Key Components

Balance sheets for hotels follow the same model as most other industries and include many of the same
components. Here are the three primary components of the balance sheet:

 Assets are the tangible and intangible resources that a hotel owns. Short-term, or current, tangible assets can be
converted to cash within a year and include cash, inventory (including food and beverages) and accounts
receivable. Long-term tangible assets include physical infrastructure, such as buildings, furniture and
equipment. Additionally, intangible assets, like the hotel’s brand reputation, intellectual property and goodwill,
are also included.

 Liabilities are the financial obligations that a hotel must pay. Like assets, these are separated into current and
long-term. Current liabilities include accounts payable, wages, accrued expenses and short-term loans. Long-
term liabilities include financial commitments, such as mortgages or other loans not due within one year of the
balance sheet’s date.

 Equity represents the hotel’s net assets after all liabilities have been settled and may also be labeled as owners’
or shareholders’ equity on the balance sheet. Equity serves as a measure of the hotel’s overall net worth, health
and long-term sustainability, as ongoing negative equity points to a hotel’s inability to pay its debts, wages and
other obligations. Hotels with negative equity can improve their operations by increasing revenue, reducing
liabilities, seeking appropriate external funding or more effectively managing their assets to earn a higher return
on investment.

Hotel Example

The balance sheet of hypothetical boutique hotel The Bow Tea Room shown below includes all three of these
sections:

 Assets: Current assets include accounts receivable for unpaid guests, cash reserves and food inventory. Long-
term assets include the property value, room furniture and intangible assets, like brand value.

 Liabilities: Current liabilities include accounts payable for vendors, taxes, short-term loans and due wages.
Long-term liabilities include the property mortgage.

 Equity: By adding all assets and subtracting all liabilities, the boutique hotel can calculate the overall net worth
of the company.

The Hotel Income Statement

The income statement is often the first document viewed when assessing a hotel’s financials. Analysts must
understand the statement’s key components to gain an accurate view of performance and create actionable
strategies to increase revenue, reduce costs and grow profits. Here are the key components of the income
statement:

 Revenue represents the cumulative income that the hotel earns from its goods and services. Many hotel income
statements will segment this section into different revenue streams, such as room rentals, food and beverage
sales, events and other supplementary services. These sales are typically considered the lifeblood of the hotel, as
the income generated here must fund the rest of the operation.

 Costs denote the expenditures that the hotel incurs during operation. These are often separated into COGS, such
as room amenities that accrue costs only when sales are made, operational expenses like administrative
overhead and other costs, such as taxes.

 Profits show the funds left over after all expenses are paid. Income statements often have intermediary profit
measures before the net profit, including gross profits (revenue – COGS), operating profits (gross profit –
operating expenses) and EBITDA (earnings before interest, taxes, depreciation and amortization).

Hotel Example

The Bow Tea Room’s sample income statement includes detailed information for all three of these categories,
as shown below.

 Revenue: The income statement shows room sales, food and beverage purchases and additional income from a
gift shop located in the lobby for the month.

 Costs: The costs listed on the income statement include COGS for room supplies, worker salaries and wages,
interest payments on loans and taxes.

 Profits: To understand where costs are accruing, the hotel chooses to list gross profits to track direct sales
profitability and net profits to see the bottom line.

The Hotel Cash Flow Statement

Key Components

Not every hotel cash flow statement will look the same, even within the same company, as individual hotels
may use different kinds of investments or financing during a given financial period. Here are the three primary
components of a standard cash flow statement:

 Operating activities involve day-to-day business processes, such as booking rooms, selling food and beverages
and renting event spaces. This metric typically starts with net income, carried over from the income statement.
However, this figure must be adjusted to compensate for any changes in accounts receivable and payable, as
 those represent sales and expenses that have been transacted but are yet to be recorded. For example, income
may track revenue when sales are made, but until customers pay their bills, those balances are reflected in
accounts receivable, not cash-in-hand, and the overall income level needs to be adjusted to reflect this lag
between the two measures. Operating activities may also include other factors, such as depreciation, that can
impact operational cash flow.

 Investing activities include cash from long-term investments, such as property and equipment purchases and
sales, mergers and acquisitions and other non-current asset transactions. While the funds earned through
investing activities may ultimately go toward running the hotel, they are often atypical and non-repeating and
do not reflect the profitability of core hotel operations.

 Financing activities include financing from lenders and creditors and principal debt payments. Depending on
how much debt a hotel uses to finance operations, this section may have a major impact on cash flow. This
section also includes payments to owners and cash raised from stock transactions.

Hotel Example

The cash flow statement for the hypothetical Bow Tea Room Hotel, shown below, segments cash flow into the
three primary categories. As expected for this smaller hotel, operating activities make up the bulk of the cash
flow for the financial period.

 Operating activities: The Bow Tea Room Hotel earned $64,500 from its primary operations, and that figure is
adjusted for changes in accounts payable/receivable. The hotel also spent $9,000 on new inventory purchases,
reducing its overall cash supply.

 Investing activities: The investing activities done during this period were $40,000 in new equipment purchases
and $30,000 earned from selling old equipment, creating a net loss of $10,000 in cash.

 Financing activities: The hotel took out a new $10,000 loan and made a $3,000 debt payment during this
period, increasing cash flow by $7,000.

The Hotel Statement of Changes in Equity

Key Components

The statement of changes in equity is less likely to be included in a set of financial statements than the balance
sheet, income statement and cash flow statement and is not considered as essential as the other documents.
However, if a hotel generates this statement, it will likely include the following key components:

 Opening equity is the equity value at the beginning of the financial period covered by the statement. This
serves as a baseline for adjustments and comparison.
 Profits often come from the income statement (listed as net income in the prior example) and are added to the
opening equity. These profits may be distributed to owners further down the statement or held as retained
earnings, increasing the equity of the hotel.

 Losses may decrease equity if the net income is negative. Other losses (and gains) can include prior period
adjustments, share capital changes and asset revaluation.

 Distributions include all profits distributed to shareholders or owners and they are subtracted from the overall
equity. High distributions can signify to investors profitable periods and a healthy return on investment, but too
many distributions can reduce equity and hurt the hotel’s sustainability.

Once all these items are recorded, the final equity balance can be calculated and written at the bottom of the
statement of changes in equity.

Hotel Example

The hypothetical Bow Tea Room Hotel has a short statement of changes in equity, as it did not have major
stock transactions for the year measured. But equity was changed when net income contributed to an increase,
despite some of those profits being distributed to owners. Additionally, due to an error in a previous financial
period that was discovered after close, there are some adjustments, shown below. This statement serves as a link
between the balance sheet and the income statement and helps stakeholders gain more information on some of
the data found on those financial statements.

Analysis of Hotel Financial Statements

The real value found in hotel financial statements is deeper than the surface data — though that is still
important. Hotels can use these statements to gain a deeper understanding of their operations and financial
health through easy-to-understand financial metrics and key performance indicators (KPIs). Decision-makers
can compare these measures against competitors, prior periods or other benchmarks to see what’s going right
and what needs to be adjusted to gain and maintain a competitive edge and ensure long-term success.

Ratio Analysis

An essential way that analysts assess a business’s performance is through ratios. These ratios compare two or
more data points from financial statements to give a streamlined value, often as a percentage or decimal, for
easier comparison and analysis. Here are four key financial ratio categories that can benefit hotels:

 Profitability ratios track how much money business processes bring in after expenses are paid. They include
measures such as gross profit, operating profit and net profit that may or may not be listed on the income
statement. They also include return ratios, such as return on equity (ROE) and return on assets (ROA), which
show how effectively a hotel is using its resources to generate profit. These profitability ratios are typically
found by comparing revenue and costs to show overall profitability of specific aspects of the hotel’s business
and find areas where efficiency can be improved.
 Liquidity ratios show a company’s ability to pay its short-term debts and obligations. A hotel’s balance sheet
may show more assets than liabilities, but if those assets are primarily long-term, such as property, the hotel
may not be able to pay its bills on time and maintain normal operations. Common liquidity ratios include the
current ratio — current assets / current liabilities — and the quick ratio — (cash + accounts receivable +
marketable securities) / current liabilities. The higher the liquidity ratios, the more easily the hotel can pay its
bills.

 Solvency ratios focus on a business’s ability to pay long-term debts and are primarily used by lenders to
establish creditworthiness before issuing funding. There are several ways to calculate solvency, but the primary
solvency ratio is (net income + depreciation) / all liabilities. Other, more specific solvency ratios include debt-
to-equity — sum of all debts / total equity — and interest coverage — earnings before interest and taxes /
interest expenses. A ―good‖ solvency ratio varies by industry and how much of a business’s operation is funded
by debt, so it’s best to compare it with direct competitors, not as a standardized benchmark.

 Efficiency ratios measure how effectively a hotel is using its resources to generate income. The most basic
efficiency ratio is found by dividing expenses by revenue, but many analysts use similar ratios by isolating
specific areas, such as turnover ratios in accounts receivable (net sales / average accounts receivable), accounts
payable (total supply purchases / average accounts payable) and inventory (COGS / average inventory). If
efficiency ratios are trending in the wrong direction, hotel managers should look for bottlenecks or areas where
costs can be cut to create a leaner and more efficient operation.

How does seasonality impact a hotel’s financial statements?

 Hotels are especially vulnerable to seasonal fluctuations in demand and often need to rely on busy
periods to fund operations for the rest of the year. By generating and analyzing regular financial
statements, hotels can compare different periods over the year, as well as year-over-year results, to make
sure there is enough liquidity during slow periods to maintain staff levels and keep the hotel supplied.
This data also helps control expenses by optimizing when staff levels are changed and supplies are
reordered.

What is trend analysis, and how is it used in understanding a hotel’s financial performance?

 Trend analysis examines historical data to identify patterns and predict how key metrics will change in
the future. For hotels, it can inform revenue and expense forecasts to better allocate resources and
optimize operations. Trend analysis can also set benchmarks and assess performance over time, helping
decision-makers identify issues and inefficiencies early before they affect customer satisfaction and hurt
profits.