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Hotel Financial Models

Hotel Financial Management

When running a hotel, it’s essential that you have a good understanding of the financial aspects of the business. Many hotel managers shy away from the finance side of things, as form filing, bookkeeping, and dealing with complicated numbers can be tedious and difficult! However, the less you do in terms of finance organization, the more your accountant will have to do, and the higher your bill will be! So as a hotel manager you should meet with your accountant as soon as possible to make sure that the data you are collecting on a regular basis is correct and efficiently collected. By having practical financial controls put in place from day one, you’re making your life easier for the rest of the year from a cash flow, tax liability, and profitability sense. Your accountants should also do your personal tax return, because this return will be heavily connected to your bookkeeping records and financial accounts. E.g. any time you withdraw from petty cash, it has to be accounted for, whilst any income drawn has to be highlighted from the P&L account and included in the personal tax calculation. If you use just one accountant, you will also benefit from minimal overall tax burden as your accountant will be in the position to see the bigger picture with all of your information available. If you use two separate accountants or accountancy firms, you risk confusion, duplication, and doubt which will see you being charged an inevitably high bill at the end of the year. This is why, before you get stuck in to running your hotel, you should seek professional financial advice on the things you should be doing throughout the year.

Dealing with hotel finance

Once turnover reaches £61,000, (83,211.32 USD) most hotel businesses will have to start dealing with Value Added Tax. Once your hotel business is considered VAT registered, you must declare your VAT return at the end of each quarter, meaning your bookkeeping must be completely up-to-date and accurate or you could face financial penalties. Calculating VAT is relatively easy to calculate. The output tax is what is received from your paying customers, or in this case, guests. The input tax is money that is connected to paying for operating expenses. The difference between these expenses- where your output tax has exceeded your input tax- is amounts to the VAT you will pay at the end of that period. Similarly, if the input tax is higher than the output tax, you have the right to claim back the difference. There are different tax rates for different product groups, as well as different regulations in different countries, and so you should consult your accountant as well as the Inland Revenue regarding your bookkeeping activities to ensure that all of your receipts and invoices have amounts associated with them that are legally identifiable.

Your profit and loss account will be the main measure of profitability at the end of the year. This is usually generated by your accountant based on all of the bookkeeping receipts and activities. Either you will have organized these papers or your accountant will have done your bookkeeping for you. The hotel’s bank statements will be compared with all of your VAT returns and bookkeeping records, and your accountant will then question you on any items of expense or revenue that appear to be unidentifiable. The P&L statement will formally present the amount of guest revenue generated during your annual fiscal period minus all allowable expenses so that a gross profit figure can be calculated. Banking interest is then taken away along with a calculation of corporation tax that is based on gross profit amount in order to get a final net profit. Corporation tax could change every year in line with budget announcements.

By organizing your expenses into categories, you should help your huge pile of statements and receipts to appear more meaningful. Sales and costs can only become understood and controlled if they are organized. Running a hotel business, you will encounter a vast amount of expenses in a range of categories: advertising, insurance, electricity, cleaning supplies, wages, food, repairs, maintenance, stationary, and telephone. It is advisable to have a system in place that will record all expenses; a program such as QuickBooks for example. You should allocate some time each evening to record all of the takings for the day into the system. If you fail to record these accurately, there will inevitably be errors leading to surprises in your forecasts at the end of the year.

Every amount no matter how large or small of guests spending must be accounted for. When you enter all revenue and expense items daily into a system, it provides a centralized record on which you are able to reconcile your bank statement. You must store these receipts and records for at least seven years in case Inland Revenue conducts an audit to verify the reliability of current accounting processes and previous tax returns.

You will find that your profit and loss account will become a useful tool for management as it can provide a comparative analysis to see how efficiently your cost base is being controlled. As well as this, you can use it to evaluate your marketing efforts. E.g. you and your accountant may agree on separating sales by rooms, alcohol sales, food sales, and room extras. This will help management to identify opportunities to cut costs or areas where margins are under pressure. You will also have the chance to break down the average profitability per guest and per room. Commonly, percentages are used to identify each expense-line item against other items so that you can spot trends over a number of years. The profit and loss account can also show your break-even point once fixed and variable operating expenses are better understood. The majority of hoteliers have an understanding of the occupancy rate that is required to break even and how much the rooms must be sold at over a given period of time. Due to the fact many hotels are highly seasonal, it becomes very important to plot cash flow over a 12 month period.

Petty cash withdrawals should be accounted for at the end of each day in a record log book that outlines the date, supplier, amount, and outstanding decreasing balance withdrawn. Receipts must be kept to prove that the expense was incurred by the business and is permitted under tax rules.

The balance sheet is the other main document that must be submitted in your annual return. It summarizes all of the hotel’s assets and liabilities at a certain point in time and is usually produced by your accountant. Potential investors for your hotel will closely examine your balance sheet so that they can have an understanding of any outstanding liabilities. Many hotel owners experience confusion when it comes to accounting for depreciation of assets. Your accountant will explain to you the most recent Inland Revenue guides concerning the amount that fixed assets can be depreciated by. Depreciation can reduce profitability and therefore corporation tax liability. Many people get confused also by goodwill and its value. Goodwill is known as an intangible asset, and it does not feature on the balance sheet. However if you ever decide to sell your business, your overall reputation in your area will be an essential factor in the final selling price.

Running hotel finances also requires proper forecasting and budgeting. A sales forecast should be both achievable and realistic. Ideally, budget should be calculated weekly to identify seasonal trends and guest spending patterns as actual figures accumulate. E.g. by their respective room rates per week, your sales forecast budget should be able to identify number of rooms you have. You could use a basic spreadsheet to make adjustments based on worst and best case scenarios regarding occupancy levels throughout the course of the year. By examining previous years, the actual room occupancy rates are useful for future budgeting. For example, adding dinner and drinks sales from guests to top of line items for room revenues will show that a proportion of guests will also order dinner and drinks. By examining seasonal trends, you will be able to identify where sales figures need improved. Consequently, you can begin to offer promotional deals.

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).

As a hotel owner, you need to be aware of specific kinds of bank charges for various transactions. These could be charges when cash is paid out, when a cheque is paid in, automatic pay-ins, overdrafts, and supplier direct debits. You should keep an eye on the types of transactions and the volume of them that your hotel must process to understand and be aware of the overall bank charges. When added up, these can amount to a significant expense item on the P&L account.

Last but not least, hotel guests generally expect to pay by credit card. It must be made clear what debit/credit cards you accept and which you don’t. According to the volume, credit card processing can cost around 5% of the transaction value, therefore must be analyzed carefully due to the significant debt they can make in your net margin.

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