WHY you should follow the 11th Edition

Did you know that the Hotel Industry has a standard chart of accounts and Operating Statement format?

If you’ve heard me speak at a convention, or used one of the industries many profitability comparison reports then you’ve heard of and seen it.

The 11th edition was put together by a group Hotel Financial Experts in association with the American Hotel Lodging Institute (USALI) and the Hospitality Finance and Technology Professionals (HFTP). The standard Is used by virtually every large hotel company in the United States, be they brands, management companies, or REITS. Why do they all use the same format? Easy, comparability. The same way that hotel companies use the STR report to compare their Revenue and Room Sales, large publicly held companies want to compare expenses and profit. They use the comparisons to stay aware of expense trends and look for areas to improve the costmanagement and efficiency, much the way you might use the STR report to help set rates.

A second reason they use the 11th edition is investor comparisons. Wall Street and other investors require that the companies Profit and Loss statements be in a standard format to ensure a fair comparison to other hotel companies. REIT’s and other investors often own stock or assets from a variety of brands, and assess future investments and rebranding based on performance. Often times our clients ask for reporting on which of their management companies are run the best Labor Cost, Best Maintenance Cost, etc. This requires continuity across the reporting.

“We cannot solve our problems with the same level of thinking that created them”

– Albert Einstein

11 Reasons For Using the 11th Edition

So with apologies and acknowledgements to David Letterman, here are the top 10 11 reasons YOU should embrace the industry standard.

1.  Industry standard

    There is an industry standard, so why not use it? What advantage do you perceive to doing things differently than every other hotel? If your objection is, “What difference does it make”? Check out the next 10 reasons.

2.  Accurate expense coding

    You know the old saying “Everything in its place”. Well this is one of the first benefits that you will gain from embracing the standard. There is an Expense Dictionary in which you can look up any item or service you purchase, and it will reference exactly what account to which the item should be coded. In a study of Maintenance Expense we found that the average cost per occupied room for 700 hotels was $5.94, the HOST average for Limited Service Operators was $4.11. If you are one of the hotels in our study, would you want to know how to save $1.83 per room? For a 60 room hotel, running 70% occupancy, this would produce over $28,000 more in income. The first issue to resolve is: “Are you accounting for Maintenance the same as these other hotel”? If you are on the 11th Edition, the answer is YES! Oh and one more point, the lowest cost reported by a hotel was .81 cents, and the highest was $38.76. I assure you those owners have accounting issues, and it shows.

3.  Comparison to industry averages and studies

    Maybe you get Smith Travel’s HOST report, or CBRE’s annual study of hotel profitability, or you are user of CIA’s Hotel Operating Profit Evaluation, or participate in CHOICE hotels Project GROW. Your use of all these tools is heavily impacted by how well your accounting and reporting comply to the industry standard. All the reports mentioned are based on the 11th edition. You will need to have standardized department totals for Payroll Cost, Taxes and Benefits, and Other Expenses. Without these totals, all you can learn is how you compare at the top and bottom. If your Profit is 35% of revenue, and the industry average or your segment is 45%, then all you will know is that you are well below average in profit production. Now if you line up throughout the report, you will see exactly where you need to improve. Beyond the reports listed, there are sources like online articles, sessions at conventions, industry blogs, etc. that discuss hotel cost and profit. Your ability to benefit from this type of material will increase if you are following the industry standard.

4.  Financial Lending Requirement

    As discussed earlier, financial professionals, almost uniformly, require reports submitted to them to be in the standard format. A large part of their valuation is based on your earnings, and how those earnings compare to other hotels. In order to make this assessment, they want to compare apples to apples, and they often don’t want to have reformat your reports. I can tell you from personal experience of owners who were looking to refinance their property, or were presenting a current properties P&L when trying to secure financing for a new project, and were told to resubmit their report in the standard format.

5.  Operations vs accounting reporting

    In addition to the standard accounts and definitions of what goes in them, there is a common format to the report as well. The format chosen is designed to create an “Operating Statement”. This is a report that can be used to make Operations Decisions, not just compile numbers for tax filing. The statement is separated by department, and includes subtotals of payroll, payroll burden, and other expenses for each department. The format shows both Monthly and Year to Date amounts on the same page. This allows to see not only what happened last month, but to also see if there are long term trends that need reviewing. This format also includes comparisons to prior year and budget, and metrics that make for truer comparisons than just dollars. You should be able to share the report with managers, be able to have monthly P&L reviews using only the report, and be able to develop detailed action plans to make improvements.

6.  Comparison to your own history

    One of the features of the standard format is the inclusion of values from the same time frame Last Year. Owners look for year over year improvement, in the same way employees have some to expect an annual increase in wages. (If the notion of giving employees an annual increase pay is a new concept to you, read some of our material on the cost of turnover). This goal, make Year Over Year variance a key variances that owners want operators to manage. Assuming you can accept this reality, then you should understand the value in putting the Last Year numbers, and variances versus Current Year front and center on the report. Part of your P&L Review should be an examination of performance versus last year, and an honest understanding of what is causing the variances. In addition to Last Year, all major operators and highly profitable hotels, also include comparisons to Budget on their Operating Statement as well. Having an established set of goals for the property, and managing to those goals changes you from a passenger along for the ride, to driving your own success.

7.  Metrics

    We all can understand that when you are comparing expenses from two periods of time (this year vs last year, this month vs last month, etc.), comparing to other hotels (or groups of hotels), the first question is “How many rooms did they sell”? This is necessary because it is axiomatic that if you had more rooms sold, you are going to spend more servicing them. If there are two hotels each with 70 rooms, and one spent $7,000 on Housekeepers and the other spent $10,00 on Housekeepers, there isn’t much you can tell from this. In fact, if you are the first hotel, you may think “I’ve won. I spent less.” But, if we use Cost Per Occupied Room we can learn a lot. By dividing the expense by the number of room occupied, we get a fair comparison. Using this method, we see the first hotel spent $6.45 per room and the second $5.15. The second hotel is clearly more efficient.
    This same approach is needed for accurately comparing your current year and last year values. Unless you had the same number of rooms and the same revenue, a comparison of dollars can be very misleading.
    Your Operating Statement should include Cost Per Occupied Room and Cost Percent of Revenue at a minimum. For some line items (expenses) you may also want to see Cost Per Cover, Cost Per Available Room, or Cost Per Day.
    Conversations with managers, brand representatives, accountants, etc. will be much more productive if you focus on the proper metrics, and eliminate cross talk about differences in volume of business. If you have ever been involved in a conversation like this:
    Owner, “Why are spending so much in breakfast?”
    Manager “We had more rooms.”
    Owner, “We had that many more rooms?”
    Manager, “I guess.”
    Then you need to be looking at and discussing metrics, whether you are the Owner or the Manager. Make your conversations meaningful.

8.  Informed decisions and improved communication

    As I touched on above, the standard operating statement became the standard because it helps Multi-property managers, Owners, and Analysts to have clear communication, and ask more meaningful questions. When reviews and discussions focused on dollars, entirely too much time was wasted trying to determine the impact of volume on the numbers. The inclusion of metrics allowed hoteliers to find the real issues and move on to solving for the problems.
    The Metrics and Comparisons described above give you accurate benchmarks to agree on, and will stop owners and managers from arguing over whether or not a goal is fair, and get on to planning specific actions to obtain it.
    In a recent conversation with an owner we were discussing Room Attendant cost. The manager was convinced that there had to be something different about their hotel, because they were spending so much more. We sat together and looked the Cost Per Occupied Room and Hours Per Occupied Room on a day by day basis for 6 months. When we reviewed it this way, the manager was able to see that were plenty of days where she was running the same levels she thought wasn’t possible. Together we determined what conditions were causing the “bad” days. The manager made the changes, and payroll cost dropped into line.
    Awareness and understanding of industry measures, focus on comparable values (metrics), and having a format that make both clear, will allow you to work together to improve performance.

9.  Hiring qualified people

    One of the best habits of highly profitable hotels is that either hire or develop highly skilled managers. Their managers have a high financial acumen, and our as skilled at managing a P&L as they are at managing guest and employee relations.
    In converse to this, low profit operators tend in, strong numbers, to have inexperienced managers. Often time their managers are extremely hard working, and were the best desk clerk on property. They know the PMS and Reservations system like the back of their hand, they are wonderful with the guest, they are the first ones to come in and cover when someone doesn’t show up. They are valuable employees, and can be developed into quality managers, but they have no knowledge of financial statements. Teaching them to manage an industry standard statement will pay dividends to you for many years to come.
    If you are new to the industry, or looking to improve your properties performance, bringing in an experienced manager can pay immediate dividends. When I use hiring GM’s for a large brand, the first two questions I asked candidates was: What’s the GOP at your current hotel, and What do you run for payroll cost? These are two questions that experienced GM’s will answer off the top of their head, because they live and breathe these two values. If your reporting isn’t in the industry standard, it will say a lot about you. The same way you are interviewing candidates, they are considering you. Presenting professional, industry standard reports, and a knowledge of them WILL help you to secure better candidates.

10.  Reputation

    This brings us to how other view you and your properties. Whether it is dealing with financiers, brand representatives, potential candidates for positions, other owners, or any one in the industry in general, your compliance to reporting standards and your understanding of industry metrics and benchmarks is going to be a positive on your business.
    No bad numbers in the correct format are not going to magically look better. The correct format, and your ability to explain your numbers does tell others that you are actively driving your business, and not merely a victim of luck (be it good or bad). Think of all the situations where you want to be taken seriously and seen in the best light. In many ways, the reporting we are discussing is the foundation of your reputation. You keep your hotel clean, you make sure your employees are polite, and do other things to make sure that customers think highly of you and want to stay at your hotel. The reporting standards establish the same value in the eyes of your company with business partners.

11.  Value of your asset

    So all of this comes down to the value of your asset. You did the work to build and acquire hotels, you work hard to maintain and operate them. Someday you will want need to move on from them. Whether your exit strategy may be to sell your properties, or to pass them on to family, you want them to be a valuable as possible.
    Think about the 10 reasons above this one. They are all moving you in a specific decision: Make as much profit as possible without destroying your investment. Show margins as good as, or better than similar operators. Be a knowledgeable, savvy, operator who is taken seriously by outside entities. All with the end goal of making sure there is no reason anyone will discount the values of your asset.
    I realize that the Business Man in you is probably thinking, “If my numbers are good, who cares what the report format looks like.” I would only as you to consider the accompanying quote.
    Little things that may seem unimportant can have a big impact. Choose reports and measurements that help you dig deep, and stay aware of how things relate and affect one and other.
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