A Chart of Accounts -- Why Bother?
As our industry has matured, so has our sophistication, particularly behind the scenes in the "back office." Which in the case of inns, is probably a door across the top of two file cabinets in our bedroom. While our guests are getting that personalized attention and fresh cookies, we are now using copiers, fax machines, computers, modems, reservation software and accounting programs. The days of running the inn out of your personal check book are long gone (and if you are still doing that, stop it right now)!
A successful inn needs to know both where their money is coming from and where it is being spent, with the goal to have a positive cash flow at the end of the day and not a negative one. Further, by knowing the details of your revenues and expenses, you can make intelligent decisions on short and long-term changes, that will help your bottom line. Maybe that Gift Shop income is not covering the current mix of products for sale and it is actually losing money. Perhaps the Meeting business is more successful that you thought, when you see the percentage of revenue greatly increase over the expenses of meeting and groups.
However, the only way you will know what is happening within the various categories of your business is to keep track of them through a Chart of Accounts. Even a basic set of accounts will help you get by the guessing game of "just how much does it cost me to rent a room versus letting it go empty." All the current accounting software packages use a Chart of Accounts as their basis. Further, they can often be customized by adding and deleting accounts, adding account numbers, adding sub-accounts and changing account names. A basic Chart of Accounts for a Bed & Breakfast Inn is probably only five revenue accounts and 20 expense accounts. A Chart of Accounts for a Country Inn probably has a few more accounts in both revenues and expenses.
PAII provides a basic Chart of Accounts for both Bed & Breakfast Inns and Country Inns in its Sixth Biennial Industry Study of Bed and Breakfast and Country Inns 1998 Operations, Marketing and Finances (the Study) on page 8. Both account names and a brief description are included. This is a great place to start if you are setting up your Chart of Accounts. If you already have your accounts established, this is a good resource to check on possible additions or how your current accounts compare. It will also make it easier in January 2001, when it will be time to participate in the 2000 Study, if your Chart of Accounts is similar to PAII's recommended list.
Our industry is not the only one that has some standardized accounts, so we can compare data and trends. The Uniform System of Accounts for the Lodging Industry is a classification system still in use, developed by the New York and American Hotel & Motel Associations in 1926. The key to your success, however, comes after the Chart is established. Revenues and Expenses must be correctly coded and inputted. Then you must take the time to review the accounts, look at variances and figure out why changes have happened.
Beware of the catchall accounts of "Other Income" and "Miscellaneous Expenses." Rather than thinking carefully about what account an item should go in or establish a new account or sub-account, it is quick and easy to just dump it in the "Other/Miscellaneous" account. However, virtually no one can remember just what he or she put in those accounts.
There was a disturbing trend in the 1998 Study, which saw a growing increase in Other Income and a significant increase in Miscellaneous Expenses. For Accountants this is a "red flag" for hiding inappropriate expenses, an inadequate Chart of Accounts or laziness in identifying and correctly inputting revenues and expenses. The 1998 Study showed an increase in Miscellaneous Expenses from one percent of total expenses in 1996 to as high as 3 to 4 percent in 1998. Budgeting one percent of your expenses to Miscellaneous is generous. I would encourage budgeting no more than $100 per year on a budget as high as a $250,000. Because when the money is in "Miscellaneous and Other," you are in poor control of your expenses.
Once your Chart of Accounts is set up, it is not cast in stone. Changes can be made and the best time is at the start of your new fiscal year. Most accounting software will allow you to see and print reports that compare your accounts month-to-month, year-to-date, actual-to-budget and last year-to-this year, plus a number of custom reports. It is with this data, that you can start to make comparisons on how your business is doing, what is up and what is down. It allows you to think about the variances and compare your inn to others in the industry by looking at the figures in the Study, by size, location, year in business and more.
An excellent article about how to use the Study data is in the Study itself on page 9, Lodging Analysis: How to Benefit from the 1998 Bed and Breakfast/Country Inn Industry Study by Robert Mandelbaum.
Other than knowing how much you actually have in your business checking account, knowing and using your Chart of Accounts is the next key in managing all the financial aspects of your business. Take the time to code and input entries correctly. Use these tools to make your inn even more successful this year.
Hugh Daniels has over 17 years of innkeeping experience and has degrees in Accounting and Business. He currently is the Vice President and General Manager of Rocky Mountain Inns (formerly Utah Inns), which provides management and consulting services to our industry. Hugh also was the innkeeper member of the 1998 Study team.
Published in 2000 in Innkeeping Newsletter