Hotel Financial Management

All hoteliers will need to have a good grasp of the financial aspects of running a hotel. Not many people enjoy bookkeeping, form filling and dealing with complicated numbers. So for the new hotelier the first step is to meet with your accountant as soon as possible after you begin your new hotel business. You will need to ensure that any data you are collecting on a regular basis is the correct data and is collected efficiently (so that your accountancy bill remains reasonable). The more complicated your financial situation at the end of the fiscal year that more work your accountant will have to do and the higher his charge will be. Therefore by putting in place practical financial controls from day one you will have a good understanding throughout the year regarding your cash flow, profitability and tax liabilities. It’s common sense to get your accountants to also do your personal tax return (as this return will be heavily linked to your financial accounts and bookkeeping records). For instance any drawings from petty cash must be accounted for, while any income drawn must be highlighted in the profit and loss account and included in your personal tax calculation. Using just one accountant will have the added advantage of minimising your overall tax burden as your accountant will be up to view the bigger picture with all the information to hand. Using two accountancy firms or two separate individuals creates unnecessary duplication, confusion, uncertainty and doubt which will inevitably lead to a higher accountancy bill at the end of the year. So it’s essential you get off on the right foot and seek professional tax advice and practical advice on what you need to be doing throughout the year.

Dealing with hotel finance

Most hotel businesses will have to deal with Value Added Tax once their turnover reaches £61,000. This threshold may change at the end of each year during the budget (according to government policy). Once your hotel business becomes VAT registered your bookkeeping must be completely accurate and up-to-date as you may be liable for financial penalties for failing to declare your VAT return at the end of each quarter. The basic formula for calculating VAT is relatively straightforward to calculate. The output tax is that which is received from your paying hotel guests. The input tax is monies linked to paying out operating expenses (such as trade hotel suppliers). The difference between the two (where your output tax exceeds your input tax) is the amount of VAT paid at the end of the period. Likewise if the input tax is greater than the output tax you can claim back the difference from the VAT man. Be aware that there are different rates of VAT for different product groups and there are also different rules which applied to different geographic areas of the world. You should consult the Inland Revenue and your accountant regarding your bookkeeping process to ensure that all of your invoices and receipts have legally identifiable amounts associated with them.

The main measure of profitability at the end of the year is your profit and loss account. Normally this is generated by your accountant based on all of the bookkeeping activities and receipts. Either you have organised these papers or alternatively you have employed your accountant to do your bookkeeping for you. Your accountant will compare your bank statements for the hotel with all of your bookkeeping records and VAT returns and quiz you on any unidentifiable items of revenue or expense. In simple terms the profit and loss account will formally show the amount of hotel guest revenue received during your annual fiscal period minus all of your allowable expenses to calculate a gross profit figure. Any banking interest is then deducted along with a calculation of corporation tax based on the amount of gross profit to get to a final net profit (out of which shareholder dividends may be allocated). The rates of corporation tax may change every year in line with budget announcements.

By classifying the huge range of expenses into logical categories your piles of receipts and bank statements suddenly become meaningful. Only by organising a set of accounts can sales and costs become understood and therefore controlled in the future. When running a hotel there are huge range of expense items including advertising, repairs and maintenance, cleaning supplies, hotel insurance, heat and light, food, wages, items, telephone, and stationery. It is recommended that you have a formal system to record all expenses in your hotel business such as a computer software programme (such as Quickbooks, Dosh and Clearly business), ledger system or just a simple accounts book for smaller hotels or bed and breakfasts. Hotels are obviously busy places with lots of cash purchases of sometimes incremental amounts as well as credit card bookings from guests. Time should be allocated in the evening to document all of the day’s takings into your system of record keeping. Failure to keep accurate records will inevitably lead to human error, (as receipts get mislaid of not entered) which would provide a nasty surprise to your end of year profit forecast.

Every penny of guests spending must be accounted for no matter how large or small. By entering all items of revenue and expense on a daily basis into some type of system it provides a central record upon which your bank statement can be reconciled. These receipts and records must be stored for at least seven years in case the Inland Revenue decides to undertake an audit to check on the reliability of previous tax returns and current accounting processes.

Your profit and loss account will also become a useful management tool as it will provide a comparative analysis to see how efficiently you are controlling your cost base. Likewise it can be used to check if you are doing a good job of marketing your hotel to attract guests to maximise your occupancy rate. For instance you may agree with your accountant to separate out sales by rooms, food sales, alcoholic beverages sales and room extras. This will help identify areas where margins are under pressure or where opportunities exist to cut costs. Your accountant will also be able to help you break down the average profitability per room and also per person. It is common to use percentages to identify each expense line-item against others to help identify trends over years. Your profit and loss account will also show your break even point once you have understood more fully your fixed and variable operating expenses. Most hoteliers will have an understanding of the occupancy rate required to break even and the rates at which those rooms must be charged out over a given period. Given that many hotels are highly seasonal, plotting cash flow over a 12 month period also becomes critical.

To account for any petty cash withdrawals from your hotel business, a simple petty cash record log book should be completed at the end of each day outlining the date, the supplier, the amount and the outstanding decreasing balance withdrawn. In other words payment of small suppliers for nominal amounts deducted from the overall petty cash withdrawn. Receipts will need to kept to prove the expense was wholly incurred by the business and is allowable under tax rules.

The balance sheet is the other main statutory document that needs to be submitted in your annual return. It summarises all of your assets and liabilities of your hotel business at a given point in time and is ordinarily produced by your accountant. Hotel investors will look closely at your balance sheet to understand any outstanding liabilities (such any outstanding business loans, supplier trade creditors and any liquid assets which could be sold off in the event of a resale or liquidation). One area of confusion most hotel owners experience is how to account for depreciation of assets. Your accountant will explain the latest Inland Revenue guidelines regarding the amount which fixed assets can be depreciated (such as kitchen machinery, computers and so on). Depreciation has the impact of reducing profitability and hence corporation tax liability. However large investments in new plant and machinery clearly involves obtaining business loans or utilising the greater investment during the hotel purchase process. The other area of confusion is the value of goodwill. Goodwill is an intangible asset and it does not appear on the balance sheet. Yet if you ever decide to sell your hotel business you’ll overall hotel reputation as quality provider of hotel accommodation in a local area is paramount in charging a premium for your business.

Another important aspect of running a hotel finances is proper budgeting and forecasting. A sales forecast should be both realistic and achievable. While your and operating expense forecast should not degrade the high quality of service you aim to provide your guests via planned excessive cost cutting. Ideally your budget should be calculated on a week by week basis in order to identify guest spending and seasonal trend patterns as actual figures accumulate. For instance your sales forecast budget should identify a number of rooms you have by their respective room rates by week. A simple spreadsheet would allow adjustments based on best and worst case scenarios of occupancy levels throughout the year. By looking at previous years, the actual room occupancy rates are a good basis for future budgeting. On top of a line item for room revenues you should add on sales from dinners and drinks. You will soon understand from your actual figures the proportion of guests that will also order dinner and drinks. By analysing seasonal trends you can identify where you need to improve your sales figures. Consequently by offering promotional deals in your hotel marketing literature you can hope to plug the gap.

There are specific types of bank charges for various types of transactions which you need to be aware of the hotel owner. These may include charges every time a cheque is paid in, cash is paid out, supplier direct debits, written cheques, automatic paying ins and an authorised and unauthorised overdrafts. Keep a close eye on the volume and types of transactions your hotel has to process in order to build up a picture of the overall bank charges (which collectively can mount up to a significant expense item in your profit and loss account).

Lastly and most importantly hotel guests expect to pay with a credit card (which provides added security and convenience on both sides) for the hotel and as well as the guest. You need to make it clear in your hotel marketing literature which debit or credit cards you accept and which ones you don’t. Credit card processing can cost around 5% of the value of the transaction which may vary according to volume so analyse your credit card needs carefully as they can make a significant dent in your net margin.

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