As mentioned in Part 5, hotel management accounts generally adopt a departmental structure that allocates revenues, direct and indirect costs in a way to reflect either responsibilities or the major activity centres of the operation.
As this involves allocating revenues, cost of sales, labour costs and other expenses, it is important to know the bases for these. Users of the Uniform System of Accounts will have followed the Revenue and Expense Guide that forms part of the publication. There is also a guide to Departmental Payroll Tittles within the Operating Statements section.
For each department, the USALI sets out the criteria for the reporting schedules. The reporting system is primarily geared to full service, city type, hotels and some difficulties can arise as to how to make the relevant allocations. Users need to be aware of the most significant of these.
This part of the series will make reference to some of the most important examples.
Allocation of Departmental and Inclusive Price Revenues
This is probably the most complex of the issues for users of the USALI.
The USALI departmental structure is based on revenues being allocated to Rooms, Food and Beverage, Other Operated or Miscellaneous Income.
On the face of it this is straightforward, but when several services are packaged into one total price, and that total is not simply the addition of the standard prices for each element, then how to distribute the end result and share the effect of discounts or premiums can be challenging. To provide a method that is uniform for all hotels is even more challenging.
Why this is an important issue is that hotel revenue performance measures and key operating statistics are generally related to room or guest numbers, and average spends per customer. They are focused on the departmental revenues, so ensuring that consistent standards are applied to generating the revenues is necessary to generate reliable and comparable data. In addition, elements such as commissions or revenue related fees depend on accurate recording of the relevant revenues.
The USALI has the benefit of many years of experience, and of understanding the impact of the reporting on industry benchmarking and the existence of franchise, management, rent and other agreements that can be affected by whatever standards are used. In the interests of uniformity, this results in certain procedures that may conflict with how the business is actually run.
Interpreting a hotel’s performance statistics and what is shown in the operating statements requires knowledge among other things of:
• whether the standards for treating revenue as gross or net have been followed (Part V of the USALI)
• how any prices that include more than one revenue element are treated (discussed in Part I of the USALI Operating Statements section in the Rooms Department)
• understanding the effects of ‘free’ elements (eg where breakfast is part of the room rate; WiFi is not charged for; meeting rooms used by resident conference guests are provided free) on the departmental revenues
• being aware of the impact of revenues being recorded net of discounts and before the payment of commissions
It would be necessary to write a book about the many different ways hotels handle these items. Suffice it say that commercial, tax and practical considerations will all affect whether a hotel or hotel company have used the standards of the USALI as per the book. And even if they say they have, whether their interpretation is the same as others. Similarly, independent publishers of performance data for the hotel industry will either have accepted the input they use as being in compliance with standards such as the USALI - or they will have modified the input to try to make them compatible.
Competitor set analysis is often used for performance tests that are vital to the relationship between owners and operators. It is inevitable there will be differences between hotels no two of which have identical facilities and depending on how they have recorded and allocated their revenues.
Calculating Average Rates and Spends
The convention for the most common hotel operating statistic is to relate total revenues to the number of rooms.
Revenues are stated net of VAT, and reflect the yield to the hotel rather than the price paid by the customer. The latter may well be very different from that shown by the operating statistics, especially where the customer has been charged a retail price by an intermediary (an agent or OTA) that differs from the wholesale price paid to the hotel.
The USALI has set down (summarised in Part III as Operating Metrics) various standards that are generally used throughout the hotel industry. Within the departments, rooms revenues are related to rooms available and rooms sold. Food and Beverage revenues are generally related to customers and seats.
It is not common for there to be statistics that distinguish between total revenues generated from resident (overnight) guests, and those from other sources (such as restaurants and bars open to the public).
Hotels are often owned by real estate investors. To compare with other types of property, measuring revenues against areas occupied, such as per square foot or metre would be more informative - but so far the hotel sector has not widely adopted this approach.
Interpreting revenue data statistics therefore requires an understanding, in addition to how the base revenue figures are derived, of how the room or customer counts have been applied.
For example for rooms:
• is there consistency with the count of rooms available; how are rooms being refurbished counted; is seasonal closure an issue; is every bedroom a ‘room’ even if part of a suite
• are rooms sold statistics based on rooms occupied (including rooms that are occupied on a complimentary basis) or only for rooms sold
For Food and Beverage
• has the count been based on customers, covers, seats or some other standard
• has the allocation of revenues between food and beverage followed the USALI standard - which items are classified as food, and which are beverage
• how have service charges or other add-ons such as cover charges been handled
There are examples and explanations of how the USALI treats these, and as before it is recommended that reference is made to the book, and that identifying the standards that have been adopted by the hotel under review is recommended.
These are only top level aspects of how revenues are accounted for, and more about the subject and about costs will follow.