In today’s unpredictable hospitality market, hoteliers are finding it absolutely essential to maintain a watchful eye over business health. To preserve and expand on their successes while correcting and minimizing failures, hotel professionals need to be able to rely on effective financial accounting practices that can readily provide an accurate snapshot of performance during a specific timeframe.
Whether for a hotel group, luxury suite hotels or an independent boutique property, the key to keeping a consistent pulse on business health is a financial model known as the balance sheet. Understanding the purpose behind this spreadsheet and knowing how to leverage its insights can often be what stands between experiencing hotel profit or substantial revenue loss.
What is a Hotel Balance Sheet?
Simply stated, a balance sheet provides a summary of an organization’s financial position and demonstrates the effectiveness of a business plan during a set point in time This is achieved by a balance sheet listing a business’s various assets, liabilities and equity in order to determine an organization’s worth and whether it is operating either profitably or at a loss.
A balance sheet serves two main purposes. Internally, it provides an opportunity to identify successful strategies in order to double down on them to enhance results. It also offers a critical analysis of where a business is underperforming so that organizational leaders and employees can adjust course and minimize any negative impacts on their financial plan.
The second main purpose is to provide external audiences with an overall representation of a business’s worth, how it is being financed and the number of resources it has available. This information is routinely sought by investors who may be interested in investing in a particular company, but who first want to determine potential ROI and what risks may be involved.
How to Prepare a Balance Sheet for Hotels Step-by-step
To create an accurate balance sheet, hotel businesses like other industries begin by using the following equation: Assets= Liabilities + Owners’ Equity.
As is evident in the name of the financial statement, a balance sheet performed correctly should always ultimately balance. This means that Assets should always equal liabilities with the addition of equity. A sheet that doesn’t balance often reflects an error or missing information that was overlooked while entering in data for each section.
Current Vs. Non-current Assets
As the first part of a balance sheet, Assets represent anything a hotel owns that holds financial value. These are separated into two fields: current assets and non-current assets. Current assets are any items that a hotel business believes will be converted into cash at some point during the current year. These can include but are not limited to:
- On-hand cash
- Accounts receivable
- Inventory
- Prepaid expenses
Non-current assets represent long-term investment items that are unlikely to be converted into cash within the next 12 months. These often include assets such as:
- Property land
- Equipment
- Non-current receivables
- Patents
Current Vs Non-current Liabilities
Once a hotel’s current and non-current assets have been added up, the next step in creating a balance sheet is to list business liabilities. Like assets, liabilities that a hotel owes are broken into current and non-current fields. Current liabilities are debts that are owed within a year, while non-current liabilities are long-term financial obligations that are due at a later point in time.
Examples of current liabilities include:
- Accounts payable
- Utility fees
- Rent costs
- Short-term debt
- Accrued expenses
In contrast, non-current liabilities can include:
- Long-term leases
- Deferred taxes
- Long-term loans
- Bonds payable
Once compiled, all liabilities are then added together in order to demonstrate a property’s total amount of debt.
Calculating Owners’ Equity
With all assets and liabilities accounted for, the next and final section of a balance sheet focuses on owners’ equity. This importantly reflects what owners and investors own once liabilities have been addressed. Identifying the amount of owner’s equity can be achieved by adding up all assets and subtracting the total sum of liabilities.
Items reflected in the owners’ equity include capital contributions, owners’ distribution, retained earnings and net income. Any other remaining value from a hotel’s assets can also be attributed to equity.
What are the Format Options for a Balance Sheet?
Hoteliers have several options to create a balance sheet depending on their specific analytical needs. Whether creating an Excel template, using an accounting consultant or a dedicated software solution, the main types of balance sheets consist of classified, common size, vertical and comparative formats.
Classified and Common Size Balance Sheets
Classified balance sheets are a straightforward format that simply lists out assets, liabilities and owners’ equity for a specific time period. Comparative balance sheets include all of the information present in a classified format, but also note each line item as a percentage in a separate column. Including percentages can be useful for identifying changes in cash flow trends.
Vertical and Comparative Balance Sheets
With a vertical balance sheet format, assets, liabilities and owners’ equity are listed in a column as with the other formats, but are included in decreasing order of liquidity for each section. Comparative balance sheets provide an opportunity to analyze asset, liability and owners’ equity performance between two or more periods in time. This again is useful for highlighting any changes.
Hotel Balance Sheet Example
In the hospitality industry, hoteliers often measure their level of success and financial worth by analyzing and contrasting performance month-over-month or year-over-year. Below is an example of a typical balance sheet for a hotel that performs this function:
In this example, it can be clearly seen that Grand Hotel is performing an analysis by comparing the current reporting period to the previous two years. Total assets for the current year are valued at $1,176,300.00, while the value for the previous year is $1,065,000.00. This indicates that the property’s total assets grew by $111,300 over the course of a year.
In the next section focusing on liabilities, the hotel can determine that its current liabilities for the present year total $214,000, while its overall liabilities which also include long-term debt come in at $659,000.00. By performing a year-over-year analysis, the hotel can significantly see that its total liabilities have increased by $14,000.
For business stakeholders, total owners’ equity is the sum that likely draws the most interest. By comparing current total equity to the previous year, both external and internal audiences can see that the hotel increased ownership of assets by $97,300, demonstrating growth in business value and lessening the likelihood of being viewed as a potential investment risk.
Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at UpStay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.
