Current Assets-Are you managing these effectively in your Hotel Balance Sheet?

Would you know which hotel current assets are producing a chunk of your monthly revenue?

Can you identify current assets examples from a list of assets for a hotel?

Are you aware that they belong to a hotel financial statement you may not be looking at ever?

No, I am not exaggerating.

It is a pity hotel managers are more focused on achieving hotel revenue than know its sources.

Current Assets of a hotel are one such powerful revenue source.

I will lay out a case for understanding these seemingly alien hotel financial statement elements.

This is Chapter 2 of the Ultimate Guide on Hotel Balance Sheet Basics.

We will be using an actual Balance Sheet - of Paradise Hotel to understand concepts visually.

This Chapter will cover:

Why Current Assets?

What are Assets?

Assets are What the Business Owns.

They are the resources of the hotel.

The primary function of an asset is to generate revenue.

Without assets, a business cannot generate revenue.

Assets are an index of strength of a business.

This is because assets are used to generate revenue.

So, you could say that the capacity of a business to generate revenue will be based on the:

• type and
• extent of

assets owned by it.

What are Current Assets?

Assets can be short term or long term.

Short term assets are those whose life is less than a period of 12 months.

These are known as Current Assets.

Long term assets are those whose life is more than a period of 12 months.

These are known as Fixed Assets.

So, the difference between fixed assets and current assets is their life.

Current Assets Examples

See the Paradise Hotel Balance Sheet below:

The categories can be:

• Cash
  • This is the cash held by the hotel in bank and in its premises.
  • Cash is mainly for day to day running of the hotel.
• Short Term Investments
  • Short Term Investments are deposits made for less than a year.
  • Often these are for 90 days or less.
  • Short Term Investments are meant to earn quick returns within a year.
• Accounts Receivable
  • Accounts Receivable is the outstanding short term debts owed by the hotel’s customers.
  • These are invoices remaining unpaid by customers for using the services of the hotel.
  • You could say that accounts receivable are sales made but not yet collected.
• Inventories can be of:
  • food,
  • beverage,
  • operating equipment,
  • general supplies,
  • cleaning supplies,
  • printing and stationery
• and so forth.
• Prepaid Expenses
  • Prepaid Expenses are:
    • expenses paid for goods not yet delivered to or
    • services not yet rendered for the hotel
  • So, Prepaid Expenses are expenses paid in advance of goods and services received

Assets are used to generate revenue.

Revenue is related to cash inflows.

As a result, assets are also related to cash inflows.

This applies to both current and long term assets.

We will understand long term assets in a different chapter in this Ultimate Guide.

And now on to specifically understanding why current assets are such powerful revenue generators.

We will be using the food and beverage department of a hotel to illustrate that.

Inventories as Source of Revenue and Expenses

For example, let us take the the food and beverage revenue of a hotel business.

This revenue comes from selling food and beverage inventories.

Now, on to that category in the Balance Sheet that you may be familiar with in your hotel.

Inventories are an integral part of assets of a hotel.

They get used up within a period of twelve months and are replaced by new purchases.

Did you know that there are two types of inventories in a hotel:

• Sales based or revenue related (food and beverage) and
• Consumption based or expenses related (guest room supplies and operating equipment)

See Image below:

Guest Room Supplies and operating equipment when consumed become part of expenses.

So, there you have it - the sources of both revenue and expenses in one single item.

And that item sits in the Balance Sheet!

Which you probably do not get to see much.

Now, do you realize why I am hyping up the hotel Balance Sheet so much?

Liquidity in Current Assets

The Current Assets laid out in a Hotel Balance Sheet are also unique in a way.

The Hospitality industry is:

• one of the few industries 
• where there is a guideline for the format of the financial statements.

The system is called the Uniform System of Accounts.

In particular, short term assets (current) in a hotel balance sheet have to follow the liquidity guideline.

Or, in other words, the these assets must be listed in order of how liquid the asset is.

Liquidity is a concept that broadly means how quickly an asset can be converted to cash.

This is why you see Cash at the top - since they are already cash, they are the most liquid.

Then come Short Term Investments which can be withdrawn and converted to cash.

You may have a question: why are accounts receivable listed ahead of inventories?

Accounts Receivable differ from Inventories as current assets in a big way.

Accounts Receivable are actually sale already made but money not yet collected.

Inventories on the other hand are yet to be sold.

This is why Inventories are considered less liquid than accounts receivable.

Read the next section on the Incomplete Sale syndrome for accounts receivable.

Accounts Receivable as Current Assets

The sale process in a hotel business often remains incomplete in certain situations.

In general, there is an unwritten business rule that:

• a sale is not considered complete 
• until money is in the bank.

Money is often not in the bank on the day the sale is made in a hotel.

For example, let us say the customer settles his or her room folio with a credit card.

The payment from the credit card company may only come 24 to 48 hours later.

Until then it remains accounts receivable in a hotel balance sheet.

Accounts Receivable Type

Accounts Receivables being short term debts not collected may be of the following types:

• Credit Card Companies - normally, this payment comes in 24 to 48 hours from time of sale
• Corporate Customers - normally, this payment comes after the credit period of 30 days is passed
• Travel Agents -normally, this payment comes after the credit period of 30 days is passed

Thus, accounts receivable depends upon the credit period approved for that customer.

We have now had a good idea about current assets in a hotel balance sheet.

In Chapter 3 of this Ultimate Guide on Hotel Balance Sheet Basics, we will look at the counterpart of current assets - current liabilities.

See below for links to all other chapters in the Ultimate Guide.

Action Steps You Can Take Right Now

STEP 1

Go to your Hotel Financial Controller and ask him to show you the Balance Sheet for the hotel.

STEP 2

Identify Current Assets in your hotel balance sheet.

STEP 3

Notice how Cash, Accounts Receivable, Inventories etc are laid out.

What type of inventories does your hotel have?

STEP 4

How much are Accounts Receivable for your hotel?

Do you know how long they are outstanding for?

STEP 5

Ask yourself whether as a hotel manager you are managing your current assets effectively.

Other Chapters of Ultimate Guide on Hotel Balance Sheet Basics

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