Part 1: These Are Funny Looking Financial Statements
Among the questions we’re commonly asked is why hotel financial statements look different. The simple answer is that they reflect the actual operations of a hotel and provide in depth insight for owners, operators, lenders, and industry analysts. Now in its 11th edition, the Uniform System of Accounting for the Lodging Industry (also referred to as the Uniform System of Accounting for Hotels or simply the Uniform System) is maintained by the Financial Management Committee of the American Hotel & Lodging Association. Periodic updates reflect changes that occur within the industry, e.g., the 11th edition created a fifth Undistributed Expense category (more in part two of this series) recognizing that in-room phones are no longer a revenue generator but rather an expense center.
It is also important to understand that hotel financials conform to the accrual method of accounting and not the cash method. Among the reasons is that because there are many moving parts in a hotel, the accrual method provides a more accurate picture of the overall financial state of a hotel in a given period vs. the cash method.
This three-part series serves as a primer to familiarize you with the nuances of reading, understanding, and deriving value from hotel financial statements. We will use the cover sheet of a generic financial template for a full-service hotel as a guide. Actual hotel financials will have multiple pages divided into individual departments with line-by-line detail serving as backup for each item on the cover sheet.
Like other financial statements, revenue is recorded first. Operating Revenue begins with Rooms revenue which is (you guessed it) the revenue collected from selling hotel rooms, and it is always listed first. Generally, this is the largest revenue generator of the hotel and for limited-service hotels, can account for over 95% of hotel revenue. Food and Beverage revenue is recorded next and includes revenue from a hotel restaurant as well as from banquets or food and beverage for on-site meetings.
The next set of revenue listed is Other Operated Departments. This accounts for revenue from departments other than Rooms, Food, or Beverage that have both actual gross revenue and direct expenses associated, e.g., gift shop, parking fees, and spa revenue. While these revenues are accounted for in aggregate on the cover sheet, gift shop, parking, or a spa would all be detailed as separate departments with line-by-line information in the backup pages behind the cover sheet.
Lastly, Miscellaneous Income is revenue with no associated expense. These can be cancellation penalties or dry cleaning offered to guests when the dry cleaning is provided by a third-party service outside of the hotel. Usually, this is the smallest amount of revenue, but because it has no associated expense, it is of course the most profitable.
How profitable is my revenue?
Immediately following Operating Revenue is Departmental Expenses. These are the expenses directly associated with the Operating Revenue. Because we have Rooms revenue, Rooms expense is listed first. All expenses associated with the Rooms Department are aggregated including the cost of labor for front desk and housekeeping, rooms expenses such as travel agent commissions, and housekeeping expenses such as laundry supplies and guest supplies. Food and Beverage expense is an aggregation of all expenses in these departments including the cost of labor, and similarly, Other Operated Departments expense includes any and all expenses associated with other departments that have a revenue component. As a reminder, there is no Miscellaneous Income expense because there is no expense associated with the items including in this line.
Immediately following Departmental Expenses is Total Departmental Income. This number reflects the net amount resulting from Total Operating Revenue less Total Departmental Expenses. It also is an indicator of how efficient operations is in managing the expenses directly associated with revenue.
The next post in this series will dive into Undistributed Expenses.