Current Liabilities-Is Your Hotel Cash Flow Position Sound?

Is your hotel able to pay its current liabilities with your current assets?

Does your hotel meet its day to day running (short term) cash flow obligations smoothly?

Why is this important you ask?

You learned about Current Assets in Chapter 2.

Together with that, your current liabilities are critical in ensuring smooth cash flow or working capital.

Both current assets and current liabilities play a big part in your hotel meeting its short term debts.

I will lay out a strong case on why monitoring your current liabilities is as important for your hotel.

This is Chapter 3 of Ultimate Guide on Hotel Balance Sheet Basics.

If you missed Chapters 1 & 2, see below at the bottom of this chapter to read that first.

Current Liabilities in What the Business Owes

Let us retrace our steps a bit to understand what Current Liabilities are.

I will keep it jargon free and simple.

You understood how Current Assets are part of What the Business OWNS.

Let us look at the other side of the picture.

In other words What the business OWES

See the image below of the Balance Sheet of Paradise Hotel

Broadly, they show What a Business Owns and What a Business Owes.

What a Business Owns and Owes

Before we look at current liabilities specifically, let us understand clearly what liabilities stand for.

Liabilities are what the business owes to outside parties.

In other words:

• liabilities are claims that outside parties have on the business for 
• goods delivered or 
• services rendered.

When you:

• incur expenditure for the business but
• DO NOT PAY FOR IT IMMEDIATELY,
• you are creating a liability for the business.

Simply put, it means you will have to pay later, normally 30 days later.

So, liabilities are expenses incurred but not YET paid for.

In a nutshell, you could say that expenses are incurred:

• by immediately paying cash or
• by creating a liability to pay for later.

Liabilities - an Index of Risk

Liabilities represent claims that outside parties have on the business for payment of their goods and services.

They thus constitute risk for the business.

Liabilities can be considered an index of risk for the business.

What happens:

• when businesses incur expenditure by creating liabilities
• but are not able to pay them back?

The business is at risk of being shut down.

So, this is serious stuff requiring a hotel manager’s attention.

Long and Short Term Liabilities

Liabilities (What the business OWES) may be short term or long term.

Long term liabilities are those that are payable after 12 months.

Short term liabilities are those which are payable within a period of 12 months.

These are known as Current Liabilities.

Liabilities are Related to Cash Outflow

As explained earlier liabilities are related to cash outflow.

In other words:

• these are payable in cash and
• the business has to plan for and arrange that.

Financial Position Ingredients - Assets, Liabilities and Capital

The Balance Sheet shows the financial position of your hotel at the end of a month/period.

It does this through three major ingredients:

• assets,
• liabilities and
• capital.

Broadly, they show What a Business Owns and What a Business Owes.

Working Capital

Have you heard of the expression “blissfully unaware”?

It is about not being aware of something which is likely to be unpleasant.

It is strange that:

• on the one hand hotel managers focus on revenue
• but not the source - the asset that produces the revenue.

What about a situation when your revenue is decreasing sharply?

Or your profit.

These are all Profit and Loss Statement related.

You will still not know if this decrease is causing other kinds of problems.

Problems that do not show up on Profit and Loss Statements.

Where do they show up then and what problems, you ask?

In the Balance Sheet (note, I am not the gloating type!).

And the problem could be cash flow related.

In lay person terms, Cash flow could be loosely taken as Working Capital.

The Working Capital Ratio literally tells you the short term position of cash flow.

Cash Flow needed to run the day to day business.

You could continue focusing on revenue and even profit but not know about the cash flow.

Working Capital is arrived at by:

• deducting Current Liabilities from
• Current Assets.

Remember Current Assets?

Current Assets as those which get used up within a financial year.

You will be familiar with types of Current Assets.

But may not know they are Current Assets.

Like Cash, Accounts Receivables, Inventories.

Working Capital shows you the short term financial position.

Opening and Managed Hotels

For an opening hotel:

• with no revenue earned yet,
• working capital is what the Owners approve as cash flow 
• to run the pre-opening stages.

Say, you are the general manager of a managed hotel.

Your Hotel Management Agreement will lay out the Working Capital specifically.

Take a look at the Current Liabilities position of Paradise Hotel below

Let us briefly look at each example of current liabilities.

Accounts Payable

The first item you see above is Accounts Payable.

Remember Accounts Receivable in Current Assets from last week’s blog post?

Click here to read that again.

Just like:

• Accounts Receivable are what customers owe the hotel, 
• Accounts Payable are what the hotel owes its suppliers.

Say, you authorize a Purchase Requisition for supplies for the hotel.

Your hotel does not immediately pay the supplier.

They normally do that within 30 days of the date of expense or purchase.

The outstanding amounts owed to the suppliers when totaled are known as Accounts Payable.

It is important that the hotel pays its suppliers on time and within the 30 day period.

Nothing damages the reputation of a hotel more than supplier invoices remaining unpaid.

The smaller the amount owed the more the damage to the hotel reputation.

So, regularly check with your Financial Controller what is the status of accounts payable outstanding.

I will skip the Accrued Income Taxes item to focus on something much more important.

Accrued Expenses

Accrued Expenses or Accruals are:

• temporary expense provisions made 
• when the amount of the liability is not known.

You will read in a different ultimate guide how this can be dangerous to a hotel bottom line.

Always check with your Financial Controller on a monthly basis: 

• how much amount is sitting in this Accrued Expenses account.

Current Portion of Long Term Debt will be explained briefly in the chapter on Long Term Liabilities.

So, what is the moral of the story?

Well, the moral is that:

• hotel managers must be on top of 
• Current Assets and
• Current Liabilities 

in their hotel balance sheet.

Are you aspiring to be a General Manager one day (and very few are not!!)?

You can be ahead of the crowd.

How, you ask?

Well, by gaining a good understanding of these two categories - current assets and liabilities.

In Chapter 4 of this Ultimate Guide on Hotel Balance Sheet Basics, we will visit probably the most powerful item in a hotel balance sheet - fixed assets.

You can apply the learning in this chapter by taking these steps shown below right now.

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 Liabilities in your hotel balance sheet.

STEP 3

Notice how Accounts Payable, Accrued Expenses are laid out. What type of accrued expenses does your hotel have?

STEP 4

How much are Accounts Payable for your hotel? Do you know how long are they outstanding for?

STEP 5

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

Other Chapters of Ultimate Guide on Hotel Balance Sheet Basics

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