Whether you’ve just started your own lodging business with one or two properties, or you’ve been operating within the hotel and vacation rental industry for a few years already, the most important thing you should know about profit and loss (P&L) statements is that they outline all the revenues, costs, and expenses of a business during a specific period of time. Currently, there are other statements, such as the balance sheet and cash flow statement, that you could use to get detailed information about the financial situation of your business. However, the P&L statement is the only one that indicates a company’s ability to increase its profit by cutting costs, driving more revenue, or mixing the two.
Because the most common financial statements often get mixed up, here are some important differences:
- The balance sheet presents a general overview of what you own (assets), what you owe (liabilities), and how much you have invested in your vacation rental business (equity). Since the balance sheet provides information regarding the resources available at a particular point in time, it can help you make important decisions that will affect the future of your lodging business. For instance, if you also own the home, your balance sheet will indicate whether you may qualify for a home equity loan or HELOC that you could use to renovate or upgrade your vacation rental property.
- The cash flow statement presents the cash inflows and outflows during a specific period of time. Revealing the sources and uses of cash flows, this statement is useful in determining the short- and long-term viability of your business.
- The P&L statement indicates whether a business has been profitable over a certain period of time, such as a month, quarter, or the entire fiscal year. For instance, if the report shows that your revenue for the first three quarters of the year was greater than your expenses, it would mean that your business realized a profit.
P&L Statement’s Categories for a Lodging Business
If you’re running a lodging business, the P&L statement will typically include the following items:
- the revenue resulting from renting out your vacation rentals as well as from other income streams, if available (e.g. pet fee, housekeeping, parking fees, etc.);
- the operating costs, including the payroll costs for any salaried and hourly paid staff, the cost of accounting, insurance, legal, and HR services, maintenance and repair costs, the cost of maintenance and cleaning supplies, operating supplies and equipment, utility bills, and any costs connected to servicing the guests;
- the costs of sales and marketing activities, which typically include the costs of paid marketing services, the fees you pay for listing your properties on vacation rental listing websites (OTAs), and the commissions for the bookings that come through online travel agents.
Assessing the Importance of the P&L Statement for Your Lodging Business
The P&L statement contains important financial data that indicates how your business is performing.
Here is an example of a simple (broad) P&L statement for a lodging business.
Providing insight into your overall revenues and expenses, the P&L statement allows you to calculate your gross profit margin, operating profit margin, net profit margin, and the operating ratio. Based on these metrics, you’ll be able to identify your financial performance strengths and weaknesses and, therefore, make better decisions for your business. For instance, if the P&L statement indicates that your business is underperforming financially, you may decide to look for new revenue streams and/or reduce your operating costs.
Ideally, you should prepare and review a P&L statement at least once a quarter, although monthly statements can help you manage your business finances better. Even if your revenues are growing on a steady basis, by comparing your current statement to previous ones, you can easily observe whether your profit is increasing or declining.
Additionally, adjusting your business strategy according to the P&L statements can put your business in a better position if you intend to apply for a small business loan. That’s because, besides checking credit scores and histories, lenders often review different financial reports, including P&L statements, as part of the loan application process. The P&L statement will also come in handy when it’s time to prepare your business tax return.
If the idea of creating P&L statements feels overwhelming, the good news is that you don’t have to prepare these statements or other financial documents on your own. You can opt for lodging management software that provides a wide variety of features, including invoicing, accounting, and financial reporting. On a side note, one of the roles of your PMS is to allow vacation rental managers and owners to identify new opportunities that could help them grow their businesses by increasing revenue and/or reducing expenses. Therefore, the best lodging management solution should provide a P&L statement that shows the total income and expenses of your business for a specific period of time, as well as a P&L statement per property to reveal the revenues and expenses specific to each vacation rental. By comparing different P&L statements, you can easily determine the realized profits or losses per property. Your overall P&L statement will come from your accounting software, e.g.QuickBooks after your information has been loaded from your PMS. To learn more about the benefits you should expect from a complete PMS solution, feel free to request a demo today.