Hotel owners who rely on management companies or on-property accounting teams for financial reporting are often in a passive position relative to their asset's performance. They receive reports, review the top-line numbers, and make investment decisions based on information they have limited ability to independently verify.
This dynamic creates significant financial risk. When the reports are accurate, it's manageable. When they're not — when costs are misclassified, revenue is understated, or management performance is obscured by favorable reporting — ownership is making decisions on a foundation that doesn't reflect the asset's true financial position.
Our team at Bones Hospitality Solutions conducts independent financial performance assessments for hotel ownership groups and investors across the United States. The following is what we look for — and what ownership should be asking about — in every financial report they receive.
1. Is the Report USALI-Compliant?
The Uniform System of Accounts for the Lodging Industry (USALI) is the hospitality industry's standard framework for hotel financial reporting. It defines how revenue departments should be structured, how costs should be categorized, and what line items should appear in ownership reporting.
A report that isn't USALI-structured isn't necessarily fraudulent — but it is difficult to benchmark against industry standards, difficult to compare across multiple properties, and more likely to contain classification errors that obscure true departmental performance.
What to Look For
- Revenue departments reported separately (Rooms, F&B, Other Operated Departments)
- Departmental expenses reported at the department level, not consolidated
- Undistributed operating expenses separated from departmental expenses
- GOP (Gross Operating Profit) reported as a distinct line item
- Fixed charges (insurance, taxes, depreciation, reserve for replacement) reported below GOP
2. Are Departmental Margins Reasonable?
Industry benchmarks for departmental profitability are well-established. Rooms department margins at well-managed full-service properties typically run 70–80% of departmental revenue. F&B margins vary by outlet type but typically range from 25–40% of departmental revenue. When reported margins fall materially below these benchmarks without explanation, it warrants investigation.
Warning Signs in Departmental Reporting
- Rooms department margin below 65% without occupancy-specific explanation
- F&B cost of goods consistently above menu engineering targets
- Labor cost as percentage of revenue above benchmarks for property type
- Undistributed expenses growing faster than revenue without explanation
- Management fee calculations that don't match the terms of the management agreement
3. What Does the Accounts Receivable Aging Look Like?
Ownership should request an AR aging report alongside the income statement every period. A growing AR balance — particularly balances over 90 days — represents realized revenue that hasn't been collected, which affects cash flow and creates write-off exposure that reduces net income.
Many management companies report AR as a single total rather than by aging category. This is a red flag. Without aging visibility, ownership cannot assess collection performance or identify problematic accounts before they age to write-off status.
4. Are Variances Explained or Just Listed?
A financial report that lists budget variances without explaining their source is not a management tool — it's an accounting output. Owners should require variance explanations that identify specific causes (scheduling changes, rate strategy, cost category overruns) rather than general statements about "market conditions" or "occupancy-driven costs."
Unexplained variances are a common indicator of management reporting that is designed to satisfy the ownership reporting obligation without providing genuine transparency. The question to ask: "Can management identify the specific transactions or decisions that drove this variance?"
5. Are Capital Expenditures Properly Separated?
Capital expenditures that are expensed rather than capitalized inflate operating costs and distort NOI in the period of recording. Conversely, maintenance costs that are capitalized rather than expensed inflate asset values and defer cost recognition. Both misclassifications have material effects on the financial picture ownership receives.
6. What Does the Reserve for Replacement Look Like?
The reserve for replacement — the fund accumulated to finance future capital expenditures — should be funded at the rate specified in the ownership agreement, typically 3–5% of revenue. Properties where the reserve is consistently underfunded are deferring maintenance obligations that will ultimately require capital investment above what was budgeted.
The Most Important Question
Beyond all of these specific items, the most important question ownership should ask about their financial reports is this: "Are these numbers independently verified, or am I relying entirely on the management team that produces the operations that these numbers report on?"
Independent financial oversight — through regular hotel audit services or periodic financial performance reviews — is the only way to verify that ownership reporting accurately reflects property performance. Without it, owners are managing their most significant financial assets based on unverified information.