Mastering hotel prepaids: A guide to Financial Control and Compliance

Prepaid expenses play a crucial role in hotel financial management, ensuring that costs are allocated correctly and financial statements remain accurate. When handled properly, prepaids improve cash flow management, compliance, and audit readiness. However, misunderstandings around what qualifies as a prepaid expense and how to manage them can lead to errors in financial reporting.

This article breaks down the best practices for handling hotel prepaids, including key policies and real-world examples.

What Are Prepaid Expenses in Hotels?

A prepaid expense occurs when a hotel pays for a product or service in advance, recognizing the expense over time rather than all at once. This process is called amortization, which helps distribute costs fairly across financial periods.

To qualify as a prepaid expense, an item must meet two key criteria:

• Minimum value: Hotels typically require an item to be at least $1,000 to be categorized as prepaid.
• Extended benefit: The prepaid item must provide value beyond the current month.

Common Examples of Prepaid Expenses in Hotels

1. Prepaid Insurance

Hotels require comprehensive insurance for property, liability, and business operations. These policies are often paid annually but should not be expensed entirely in one month. Instead, the cost is amortized over 12 months to match the period of coverage.

Example: A hotel pays $120,000 for an annual insurance policy on January 1. Instead of expensing the full amount in January, the hotel recognizes $10,000 per month in its financial statements.

2. Software & Technology Licenses

Many hotels use PMS (Property Management Systems), accounting software, or payroll platforms with annual subscriptions. These costs qualify as prepaids because they provide value over multiple months.

Example: A hotel chain purchases a one-year cloud-based accounting software subscription for $15,000 in July. This amount is split into $1,250 per month for proper financial reporting.

3. Prepaid Tenant Rent (Handled Differently!)

Hotels often have retail tenants such as gift shops or restaurants that prepay rent. Unlike other prepaids, prepaid rent is treated as a liability, not an asset. The hotel recognizes the revenue gradually as rent is earned.

Example: A coffee shop inside a hotel prepays $36,000 for six months of rent. The hotel records this as a liability and moves $6,000 each month into revenue.

4. Prepaid Maintenance Contracts

Hotels frequently enter into long-term maintenance agreements for elevators, HVAC systems, or pest control. Since these services extend beyond one month, they should be recorded as prepaids and expensed gradually.

Example: A hotel prepays $24,000 for a 12-month elevator maintenance contract in March. Instead of expensing the full amount in March, $2,000 per month is allocated.

5. Prepaid Marketing & Advertising

Hotels may prepay for advertising campaigns, influencer partnerships, or online travel agency (OTA) promotions. These expenses are typically spread out over the campaign duration.

Example: A resort prepays $30,000 for a six-month Instagram ad campaign. Each month, $5,000 is expensed to align with the campaign period.

Key Policies for Managing Prepaids in Hotels

To maintain financial accuracy, hotels should implement strict policies for prepaid expenses. Here are the most important guidelines:

1. Approval Process

• All prepaid expenses must be approved by the Director of Finance before they are set up.
• If a department head wants to amortize an expense over multiple months, they need written approval.

2. Proper Categorization

• Only expenses that benefit the hotel beyond one month qualify as prepaids.
• Items paid for a single month in advance (e.g., utilities, payroll, or one-time services) should be expensed immediately.

3. Monthly Reconciliation

• All prepaid accounts must be reconciled by the 20th of each month to ensure accuracy.
• Hotels should use a standardized Excel template to track amortized amounts and link invoices to financial records.

4. Correct Handling of Long-Term Prepaids

• Any prepaid expense lasting more than 12 months should be recorded under "Other Assets" instead of Prepaid Expenses.

Why Proper Prepaid Expense Management Matters

Mismanaging prepaids can lead to financial misstatements, compliance issues, and cash flow misalignment. By implementing structured policies, hotels can:

1. Ensure accurate financial reporting
2. Prevent cash flow miscalculations
3. Simplify audits and regulatory compliance
4. Strengthen internal financial controls

Final Thoughts

Prepaid expenses are more than just a bookkeeping detail—they play a critical role in financial strategy and compliance. Hotels that establish clear policies and follow structured reconciliation processes can avoid financial misstatements and optimize expense management.

By mastering prepaid expenses, hospitality finance teams can enhance profitability, streamline audits, and ensure financial stability.

David Lund – The Hotel Financial Coach

Contact David at (415) 696-9593
Email: david@hotelfinancialcoach.com

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