Hotel Analysis
The use of the statement of cash flow is a relatively new wrinkle in financial reporting. This statement, however, can be a useful management tool
CASH FLOW is the life blood of a hotel. To manage a hotel's assets properly, the hotel's management must understand cash flow. The Financial Standards Board (FASB) has mandated that companies issue a statement of cash flow (SCF), in addition to the traditional income statement and balance sheet. The SCF is a replacement of the little-understood measure called statement of changes in financial position (SCFP). General managers and other users of financial statements will find that the SCF, with its focus on cash, will be more useful than the obsolete SCFP, because the SCFP could be prepared based on either cash or working capital. Unlike the SCFP, the SCF shows cash flows related to the hotel's three major financial activities: operations, investing, and financing.
The segregation of cash flows by activity allows the general manager to see the major sources and uses of cash for the hotel. Since the major purpose of virtually all hospitality businesses is the generation of net income and related cash flow, the SCF is vital to a manager's understanding of the relationship between the two. A hotel may earn profits but incur a reduction in cash over a given period of time, or the opposite may happen. The SCF provides a clear reconciliation of net income (from the income statement) and cash flows from operating activities (CFO).
The following "Economics 101" lesson is intended to show how the SCF fits into the overall financial scheme. Owners of hotel firms and other hospitality companies desire to increase their wealth. They do so by converting their operating profits to cash and disbursing those funds as dividends. (Of course, they also benefit from capital gains as their stock value increases.) Dividends are paid only as cash is available, and the chief source of cash for dividends is from operating activities.
CASH FLOW is the life blood of a hotel. To manage a hotel's assets properly, the hotel's management must understand cash flow. The Financial Standards Board (FASB) has mandated that companies issue a statement of cash flow (SCF), in addition to the traditional income statement and balance sheet. The SCF is a replacement of the little-understood measure called statement of changes in financial position (SCFP). General managers and other users of financial statements will find that the SCF, with its focus on cash, will be more useful than the obsolete SCFP, because the SCFP could be prepared based on either cash or working capital. Unlike the SCFP, the SCF shows cash flows related to the hotel's three major financial activities: operations, investing, and financing.
The segregation of cash flows by activity allows the general manager to see the major sources and uses of cash for the hotel. Since the major purpose of virtually all hospitality businesses is the generation of net income and related cash flow, the SCF is vital to a manager's understanding of the relationship between the two. A hotel may earn profits but incur a reduction in cash over a given period of time, or the opposite may happen. The SCF provides a clear reconciliation of net income (from the income statement) and cash flows from operating activities (CFO).
The following "Economics 101" lesson is intended to show how the SCF fits into the overall financial scheme. Owners of hotel firms and other hospitality companies desire to increase their wealth. They do so by converting their operating profits to cash and disbursing those funds as dividends. (Of course, they also benefit from capital gains as their stock value increases.) Dividends are paid only as cash is available, and the chief source of cash for dividends is from operating activities.