Chapter 8 Notes: Hotel Accounting and Financial Analysis

Introduction

• USALI standardizes hotel accounting and financial statements.

• USALI is based on responsibility accounting: Managers are evaluated based on revenues/expenses they control. Direct expenses are charged to departments. Other costs are charged to the hotel.

Questions Addressed

• Income statement formats for external (stockholders) and internal (managers) users.

• Statement of gaming operations.

• Helpful operating ratios for hotel management.

Hotel Income Statement

• Income statement (P&L) is crucial for cost control.

• USALI income statement: Revenue, Expenses, Income (before taxes, etc.)

Hotel Income Statement Formats

• Internal Format: For managers.

• External Format: For owners/creditors.

Internal vs. External Users

• Internal: Detailed info, single operation focus, controllable expenses only, frequent reports, budget comparisons.

• External: Summarized info, total net income focus, quarterly/annual reports.

Income Statement Sections

• Operated Departments

• Undistributed Expenses

• Fixed Charges

• Income Before Taxes

• Income Taxes

• Net Income

Departmental Sections

• Net Revenues

• Cost of Sales

• Payroll & Related Expenses

• Other Expenses

• Net Income

Revenue Section

• Revenue centers generate sales.

• Operated departments: Rooms, Food & Beverage, Telecommunications.

• Rentals and Other Income: Included in a schedule.

Schedule of Rentals and Other Income

• Includes: Interest, Dividends, Rental of store, Concessions income, Commissions, Vending machine profit, Cash discount earned, Salvage income

Package Plans

• Single price for multiple items (Room, Food, Beverage, etc.).

• Revenue Allocation: Allocate revenue to appropriate departments.

Package Plan Example

Expense Section

• Direct Expenses

• Undistributed Operating Expenses

• Management Fees

• Fixed Expenses

Direct Expenses

• Cost of food/beverage, salaries/wages, payroll taxes, insurance, supplies, advertising, etc.

Undistributed Operating Expenses

• Support Centers: Minimum guest contact, no sales.

• Franchise fees, expenses.

Undistributed Operating Expenses (Detailed)

• Administrative & General, Human Resources, Information Systems, Security, Sales & Marketing, Transportation, Property Operations & Maintenance, Utilities.

Fixed Expenses

• Rent, Property Taxes, Insurance, Interest Expense, Depreciation & Amortization.

Operating Ratios

• Mathematical relationship between two amounts (%).

• Comparison to budget, standard, historical data, industry average.

Common Operating Ratios

• Average Room Rate, Occupancy Percentage, Average Food Check, Food/Beverage/Labor cost percentage.

Average Room Rate (ARR)

\text{Average Room Rate} = \frac{\text{Rooms Revenue} $}{\text{Paid rooms occupied}}

Occupancy Percentage

\text{Occupancy Percentage} = \frac{\text{Paid rooms occupied}}{\text{Rooms Available}}

Average Food Check

\text{Average Food Check} = \frac{\text{Food revenue } $}{\text{Number of covers}}

Food Cost Percentage

• Typical: 28-34\%.

\text{Food Cost Percentage} = \frac{\text{Cost of Food Sold}}{\text{Net Food Sales}}

• Example: Calculate the Food Cost Percentage \frac{\text{Cost of Food Sold}}{\text{Net Food Sales}} = 33\%

Beverage Cost Percentage

\text{Beverage Cost Percentage} = \frac{\text{Cost of Beverages Sold}}{\text{Net Beverage Sales}}

Labor Cost Percentage

\text{Labor Cost Percentage} = \frac{\text{Payroll and Related}}{\text{Revenue}}

Statement of Gaming Operations (Casino Hotels)

• Includes: Revenue, less Complimentary allowances, Payroll & related Expense, Other expenses.

Revenue Accounting (Casino Hotels)

• Gaming Revenue: difference between gaming wins and losses.

• Two Methods: Gaming revenue only; Gaming revenue and retail value of complimentary items.

• Complimentary allowances are used when the first method is used.

Expense Accounting (Casino Hotels)

• Allowances include: Room, food, beverage, travel,…

• Payroll & related expenses, Credit & collection expense, Gaming taxes/licenses/fees, Postage, Complimentary Expenses.