Hospitality Finance and Accounting

Essential Theory and Practice

Rob Ginneken, Rob Ginneken, Rob van Ginneken, Rob van Ginneken

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138583481
• eBook ISBN: 9780429015113
• Edition: 1
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

Hospitality Finance and Accounting provides a uniquely concise, accessible and comprehensive introduction to hospitality, finance and accounting from a managerial perspective. By avoiding unnecessary jargon and focusing on the essentials, this book offers a crucial breakdown of this often overly-complex subject area.

The concise chapters cover the essential concepts, ideas and formulas to be mastered within the hospitality industry including income statements, balance sheets, pricing and budgeting. Each chapter is split into two sections: theory and practice, giving students practical insight into the everyday realities of the hospitality industry through case studies which show how theories are applied to a range of relevant scenarios. Emphasis is placed particularly on the practices of revenue and budget management within the food and beverage industry.

This will be an essential introductory yet practical resource for all Hospitality students and future managers within the industry.

Chapter 1
Measuring performance

Learning outcomes

At the end of this chapter, readers should:

• appreciate the importance of measuring financial performance, for any business but especially for the hospitality industry;
• understand essential accounting principles and the general structure of an income statement to correctly interpret this report;
• be familiar with the most important sources of revenue and expenses in a hospitality business;
• understand how hospitality managers monitor actual versus past performance and versus the operating budget, using simple techniques such as vertical and horizontal analysis.

Theory

Rob van Ginneken

Introduction: two financial perspectives

Basically, there are two ways to look at any business – or not-for-profit organization, for that matter – from a financial perspective. One way, which we will explore in more detail in Chapter 2, focuses on what a business owns and owes at a certain moment in time. Think of the amount of cash in the organization: the petty cash in the secretaries’ office, in cash registers in departments where money is received from customers, or the money in bank accounts. Or imagine the value of the buildings, furniture, operating supplies and inventories. Or, in terms of what the business owes: money it may have borrowed and needs to pay back over time. You can hopefully imagine businesses would want to keep track of all of these. It’s a bit like taking a photograph of the organization; that is also a reflection of the way things are at a moment in time. The photograph in question is actually the financial statement known as the balance sheet, or the statement of financial position.

The other way of looking at a business from a financial point of view is arguably much more interesting for those interested in a career in hospitality management. This perspective is more like filming to track the activities and results (financial performance) of a business over time. In financial terms, you look at how operations lead to the organization becoming either richer or poorer. The business provides guests with a meal and receives payment for that; pays its employees salaries in return for their labour; and experiences a decreasing value, over time, of equipment, to name but a few. Hospitality firms typically do this on a daily basis: restaurant owners, hotel management teams, club managers: they all like to track the performance of their business day in, day out.

There are different names for the financial report that measures financial performance. If the report is about performance in a past period (yesterday, last month, last quarter etc.) it is often called the (daily, monthly, etc.) income statement, or profit and loss account. If the report is about the expected results in a future period, it is often called the operating budget. A budget is a financial plan. You can learn more about operating budgets, and how management monitors real performance versus the budgeted one, in the practice part of this chapter. Chapter 4 discusses the cash budget, a related but different kind of budget. After studying the next section of the current chapter, you may already appreciate the difference between the two.

It may help to compare the two financial perspectives to the movie “Super Size Me”. The movie is about the protagonist eating three daily meals at McDonald’s for an entire month. Apparently, Mr. Spurlock had a fat percentage of 11 at the start of the 30-day period, and of 18 at the end. These fat percentages could be seen as balance sheet data: the 11 and 18 convey information about his situation (how much fat he has) at a certain moment in time. The movie itself, spanning the 30 days of his experiment, would be the income statement: we would see how much weight he gained (by eating burgers and fries, and drinking sodas) and how much he lost (by walking from his car to the restaurant, for example). Obviously, there is a link between these two perspectives: the excessive eating and drinking, and lack of any serious physical exercise probably caused the increase in fat percentage. In financial terms: if a business performs well in a period (i.e. the income statement will look great), that will also show on the next balance sheet. We will discuss how this works in the next chapter.

The Income Statement and two “accounting principles”

Revenues and expenses are what’s on an income statement. Roughly speaking, revenue is the value of what you have sold in a given period, and expenses are the costs incurred in doing business in that period. Not only of the materials involved, but also the costs of labour (people you had to pay to make the product or provide the service or do the administration or supervise other people), of rent you had to pay for the premises, interest you had to pay on a loan etc. etc. – unfortunately for business owners, the list is long!

If you put revenues and expenses (we’ll go into more detail about those two shortly) in one statement, and subtract expenses from revenue, you have what’s called profit.

The more successful a business is in a) selling its products and services and b) running a tight ship, in other words, in keeping expenses in line with revenue), the more profitable it will be. In accounting terms: the more revenue (the “top line” on an income statement) will end up being profit (which is “the bottom line”). In hospitality businesses, this is often referred to as the “flow-through”; in the practice part of this chapter you will see an example of how a hotel management team discusses this. Of course, it is also possible – but clearly not desirable! – that expenses exceed revenue in a certain period. The business is then said to have a loss for that period.

At this point, it is important to make sure you understand revenue for a period is not necessarily the exact amount of money received in that period from clients. Nor do total expenses always equal all payments made. Revenues and expenses are on an income statement, and they reflect the business successes of a firm, in terms of value gained or lost. Cash receipts and cash disbursements (a posh way of saying ‘payments’) may be the result of revenues and expenses, but express something different. A few examples to illustrate this point.

Let’s say a restaurant hosts a wedding party on15 June. The party over, the restaurant has provided the newly-weds with a service and goods (food and beverages); as a result, the guests now owe the restaurant money. The owner includes this as revenue in her income statement for June, even if the couple would not be expected to pay until July or even August. This is referred to as the recognition principle. In other words: the cash will be received later, but the business can “recognize” and report it delivered a service, and thus record this as revenue in June. The same is true for expenses versus payments. Let’s say the crew of a cruise ship put in a lot of overtime in a certain month in high season. Even if the overtime may only be paid out next month, this is an expense which will be put in the month the hours were worked. This second important accounting principle is known as the matching principle. The idea is that to correctly assess performance in a given period, you subtract from revenue in that period all expenses which should be matched, are linked to that revenue, regardless of when they were paid for.

If all of this may sound overly complicated, just as often as not revenues and receipts do go hand in hand, as do expenses and payments: many customers pay straight away, employers pay regular July salaries in July, etc. There are, however, a few other situations in which expenses and cash disbursements do not go hand in hand. Let’s say a hotel buys a laptop to be used by the Banqueting Department. Is this an expense for the current accounting period? An expense, as we have seen earlier, is a loss of value needed to generate revenue. But can we really speak of a loss of value? The answer is “no”, as in effect we have traded one possession (an “asset”) for another: cash for a laptop. So we have not lost any value. That is to say: not at the time of the purchase. The matching principle applies here in the sense that we spread out the total cost of the laptop over the period in which it is of use to us. This expense is called depreciation (colloquially, this is often referred to as “writing off” the laptop), and, following the matching principle, will impact the income statement.

One more example: a business has borrowed money (for example to buy the laptop mentioned above) and now makes a loan payment to the bank. Is this an expense for the current accounting period? No. What is the business losing in value from paying back part of a loan? Exactly: nothing! They are simply giving back something they just had the temporary use of. Let’s take this example one step further and now take into consideration the bank is also a business, and is not content simply lending money and getting it back over time. Somehow, they will expect to get back more than they lent, and the “more” is called interest. To the borrowing company, this interest would be the expense associated with the loan.

At this point, you may ask yourself how businesses write off assets, or how much interest they owe the bank in a certain accounting period. It is outside the scope of this “Essentials” text to discuss this in-depth but to give you a first idea, the end of this chapter has a short introductory section on the topic.

Other types of expenses and structure of the income statement

We already discussed some expense types in the rather theoretical section above. Let’s have a more practical look at the different kinds of expenses hospitality businesses incur.

By and large, most of the income statements that companies draw up follow a similar “path” going from revenue to profit. The first group of expenses subtracted from revenue is comprised of those expenses most closely linked to actual business operations. How much is the business paying for the products, or the parts thereof, they are selling? How much to pay production personnel? A second category of expenses would be a bit further removed from actual operations, but still considered “operating expenses” in accounting speak: how about costs of Marketing and Sales, like a social media campaign, how about the expenses of the HR and ICT Department? And how about utilities expenses (the bills received from gas, water and electricity companies)? The last type of expenses would include, for example, property taxes, rent payable to the company’s landlord, or the depreciation and interest expenses discussed briefly earlier. This last group are called non-operating expenses: if you take a close look at them, you’ll notice these expenses are more the result of certain choices made by the owner than they are related to how much business the company happens to be doing in a certain accounting period. Did the owners choose to rent a modern, luxurious office building or opt for cheaper yet fully functional premises? Did they have the company borrow as much as possible – causing it to incur a high interest expense – rather than putting a bit more of their own money in the firm? Your lecturer may talk to you about abbreviations such as EBIT and EBITDA. These relate to different profit levels where certain expenses have, and others have not yet been subtracted from revenue (e.g. EBITDA stands for Earnings (another word for profit) Before Interest, Taxes, Depreciation and Amortization, whereas EBIT is (you guessed it) Earnings Before Interest and Taxes: a profit level a bit further down the income statement, after the depreciation and amortization expenses have also been subtracted). The last step on the path from revenue to profit is corporate income taxes. Just like personal income (from salaries, or from other sources) is taxed, so are the profits of a business. And so finally we arrive at the bottom line of the income statement: net income or net profit, after taxes.

Figure 1.1 USALI 11th Revised Edition overview

In the next section, we will introduce the income statement format used by most hotels around the globe: the so-called Uniform System of Account for the Lodging Industry – USALI for short. You’ll see it closely follows the general set-up of income statements just discussed. Other hospitality operations, such as restaurants or clubs, may use different lay-outs, but once you understand the structure of the USALI format, you will also be able to understand these.

USALI presents us with a three-part income statement.¹ The first (top) part shows all departmental revenues, that is revenues from selling 1) rooms, 2) food and beverage, 3) revenue from other operated departments (think: spa, golf course) and 4) something called “miscellan...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Acknowledgements
• 1 Measuring performance
• 2 Balance sheet and ratios
• 3 Pricing
• 4 Finance and accounting in F&B
• 5 Capital budgeting: planning for long-term asset expenditure
• Index