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)