Accounting Essentials for Hospitality Managers

Chris Guilding, Kate Mingjie Ji

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000539929
• Edition: 4
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

For non-accountant hospitality managers, accounting and financial management is often perceived as an inaccessible part of the business. Yet having a grasp of accounting basics is a key part of management. Using an easy-to-read style, this book provides a comprehensive overview of the most relevant accounting techniques and information for hospitality managers. It demonstrates how to organise and analyse accounting data to help make informed decisions with confidence.

With its highly practical approach, this new fourth edition:

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• Quickly develops the reader's ability to adeptly use and interpret accounting information to enhance organisational decision-making and control.

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• Demonstrates how an appropriate analysis of financial reports can drive your business strategy forward from a well-informed base.

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• Presents new accounting problems in the context of a range of countries and currencies throughout.

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• Develops mastery of the key accounting concepts through financial decision-making cases that take a hospitality manager's perspective on a range of issues.

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• Includes accounting problems at the end of each chapter to be used to test knowledge and apply understanding to real-life situations.

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• Offers extensive web support for instructors and students that includes PowerPoint slides, solutions to end-of-chapter problems, a test bank and additional exercises.

The book is written in an accessible and engaging style and structured logically with useful features throughout to aid students' learning and understanding. It is a key resource for all future hospitality managers.

Chapter 1Introduction: Hospitality decision-makers’ use of accounting

DOI: 10.4324/9781003183334-1

LEARNING OBJECTIVES

After studying this chapter, you should have developed an appreciation of:

1. 1 the accounting implications of key hospitality industry characteristics,
2. 2 the difference between financial and management accounting,
3. 3 some of the ways hospitality managers become involved in accounting,
4. 4 what is meant by the Uniform System of Accounts for the Lodging Industry,
5. 5 the basic differences between sole proprietorships, partnerships and companies,
6. 6 the focus and structure of this book.

1 Introduction

This book describes accounting and financial management procedures and analytical techniques in the context of hospitality decision-making. The purpose of this introductory chapter is to set the scene for the remainder of the book.

The first section of this chapter describes key characteristics relating to the hospitality industry and outlines accounting implications associated with these characteristics. Then, an overview of the nature of accounting is provided. In the course of describing the nature of accounting, the overall structure of the book will be introduced. We will see that Chapters 2–5 provide a grounding in hospitality financial accounting. Chapters 6–12 introduce a range of topics relating to management accounting and will show how management accounting techniques and procedures are critically important to a host of hospitality decision-making situations. Chapters 13–15 focus on managerial finance issues, and Chapter 16 provides a financial perspective on revenue management.

This chapter’s subsequent section highlights some of the many ways that different hospitality managers can apply accounting techniques and procedures to inform their decision-making. The following section introduces an important accounting report: the income statement. This statement is introduced in the context of a description of the Uniform System of Accounts for the Lodging Industry. This system was developed in the United States and is being increasingly used in large hotels internationally. This signifies increased standardisation of the classification scheme used by hotels to record their financial transactions and also greater standardisation of the financial performance reports produced by hotels.

2 Key characteristics of the hospitality industry

The hospitality industry encompasses a broad range of activities and types of organisation. Some of the industry’s particularly visible players include restaurants and bars that provide dining and beverage services and also lodging operations that offer accommodation facilities. Restaurant organisations range from multinational companies to small street-corner cafés. Similarly, lodging operations range from multinational hotels offering thousands of rooms worldwide to bed-and-breakfast operations offering a single guest room. At the bed-and-breakfast extreme, we have small family-run concerns with a limited service range, while at the other extreme, we have multinational companies offering a range of services that include accommodation; dining; and frequently conference, sports and leisure facilities. The hospitality industry’s heterogeneity becomes apparent when we recognise that its diversity encompasses the following:

• Hotels
• Motels
• Restaurants
• Fast-food outlets
• Pubs and bars
• Country and sport clubs
• Cruise liners

This book is primarily focused on hotel management. This focus has been taken because the majority of large hotels provide most of the service elements offered by the hospitality organisations listed above. In addition, as many large hotels have to co-ordinate provision of a range of hospitality services under one roof, they confront a degree of management complexity not encountered in many other hospitality organisations that offer a narrower range of services. For example, a large hotel’s organisational structure and accounting system must be designed with due regard given to co-ordinating a range of disparate functions that, in most cases, will at least include the provision of accommodation, restaurant and bar facilities. The disparity of these functions is apparent when we recognise that the sale of rooms can be likened to the sale of seats in the airline or entertainment industries, a parallel exists between food preparation in restaurant kitchens and production activities in the manufacturing industry and bar operations can be likened to retailing. In addition to managing this disparate range of services, a hotel needs to co-ordinate a set of distinct support activities such as laundry, building and grounds maintenance, information systems, training, marketing, transportation and so on.

This disparate range of hospitality activities are housed within a single site (i.e., building and surrounds) that we refer to as a hotel. This creates a degree of site complexity which is exacerbated when we recognise that the location of the service provider is also the place where the customer purchases and consumes the services offered. While this is patently obvious to anyone who has been to a hotel, we should not forget that it is not the case in many other service industries (e.g., banking, transportation, telecommunications, law, accounting) or the manufacturing industry. This factor highlights a further dynamic of the hotel industry. Not only is a hotel site the place where a broad range of activities are undertaken, it is the focal point of extensive and continual vigilance with respect to cleaning, maintenance and security. We can thus see that a hotel represents a complex site where distinct activities are conducted in close proximity to one another. Where the performance of one functional activity (e.g., cleaning) can be affected by the way another is conducted (e.g., maintenance), high interdependency is said to exist. Such high interdependency can create problems when attempting to hold one functional area (e.g., cleaning) accountable for its performance.

Not only is functional interdependency an issue when trying to hold a manager accountable for costs, it can be a problem when attempting to hold a manager responsible for a particular department’s level of sales. For example, through no fault of her own, a food and beverage (F&B) manager may see her profits plummet as a result of a relatively low number of rooms sold by the rooms division. Such cross-functional interdependency needs to be recognised when identifying what aspect of a hotel’s performance a particular manager should be held accountable for.

Sales volatility

The hotel industry experiences significant sales volatility. The extent of this volatility becomes particularly apparent when we recognise it comprises at least four key dimensions:

• economic cycle volatility
• seasonal sales volatility
• weekly sales volatility
• intra-day sales volatility

These dimensions of sales volatility and the implications they carry for hotel accounting are elaborated upon in Box 1.1.

BOX 1.1

Dimensions of sales volatility in the hospitality industry

1. 1 Economic cycle volatility: Hotels are extremely susceptible to the highs and lows of the economic cycle. Properties with a high proportion of business clients suffer during economic downturns due to significantly reduced corporate expenditure on business travel. Hotels offering tourist accommodation also suffer during economic downturns due to families reducing discretionary expenditure on activities such as holidays and travel. This high susceptibility to the general economic climate highlights the importance of hotels developing operational plans only once careful analysis has been made of predicted economic conditions.
2. 2 Sea...