Hotel Accounting: What You Need to Know
by The Ottimate Editorial Team
Hotel accounting is a logistical challenge as much as a business one.
Hotel accounting processes require a seamless flow of data and communication across departments, vendors, revenue streams, and properties in different geographic locations — each with different regulations and tax codes. Some hotels do their own accounting, while others engage third-party management firms to perform this function.
According to Statista, hotel revenue is forecast to continuously increase between 2024 and 2029 by 22.7 billion, an increase of about 20 percent. Experts have estimated that hotel revenue will continue growing each year and reach 133.27 billion in the future, hitting a new peak in 2029.
The Association of Certified Fraud Examiners (ACFE) reports organizations lose 5 percent of revenue to fraud yearly. The food service and hospitality industry experiences a median loss of $100,000. Overall, the median loss is up 24 percent from 2022 to 2024.
Don’t lose any of your hotel’s share in that projected revenue peak!
AP Automation AI software, such as Ottimate, not only makes hotel accounting more efficient, it will protect you from losing revenue due to preventable fraud.
One Ottimate client, Golder Hospitality, said it best:
“We’re an industry that doesn’t shut down.”
This article will go over what makes hotel accounting so unique, its common problems, and how to fix them.
You’ll learn:
- What is Hotel Accounting?
- Unique Aspects of Hotel Accounting
- 5 Essential Roles in Hotel Accounting
- 5 Common Hotel AP Problems
- Solution: Using AP Software That Lives & Breathes the Hospitality Industry
“Ottimate is the AP automation software that understands hospitality.“
See how we helped our client Golder Hospitality drive business expansion with a streamlined AP process.
What is Hotel Accounting?
Hotel accounting follows general accounting principles but is customized for hotels. Accounting is the organized process of recording and managing a business’s financial transactions. The goal is to inform both the company’s employees and external stakeholders about its financial health.
Internal Use
Managers rely on financial reports for analysis and decision-making. These reports assist with budgeting, forecasting, and understanding department profitability in the hotel.
External Use
Investors, lenders, and other stakeholders base their decisions on standard financial statements. These statements reveal how the hotel is performing financially and if it’s in compliance with regulations.
Specific Guidelines for Hotels
Hotel accounting adds guidelines to basic accounting to address the specific nuances of the hotel industry. This involves managing various sources of income, such as room bookings, event hosting, and food and beverage sales. It also involves abiding by tax codes and regulations that are specific to the hospitality sector in different geographic areas.
Understanding these principles and guidelines will help hotel operators manage their financial responsibilities, ensuring both compliance and profitability.
Unique Aspects of Hotel Accounting
Hotel accounting has some unique characteristics. Here are some of the distinct aspects of hotel accounting that you won’t find in many other types of business.
Night Auditing
As a 24/7 business, night auditing is essential for a smooth day-to-day transition.
Night auditing starts by completing a night audit checklist — a routine task that needs to be done every day.
The night auditor’s job is to ensure the numbers for the day are in line with what’s expected.
Every night, the night auditor will print reports going over:
- Trial balance
- Business on the books (future hotel bookings)
- Compensations rooms
- Detailed description of room revenue, taxes, credit card payments, and cash and check payments
Then they prepare the numbers for an accountant to review later. They’ll also review daily reports and operate the front desk by checking guests in and out during the night.
At the end of the night audit, the audit circulates an electronic or paper routing pack that must get approval from all department heads and the General Manager. This is often required as part of the hotel audit with big hotel chains.
Varying room costs
Many factors can make the room rates vary — including weekends, holidays, certain seasons, and at times the hotel is near capacity. When it’s near capacity, rates are higher because rooms are scarce and the demand is high.
Occupancy rates (the ratio of booked rooms to the total available rooms) affect the hotel’s rates.
Another factor that affects occupancy rates, and in turn, room costs, is the season. Certain seasons in different properties will have busier periods that will drive costs up.
Guests may incur additional charges, known as “incidentals,” for services such as telephone use, room damage, missing items, food and beverage, and dry cleaning.
Varying charges depend on the hotel and the services they offer. In other words, each hotel offers different things and exists in different categories (like an overnight or extended stay hotel).
For example:
Extended stays tend to be cheaper because guests stay for a longer period. They also tend to offer amenities as if they were in an apartment, like a kitchen and the related accessories.
Overnight hotels are more expensive as they have high guest turnover — they only stay for a night or two. Some offer breakfast and room service, but the latter tends to come with fees.
Impact on Hotel Accounting
Changing room prices are significant in that sense that they complicate hotel accounting. The variability in room rates, known as Dynamic Pricing, poses a challenge for hotel management in budgeting and forecasting. Room rates can go up or down depending on the time of year, how full the hotel is, and if there are any special events happening, just like how airlines adjust their prices.
Moreover, the presence of incidentals and special group or package pricing further adds to the complexity of billing. Hotels need to be diligent in tracking and billing these varying charges, which can include anything from minibar usage to conference room rentals.
The combination of dynamic pricing and additional charges makes forecasting revenue with accuracy a daunting task. Hotels must employ sophisticated accounting systems to manage these variables with effectiveness, ensuring that they account for all potential revenue streams and maintain as accurate financial forecasts as possible.
Vendor contracts
Vendor contracts support the hotel’s operations, and hotels can’t operate without the vendors.
Most hotels have vendor contracts, and these vendors usually give a special rate as long as they have a certain number of rooms booked each month. Vendor needs vary, and hotels are usually willing to meet each vendor’s needs to obtain and keep their business.
Hotels tend to have vendors for alcohol, food & beverage, transportation, guests’ supplies, and more. Whichever vendors a hotel has, it’s crucial they follow company culture, standard operating procedures, and hotel guidelines.
Multiple revenue streams & departments
In general, each hotel has several revenue streams. Some of them have distinct P&Ls, and need to be accounted as such.
Some of these operations are for just the guests, like most of the amenities on the property: pool, laundry, and so on. Other operations are available to the public: restaurants, bar services, spaces to rent for meetings, outside event catering, etc.
Each department can bring a significant amount of revenue to the hotel. Multiple income streams allow the hotels to make more money and are better for the business’s health — since they can offer more than just rooms.
However, just because it’s a “revenue stream” doesn’t mean it’s profitable. Some “revenue streams” are to just serve as an amenity for guests.
In most cases, each department has separate profit-and-loss statements for tracking purposes (e.g., room service, front desk, restaurant). Departments or properties also often share or split expenses.
These unique aspects as covered, go hand-in-hand with unique challenges. Expand the boxes below for further details!
5 Essential Roles in Hotel Accounting
Below are five essential roles in hotel accounting that combine to ensure a hotel’s finances are healthy and operations run smooth.
1. Financial reporting
Financial reporting is one of the most important tasks that an accountant must carry out on a monthly basis.
Any partners or owners of any given hotel look for financial statements at the beginning of each month. Much of the time, they don’t get them early enough.
Those who have invested in the hotel will be eager to know how it performed for the month, as the industry is known for its unpredictability and constant changes.
The reports that should be run are the balance sheet, P&L, cash flow, the comparison between the current year vs. the previous year, and actual versus budget. These reports are essential in determining how the hotel is performing. These reports create financial models to help executives make future decisions and projections.
Let’s take a look at one of those reports.
Understanding the Income Statement (P&L) in Hotels
An income statement, often referred to as a profit and loss (P&L) statement, shows a company’s revenue, expense, and profit (or loss) over a specific period. This financial statement is crucial because it provides insight into the financial health of a business’s operations. Unlike a balance sheet, which offers a snapshot at a point in time, an income statement is cumulative, reflecting all the revenue, expenses, and profits over the period covered.
In the context of hotels, P&Ls often follow a multistep income statement style. This format breaks down revenue and expenses by department, such as:
- Room rentals
- Food and beverage
- Gift shops
- Spas
- Laundry services
Hotels can choose to itemize as many or as few of these departments as they find useful for their internal and external stakeholders.
By understanding and utilizing these detailed income statements, hotel executives can get a clearer picture of their financial performance. This insight allows for more informed decision-making and strategic planning, ensuring that the hotel remains competitive and financially healthy in a constantly changing industry.
More and more frequently, hotels are leveraging technology to assist with reporting and replace their legacy accounting systems.
According to Hotel Business, forward-thinking hotel management and ownership firms are realizing the tremendous benefits of incorporating AI into their accounting practices.
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2. Budget management
Budgets are essential for a hotel’s success. And the budget season is a critical time for hoteliers. Often, budget preparation starts in August and budgets become final in November.
A lot of market research has to be done to complete revenue and expenses projections. Market trends and historical data are excellent sources if they’re available to hotel accountants.
With so many factors to consider, it can be challenging to create a budget. In any month, a disaster could happen, causing occupancy to rise because of the unforeseen circumstance. And another could be uncharacteristically quiet, causing food to be overstocked.
The COVID-19 pandemic, for example, was something the hotel industry never saw coming. Overnight, all the budgets they had prepared had to be changed. They needed flexibility in terms of revenue and keeping expenses down.
The best way to create a budget for a hotel is to stick with specific percentages of the revenue for expenses and try to stay within that range — rather than sticking with concrete numbers.
3. Payroll processing
For payroll processing, it’s essential that all times worked are entered for each employee.
The accountant has to ensure that every department is entered, and each manager has signed off on the employees’ timesheets.
There are many different payroll processing software, and the hotels get to choose which program they’ll process their payroll with.
4. Expense tracking
Part of expense tracking is making sure each department stays within a certain dollar amount. This is one of the biggest challenges that an accountant faces.
Certain items — like hygiene products, laundry detergent, and cleaning supplies — can run out quicker than expected. It is necessary to order these as quickly as possible. In short, some areas are hard to keep within a range.
Communicating with departments about their expenses is often difficult and time-consuming for various reasons. For example, asking for people to get approval before they order anything is often a good practice. But it doesn’t always happen that way because the need might be urgent.
With so many departments, it can be hard to control expenses.
5. Financial auditing
Auditing the financials and comparing the actuals versus the budget is essential for any accountant, especially a hotel accountant.
This is a great way to determine the hotel’s financial ins and outs, making sure each department isn’t spending too much money. And if they are, they need to find out why. Being familiar with every category and purchase is crucial for the accountant to work successfully.
Someone should be able to ask the accountant why a particular expense may be higher than anticipated, and the accountant should have the answer at hand.
Accountants need to be familiar with various categories, including but not limited to:
- Room expenses
- Maintenance
- Utilities
- Food and beverage
- G&A
- Income
- Franchise fees
Each category needs to be analyzed monthly, and an accountant should figure out what should or should not change for the next month.
Hotel financial auditing should follow GAAP principles — and it’s a good practice to have quarterly audits to ensure the hotel is always compliant.
Why These Roles Matter
Hotels operate with a level of complexity that necessitates specialized accounting roles. From the nightly audits that ensure financial integrity to the revenue strategies that boost profitability, each role plays a vital part in the overall financial health of a hotel.
- Enhanced Accuracy: Each role focuses on specific areas, thereby reducing errors and increasing precision.
- Operational Efficiency: Specialized functions allow for better management of financial resources.
- Revenue Optimization: Dedicated experts in revenue and inventory management help in maximizing profits through strategic planning.
These specialized accounting roles not only uphold the financial staunch of the hotel but also contribute to delivering exceptional service by ensuring that all financial operations run seamlessly.
5 Common Hotel AP Problems
While there are various kinds of obstacles for hotel accountants, we’re going to stick with some of the biggest hurdles we see as an AP software vendor for hotels.
1. Spending too much time processing invoices
The cost of processing an invoice can vary widely depending on multiple factors, such as the industry, the size of the company, the complexity of the invoice, and the degree of automation or manual intervention involved.
According to our data, traditional, paper-based invoice processing is generally more expensive, with costs ranging from $10 to $30 per invoice according to various industry studies. These costs incorporate labor, overheads, errors, and the time value of delayed approvals and payments.
Have additional questions about how to calculate the cost of invoices? That and more questions about invoice automation are answered here!
What makes this worse?
Hotels receive an abundance of invoices, particularly because of the multitude of departments and intricate operations within a hotel.
Examples include cleaning supplies for housekeeping, food and drink for the restaurant, amenities to be placed in the rooms, and all utilities.
Having to enter invoices is a time-consuming task because each relevant department must approve each invoice to ensure that the invoice is correct and the right amounts were received.
The task of tracking down a specific department’s management is difficult and time-consuming, which can result in the late payment of an invoice.
2. Struggling to track price changes for specific items
There are different vendors that products can be ordered from — and each vendor changes its prices at least 2 times a year.
It can be a significant challenge to monitor the vendors and their price changes, not to mention comparing these costs across properties.
When businesses fail to properly track price changes, they may overlook shrinking profit margins.
Most franchise hotels make it mandatory to stay with certain vendors to get the “branded” items, making the selection of vendors slim. And sometimes, it’s challenging to compare certain items because it’s not exactly apples to apples all the time.
3. Manual audits are costing too many hours
Audits can be one of the most time-consuming things because the auditor is always looking for previous years’ information.
Sometimes, this information is hard to track down, especially if vital documents are all in paper format.
When a franchise conducts a tax audit, the hotel has to produce state, city, and county documents for a certain number of years. This costs too many hours of labor just to dig up old documents.
4. Losing unknown amounts of profit due to human error
Manual data entry is prone to errors, causing delays and inefficiency, according to the CFO. The delays often come in the form of staff needing to conduct reviews and correct errors, further straining resources.
Sometimes, the numbers entered by hand into the accounting software aren’t accurate.
On top of that, many OS in hotels don’t communicate with the accounting software — and that’s where the manual entry comes in, causing errors in turn. Many hotels with a restaurant have three or more systems — which can be far too many to manage.
And in situations where manual data entry is required for large systems, every mistake can have expensive consequences.
AP Automation for Hotels
With Ottimate, AP automation software designed with hospitality in mind, your hotel operations can easily tackle high invoice volumes, automate payment approval workflows, and integrate seamlessly with your property management system.
5. Poor exporting quality from their hotel accounting software
When a hotel’s tech stack doesn’t work together, it’s made up through manual labor, which causes additional costs in wages and errors.
Unfortunately, some hotels have software that doesn’t communicate with other software.
As previously mentioned, some hotels have more than one operating system because they’re not using an OS that can do it all. This leads to more manual data entry — leading to errors and inaccuracies in sales.
Solution: Using AP Software That Lives & Breathes The Hospitality Industry
Given the above complexities and problems, implementing a hotel accounting system is not just beneficial, but necessary. Integrating an accounting system or AP automation software with other hotel software, such as point-of-sale (POS), payroll, and reservation systems, result in a significant reduction in the amount of data entry required of frontline staff and the accounting team, lowering the likelihood of manual errors.
If left unaddressed, these problems in hotel accounting can end up costing countless manual hours, data errors, and ultimately — profits lost.
And the longer those issues go unsolved, the more the costs compound.
But the good news?
AP automation software like Ottimate can resolve all these issues.
The thing that we see companies trying to do, they’re trying to make it more difficult than what it actually has to be. It is very simplified. It’s absolutely amazing how simple [accounts payable] is and how difficult people are trying to make it. Because it is accounting, and accounting is supposed to be hard –– but Ottimate is not.
Karen Troyer
Executive Director, Nivea Hospitality
Key Benefits of a Hotel Accounting System Automated by Ottimate:
- Efficiency: Automates complex processes, saving time and reducing workload.
- Accuracy: Minimizes manual errors by removing manual tasks and setting up safeguards to catch errors and inconsistencies.
- Compliance: Ensures adherence to different regulations and tax codes across various locations.
- Scalability: Supports the industry’s growth and resilience by efficiently managing increasing volumes of transactions and vendors.
Ottimate is AP automation AI that provides a smarter way for AP managers, approvers, controllers, and CFOs in the hotel industry to work through their entire invoice lifecycle.
*Updated for content and accuracy on August 26, 2024. Originally published April 20, 2021.
