Finance in the Hospitality Industry
Recognize your ethical responsibilities as a managerial accountant in the hospitality industry. Unique Aspects of the Hospitality Industry Whether you are reading this book for a class, to improve your business skills, or simply to better understand managerial accounting, you probably are familiar with the term hospitality. Hospitality can be defined as the friendly and charitable reception and entertainment of guests or strangers. Hospitality also refers to a specific segment of the travel and tourism industry.
The question of precisely which specific businesses should or should not be included as part of the hospitality segment of travel and tourism is subject to open debate and honest disagreement. As a result, those colleges and universities that offer educational programs in hospitality may elect to call them either Hospitality Management or Culinary, Hotel, and Restaurant Management, or Travel and Tourism Management, or Restaurant Management, or Hotel Management, or Institutional Management or any of 5 a number of other name variations.
The difficulty with precise classification is clear hen you realize that, for most industry observers, each of the ten following individuals are considered to be hospitality managers: Hospitality Manager Brenda Jorge Samaritan Carl Karri Travail Jack Shay Minutia Eddie Job Title Director of food services for a 5,000-student school district Managing director of a 750-room resort hotel Regional manager of a 500-unit quick-service restaurant (USSR) chain with responsibility for the 30 units in her assigned territory General manager of a 75-room limited service, all-suite hotel near a city airport Manager of a 400-member country lube offering dining services and an 18-hole golf course Director of sales and marketing for a 2,000-room casino hotel Food and beverage director for the Student Front office manager at a 350-room full-service hotel Chef/owner of “Chew Edward,” an exclusive and upscale 60-seat restaurant While each of the industry sub-segments these managers work in are very different and can be classified in very different ways (for example, profit versus nonprofit; or corporate versus privately owned), one way to classify them is by their emphasis on either lodging or food and beverage (F&B) services. The authors recognize the attention over-simplification of such a classification but also believe that it is the emphasis on providing lodging and meals (in a variety of settings) that distinguishes those who are considered to be working in the “hospitality’ industry. When hospitality is defined as the lodging and food services industries, it can include a variety of managers in related fields.
These include hotels, restaurants, clubs, resorts, casinos, cruise ships, theme parks; the recreation and leisure market: arenas, stadiums, amphitheaters, civic centers, and other recreational facilities; the convention center arrest; the education market: colleges, universities, and elementary and secondary school nutrition programs; the business dining market: corporate cafeterias, office complexes, and manufacturing plants; the health-care market: long-term care facilities and hospitals; and the corrections market: Juvenile detention centers and prisons. When all of the different segments of the hospitality industry are included, it is easy to see that there are literally hundreds of specialized management positions available.
The number of opportunities offered by the hospitality industry is significant; as are the opportunities for those managers who understand and can utilize their hospitality accounting skills. With such a diverse hospitality management audience, the challenge of creating a “hospitality managerial accounting” text such as this one is daunting. But as you will discover as 6 C H A OPT E R 1 Hospitality Industry Accounting you read this book, the authors have worked very hard to assemble a managerial accounting text that can be of maximum help to the widest possible range of hospitality practitioners. The Purpose of Accounting in the Hospitality Industry Some hospitality students believe that learning accounting is very difficult. It will not be difficult for you.
The term “accounting” originated from Middle French (compete), which itself originated from Latin (ad + compete) meaning “to count. ” As a result, you already have years of experience as an accountant (a counter)! A more detailed definition of accounting is the process of recording financial transactions, summarizing them, and then accurately reporting them. As a result, a good definition for an accountant is simply a person skilled in the recording and reporting of financial transactions. Just as you learned in elementary school about the rule that says 2 + 2 always equals 4, accountants in business have developed their own financial transactions as well as analyzing and reporting them.
This book will explain many of the accounting rules and procedures that are frequently utilized by professional hospitality managers. In the business world, as well as in many other fields, accounting is used to report (account for) an organization’s money and other valuable property. Accounting is utilized by all managers in business and especially by those in the hospitality industry. In fact, in almost every hospitality Job, accounting is important. Accounting in the hospitality industry is utilized every time a guest purchases food, beverages, or a hotel guest room. Accounting in business occurs even before a hospitality facility ever opens.
This is so because businessperson estimate their costs before they decide to build their facilities and often seek loans from banks to help them. Those banks will assuredly want to know about the proposed business’s estimated financial performance before they decide to lend it money. Accurate accounting is important to many other individuals in the hospitality industry. The owners of a restaurant or hotel will certainly want to monitor their business’s financial condition. These owners may be one or more individuals, partnerships, or small or very large corporations, but they all care about the performance of their investments. Investors in the hospitality industry generally want to put their money in businesses that will conserve or increase their wealth.
To monitor whether or not their investments are good ones, investors will always seek out and rely upon accurate financial information. When it is properly done, accounting is simply the process of providing that information. Accounting is actually quite a large field of study. To understand why accounting plays such a significant role in business, consider Just a few examples of the type of basic and important questions the discipline of accounting can readily answer for hospitality managers: 1 . What was the total sales level achieved by our business last month? 2. What was our most popular menu item? What was our least popular one? 3. What was the average selling price of our hotel rooms last week? Was that higher or lower than our competitors? Branches of Accounting 7 4.
Are we more or less profitable this month than last month? . What is our company realistically worth if we were to sell it today? The above are some of the questions hospitality managers can utilize accounting to answer. However, it is important to understand that accounting is not the same as management. Accounting is a tool used by good managers. To understand why you, as a talented hospitality manager, will play a more important decision-making role in your business than will the field of accounting, consider these examples of the type of questions that cannot be best answered by using accounting information alone. 1 . Our hotel swimming pool errantly closes at 10:00 p. M.
Would we sell more guest rooms if the pool were to remain open 24 hours per day instead? How many? 2. Should I select Jackie or Samuel as the person assigned to train our new dining room wait staff? 3. Should the size of ounces? 4. Would our country club members prefer to have an increase in the number of inexpensive, or of higher quality (but more costly) wines, when we create the club’s new wine list? 5. Would our new 500-room resort be more successful if it were built in Punt Can in the Dominican Republic, or is the future of the Riviera Maya near the city of Tulle in Mexico likely to become, in the long term, a more popular tourist destination?
Notice that in each of these questions, the best decision requires that you utilize your own experience and Judgment of what is “right” for your guests, your business, your employees, and yourself. As a result, while accounting alone could not make the decisions called for in the questions above, when properly used, it can help you make better decisions about these types of issues than those that would be made by managers who do not understand how accounting could help them. The purpose of this book is to teach you how to use accounting techniques as well as your own education, experience, values, and goals to make the very best management decisions possible for yourself and the businesses you are responsible for managing. Proper accounting includes both recording financial information and also accurately reporting it.
Some accountants are skilled at one or both of these processes. Most of those who work as accountants recognize that there are actually very specialized fields or branches of accounting. While some of these branches do overlap, they include: Financial accounting Cost accounting 8 Tax accounting Auditing Managerial accounting Most hospitality managers are not accountants, but it is important for them to understand the function of the accounting work performed in each of these branches. Financial Accounting Business essentially consists of the buying and selling of goods and services. In the hospitality industry, the items sold by businesses are typically food, beverages, and hotel rooms.
Depending upon the specific area within hospitality, however, a wide variety of other products and items such as travel or activities like golf, gaming, and entertainment may be sold to guests. Business accountants who specialize in financial accounting are skilled at recording, summarizing, and reporting financial transactions. Financial transactions include revenue, the term used to indicate the money you take in, expense, the cost of the items required to operate the business, and profit, the dollars that remain after all expenses have been paid. These transactions can be used to develop the following profit-oriented formula: Revenue – Expenses = Profit owned by the business, and liabilities, which are the amounts the business owes to others.
Finally, financial accountants record and report information about owners’ equity, which is the residual claims owners have on their assets, or the amount left over in a business after subtracting its liabilities from its assets. These transactions can be used to develop the following equation for the balance sheet: Assets Liabilities + Owners’ Equity In this book, you will discover that the work of financial accountants can be extremely helpful to professional hospitality managers. In later chapters, we will examine, in detail, how these accountants do some of the important parts of their Jobs. To understand how financial accounting can help hospitality managers, consider the case of Fay Richards.
She is interested in buying her own small pizza shop. The shop would be located in a strip shopping center and would sell primarily pizzas, hot subs, and soft drinks. Some of the many financial considerations Fay would have as she tries to decide if buying the shop is a good idea would be: 1. How much revenue do pizza shops like this typically achieve on an average day? 2. What do pizza shops normally spend to properly staff their stores? 9 3. How much should I spend on the equipment I need to buy to make the food I will ell? 4. Given the size and location of my store, what is a reasonable price to expect to pay for obtaining insurance for my business? 5.
How much money am I likely to make for myself during the first year I own the store? Fay can get important information from her financial accountant, but she will also need managerial skills and her own intuition and talents to provide answers to some of the other business questions she will face. Cost Accounting Cost accounting is the branch of accounting that is concerned with the classification, recording, and reporting of business expenses. Because all businesses seek to intro their costs and not waste money, those who operate businesses are very concerned about where they spend their money. For cost accountants, a cost, or expense, is most often defined as “time or resources expended by the business. To understand why cost accounting is so important, consider Mike Edgar, the manager of a private country club. Reporting to Mike, among others, are those individuals responsible for the operation of the club’s golf course, pro shop, swimming pools, and food and beverage services. Each of these major areas will expend money to achieve the goals Mike and the club’s members set for them. It is very unlikely that Mike could know, on a daily basis, about all the purchases his staff will make. Mike however, will be responsible to the club’s members for the money they have spent. Because this is true, it will be important for Mike to have a reliable system in place the reason for the purchase.
Cost accountants determine costs by departments, by business function or area of responsibility, and by the products and services sold by the business. They create systems to classify costs and report them in ways that are most useful to those who need to know about how a business spends its money. Some of the kinds of questions that cost accountants could help Mike answer include: 1. How much does it cost the club to host one member who is playing golf? 2. What were the total costs of utilities (water, electricity, and natural gas) incurred by the country club last month? 3. Did it cost more this year to fertilize the golf course than it did last year? 4. Are all managers in the country club accounting in the same manner for the cost of the meals eaten during work hours by their staff? 5.
Does it cost more money to operate our country club than other clubs of the same size and type? 10 The work of cost accountants is critical for hospitality managers who seek to fully understand the costs of operating their businesses. As a result, throughout this text, we will utilize many of the techniques that have been developed by these accounting specialists. Tax Accounting A tax is simply a charge levied by a governmental unit on income, consumption, wealth, or other basis. In the United States, governmental units that can assess taxes include townships, cities, counties, states, and various agencies of the federal government. As a result, nearly all businesses are subject to paying some taxes.
Tax counting is the branch of accounting that concerns itself with the proper and timely filing of tax payments, forms, or other required documents with the governmental units that assess taxes. Professional tax accounting techniques and practices ensure that businesses properly fulfill their legitimate tax obligations. In the hospitality industry, managers are required to implement systems that will carefully record any taxes that will be owed by their businesses. Consider, for example, Latish Brown, the general manager of a 220-room full-service hotel located in her state’s capital and very near the airport. The work of tax accountants could help Latish ensure that she has the systems in place to: 1. Record the occupancy tax her hotel must pay.
This tax, which is the money paid to a local taxing authority based upon the amount of revenue a hotel achieves when selling its guest rooms, is typically due and payable each month for the room revenue the hotel achieved in the prior month. 2. Maintain records of the total taxable revenue achieved by the hotel and collect all money required to pay the sales tax that will be due as a result of realizing those sales. 3. Address specific tax-related questions, such as, “Is the hotel squired to collect and pay occupancy tax on those guests who were assessed a no- show charge because they failed to arrive at the hotel when they had a confirmed individuals employed by Latish are properly recorded and submitted. As you can see from these very few examples, the work of tax accountants is critically important to hospitality managers.
Throughout this text, we will often examine how the specific actions taken by hospitality managers will affect the amount of taxes the businesses they manage must pay. Auditing An audit is an independent verification of financial records. An auditor is the individual or group of individuals that completes the verification. As you have seen, the accurate reporting of financial transactions is important to many different entities including managers, owners, investors, and taxing authorities. The auditing branch of accounting is chiefly concerned 11 with the accuracy and truthfulness of financial reports. It is also concerned with safeguarding the assets of a business from those unscrupulous individuals who would seek to defraud or otherwise take advantage of it.
When financial transactions are not reported truthfully, it is very easy for many individuals to suffer great harm. The total collapse of the Enron Corporation in late 2001, as well as other highly publicized business failures such as Global Crossing and World-Com, demonstrate the importance of auditing. In each of these cases, investors, employees, and other stakeholders lost billions of dollars. In fact, the word “Enron” has now become synonymous with accounting fraud. Enron filed for bankruptcy on December 2, 2001 , a consequence of the combination of too much debt and some unusually risky investments. Business failures are not unusual and it is certainly important to note hat Enron did not go bankrupt because it violated accounting rules.
Rampant violation of standardized accounting rules, however, led Enron’s investors, creditors, employees, and others to believe the company was financially sound when, in fact, it was not. If properly performed, the auditing branch of accounting is designed to point out accounting weaknesses and irregularities and thus prevent accounting fraud of this type. In part because of the potential damage that could be done by unscrupulous corporate managers, in 2002 the United States Congress passed the Serbians-Solely Act (SOX). Technically known as the Public Company Accounting Reform and Investor Protection Act, this law provides criminal penalties for those found to have committed accounting fraud.
Serbians-Solely covers a whole range of corporate governance issues including the regulation of auditors assigned the task of verifying a company’s financial health. Ultimately, Congress determined that a company’s implementation of proper accounting techniques was not merely good business, it would be the law and violators would be subject to prison terms. The 2002 Serbians-Solely Act became law to help rebuild public confidence in the implications for the tourism, hospitality, and leisure industry. To examine an overview of its provisions, go to: www. Serbians-solely. Com/section. PH Not surprisingly, as a result of SOX, the role of auditor and the techniques used in auditing have become increasingly important.
Individuals who are directly employed by a company to examine that company’s own accounting procedures are called internal auditors. They can play a valuable role in assessment because they usually understand the company’s business so well. External auditors are individuals or firms who are hired pacifically to give an independent (external) assessment of a company’s compliance with standardized accounting practices. 12 In the hospitality industry, managers of smaller restaurants, clubs, and lodging facilities most often serve as their own in-house auditors. If the facility they manage is part of a larger company or chain of units, their company may also employ auditors.
In larger hotels, the controller, who is the person responsible for managing the hotel’s accounting processes, may serve as the auditor or, in very large properties, full-time individuals are employed specifically to act as the property’s in-house auditors. As you have learned, auditors not only help ensure honesty in financial reporting, they play an important role in devising the systems and procedures needed to help ensure the protection and safeguarding of business assets. As a result, hospitality managers use auditors and auditing techniques to address many internal questions, a few of which are: 1. Are all purchases we make supported by the presence of a legitimate invoice before we process payment? 2.
Are guest adjustments from their bill supported by written documentation explaining why the bill was adjusted? 3. Is all the revenue reported as achieved by the business fully documented and reconciled (compared and matched) to deposits ultimately made in the business’s bank accounts? 4. Are wages paid to all employees supported by a written and verifiable record of hours worked? The best auditors help ensure that financial records are accurate as well as assist managers in reducing waste and preventing fraud. In this text, the procedures, techniques, and strategies developed by this important branch of accounting will often be utilized to help you learn to become the best hospitality manager you can be.
Managerial Accounting Managerial accounting is the basic topic of this book as well as the final branch we will examine. To clearly understand the purpose of managerial accounting, assume that Karen Gomez is the person responsible for providing meals to international travelers on flights from New York to Paris. She manages a large commercial kitchen located near the John F. Kennedy Airport. Careen’s clients are the airlines who count on her company to provide those who have chosen to fly with them tasty and nutritious meals at a per-meal price the airline finds affordable. One of Careen’s n average of 500 travelers, each of whom will be offered one of two in-flight meal choices for dinner.
The client would like to provide each flier with a choice of a beef or a chicken entree. To ensure that the maximum number of fliers can receive their first choice, should Careen’s company plan to provide each flight with 500 beef and 500 chicken entrees? The answer, most certainly, is no. 13 To prepare 1,000 meals (500 of each type) would indeed ensure that each traveler would always receive his or her first meal choice, but it would also result in the production of 500 wasted meals (the 500 meals not selected) on each flight. Clearly, it would be difficult for Karen to provide the airline with cost-effective per-meal pricing when that many meals would inevitably be wasted.
The more cost-effective approach would be to accurately forecast the number of beef and chicken entrees that would likely be selected by each group of passengers, and to then produce that number. The problem, of course, is in knowing the optimum number of each meal type that should be produced. If Karen had carefully and properly recorded previous meal- related transactions (entrees chosen by fliers on previous flights) she would be in a such better position to use managerial accounting to estimate the actual number of each entree type the new passengers would likely select. If she had done so, she would be using managerial accounting. Managerial accounting is simply the system of recording and analyzing transactions for the purpose of making management decisions of precisely this kind.
Because you utilize accounting information (historical records in this specific case) to make management decisions, managerial accounting is one of the most exciting of the accounting branches. Its proper use requires skill, insight, experience, and intuition. These are the same characteristics possessed by the best hospitality managers. As a result, excellent hospitality managers most often become excellent managerial accountants. The branches of accounting we have reviewed and the main purpose of each can be very briefly summarized as shown in Figure 1. 1 . Now that you have reviewed the major branches of accounting, it may be easier to understand why it is so important for businesses to employ highly skilled professionals to perform their accounting functions.