Understanding Hotel PnL statements

As a hotel professional, you will have to understand your hotel Pnl statement and budgets to make and deliver profits for the hotel.

You may have seen the budgets in the past and I am yet to see any hotel that does not make a budget in some form. But what constitutes the component of a hotel budget. Lets try to breakdown the components and see how to make them.

Budget is a financial plan for a defined period of time, usually a year and made according to principles of accounting. This is the generally accepted definition as it helps us to chart a course for the future.

It is important to note that the budget is an estimation of the revenue and expense that the hotel will incur over the year. So it is an effort to find out after all expenses how much profit will be available to the owners or developer to take home.

In its simplicity

Profit = Revenue – Expenses.

There are additional expenses like taxes, depreciation etc which are taken in to consideration and there is an entire finance department for managing that but this guide is for non finance professional who need to make decision based on the profit and loss statement on a monthly basis.

Some universal truth of Accounting

Double entry system of accounting:

In accounting every expense has 2 entry. A debit and a credit. Without getting too technical, if you bought a packet of rice at the supermarket, you give money to get rice. So even in 1 transaction, it looks different in eyes of both the parties. One gets money, one looses money.. one gets rice other looses rice from their inventory.

So in accounting this transaction for the seller has 2 parts, receive money and reduce inventory.  Similarly for the buyer, it has 2 parts , receive rice and reduce cash on hand.

This is the most basic principle of accounting. So when you sell a steak at the restaurant, it affects inventory and food cost in equal numbers in the opposite column.

Matching revenue to expense:

This another principle is critical if you want to make any sense of the data presented to you. For e.g if you had an event at the hotel and wanted to check if the event was profitable, the easiest way would be to put the revenue made and reduce the expenses. However when this data comes it and it does not look good, it is tempting to move some ancillary expense like maybe the DJ expense to the bar. While technically it is not wrong and the data is captured in the overall expenses correctly, the PnL for the event provides a wrong impression to the person looking at it.

So in order to correctly understand the impact, all expenses incurred to generate a direct revenue should be clubbed together

Un allocated expense:

Some time it is not possible to split some expenses like utilities – cost of water and electricity into each revenue department, or salary for the General manager. This comes in a different department which only records these common expenses

So a department Pnl  should have the following heads:

Revenue for that department
Direct cost of doing business: Eg cost of good sold if any ( usually used in food and beverage department)
Salaries and benefits for the department
Department expenses
Departmental profit

For the hotel PnL statement should look like

Total hotel revenue

( Minus) 

Cost of goods sold
Salaries and benefits from operational departments
Departmental expenses from operational departments
Total Departmental profit / loss
Un allocated expenses ( Admin, HR, Finance, Repairs and Maintenance cost, Utilities cost)

Will equal

Gross operating profit / Loss

(Minus)

Other expenses ( Licenses, fees, etc which are required to run the show but the hotel has no control over)

Will equal

Net operation profit / Loss ( EbItda – Earnings before interest, taxes, depreciation, and amortization)

This is still not something the promoter takes home.

Below this line finance teams will reduce all the expenses like interest, taxes, debt service and depreciation before giving some profit to the owners.

So this is basics on how to look at the budget and as you look at the overall profit number which the owner takes home in many case you may wonder, why does he just not keep the money in bank. He might make more. There might be many reason for building the hotel, but as a professional who understands the numbers you can contribute to making sure that he is able to recover the cost of building the hotel, providing a job and income for you and then take some home for himself as well.

So this is how to read a Pnl statement and make sense out of it and use it to see which area of the hotel is making or loosing money