What does it mean to have your balance sheet reconciled? It’s a question I discuss with hoteliers far too often. It’s not their fault: The reality is they don’t understand what this statement means and it can cost them money in the long run. I’m here to answer it.
A client recently told me he looks at his balance sheet once a month. “Great,” I responded, “what do you look for?” There was an audible gulp then a long pause. “What am I supposed to look for?” he asked. To which I replied: “It’s not what you’re looking for, it’s what you want to see and, more importantly, hear that’s critical”
Balance sheet accounts are commonly referred to as the “permanent accounts” as opposed to the income statement accounts, which are known as the “temporary accounts.” What does this mean and what’s the difference?
The permanent accounts (the balance sheet) are not reset to zero at year-end. The temporary accounts (income statement) are reset to zero at each year’s end no matter when in the year this occurs.
The fact of the matter is that the balance sheet never starts over from zero like the income statement does. This means that your balance sheet requires a completely different set of conditions to be useful in your business.
Consider transient room revenue on an income statement account. Each day we post our sales and eventually each month to the transient room revenue account on the general ledger. On the other side of these postings, we’re hitting the balance sheet with how we will receive this income—either cash, credit cards, guest or city ledger. Remember: Every transaction has two sides, a debit and a credit.
Now, here is the all-important pivot. The income accounts story is over until tomorrow, but the balance sheet story is just starting. What we need to do is have a crystal-clear picture of where our money is and where to find it. Think of it like your paycheck: It’s understood and important to know we grossed $1,000 in wages, but the net amount of the check is a different story. It lives on and we know where we put it and where to find it when we need it. Same story as your payment for the sale of that room. Where is it and how can someone prove to you that it’s there?
That’s where the balance sheet reconciliation comes in. Each month the accountant, if he or she is doing their job correctly, must completely reconcile each and every account on the balance sheet. What does the report say in real dollar terms and what proof do we have to back this up?
Here are four examples:
Cash
What does the bank statement from the last day of the month say the ending bank cash balance is and what is the balance sheet account number for the same period? And what happens if it’s not even close? Ask the accountant what the difference is and why? The response should be: Outstanding checks that have been credited to the balance sheet account but have not hit the bank and outstanding deposits that have been debited to the balance sheet but have not yet reached the bank. Here is the list of outstanding checks and here is a copy of the deposits in transit. Got it?
Pro tip: dig deeper and ask to see the corresponding evidence, checks and deposit slips. It’s not rocket science, folks.
Guest Ledger
This is perhaps the cleanest example. The guest ledger should be the money that each guest staying at a hotel at any given point owes. For example, the balance sheet is Aug. 31, and it says $12,525. Pull the corresponding guest ledger balances report from your PMS and, voila! Do they match? They should and to the penny.
Pro tip: Review the PMS report and look for “checked out with balance folios.” Those are likely guests that had a problem last week, last month, even last year. They are also probably a write-off, which means we recognized the revenue when the transaction happened, but we didn’t collect. To fix this, either bill the guest (good luck with that) or reverse the prior posting, which means a debit or a hit to your profit-and-loss statement.
Inventory
This is dirt simple. Look at the balance sheet amount and pull the count sheet with the inventory extended. Do they balance? – They should, to the penny.
Pro tip: Look at the count and extension sheet. Look at the descriptions and the amounts. According to the backup, we have 3,000 pounds of ground beef and it totals $12,000. Huh? Mistakes or fraud can easily be hidden right under your very eyes, so look at the details and ask yourself: Does this make sense?
Accrued Vacation Pay
This one is a monster in most hotels, especially the bigger ones. What this account says is: If we closed the hotel tomorrow and I pay everyone their outstanding vacation pay, this is the total I need. What you need to compare this to is a person-by-person list of outstanding vacation days, rates of pay and dollars. Do yourself a favor and check your line—everyone knows how many days’ vacation that they have coming. Is yours, right? Is your hourly rate correct and up-to-date? I can almost guarantee it’s not right and not current or up to date.
Pro tip: Ask what happens to the vacation accrual when we give everyone a raise. If you get the deer in the headlight’s response, that’s a sign of trouble.
Having a clean and completely reconciled balance sheet is mission critical. Just because you’re not an accountant does not mean you can’t stay on top of this. Ignore this or leave it to the man or woman at the end of the hall and sooner or later you’re going to discover the truth because the balance sheet never stops; it only pauses to report its current position.
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David Lund is The Hotel Financial Coach, with services that include Financial Leadership Workshops, Personalized 1:1 Financial Leadership Mentoring, Financial Statement Design and Hotel Financial Consulting.