Management Accounting for Hotels and Restaurants

Richard Kotas

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781135404253
• Edition: 1

The book gives practical instruction and guidance in the use of accounting for effective control and higher profit in hotel and catering operations. The author covers all aspects of the subject, setting arguments and examples in a real context.

1

Orientation

Introduction

The hotel and catering industry is a substantial one in many countries. Indeed, it is often claimed that it is the fourth largest industry in Britain.

It consists of tens of thousands of hotels, restaurants, pubs and industrial canteens and thousands of other establishments within both the commercial and welfare sectors of the industry. Taken as a whole, the industry is an important employer of labour; in Britain its total labour force during the season is approximately two million. The turnover of hotel and catering establishments is well over £4,000 million. Thus from very humble beginnings in the relatively recent past the industry has moved to a position of undisputed importance in the national economy.

Yet there is no doubt that, in spite of its prime economic position, the industry lags behind in business methods generally and in accounting and control procedures in particular.

A survey of recent additions to hotel and catering administration, accounting and related literature would disclose two distinctly different approaches. Some authors take existing techniques, which have been useful elsewhere, and try to adapt them to hotel and catering conditions. Others look at the problems of the industry and try to provide answers which are related solely to the hotel and catering operation. The consensus of opinion now is that this second approach is more appropriate and more relevant.

What applies to the whole repertoire of business techniques applies equally to the wide field of accounting and business control. The most sensible approach is to examine the nature of the hotel and catering operation, identify the principal problems and then seek purpose oriented solutions.

Let us, therefore, examine the main features of the hotel and catering operation, decide what problems exist and identify the implications of such problems for accounting and control methods.

Sales instability

Sales instability is a special characteristic and is inherent in almost all hotel and catering operations. Fluctuations which occur in the volume of business are of three kinds.

Firstly, there is the annual pattern. Many hotels, restaurants and other establishments are seasonal, and whilst the degree of sales instability varies from one establishment to another, seasonality is generally regarded in the industry as a serious problem. Frequently, the volume of business achieved during the season is three times that in the off-season.

Secondly, we have the weekly pattern. Many city restaurants do little business during the first few days of the week, but operate at almost full capacity towards the end of the week. Numerous hotels both in London and the provinces find that the highest occupancies are achieved from Monday to Thursday, and the weekend is for them the least busy period of the working week.

Finally, to look at catering operations, there are fluctuations in the level of activity and the revenue inflow during the working day. Generally, peak periods are lunchtime and after 1800 hours. Thus, whatever the nature of the establishment, there are continuous changes in the volume of sales—daily, weekly and annually.

The effect of sales instability is to produce three problems. Firstly, there is a degree of uncertainty about the future volume of sales. Secondly, where there is sales instability there is inevitably some spare capacity and the consequent failure to utilize fully the resources and facilities of the establishment. Spare capacity, coupled with a high level of fixed costs, tends, in turn, to result in a high degree of profit instability. During slack periods considerable losses may be incurred and these may take quite some time to recover during busy periods.

The implications of sales instability for accounting and control procedures are quite clear. As there is uncertainty about future revenue inflow, we must develop appropriate methods of prediction. In relation to food operations this means the maintenance of a well-developed system of volume forecasting (1.1). In relation to room sales it means the use of occupancy statistics to predict future occupancy levels with a fair degree of accuracy.

Secondly, it is necessary to adjust operating cost levels to the ever-changing volume of sales. Food costs will automatically be adjusted where there is a system of volume forecasting. Efforts must, therefore, be made to control labour costs and other non-fixed expenses to ensure that they stand in the correct relationship to the current volume of sales.

Thirdly, in order to cope with the problem of spare capacity it is essential to evolve an effective and often sophisticated approach to pricing. The pricing policy of the establishment must not only give it the fullest benefit of high occupancies in the peak-periods. Where demand in the peak-periods is more than can be accommodated by the establishment, the price structure must be such as to shift demand from peak- to off-peak periods and thus ensure an increase in the overall volume of business.

Cost structure

Most hotel and catering establishments have a high proportion of fixed costs, and this applies particularly to hotels and other residential establishments. Considered from the point of view of the various revenue-producing departments, the position is this. Overall approximately three-quarters of the total cost of a hotel is fixed and uncontrollable. The rooms department has a fixed cost (mainly departmental wages and salaries) of 15–20 per cent in relation to its sales volume, and a considerably lower proportion of variable costs (laundry, dry cleaning, domestic supplies, etc.). Hotel food and beverage operations entail relatively high fixed costs (mainly kitchen and restaurant wages) as well as high variable costs (food and beverage costs and energy).

Restaurants have considerably lower fixed costs—in many cases 40–50 per cent of total sales. Their variable costs tend to average 40–45 per cent of total sales volume.

High fixed costs mean high gross profit margins. This, in turn, means that each addition to total revenue results in a substantial rise in net profit. Conversely, each decrease in total revenue will have a very substantial negative effect on profitability.

Mention has already been made of the effects of sales instability. The combined effect of a high percentage of fixed costs, fluctuations in the sales volume, and spare capacity is to produce a condition of profit instability which is quite uncommon in many other industries. The higher the percentage of fixed costs the more difficult it is to maintain adequate profitability through cost manipulation. In such circumstances, whilst paying adequate attention to cost control, one should be more concerned with the control of the revenue of the business. The main implication of the high fixed-cost structure of the business unit is that the traditional cost-oriented approach to accounting and control problems is only partly relevant. Cost analysis, cost control, cost statements, etc., are not the right weapons with which to attack obstacles to hotel and catering profitability. We must, instead, look at the other side of the profit and loss account and look for solutions in the total sales volume, sales mix, departmental profit margins, occupancy rates, pricing devices, etc.

Nature of ‘product’

The nature of the product sold by an industry is of considerable importance for a number of reasons. A product which is durable may be stored for long periods and held in large quantities to meet peaks of consumer demand. During inflationary periods there is often the added advantage of selling at an increased price a product which was manufactured some months previously at a relatively low cost.

The product of the hotel and catering industry is entirely different. A hotel bedroom which has not been sold is an irretrievable loss. Similarly, food is perishable both in raw material form and as a prepared meal.

With regard to accommodation the solution to the problem of product perishability requires a dual approach. Firstly, we must have adequate predictions of hotel occupancy levels which, by definition, will indicate what spare capacity will obtain over a future period. Secondly, we must ensure imaginative pricing and effective marketing: price concessions, off-season rates, mini-weekends, conferences and business meetings all have a great contribution to make. The management accountant, though not a marketing expert, certainly has an important part to play in this context.

Finally, hotels and restaurants do not sell a single product, but a multiplicity of mainly low-priced items. Whatever the wisdom of it, many restaurants have menus containing well over one hundred items, each of which has to be separately costed, prepared, served and accounted for on the customer’s bill. In the case of hotels there is an even greater multiplicity of products and services offered to the customer. To quote from a well-known American text (1.2):

There is hardly any other business in which the amount involved in each individual transaction is so small and where these transactions, cash or credit, follow each other with such rapidity. A guest may arrive and take a room, have his baggage delivered, use the telephone and valet service, have his meal in his room or in the dining room, send a telegram, purchase cigars and dictate a few letters to the public stenographer, all within little more than an hour. During the same time he must be registered; his name must be listed so that mail and telephone calls can reach him; an account must be opened for him; the baggage porter, telephone operator, valet, restaurant cashier, telegraph office, cigar stand and the public stenographer must all record the charges for their services, and must report the charges to the bill clerk, who, in turn, must post them to the guest’s account.

Of course, all the postings to the guest’s account must be made as soon as possible so that his bill may, if necessary, be ready for presentation virtually within minutes. There must be few other industries where the speed of sales recording and an efficient cash collection system are so important.

Cycle of operations

In some industries the time taken from the purchase of raw materials to the sale of the finished product is long, sometimes a matter of months. In hotel and catering establishments the cycle of operations is, on the other hand, very short. Food delivered early in the morning is often processed later that morning and sold the same day.

Unless there are adequate checks and control devices at each stage of the catering cycle it will be very difficult for the establishment to reach an acceptable level of profit. The checks and control devices must be such as to cover the whole of the catering cycle, i.e. (a) buying, (b) receiving, (c) storing and issuing, (d) food preparation, and (e) selling.

In addition to adequate and comprehensive controls of both revenue and operating costs, each establishment needs a reporting system related to this particular cycle of operations. There must, therefore, be relatively more short-term reporting than is the case in other industries. It will be found that most well-managed establishments have a variety of daily and weekly reports in addition to monthly and quarterly operating statements.

Business orientation

In the first half of this chapter we have stressed several times that the two most powerful factors which militate against hotel and catering profitability are sales instability and high fixed costs. It is, in fact, t:he stability or otherwise of demand and cost structure that jointly determine what may be described as business orientation.

When one considers the various sectors of the hotel and catering industry, one can distinguish two types of operation. Some establishments operate at low fixed costs and enjoy a relatively stable volume of business. Others have a high percentage of fixed costs and are subject to a high degree of sales instability. In the first category we have various kinds of welfare catering: industrial canteens, hospital catering, school meals, university and college catering, etc. In the second category we have hotels, motels, guest houses and similar operations. The two groups of establishments, though integral parts of the industry, are so different in many respects that it is useful to be able to summarize such differences by attaching to each group a different label. For our purposes here we will refer to the first group as ‘cost-oriented’ and to the second as ‘market-oriented’.

Of course, where there is a broad classification such as the one suggested above, it is inevitable that there should be borderline cases, i.e. types of operation which are partly cost-and partly market-oriented. It is thought nevertheless that the two labels are valuable and may serve many useful purposes.

In order to determine the degree of cost or market orientation of a business we may use a bus...