A financial statement is a powerful report on business results that hotel middle managers often use.
However, they may not have realized that each financial statement suffers from inherent shortcomings.
It is critical to understand these defects.
This will make your reading of financial statements more effective.
However, what are these defects and how to over come them?
Watch the video below which will lay out the four key financial statements in a hotel and their defects.
Right at the end of the video you will come across a priceless principle that will supercharge your decision making.
Click to play
Each of the four financial statements in this video has a story to tell.
However, understanding their stories individually will be erroneous.
It will be like the 6 blind men who were touching individual parts of the elephant's body and arriving at incorrect conclusions.
What am I talking about?
Let's find out.
Financial Statement - Story on Performance
Welcome to the first character in our story:
The Profit and loss statement.
The Profit and loss statement is called the performance statement.
it is the statement which measures business activities of your hotel during a particular month.
The performance statement answers questions relating to revenue, expenses and profit for the period.
it also answers questions of increase or decrease of revenue, expenses and profit over last year.
Despite its power, the profit and loss statement suffers from a big shortcoming.
it can only show part of the picture - the performance of business results of the hotel.
For example, it cannot tell you:
- What happens to the assets that actually produce their revenue during the month?
- Which the profit and loss statement records and shows
A different kind of financial statement is needed to answer these kind of questions.
That financial statement is your balance sheet.
Financial Statement - Story on Financial Position
This is the second character in our story.
The profit and loss statement we saw earlier is called the performance statement.
However, the balance sheet is called the financial position statement.
it is a statement showing:
- assets
- liabilities and
- capital
of your hotel.
The financial position statement answers questions relating to the assets, liabilities and capital of your hotel.
Financial position tells you what the hotel owns and what it owes.
Despite its power, the balance sheet like the profit and loss statement earlier suffers from a big shortcoming.
It shows only part of the picture - the financial position in general of the hotel.
For example:
It cannot tell you:
- How much change took place in your cash balances
- from various sources between last and this month.
It also cannot tell you what cash flow your hotel might need in the future.
Financial Statement - Story on Cash Movement
So, the first two characters of our story, Profit and Loss Statement and the Balance Sheet in spite of being powerful had shortcomings.
The third character in our story is the Cash flow statement.
The Cash Flow statement is called the cash movement statement.
In other words:
- How much did the cash balancers change
- Between previous and current period
- How much was the inflow, outflow and net flow
The cash movement statement answers questions relating to:
- cash balance movements and
- sources of inflow and outflow
It talks about changes to cash balances not the cash balances themselves.
Alas, the cash flow statement has a huge shortcoming.
It is able to give you information only related to cash.
For example:
Say, you needed to know whether you had an approved budget for buying kitchen equipment.
Or whether your laundry equipment needed to be replaced.
The cash flow statement is unable to assist.
For that, you will need the Capital Expenditure Statement.
Financial Statement - Story on Fixed Assets
The Capital Expenditure statement is also called the Fixed Assets Statement.
It mainly works with fixed assets although some related elements are also considered.
The fixed asset statement answers questions relating to fixed assets:
- What is the life of your laundry equipment?
- Is there a need to renovate your guest room interiors?
and so forth.
Alas, the capital expenditure statement also has a huge shortcoming.
It is able to give you information only related to fixed assets.
For example, if you wanted to know:
- what your inventory of food and beverage was or
- whether the inventory was adequate or
- how much you owed your equipment suppliers
the capital expenditure statement was unable to provide that information.
Financial Statements - Moral of the Story
Financial Statements - Defects Hotel Middle Managers Miss
So what is the lesson we have derived from our story of the four lead characters:
- profit and loss statement
- balance sheet
- cash flow statement and
- capital expenditure statement
Just like the six blind men story, you cannot be looking at financial statements in parts.
You must get the full picture.
Too many finance courses focus on analyzing individual financial statements.
Without understanding that the power is bringing them together and looking at the entire picture.
Only when you look at the full picture:
- you will be able to understand the relationships among them
- this is what makes your decision making powerful
Each of these financial statements tell their own story.
Looking at them individually will be:
- like the blind men who were touching individual parts of the elephant's body and
- arriving at incorrect conclusions
This method is often known as the Big Picture Overview.
The power in your decision making comes from
- Looking at your big four together
- Seeing relationships among them and
- Harnessing those relationships
It is what will empower you to optimize profit in your operation.
This is your Big Four!
Go and optimize profit in your operation using the Big Picture Overview principle.
Click below to read in depth about the stories of the profit and loss statement and the balance sheet.
Related Posts on Financial Statements
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