Career Directions in Hospitality Financial Management Introduction Until the mid to late 60s, there were few hotels which were large enough to warrant the employment of a qualified accountant in the management team. The majority of hotels in the UK were locally or nationally owned, and where they were businesses within larger groups, much of the administration was centralised in head offices, often under the Company Secretary a role which generally concentrates more on corporate administration and compliance than with dynamic commercial issues. By the early 70s, many new or extended hotels some developments having been encouraged by government grants, loans and tax incentives had appeared on the scene. The UK public owning companies (at that time the major names were Forte and Grand Metropolitan) were starting to embrace techniques of management accounting and reporting which had their origins in the USA. A UK version of an industry management accounting system, called A Standard System of Accounts for Hotels, was proposed and published by an early quango working with the industry. This was not fully adopted and used, and has been out of print for many years. US based hotel groups such as InterContinental, Hilton, Sheraton, Holiday Inn, Ramada were pushing into Europe. These companies were far more unit focused, and implemented comprehensive management accounting at hotel level. They were almost 100% users of the US-developed Uniform System of Accounts. This originated in New York as long ago as 1926, and has been updated periodically since then; its current full title is Uniform System of Accounts for the Lodging Industry. The internationally branded hotels referred to were (and are) not always owned by the operating company. For financial accounting to comply with local requirements and to reflect the resulting corporate structures meant there was a need for management accounting and financial accounting to be addressed as separate issues. In general, the larger international hotels have been fully self accounting from the outset that is the unit accounting function carries out the whole financial and management accounting and reporting for the business in-house. This often includes handling statutory accounts and taxation matters. Other major factors affecting the evolution of the role of the financial manager have included the advances in data processing and software tools either tailored for the hotel industry or available for general business use. Scorekeeping and historical bookkeeping take second place to dynamic business information production to support management planning and measuring of performance on an on-going basis. The degree of autonomous accounting and reporting at unit level remains the prime factor which impacts on the level of skills and experience required by hotel unit financial managers. In the more recent period, there has been a trend towards greater distinction being made between ownership and operation of hotel businesses. The owners are often financial institutions or private investors, some of these being pooled funds managed aggressively on behalf of high net worth individuals by teams of asset managers. This can result in pressures on unit managers and their teams to perform to a variety of measures imposed by the owners representatives, the management companies, the brand standards and their own internal targets. The net effect is a major increase in demand for management information and analysis. A side effect is that the owner s books are often dealt with externally. Financial management in the hospitality industry therefore encompasses a wide range of functions and responsibilities. These notes aim to identify the role of the finance manager, outline its nature, indicate the education and technical requirements, and show potential career paths available within this dynamic sector. The focus is principally on UK located or based hotel businesses, but what follows can be seen to be applicable to a large extent to restaurant, bar, catering and allied businesses, and to international locations.
1 The Hospitality Industry Financial Management Context An almost unique feature of the hotel industry is that the operations of the business are 24 hours, seven days a week, year-round (with of course some exceptions for seasonal-only operations). Once a hotel property has opened its doors, it is for all practical purposes a perpetual motion economic unit. A further feature is that the business comprises a mix of manufacturing and service elements. The manufacturing element, catering, involves the input of raw materials, and a process to turn these for onward retail sale. Varying inputs of labour are needed to provide the production and service elements of the catering operations, and the hotel s other outputs of accommodation, bars, leisure etc. As a whole, the product is highly perishable. The major revenue producer for most hotels, accommodation, on offer on one day can not if unsold be held in stock and sold twice the next day. Pricing has to be flexible to optimise revenue, creating the need for systems enabling differential pricing for very element of the product to reflect supply and demand, and market sector issues. The customers, the guests, are transient coming and going as they please, which in itself is somewhat of a unique feature from a business standpoint. Whilst there, they give rise to a numerous transactions varying from small values to large, some for credit and some for cash creating a further variety of unique control challenges. The nearest equivalent being a retail department store but as yet, customers in such businesses do not have the option of staying overnight or being given access to a range of other services such as laundry or indeed holding major functions, conferences, meetings and banquets on the premises. A wide range of IT systems underpins the operations of a modern hotel business. These play a part at the front end in business generation, reservations and revenue management, sales, customer relations and marketing and in accounting for guest and other point of sale transactions. Behind the scenes, purchasing, storing, issuing and production, accounts payable and receivable, cashiering, payroll, management and financial reporting are all now carried out by integrated or interfaced systems. Further specialist systems support such aspects as telecomms, Internet access, entertainment, security and maintenance functions. The hotel business is initially highly capital intensive. To build or acquire a hotel, and prepare it for trading is costly and it requires significant additional investment to maintain its standard and market position. In operation, hotels generate significant cash flow, with a major ongoing cost being for labour, a substantial part of which is often fixed to ensure it can meet its service standards. Covering the cost of its capital, which will be dependent on its financing structure, may also be one of the largest fixed costs. Leasehold hotels will have rent, sometimes fixed and sometimes with a link to turnover. Owned hotel properties may have loan capital to service. The nature of the business entity itself will also play a part in defining the scope of the financial manager s role. The following section examines typical structures in the hospitality industry. 2 Hotel Ownership and Operating Structures The most common format for mainly privately owned hotel businesses is that of the owner operated unit, where the property and the business are one entity. This structure might also apply to larger organisations including major companies but as has already been mentioned, ownership is fast becoming the exception for the latter category of operator. The next level is where the property is leased (ie it is owned by a landlord) by the operator. This is found with private hotels, but implies a level of financial obligation which limits the number of individuals who would qualify for a lease. It is becoming far more prominent for multi-unit operators and major groups.
It removes a substantial capital investment burden from the operator and replaces it with a cost which can be more directly related to the operating revenues. In some recent examples, the rents fluctuate based on the hotel sales. A further separation of ownership and operation involves the hotel company in entering into a management contract to run the hotel on behalf of the owner. In this latter case, the property and the business are those of the owner. The operator runs the business as the owner s agent, and earns fees which are generally based partly on the level of sales revenue, and partly on a defined level of profit. Joint ventures, performance guarantees, franchise licences these are all factors which can complicate the structures outlined above, and which will have an impact on the hotel s financial management requirements. Joint ventures imply that there is more than one party interested in the performance of the business. Performance guarantees may involve financial penalties if the management of the hotel under-performs against certain criteria. Franchise licences impose standards with which the hotel must comply in order to maintain the brand identity of the hotel. 3 Hotel Management Structures To reflect the ownership and operating needs of these different business arrangements requires a management structure to mirror the owning and operating elements. A business which is both owner and operator might have only one financial manager. A large scale business might need to separate its corporate requirements from the day to day operation. Multi-unit businesses could also require separation of corporate and operational financial management. In major companies, this might mean area, regional, national and international financial managers. If the operations are large enough economic units, they will often have individual financial managers on-site. Owners have management structures which differ from those of the operators. Landlords are interested in collecting rents and ensuring compliance with the lease terms. Owners whose hotels are operated under management agreements have an interest in every aspect of the operation. The extent of the reports each of these types of owner or their asset managers require will be governed by the terms of the leases or management contracts. The roles of financial managers for landlords and for owners of managed hotels will vary accordingly. Often these individuals do not have detailed hotel industry knowledge. They will therefore rely more heavily on the quality of the financial reporting from the hotel being of a standard on which they can rely. This might be supported by independent audit or monitoring by appropriately experienced external advisors. With these factors in mind, the next section looks at the scope of accounting, control and reporting needs which form the foundation of the hospitality financial manager s role.
4 Scope of the Hospitality Financial Management Role Probably the best way to illustrate the areas of responsibility of a typical financial manager in a hotel business is to set out a job description. The aspects noted will be areas which remain the responsibility of the Corporate Finance Director will depend on whether the operation is independent, part of a group or a fully self-accounting entity. In a larger business, and especially a public company, a Company Secretary may also be involved in certain of those functions. Being a senior executive in a hotel, the financial manager will be expected to play a full part in the management team. This can include being the financial advisor to the business and the individuals, participating in guest and employee relations activities, performing duty management responsibilities. The financial manager is often expected to be the most independent voice in the operation but also to be a full team member. The role in a major hotel is commonly second only in seniority to the general manager. There is some variation in the policies of different hotel groups as to whether the primary reporting relationship is to the unit general manager or to the corporate office. 5 Skills & Qualifications for Hospitality Financial Managers Educational qualifications will need to be complemented by experience which demonstrates appropriate technical and professional knowledge, skills and aptitude. An accountancy qualification is generally preferred. Examples of those most relevant follow. Chartered Accountants are commonly found in the largest hotels and at Board level. Qualifications such as those awarded by the Chartered Institute of Management Accountants (CIMA) and the Chartered Association of Certified Accountants (CACA) are equally recognised. At unit level, Association of Accounting Technicians (AAT) and accounting degrees are often sufficient. Within the hotel sector, membership of and qualifications gained via the British Association of Hospitality Accountants (BAHA) are now widely accepted. The latter enable more junior accounting staff to secure a recognised qualification within their specialised field or more senior financial managers to underpin their on-the-job training with more structured learning. Indeed the core BAHA qualification also provides certain exemptions for subjects within the CIMA syllabus, and recent developments of the BAHA courses will lead to further recognition by other professional bodies. The professional qualifications mentioned are those most appropriate for and recognised within the hospitality industry. Whilst for senior positions greater emphasis is given to formal educational and professional qualifications, exposure to sophisticated operations, international standards and current operating systems are all valued and can sometimes override the preference for higher level qualifications. The following is a menu of skill and experience attributes which will facilitate entry into employment at the most senior levels of financial management in the hospitality industry: A sound academic record Professional standard training in finance, accountancy, controls, systems and business techniques
Commercial experience gained in an international standard hospitality business, preferably in the hotel sector Strong numeracy skills, including both analytical and spreadsheet competency Ability to produce relevant, incisive and informative reports Knowledge of financial appraisal techniques, including familiarity with discounted cash flow and investment return appraisals Sector experience involving analytical aspects of development, corporate finance or similar roles Knowledge of and familiarity with industry specific operational controls and IT systems, and of Uniform System style financial reporting Knowledge of real estate aspects, such as leases and rent terms, and of management contracts, franchises and similar arrangements A high standard of English articulate in both written and spoken forms Appropriate tests to assess skills levels, and psychometric analysis to support personality aspects, can be expected when candidates are being selected. Demonstrating lateral thinking ability will score highly, as will determination and drive. Good personal presence or gravitas and being able to create a positive impression of professionalism and credibility will be important when selecting a senior financial manager, who will often have to represent the business unit as the most senior finance executive to external sources, such as directors, owner representatives, bankers, investors and the like.