tell me why, for example, that cable TV should not be charged to the rooms department because all the other utilities are charged to maintenance/energy. I usually let them rant a bit and then I pull out my book. Fun stuff for an accounting type, right?

Now, to highlight what I think is a real shortcoming when it comes to the way we look at profit and loss metrics in our industry. We have a single view of profitability through the lens of departmental results. What if we could look at the profitability by segment and roll that up to be able to see revenues and the associated costs by market segment? I hear this cry from the revenue management world all the time, but it’s not expressed the same way. They talk about profit management, but in order to do that we need to put some wheels on what we have.

In today’s advanced technological world, I think the time has come to create a new version of the hotel profit and loss statement that accompanies the departmental version. Most hotels are very good at segmenting their customers by rate code. What if all the other revenues generated from that customer were tagged so we could report total revenues by customer segment?

We have for a very long time debated which segment is the most profitable. What I’m saying is, it’s now possible to prove this. With the revenues by segment at our fingertips, the costs using the same allocation and distribution principles we currently employ today are possible. We just need to come up with some new methods and agree on what goes where. Just like we have done for 100 years only now we have a second view, first by the department and now by customer segment.

As it stands today, achieving departmental results means we need to allocate many expenses and even benefits, as well as the cost of goods. We could employ the same logic and follow the customer revenue with our closing adjustments. If we do this, we will be creating a picture of profitability by customer segment.

Let me break it down

The cost of goods is typically allocated to the restaurants and bars by revenue mix. Coming to grips with the fact that the hotel has one global food cost and often a global beverage cost as it stands today should give one comfort. Follow the revenue by customer segment and do the allocation of the cost of goods on the same mix.

Expenses by their nature are based on volume and time, recording the direct and allocated costs to their department, and simultaneously their customer segment is possible. Big expenses like online travel agent commissions can easily be tracked and attached to segments. Other expenses like laundry are equally available by the customer segment. Credit card commissions could be directly charged based on settlement type. Data exists to do this. We would need to break the expenses down accordingly by type and nature—based on a fixed, semi-variable and variable basis.

Payroll today typically is tracked by department through job codes by person. The payroll is perhaps the most challenging part of the numbers exercise. We currently do a good job of organizing it and recording it by department. What I think we could do to break it down by customer is again like some expenses, using a fixed, semi-variable and variable approach.

For example, front desk, housekeeping, administration, sales and maintenance could be allocated to each customer equally. Certain departments like the all-day dining room, room service and concierge could be apportioned to reflect a bigger portion of the leisure segments. Banquets could be charged against the group revenue. We would need to agree on a standard much like we have today with USALI. Overheads in payroll would be allocated based on the payroll mix.

Addressing the cash-paying, and non-hotel guest room customers would need to be addressed.

I’m not saying it’s all going to be clean and neat as a new shirt right out of the box but anyone who is intimately familiar with how we get the books closed today knows we make the same volume of allocations and distributions. These are what we refer to as closing adjustments today and there is no getting away from this fact if we want to have a detailed financial statement.

What I am saying is we could also arrange the information and data we have so it rolls up into a picture of profitability by customer segment.

Who is with me on this?

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