Balance sheet: financially, nothing else matters

Over the years I have seen a lot of messes in my career. Not only the ones that catch your eye because of the clutter and disorganization you see in the back spaces of your hotel but I’m talking about a mess on the balance sheet.

There are two main differences between the two different kinds of messes.

1. The balance sheet mess is not easily spotted by just anyone. Contrary to the messy housekeeping office or banquet storeroom the balance sheet disaster takes a trained eye to detect.
2. The physical disorganization is a costly problem in equipment costs and expenses related to operating outlays for amenities and supplies. The balance sheet disaster is quite another beast which can and usually does produce an incredibly hard financial pill to swallow – 10, 20, 200 times the physical mess and even more sometimes.

More on point one. Why is this mess so hard to see? The balance sheet detection game is like hide and seeks and we are playing in a place that provides some excellent places to hide and it is coupled with the fact we are playing with people who can’t see! What a perfect combination for an accident looking for a place to happen.

To see the balance sheet is a mess, one first needs to look at it on a regular (at least monthly) basis. I know most hotel executives can’t even read a balance sheet and on top of that they never look at it. Why bother? is the attitude as this is the finance person’s responsibility, right? Wrong. Ignore the balance sheet and combine this with a less than razor sharp finance professional and you have the makings of a hotel financial tsunami.

The first tip on how to read a balance sheet is you need to see the supporting documentation for “each” and “every” account. To simply look at the report is a waste of time. If you’re interested in seeing if the balance sheet has integrity you need to verify each account is reconciled and properly balanced. The balance sheet itself is always in balance and it tests the fundamental accounting equation. Assets = Liabilities plus Owners Equity. Not what you’re looking for. What you are looking for is the supporting detail which makes up the account balance and the activity inside the account.

I know what you are thinking. That’s the job of my accountant. You are right and it is also right that as the GM you take the necessary responsibility to oversee the financial function. It’s not as difficult as you think. Ultimately the buck stops here. The GM is the one responsible for the entire operation and in my book includes the finances. Knowing what to look for is not difficult and it is good for you, as it will help you be a better all-round leader.

Here is what you need to look for when reviewing the balance sheet reconciliations:

1. They’re completed monthly – usually by the 20th of the following month. Many should be done before or in conjunction with the previous month’s closing. Not ready for your review is the tell-tale sign of a bigger problem. I would always tell my team the following, “If the books are not clean and completely reconciled, nothing else we do matters.”
2. All reconciliations need a standard top sheet with account name, opening balance, detailed outstanding balance and the supporting documentation for all outstanding balances. The detail on the summary sheet needs to be organized and numbered so the backup is easily verified.
3. Items that “sit” from one period to the next with no change need to be challenged unless they are a deposit or a fixed item.
4. All balance sheet reconciliations need a signature and date section to verify the preparer and the reviewer. Be wary of accounts prepared and verified by the same person. Even in a small operation this needs to be properly segregated or you are giving too much control to one individual and this is creating exposure for you.
5. Last and not least there should be nothing on your balance sheet reconciliations that you don’t understand. If you are getting a bunch of mumbo jumbo about some unexplainable situation, that’s a fire alarm and you want to dig into that. Don’t let up until you are satisfied with the answer.

The balance sheet is not difficult to understand – to the contrary it helps you understand your business and it will help you make better overall decisions. It is not just for the finance people. Compare it to understanding the group rooms on the books in your hotel. Are we heading into the year with enough to safely cross over? You know how important that is. Well, the balance sheet is just the same. It’s a great tool to help you see where you’re at and where you are going.

Back to point two

The difference in the mess on your balance sheet compared to the physical one. The balance sheet and the income statement are insufferably linked. Whatever is sitting on your balance sheet whether it is reconciled or not must find its way onto your profit and loss statement. Like a pimple, what’s underneath must eventually find its way to the surface. There is no hiding and there is no chance to pass through undetected. If my guest ledger is out of balance, then the P&L must take the hit and I always hope it’s a debit to my ledger and a credit to my expenses.

When I say, nothing else matters “financially” the Balance Sheet is akin to the last and final card in the game. Make sure you know what you are holding onto.

David Lund – The Hotel Financial Coach

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

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