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Agenda
Chart of Accounts, General Ledger and Transactions Understanding the Balance Sheet, the Income
Statement and the Cash Flow Worksheet Why You Need a General Operating Budget and How
to Create One Managing by Budget Avoiding Problems
Important Note
Any commission rates used in examples in this course are arbitrary numbers.
They do not reflect industry standards or common practice in any particular locality.
One Size Does Not Fit All • We are aware that some of the suggestions we will make
in this course might not fit the size and scope of your operation or your market.
• As such, please remember that the assumptions made throughout this course are designed to represent an average vacation rental company.
• We encourage you to speak up and share your experience as another point of view.
Getting Started
“Everything is associated with money, and the person who knows what they have at all times wins”
Julie Aydlott owner of San Diego Business Accounting Solutions, and author of The Quick Guide to Small Business Budgeting
To be financially successful a VRM must:Have the financial knowledge and resources to meet the
company’s financial obligations
Ensure the company remains a going concern for the benefit of owners, shareholders, employees, guests and the community
Accounting vs. Bookkeeping
Bookkeeping is a systematic recording of every revenue and expense transaction, including dates, amounts and descriptions.
Bookkeeping is the financial infrastructure of your business.
Accounting provides a bigger picture by tracking bookkeeping transactions and using them to analyze business results.
Managers use the financial reports generated by accounting to make decisions and plans for their business.
Why You Should Know Some Bookkeeping and AccountingTo effectively manage your company to ensure it remains
a viable operation
To avoid being taken advantage of financially (particularly embezzlement and fraud)
To assist in the planning and control of your business
To be able to knowledgably communicate financial information to employees, potential lenders and investors, shareholders, and the media
First Things First
Accounting systems and financial reports are only as reliable as the information and processes used to create them.
To create reliable information and processes, follow these steps . . .
First Things First (continued)Create clear, standardized policies and procedures
This consistency creates trustEnsure policies and procedures aren’t just for accounting
employees—every employee is involved in some aspect of financial accountability and needs to know where he or she fits into the bigger picture
Start by reviewing the workflow of accounts receivable, accounts payable and property management revenue to ensure your company has a fundamental accounting foundation
First Things First (continued)Ensure that transactions are complete, accurate and
timelyEnsure that transactions have source documentsHire knowledgeable, skilled employeesCreate and enforce strong internal controls to
minimize errors and temptations to dishonesty as well as to safeguard assets
First Things First (continued)To create and enforce strong internal controls:
Segregate employee duties to provide checks and balances—don’t have the same person process purchase orders and receive inventory or write checks and reconcile bank statements
Ensure all transactions have verifiable source documents and are properly stored
Consider using electronic storage to save money and space
First Things First (continued)
Ensure proper authorization of transactions, such as requiring two manager signatures to approve a transaction over a specific amount
Ensure physical control of assets, such as limiting employee entry and exit routes, installing fences and locks, using surveillance equipment, conducting unexpected inventory counts and inspections and establishing inventory par levels
First Things First (continued)Check references or perform background checks before
hiring new employees
Perform independent checks on performance, such as requiring employees to take vacations and using a substitute while gone
Review “7 Signs of Internal Accounting Fraud” article at end of Student Workbook
Consider doing some of your own bookkeeping at first so that you understand how your accounting system and transaction processes actually work
Chart of AccountsList of all the accounts your company uses to track
transactions
Types of accounts or categories: assets, liabilities, owner’s equity, revenue, and expense
Assets are anything your company owns that has monetary value
Chart of Accounts (continued)Current Assets can easily be converted into cash (cash,
savings, checking, accounts receivable, inventory)
Non-Current Assets cannot easily be converted into cash (equipment, real estate, other capital assets)
Establish a minimum asset to avoid wasting time tracking low cost assets
Chart of AccountsLiabilities are anything your company owes to people
or businesses—they are financial obligations
Current Liabilities are payable within one year (wages, accounts payable, taxes, etc.)
Long Term Liabilities are payable after one year (long term leases, long term debt, pension obligations, etc.)
Owner’s Equity or “capital” = Assets - Liabilities
Account OrganizationKeep it simpleYou decide the number of accounts within each
category and level of detailWhen naming accounts, use common terminology
that quickly allows managers and employees to determine the meaning of a specific account
Organize the chart of accounts to allow decision making employees to quickly understand transactions and financial information
Account Organization (continued)Only create material accounts
Once chart of accounts established, ensure employees are consistently coding to these accounts and minimize creation of new accounts
Consistency is the key
Simple Chart of AccountsAccount Number Account
100 Assets
200 Liabilities
300 Owner’s Equity
400 Revenue
600 Payroll/Wages
700 Other Expenses
General Ledger and TransactionsGeneral Ledger (G/L) is the part of your accounting
system used to record (post) transactions
Two methods of recording transactions in G/L: cash and accrual
Cash BasisRevenue recorded upon receipt of cashExpense recorded upon payment of cashNo accounts payable or receivable
General Ledger and Transactions (continued)Accrual Basis
Revenue is recorded when earnedExpense recorded to match revenue or in period in which it
is incurred
G/L uses a Double Entry accounting systemFor every transaction, two accounts are affectedOne is debited and the other credited
General Ledger and Transactions (continued)
Type of Account
Debit Credit
Asset Increases acct Decreases acct
Liability Decreases acct Increases acct
Income Decreases acct Increases acct
Expense Increases acct Decreases acct
Owners Equity Decreases acct Increases acct
General Ledger and Transactions (continued)Example #1: Receive deposit from guest
Debit Credit
Account # 101 202
Description Cash Advance Deposits
Type Asset Liability
Amount $2,000.00 $2,000.00
General Ledger and Transactions (continued)Example #2: Receive utility bill
Debit Credit
Account # 702 201
Description Utilities Accounts Payable
Type Expense Liability
Amount $500.00 $500.00
General Ledger and Transactions (continued)Example #3: Pay utility bill
Debit Credit
Account # 201 101
Description Accounts Payable
Cash
Type Liability Asset
Amount $500.00 $500.00
Important Financial Reports and for Vacation Rental ManagersStatistics/Metrics for the VR Business
Balance Sheet
Income Statement
Cash Flow Worksheet
Review and verify all transactions posted to the G/L for reasonableness and consistency
This information is typically prepared and reviewed each month after month end close
Statistics & MetricsPerformance metrics measure an
organization's activities and performance. It should support a range of stakeholder
needs from customers, shareholders to employees.
Traditionally many metrics are finance based, inwardly focusing on the performance of the organization.
Sample Statistics & MetricsTotal Available Nights Nights Net Available Nights Guest Occupied Nights Owner Occupied NightsOccupancy % Average Daily Rate (Guest nights only)Management Commissions Commission Per Property Average Length of Stay Number of Reservations
Sample Statistics & Metrics cont’d
Total Available Nights – include ALL nights available to sell. (Number of properties * 365)
Nights Net Available Nights – Total Available Nights less Owner/Maintenance Use Nights.
Guest Occupied Nights – Paying Guest Nights
Owner Occupied Nights – Owner or Non-paying Guest Nights
Sample Statistics & Metrics cont’dOccupancy % - Total Occupied Guest Nights/Net
Available Nights
Average Daily Rate (Guest nights only) – Gross Rental Revenue/Total Occupied Guest Nights
Management Commissions – Gross Rental Revenue less Payments to Owners
Average Length of Stay - Total Occupied Guest Nights/Number of Reservations
Sample Statistics & Metrics cont’d
Total Available Nights – include ALL nights available to sell. (Number of properties * 365)
Nights Net Available Nights – Total Available Nights less Owner/Maintenance Use Nights.
Guest Occupied Nights – Paying Guest Nights
Owner Occupied Nights – Owner or Non-paying Guest Nights
Sample Statistics & Metrics cont’d
Review Sample Statistics and Business Metrics
Balance SheetAlso known as Statement of Financial Condition
Provides a snapshot of your company’s financial condition at any one point in time
Assets = Liabilities + Owner’s Equity
Typically compared to last year’s Balance Sheet at same point in time
Statistics Model
Balance Sheet (continued)Helps you determine if your company can withstand
typical market fluctuations, if you can expand and if you need additional cash reserves
Helps you spot trends in accounts payable and receivable
Frequently required by potential lenders and investors
Reviewing the Balance SheetReview each account for reasonableness
Perform an Acid Test
Also called Quick Ratio or Liquid Ratio
Acid Test (current assets – current liabilities) measures the ability of a company to use its current assets to immediately satisfy current liabilities
Reviewing the Balance Sheet (continued)
The Acid Test indicates a company’s capacity to maintain operations as usual with current cash; thus, this test implies a liquidation approach and does not recognize the revolving nature of current assets and liabilities
Generally, the Acid Test ratio should be 1:1 or better; however, this varies widely by industry
Income StatementAlso known as Profit and Loss Statement or Earnings
Statement
Reports how well your company operated over a period of time. Did it make or lose money? What’s the bottom line?
Revenue - Expenses = Net Income (or Loss)
Net Income (or Loss) gets moved to the Balance Sheet and becomes Owners Equity
Income Statement (continued)Typically compared to budget and prior year’s
operations
Helps you determine which areas are under or over budget
Frequently required by potential lenders and investors
Investigate each variance
Reviewing the Income StatementTop line revenue—Did you hit your forecast?
Payments to owners—What is the percentage of top line? Are you paying more than you should? If so, why?
Review all other revenue accounts for reasonableness
Reviewing the Income Statement (continued)Review all expenses for reasonableness
Compare each account to budget and prior year
Focus on variances
Net operating income—Did you hit your forecast? If not, why?
Cash Flow WorksheetPart of a larger and more complex report called
Statement of Cash Flows
Reports cash generated and used by your company over a period of time
Don’t confuse profitability (revenue – expenses) with cash flow -- you can be profitable and still lack cash and still go out of business
Cash Flow Worksheet (continued)Helps you determine if you’ll have enough cash each
month
Helps you assess capability of generating future cash flow
Focus on including all line items
Cash Flow Worksheet is only as good as information provided therein
Reviewing the Cash Flow WorksheetEnsure all accounts and transactions are included
Look for irregularities or short falls in cash
Short falls in cash will require you to add additional capital to your business
Simple planning can negate or minimize the need for additional capital
What is a General Operating Budget?
A Financial Planning Tool that… Is an itemized summary of projected income and
expenses for a period of time
Helps you identify your company’s financial values, prioritize your spending, manage your money and track performance
Provides a means of managing your actual performance against your projected performance
What You Need a General Operating BudgetTo achieve your company’s goals
It allows you to more effectively and efficiently manage the financial operation of your company
It can provide you with a better basis for understanding your company’s operations in relation to the general environment
It leads to faster reactions to developing events, which increases your company’s ability to perform effectively
Why You Need an Operating Budget (continued)To plan for your company’s future
It allows you to be prepared—you can either “wing it” or you can plan for profit, cash flow, and the financial condition of your business
It allows you to anticipate change and adapt, such as a downturn in your company’s performance
It is an indicator of financial health, stability and sophistication to any potential lender, investor or buyer
Why You Need an Operating Budget (continued)To obtain the most productive and profitable use of
your company’s resources—not to limit expenditures
Creating a General Operating BudgetBe kind to yourself (and others)—Realize that you’ll
make some mistakes and that there is a learning curve
Start in October or November
Make time for budgeting
Use last year’s financial statements to provide the foundation for this year’s budget, then you can evaluate assumptions each year and make corrections
Creating a General Operating Budget (continued)Create a realistic and detailed budget—record true
and accurate revenue and expense assumptions—avoid “sand bagging”
Review your budget every month and revise your forecast (a revision detailing material increases or decreases to your budget) regularly
Use it for restraint and not constraint
Involve Your ManagersHave your managers create financial plans for the
year, including specific objectives and means of accomplishing those objectives
Review those plans with your managers and reach consensus among your team
Incorporate those plans into the General Operating Budget
Involve Your Managers (continued)Have your managers review budget versus actual
throughout the year and make mid-course corrections via a forecast
Support their budget-based management decisions throughout year
This process helps managers do a better job of forecasting
Involve Your Managers (continued)This process motivates managers and employees,
particularly if you tie incentive bonuses to financial performance
This process allows you to more effectively monitor and manage against departmental/employee performance
Identify Revenue SourcesUse last year’s revenue as a guide—pull amounts from
your reservation system
Be realistic and conservative—Don’t overestimate income
Understand Key Metrics and Terminology
Focus on Gross Lodging Revenue because it will allow you to forecast expenses
Determine what you’ll charge for services and fees—use your market to determine a viable price structure
Develop Key Revenue SchedulesBased on Gross Lodging Revenue and other key
metrics
Housekeeping
Maintenance
Identify Direct Operating and General & Admin ExpensesDirect Operating Expenses
Are typically variable and fluctuate with Gross Lodging Revenue
Examples include housekeeping, maintenance, and hourly payroll
General & Administrative Expenses
Are typically fixed —they stay the same each monthExamples include rent, management salaries, and vehicle
lease payments
Identify Direct Operating and General & Admin Expenses (continued)Use last year’s expenses as a guide
Be realistic and conservative—Don’t underestimate expenses
Develop Key Expense SchedulesPayroll
Leases (office, vehicles, copier, postage machine, etc.)
Marketing
Housekeeping and Maintenance (included in General Operating Budget Worksheet—not done separately)
Remember Consensus is the KeyMeet with dept managers to explain reason for
budget and set goals
It is their planning tool
It is their chance to make requests (wish lists)
It is their opportunity to reveal their planning skills
It is their statement of resources required to meet their goals
Remember Consensus (continued)Set thresholds
Give dept managers a timeframe to complete and submit their budgets
Ask them for a narrative to accompany budget
Allow dept managers to manage against budgeted items
Don’t micromanage your employees
Manage against performance
Finalize the First Draft of Your General Operating BudgetAnalyze
Conduct a detailed review and make adjustmentsDuplicationReasonability checksStaffing requestsWishful thinkingPoor calculationsDenialsOmissions
Finalize First Draft (continued)Return to dept managers with request to cut money (not
everyone)
Prepare add/subtract list by department
BALANCE THE BUDGET! Worst Case!
Note that Income Statement and General Operating Budget look identical
Creating a Capital BudgetCapital expenditures are recorded when a company
spends money to acquire or upgrade fixed assets
Examples are equipment, property and buildings
Conducting a Final Review and Sign OffReview all budgets one last time with overall picture
in mind
Add items or money as needed
Cut items or money if you do not feel it is necessary to obtain department or company goals
Distribute to Dept Managers
Managing by BudgetReview actual versus budget on a monthly basis
If income is down, why?
If expenses are up, why?
Managing by Budget (continued)
Pay particular attention to:
Wages and employee benefits, including overtime
New project expenses
Accounts with previous problems
Workman’s compensation and other taxes
Advertising
Housekeeping income versus expense
Laundry income versus expense
Managing by Budget (continued)
Drill down as necessary
Adjust and adapt as necessary
Evaluate extra expenditures
Are they in the budget?
Exceptions for catastrophic omissions only or unique opportunities (CEO decision)
Ideally exceptions exchanged somewhere else
Managing by Budget (continued)Consider implementing a “Think Tank” day
Conducted off site just before budget is prepared
Every department is evaluated
Allows everyone a say in what needs to change and how to run things more efficiently and effectively
Not punitive
Use results to adjust your budget if appropriate
Managing by Budget (continued)Consider implementing a “Kick Off “ Day
Unveil budget and projections for new year for company and specific departments
Allow employees to see which of their ideas influenced the budget
Avoiding ProblemsAvoid “I don’t really need to use it” mentality
Avoid “I’ll trade it for something else” mentality
Avoid “I’ve got extra money to spend” mentality
Make thoughtful decisions
Avoiding Problems (continued)Do not implement across the board cuts
Discourages padding
All items are not equally sacrificial
Closely monitor assumptions for accuracy (# of reservations, # of work orders, high income season daily/weekly)
Look for problems EARLY
Avoiding Problems (continued)If you’re a company owner
Stick to your own budget
Don’t jeopardize company by dipping into reserves
Assess at end of year (end of quarter at most)
Conclusions and SummaryKnow where your checkbook should be EVERY month
Be prepared to adjust if necessary
Hold dept managers accountable for their expense budgets
Meet your budget goals
Consider bonus incentive for dept managers who meet goals
Conclusions and Summary (continued)Benefits if you use a budget:
Stronger company
Unified approach to planning
Respect from banks and greater chance of successful financial requests
Higher market value for your company
Positive equity position
7 Signs of Internal Accounting Fraud1. An in-house accountant works without direct supervision on every aspect of a company's financial operations. When one trusted bookkeeper or accountant is responsible for records, payroll, receivables, deposits, payments and so on, the company is placed at risk for fraudulent activity.
7 Signs (continued)2. An in-house accountant refuses to follow recently established accounting and/or payroll guidelines. In such a case, owners should demand that guidelines be strictly followed and investigate financial and payroll records for up to several years in the past.
3. An accountant continually works after hours, comes in frequently on weekends or insists on taking work home. Fraudulent activities are easier to accomplish when work is unobserved and unsupervised.
7 Signs (continued)4. An accountant refuses to take a vacation. This individual may be thought of as a highly dedicated and hard-working employee, but it could be that he or she simply doesn't want anyone to discover how the books are being cooked.
7 Signs (continued)5. An accountant insists that he or she handle activities for which other departments are normally responsible. These can include picking up the daily mail (for fear that something could arrive that would tip-off management), acting as the sole go-between with the company's financial contacts (banks, auditors, creditors, etc.) and working with police when items or money are found missing.
7 Signs (continued)6. An accountant continually misfiles important items such as payroll receipts, deposit records, supplier correspondence and estimates.
7. Deposits frequently seem too small. Owners should always carefully monitor income and deposits, comparing sales receipts against actual amounts put into the bank.
(Reprinted from National Federation of Independent Business 04/ 15/ 2002)