Hospitality Financial Leadership – What Does It Mean to Have Your Balance Sheet Reconciled?

I discuss this question with hoteliers way too often. It’s not their fault, but the reality is they don’t understand what this statement means and, in this piece, I’m going to lay it out for you. I will say that the lack of understanding and basic ignorance of this is a costly and completely avoidable expense if you just do a little digging and ask the right questions.

A recent client told me he looks at his balance sheet each month. I said, “Great what do you look for?” There was an audible gulp and then a long pause. “What am I supposed to look for David?” 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.” So, 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.

At this point, I either have your attention or you have already moved on, because of the fact that it’s news to you that the balance sheet never starts over from zero like the income statement. What this means is your balance sheet requires a completely different set of conditions to be useful in your business.

Let’s take a look at an income statement account. I’ll use transient room revenue. All year long we post our sales each day 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; it’s 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 what the balance sheet reconciliation is for. Each month the accountant, if they are doing what’s necessary, MUST completely reconcile EACH and EVERY account on your balance sheet. What does the report say in real dollar terms and what proof do we have to back this up?

Four Examples of This

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? Wait a minute, it’s not even close…… Ok – Mr. Accountant – what’s the difference and why? Response: 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 reached the bank yet. Here is the list of outstanding checks, and here is a copy of the deposits in transit. Pro tip here, 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 with you at any given point owes you. For example, the balance sheet is August 31, and it says $12,525. Pull the corresponding guest ledger balances report from your PMS and voila! Do they match? They should, to the penny. Pro tip here, review the PMS report and look for “checked out with balance folios” those are probably guests that had a problem last week, last month, heck 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 you either need to 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 too 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 here. 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?????? 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 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 here is: Ask what happens to the vacation accrual when we give everyone a raise. If you get the deer in the headlight’s response, you’re in 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 and you need to be assured that like your pay – you know where to find it.

Want to read more about balance sheet lies? Here is another article by me.

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