Now that’s a big statement to put out there, but I’m very confident that I’m pretty close to 100% correct with my observations. The reason why I’m so sure is that I know most hoteliers are not financial people and they are oblivious to the issue I am going to explain. On top of that – I see this all the time.

It’s also pretty clear that most hoteliers don’t have an accounting background and knowing this fact prompts me to write this piece and hopefully clear up the picture for others.

The catalyst for my article is the many discussions I've had with my clients over the years around this topic.

Here is the scenario. You own a hotel or 6. You are successful in that you have consistently (covid +/-) turned a profit and things are going pretty well. You have an accountant do your books and you probably have a misguided and ill-formed standard set of financials that are not in accordance with USALI – You Sally. That’s not the #1 mistake. Perhaps it’s #2.

The number one mistake is your PMS sub-ledgers do not tie to your general ledger. Now for most of you, that’s just a bunch of mumbo jumbo. So let me speak in plain English and tell you what that means.

In the hotel business, we complicate our business model by having our retail clients spend the night with us. In addition, we allow them to send us an advance deposit and, in some cases, we even extend credit. What these three conditions create is the necessity that our cash register (our PMS) has sub-ledgers.

What’s a sub-ledger you ask? The sub-ledger is the details (the list) of the account it represents on the general ledger. Your general ledger is full of sub-ledgers and three of them are directly tied to your PMS. Namely, the guest ledger, the advance deposit ledger, and the city ledger - AKA (accounts receivable).

The mistake that many hoteliers make is that they never reconcile their sub-ledgers to the general ledger. This might seem like it’s an accounting thing and yes it clearly is but it’s an accounting thing that is entirely unique to the hotel business. This PMS sub-ledger business does not exist in most other businesses. Your convenience store, car dealer or McDonald’s don’t have the need because their daily sales are complete and each one has a corresponding settlement. There is not an overnight or send me an invoice thing happening in those businesses. Their retail world is a closed loop each day. In the hotel world we always have settlements ahead and after the sale, hence the need for the nasty sub-ledger.

The PMS houses the details for the sub-ledgers; you can print them out and see the names and balances of each line item. The problem is you need to know what to do to keep these sub-ledgers clean and in balance and what to avoid that causes the problems in the first place.

The Guest Ledger Story (kinda the same story for the city and deposit ledgers)

It’s the place where we post room and tax and any other charges to the guest's account while they are in-house. If all goes well, we check them out and process the settlement (cash or credit card) normally. But what happens from time to time is that a problem occurs with the settlement or an adjustment to the balance and your front desk ends up checking out the room but not the account. They somewhat innocently do this thinking someone else will fix the problem, or maybe they will get to it later. The account will sit there on your sub-ledger forever unless you or someone else does something about it. This is where the problem is.

To remedy this, you need to (on a daily basis) review the details of your guest ledger and make sure it’s clean. Print out the report and review each line item. This is how you ensure that you get the cash your are entitled to. If you don’t do this you will come up short. Make sure any disputed or otherwise messed up “accounts” are dealt with pronto. On a monthly basis, you also need to ensure that the balance of this PMS report is to the penny the same balance of the corresponding account in the general ledger.

A recent client and I reviewed his general ledger, and I questioned him about the large guest ledger amount on his balance sheet. It was over $40,000 for a 50-room hotel. These things just catch my eye if you know what I mean. I explained that even if he was full on the last day of the month his guest ledger should not be more than say, $7500. How do you know what he said? Well, your average rate is $150 so $150 x 50 rooms is $7,500. If your guest leger is clean, it should not be any higher.

Silence ensued and I broke the pause and asked him to find the end-of-day reports for the 31st of that month. That only took a moment and we were looking at the report. It was 13 pages long! Included in the report were the in-house guests from that night with their balances and about 12 pages of weird Caca.

After a thorough review, we determined that the Caca was a combination of incomplete online travel agent posting adjustments, credit card transactions that had a problem, and accounts that were checked out of the room, but no settlement had been applied. In other words, money that was due to the owner's bank but the transactions were not complete. The transactions were in some cases recent but also, they scatted all the way back to the time when the PMS was originally installed, several years back.

Needless to say, my client was shocked, confused, and above all else he felt, and I don’t say this with any joy or humor whatsoever, he felt stupid. How could he not know this and how come his accountant didn’t know this? Well, you don’t know what you don’t know, I said. My client was not an accountant, and the accountant was not a hotel accountant. (Pro tip – your cousin's next door neighbor might be economical and a member of the local whatever but if he or she is not a hotel accountant then you need to run to your books and check this out and find a real hotel accountant.) Call Katie and Buck Hotel Solutions.

As it turned out the sub-ledger was off by almost 40k. The transactions were stale (old and not transmittable or collectible) and all had to be written off. To which my client naively said, We can just correct these and move on. Not so fast mister! In order to correct these prior mistakes, we need to reverse the transactions. In other words, we can’t collect the money, so we need to reverse the revenue. You see the original transaction had the hotel posting the revenues and taxes correctly, but no payments were properly processed. So, in order to reverse them, we need to debit (lower) the room revenue and sales tax in the current period. OUCH.

All and I stress that all of this could have been avoided if someone, the owner, the manager, or the accountant was clued into the trap of the sub-ledger.

I vividly remember a dear friend saying this long before I had any accounting training or knowledge. He said, Hotel accounting is different because…. and I forgot almost immediately what he said but I know what he meant.

David Lund
The Hotel Financial Coach
+1 415 696 9593
David Lund