How to Read Your Hotel's Financial Statements
By David Lund Hospitality & Leadership Expert, The Hotel Financial Coach | September 24, 2017
The first thing you need to know about reading a hotel financial statement is there are basically 2 different statements that you will want to get comfortable with. The two different statements are the income statement, some call it the P&L for profit and loss statement and the second in the balance sheet. Now I know what you're thinking, balance sheets are for the accounting types and they are complicated. Nothing could be further from the truth and I am going to give you a new understanding and share a secret about the balance sheet and the relationship to the P&L.One thing to always keep in mind is the fact that many miss. It's the existence of a the 11th addition of the uniformed system of accounts for the lodging industry.
Let's start with the income statement. A couple of things to note here. One the hotel income statement is a free form item and they are not all created equal. One characteristic that they all have is they are set up by department. Always starting with the rooms department, then F&B, then the minor operating departments like golf, spa, telephone and laundry. These departments are what we call the operating departments because they all have income. Then we find the non-operating departments, administration, sales and maintenance. These departments are all non-operating because they don't generate any income. I know some of you think the sales department makes money - not so fast. Sales book business but it's the rooms department that generates the income when the guest actually stays in our hotel. Funny, the P&L is organized and laid out just like a hotel.
Inside each department we will see the same layout, income first and then cost of sales if required, then payroll and last is expenses. The P&L usually starts with a great summary or overall report. This is where you will want to start your review. Here you should find total revenues for all hotel activities and the total costs, leading us to the gross operating profit and net operating profit lines. The statement is usually laid out so we can see the results of the month compared to the budget and or forecast for that same month and a last year comparison. In addition to the months numbers we will want to see the accumulated year to date results, normally to the right of the monthly numbers and in the YTD we want to see the accumulated result, let's say for November vs. the accumulated budget values up until November and the accumulated YTD last year results for the prior year up until November. Always comparing like periods of time in the budget and last year to the actual monthly and YTD amounts. A good summary P&L is probably the most read and highly anticipated financial statement in any hotel. Examples can be found in the references.
The summary statement lays out in nauseating detail the standards for our industry. It is a great resource for defining what goes where and the standard formats, but it does not include several aspects like flow thru and productivity reporting that are incredibly powerful and useful tools.
Leaving the summary statement, we find the balance of the income statement laid out by department in the same order we see in the top level. Each of these departmental statements will have totals for revenue, cost of sales (F&B, Spa, Telephones), payroll and expense that need to tie back to the summary statement. Once people make this connection it all comes together rater quickly and what we previously thought was so complicated and confusing is pretty straight forward.
The profit and loss statement is the most interesting statement because it shows us how we are doing as it relates to profit for a given period. It's a snapshot of what the revenues and costs are for the period we are looking at. If were looking at the June statement and its December it really is not relative any more.
The income statement tells us how we are doing financially with our operating profit. It's how we keep score relative to the budget (the promise) and last year. We can clearly see these comparisons for the most current month and year to date. We can also see where we have success in our operations and where we have our challenges. This is pivot. Seeing where we are not having the level of success we panned for and having the ability to manage around that challenge is the highest sole purpose of the income statement. How can we improve our results? Payroll is too high? Expenses are out of control? Revenues are falling short of budget? It all comes out on the income statement. Like a report card and a wakeup call to pull up your socks and your marks too. This is where the income statement transcends the black and white piece of paper and it becomes the vehicle for change and ideas. Get your team involved and change the way you manage. That's the result that's possible using some financial leadership.