When Was the Last Time You Looked at Your Hotel Balance Sheet?

Did you know that there are immediate, often unpleasant consequences of ignoring a Balance Sheet?

Make no mistake about this.

At its simplest, you may not see a calamity approaching.

There may already be indications that something's Off!

You are wondering what I am talking about.

Hang on, I am coming to that shortly.

Before that, are you a victim of this situation?

Of ignoring the balance sheet I mean.

Rest assured that I will make myself clear what I meant.

I will lay out a strong case for:

• components with examples of the balance sheet including
• explanation of the fundamental accounting equation
• every hotel manager must regularly pay attention to.

They literally ensure the long and short term health in terms of the financial position of your hotel business.

This is something your profit and loss statement can never show.

Isn’t that a good reason?

This Chapter 7 of Ultimate Guide on Hotel Balance Sheet Basics covers:

Balance Sheet Vs Profit and Loss Statement

When was the last time as a hotel manager you looked at your Balance Sheet?

Your response may well indicate the importance you attach to it.

Believe me however, your hotel owners have close links to that financial statement.

Just try and remember the millions of dollars they have poured into the hotel project.

Do you have an idea how much that could be?

More specifically, do you know if the financial position of your company is sound?

Many hotel managers think that is not their job.

Your hotel owners may not agree with that!

Whichever way you see it, the truth is this.

Say, you have restricted yourself to studying only the hotel profit and loss statement.

Then, you will never get answers to some key questions.

Why not, you ask rather skeptically?

Simple reason!

The Profit and Loss Statement is a performance statement.

It does not tell you anything about the financial position.

More importantly, it just cannot!

For that, you will have to reach for the Balance Sheet.

Look at it this way.

Would you not want to pay attention to something that your owners are forever concerned about?

I do not want to sound like a doomsday merchant.

However, it is worth spending some time with the venerable hotel balance sheet.

It may well make you wiser.

Let us see why and how.

Without further ado, let us dive right in.

Look at the Paradise Hotel Balance Sheet below and identify the 5 killer balance sheet ratios in it.

Balance Sheet & Net Worth of a Hotel

Consider this scenario.

As a hotel manager you may have distanced yourself from the balance sheet.

In other words you may not be looking at it.

As a result, you may be focusing on your revenue, expenses and profit.

It is ironical that you are spending time with revenue but not the source of revenue generation.

What do I mean, you ask, feeling offended?

But it is true.

If you focused on just the Profit and Loss Statement, you will know revenue well.

But not something that produces your revenue!

And what is that you ask sarcastically?

Your assets of course.

Quick question.

Do you know the total cost of assets that your hotel business owns?

You cannot know that without consulting the Balance Sheet.

Which brings us to the first key element in the Net Worth ratio.

The Net Worth is the Holy Grail of Long Term Financial Ratios.

It is literally about how much your business is worth.

We just saw it’s first key element - total assets.

The second key element is Total Liabilities.

There is value to knowing about your liabilities.

They are moneys you owe others.

You need to pay back those.

Do you know the total cost of liabilities that your hotel business owes?

If you answered “No” to knowing the total cost of assets and liabilities, you do yourself a disservice.

You have ignored the two elements that will tell you whether your business is in good health.

In the long term.

Would you not want to know that?

Particularly if your hotel owner is going to be asking you that!

The Net Worth ratio deducts total liabilities from total assets.

See below:

The higher the ratio the better.

That means that total assets are far higher than total liabilities.

Chances of you paying off your total liabilities with your total assets are that much higher.

As a reminder, total assets are those resources that deliver your revenue in the Profit and Loss Statement.

And now on to the second killer ratio.

Balance Sheet - Working Capital

Have you heard of the expression “blissfully unaware”?

No, I am not being rude!

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

It is strange that on the one hand you focus on revenue but not the source - asset.

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 a Profit and Loss Statement.

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

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

And the problem could be cash flow related.

The Working Capital Ratio in a balance sheet literally tells you the short term position of cash flow.

See below:

Cash Flow is 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 deducts Current Liabilities from Current Assets.

Do you know what are 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.

If Net Worth shows you the long term financial position, Working Capital shows you the short term position.

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.

You will see a pattern in all the five Balance Sheet Ratios we will be discussing.

That we know about the effect but not the cause (which is more important!).

I will make myself clear going forward in this post.

And now to a ratio which we touched upon peripherally when discussing Net Worth.

Balance Sheet - Fixed Assets Turnover Ratio

In discussing Net Worth earlier, we talked about Total Assets.

We also said that the hotel Profit and Loss Statement can only talk about revenue.

It cannot talk about the assets that produce the revenue.

But It is not enough to stop there.

What if you needed to know what is the potential of the assets to produce revenue?

Aha, we are gaining some ground.

What if we married the Profit and Loss Statement and the Balance Sheet?

Uh What, you sputter in outrage?

Hang on, let me explain.

What I meant is: what if we linked up the revenue to the source, the assets?

Voila!

The Fixed Assets Turnover Ratio does just that!

Turnover refers to revenue in the context of a hotel.

Fixed Assets are the long term assets (the benefit of which extends beyond a financial year).

So, this ratio tells you how many dollars your hotel is earning for every dollar cost of fixed assets owned.

A powerful ratio indeed.

See below:

It literally shows you the productivity of your fixed assets.

See now why it is great to know about the Balance Sheet.

That is not just an accountant’s pitch!

And now, let us extend our discussion of productivity of assets.

Let us learn about the last two ratios in this blog post.

Balance Sheet & Inventory Turnover

We will now turn our attention to two asset categories which are common in any hotel situation.

The first of the two current assets are inventories.

Inventories are familiar to you.

You plan to buy them, buy them, store them and then issue to the operation.

Did you know that you did all that and still have that same blissfully unaware situation all over again.

What, you ask angrily?

How would you know if your inventory management is efficient?

I do confirm here that this is something that most hotel managers might be looking at.

Even without reading a Balance Sheet!

Just with a schedule as part of the monthly profit and loss statement.

However, still that will not provide information on something critical.

Let us first see what this ratio is all about.

The Inventory Turnover Ratio literally tells you how many times your inventories turned over.

That means, how many times sold or consumed in the operation.

It is the productivity measure for inventory management.

See below:

Believe me, you do not want a low inventory turnover ratio.

It requires more storage, is susceptible to loss or pilferage.

And it locks up precious cash flow.

That last one you will not know if you are looking only at the Profit and Loss Statement!

A high price to pay indeed!

And now victoriously on to the last of the productivity ratios.

This is one which is linked to your revenue.

Aha, that earned your attention!

Balance Sheet Accounts Receivable Turnover

You may be throwing the kitchen sink at generating revenue.

But are you ensuring this translates to money in the bank?

This is the last but by no means least of the killer balance sheet ratios.

This is about the efficiency with which your accounts receivables turn over.

In other words, how quickly revenue translates to cash inflow!

Normally, hotels tend to pursue accounts receivables better than many other assets.

More possibly because owners are also switched on about collecting receivables fast.

Accounts Receivable Turnover Ratio compares average accounts receivables with Net Credit Sales.

See below:

Why credit sales?

Basically because cash sales have accomplished the money in bank simultaneously with the sales.

It is only the credit sales, or billed / invoiced revenue that needs to be collected.

When accounts receivables fail to be collected beyond six months, there is danger that they might go bad.

In other words, remain uncollected.

And will need to be written off.

A write off is a loss to the hotel.

And a failure of the collection effort.

Not to mention the revenue cycle remaining incomplete (no money in bank!)

Believe me, you do not want to be the general manager to tell the owner about a debt gone bad! Ouch!

So, there you go!

5 Killer Balance Sheet Ratios hotel managers cannot ignore.

Your Key Takeaways

Over to you.

Do you look at your hotel balance sheet at all?

How do you keep track of the 5 killer balance sheet ratios?

Do you still think focusing on just the Profit and Loss Statement is enough?

What is your plan to begin paying attention the Balance Sheet?

I am keen on knowing your thoughts on this.

Leave your comments below.

Related Chapters of Ultimate Guide on Hotel Balance Sheet Basics

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Are You on Top of Financial Terms as a Hotel Manager?

Or are you missing the forest for the trees?

What do I mean by that?

As a new (beginner) hotel manager, you are busy (hopefully) with the operation.

Because of that, often, you have not paid attention to an important factor.

You are not quite sure what some financial terms actually mean.

Don’t make that mistake (that many end up making!).

Learning the ropes or basics is critical.

It is the foundation for being a successful hotel manager.

But I have got your back.

In this Ultimate Guide on Hotel Financial Terms, you will learn all that you need to know.

It will make you a business savvy hotel professional.

And a successful one too.

You would want that right.

Let’s jump right in.

This Blog Post will cover

What are Hotel Financial Terms?

Hotel Financial Terms are definitions of important elements of a hotel operation and performance.

They can take the form of:

• Key Performance Indicators [KPIs]
• Financial Ratios
• Calculations
• Analysis

and more.

Let us briefly see what these definitions are with examples.

Definitions

Why Should You Know?

Your first question will be: Why should I know hotel financial terms?

Fair enough.

Let me make a strong case for that.

I will use the example of occupancy of a hotel.

As a hotel manager, you manage the operation.

You deal with occupancies on a daily basis.

This is to increase occupancy every day as much as possible.

You may know that occupied rooms divided by rooms available multiplied by 100 gives Occupancy %.

However, do you know the difference between Paid Occupancy Rate and Total Occupancy Rate?

Why is it important to understand this difference?

Do You Know what are Lean, Standard and Peak Month Occupancies?

Knowing hotel financial terms will allow you to:

• manage your operation and 
• in this case, optimize occupancies more efficiently.

25 Hotel Financial Terms for Beginners Series

Here is a list of 25 Hotel Financial Terms that Beginner Managers Must Know.

1. Occupancy Rate
2. Average Daily Rate
3. RevPAR
4. Market Segments
5. Hotel Room Revenue
6. Market Share
7. Average Length of Stay
8. Guest Repeat Ratio
9. Restaurant Seats Available
10. Food & Beverage Covers Served
11. Average Food & Beverage Check
12. Meal Period Analysis
13. Year on Year Growth
14. Fixed & Variable Expenses
15. Undistributed Operating Expenses
16. Management Fees
17. Gross Operating Profit
18. Depreciation
19. Net Income
20. Balance Sheet
21. Assets - Fixed & Current
22. Liabilities - Long Term & Current
23. Owner Equity
24. Cash Flow Vs Cash Balances
25. Financial Ratios

What You Will Learn?

In each of the 25 chapters, you will learn how to use these hotel financial terms.

You will learn about:

• What is the particular Hotel Financial Term?
• Why Should You Know?
• Where will You find it in the Hotel Financial Statement
• Covid-19 Example and Lessons to learn
• Formula / Calculation for the Hotel Financial Term
• What are Related Hotel Financial Terms
• FAQs on Hotel Financial Terms and Related Concepts

Your Guide to Professional Success

So, there you go.

25 Hotel Financial Terms which will make you a business savvy hotelier.

Click link below for each of the hotel financial terms as chapters of this Ultimate Guide.

Chapters for 25 Hotel Financial Terms

Chapter 1 - Hotel Occupancy Rate

Hotel Occupancy Rate - 25 Hotel Financial Terms

Chapter 2 - Average Daily Rate

Average Daily Rate - 25 Hotel Financial Terms

Chapter 3 - Revenue per Available Room

Revenue per Available Room - 25 Hotel Financial Terms

Chapter 4 - Market Segments

Market Segments - 25 Hotel Financial Terms

Chapter 5 - Hotel Room Revenue

3 Secrets to Highest Room Revenue

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Ultimate Guide on Hotel Financial Terms - Other Chapters

Financial Literacy for Beginners - Ultimate Cookbook?

A cookbook on financial literacy!

Am I out of my mind?

Hmm…not really

Allow me to explain my thought process (however crazy it must sound to you!).

Take a look at some hotel middle manager profiles I have listed below.

Are you one of them?

If yes, you may have found a gold mine in learning!

Learning to be financially literate, I mean.

I will lay out the recipes (pun intended!) in this one of a kind cookbook.

Here is an infographic that represents the Financial Literacy for Beginners Ultimate Cookbook idea.

As you can see, cookbook is a metaphor.

I have used this metaphor considering that food and beverage is a big part of a hotel business model.

And not so out of place after all.

So, What’s the Financial Literacy for Beginners Ultimate Cookbook about, you ask.

All in good time.

Let’s get to it.

This Financial Literacy for Beginners Cookbook will cover:

Financial Literacy for Beginners Cookbook Vision

Well, my philosophy about this cookbook can be stated as follows:

Share focused, individual recipes for every aspect of hospitality finance like:

• hotel financial performance
• hotel financial analysis
• hotel financial statements
• hotel revenue management
• hotel financial decision making
• hotel asset management
• how to build financial skills, knowledge and ability
• restaurant performance

and more…

Are You One of These with < 1 Year Hotel Experience?

Front Office Manager

Food and Beverage Manager

Executive Chef

Revenue Manager

Hotel Owner

Restaurant Owner

Hotel Student

If you have a profile similar to the above and have difficulty in:

• reading hotel financial statements
• analyzing business results
• taking financial decisions

then the Financial Literacy for Beginners Ultimate Cookbook is your friend, philosopher and guide.

Why Financial Literacy?

Why am I focusing on financial literacy?

Well, every hotel middle manager is in need of regular professional development.

More specifically, financial skills based.

For that matter, who does not need it?

Post covid-19, financial literacy has become your own responsibility.

You grow skill sets that way.

Being financially literate is one such critical skill sets.

On the other hand, online learning has grown even bigger.

If you wait for companies to sponsor or conduct training, you will be left behind.

That means being committed to developing your own financial literacy.

You take ownership for becoming financially literate.

I am doing my bit to assist through the Financial Literacy for Beginners Ultimate Cookbook.

I founded Financial Skills Academy PLUS so that you could grow foundational finance skills like:

• Reading Hotel Financial Statements
• Identifying Hotel Key Performance Indicators
• Budgeting for Hotel Financial Performance and
• Managing Hotel Expenses

irrespective of your financial background.

I want you to give every accountant (never mind I am one too!) a run for their money.

I want to enable you to be more financially savvy than the finance fraternity itself.

How about that for a mission!

Want to go on this exciting journey?

OK, let’s get back to some specifics.

What’s unique about our Financial Literacy for Beginners Ultimate Cookbook, you want to know?

Unique Value Proposition for Financial Literacy

Often, learning platforms focus on knowledge only.

They drum a boatload of course information into you.

As if the world challenge currently is more information, not less!

Consider this though.

If you cannot translate financial knowledge to financial skills, is it not a waste of your time and effort?

Say you are not able to utilize your financial skills for problem solving and decision making.

Is that not meaningless for you?

Dale Carnegie once said: Knowledge isn’t power until it’s applied

Financial Literacy for Beginners Ultimate Cookbook is about building financial skills, ability in you.

One recipe at a time.

It is about empowering you.

How?

Through specific recipes that will grow financial skill sets in you.

In other words, make you financially literate.

That will build the all important basics.

Hotel Middle Managers are often found lacking in financial literacy.

I have taken great pains to ensure a few typical hurdles are removed for you.

The Financial Literacy for Beginners Ultimate Cookbook recipes are:

• Jargon free (as in non-technical).
• Example driven & Easy to understand.
• Action based Learning you can apply (to take successful financial decisions)

This is why we pride ourselves as the Complete Financial Learning Ecosystem.

And this cookbook is proof of that!

You get a glimpse of what's in store as well.

Expectations for Financial Literacy for Beginners Cookbook

What can you expect from this cookbook?

I am envisioning this cookbook to be like a Chef’s Recipe Library which you can :

• learn from, through understanding concepts
• utilize simple examples
• refer to as a manual
• look up for strategies and inspiration

If you like the cookbook idea, please share the recipes.

And spread the word to your hotel middle manager and other colleagues.

So that they benefit too.

You can Subscribe to Our Youtube Channel for Financial Literacy Video Recipes too.

My goal is reach an audience of at least 100,000!

I know, I know, I am sounding crazier than before!

However, bear with me.

And yes, do spread the word around.

Thank you in advance, I really appreciate it.

Format of Financial Literacy for Beginners Ultimate Cookbook

You will find the recipes in this cookbook laid out in the form of:

• Crisp Concept Explanations, Examples
• Visual Keynote Slides
• Byte Sized Videos & Shorts
• Colorful Infographics
• Excel file Templates
• Fictional Paradise Hotel / Taste Buds Restaurant companion financial statements

and so on.

It will be my endeavor to keep this cookbook as visual as possible.

How are the Cookbook Recipes organized?

I will keep the recipes simple and easy to digest (pun intended!).

It will broadly lay out as below (extending the metaphor of the recipe):

• Key Ingredient (concept)
• Sauces (example, how to calculate etc.)
• Taste (decision making)
• Nutrition (business results)

Chef’s Take

Every recipe in this cookbook will have a Chef’s Take.

Chef as in me.

What is my claim to fame?

I spent 26 years in the hospitality industry working alongside hotel middle managers.

Financial Literacy is a huge challenge for those managers.

I am here to overcome that challenge on their behalf.

In the Chef's Take section and relevant to that particular recipe, I will share:

• Traps to avoid
• Things to watch out for
• What you should pay attention to
• Owner expectations
• Experiences & Anecdotes in the industry

and so on

I will wear a typical stakeholder hat while providing that take so that you benefit.

Your Contribution to this Cookbook Recipes

This is not a one sided set of recipes I have decided on.

Ideally I look forward to your input on topics you would like me to create recipes on.

Your feedback on the recipes themselves will help greatly in making this cookbook dynamic.

Comment below each cookbook recipe on what you found useful.

Suggest topics for recipes which will benefit your financial literacy skills.

Complete Financial Learning Ecosystem

How can you go beyond these recipes?

What recipe or cookbook upgrades can you access to take your financial literacy to the next level?

Obviously, the cookbook will feature recipes which will give you a great taste of topics.

However, you will want to take your financial, skills and ability to a new level.

Particularly if you aspire to higher positions.

Well, you can enroll in the Financial Skills Academy PLUS (coming soon..).

Sign Up in advance below:

This will be the only complete financial learning ecosystem there is in the market..

You will get access to entire cookbooks themselves (to extend the metaphor).

Click here to learn more.

Financial Skills Academy PLUS follows the same philosophy as this cookbook.

To build financial literacy in hotel middle managers.

And transform you into a business savvy hotelier.

How about that?

Next 5 Recipes Cooked Up One by One

FLBC Recipe 1 - Restaurant Table Turnover Rate Magic

FLBC Recipe 2 - Managing Inventories for a Better Bottom Line

FLBC Recipe 3 - Yield Vs Revenue Management

FLBC Recipe 4 - Profit Flow Through Analysis

FLBC Recipe 5 - Restaurant Buffet Bundling Strategy

Your Feedback on Financial Literacy Ultimate Cookbook

Do you have any questions?

What do you think about the Financial Literacy for Beginners Ultimate Cookbook idea?

Any suggestions for improvement?

What recipes (topics) do you find difficult to understand?

Comment below and I will take a shot at it.

See you soon (very soon!!!) in the first recipe of this cookbook.

Here is a sneak peek at that first recipe:

Financial Literacy for Beginners - Ultimate Cookbook Recipes

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