written by Gary Pace, CEO and President of Leisure Holding, Inc
I try to make most of my postings fun to read by inserting a bit of “tongue and cheek” humor into my comments and examples. When I decided to write about different approaches to Accrual Accounting in property management systems, I thought “now there is a hot topic.” As my mind wandered, I thought of the little tax accountant in the movie Ghostbusters who threw a party and claimed “I’m deducting this party from my taxes, that’s why I invited clients instead of friends.” As a former financial guy myself, I realized it just doesn’t get any better than that.
So if you are one of the millions who find accounting discussions boring, you’re not alone. But if you want accurate information to maximize your business valuation, make good management decisions to improve profits or just produce accurate financial statements for your banker, then take a deep breath and try to stay awake. You might gain more understanding about the issues surrounding accrual accounting in reservation and property management systems.
For years the RV Park and Campground Industry has been forced to choose from a variety of property management systems which contain reporting and accounting capabilities that are inadequate for today’s competitive environment. The problem is in the way these systems store transaction data in the database, making it difficult to precisely measure earned and unearned revenue between flexible date ranges, and nearly impossible to provide the type of dynamic reporting that owners and managers need in order to effectively monitor the growth of their business. Many systems claim to support “accrual accounting”, but the term has been used and misused to a point where few owner/operators know what each system really provides when they evaluate the various alternatives and ask about transaction processing, dynamic reporting, ad-hoc analysis, management information and accounting capabilities.
The traditional definition of “accrual accounting” is the recording of revenue on the date earned and the recording of expenses on the date the liability is incurred, which together produce financial statements that are comparable from period to period. In reservation systems, revenue is generally earned as site nights are used. If reservation revenue is recorded properly, it assures that formal financial statements are not distorted by the timing of cash receipts or other factors not related to the consumption of site nights. As an extreme example, assume a park collects of the Reservation fees in January for April through August reservations. If revenue is recognized using cash basis accounting, all of the revenue is recognized in January and no revenue is recognized in April through August. In reality, the cash collection is a prepayment and revenue is not really earned until the site nights are actually used, so cash basis recognition of revenue can create significant distortion when comparing financial information from year to year or even month to month. If you change your cash collections policy, the distortion between periods becomes even worse. For these and other reason, public companies must use accrual accounting to report revenues and expenses in their financial statements because the process of recognizing revenue on the date earned is a much more accurate measurement of revenue trends when comparing results between financial reporting periods.
When evaluating reservation software systems the term “accrual accounting” is generally used to describe the capability to report reservation revenue earned within accounting period (i.e., allocating revenue to site nights used during that period). Almost all reservation systems claim to support “accrual accounting.” If you focus on the pure financial reporting definition, then as long as the system reports revenue into monthly earned revenue totals, then you can say your system supports accrual accounting. But why then do you get different totals when you run the same reports later? Is the system estimating earned revenue rather than providing precise measurements?
The other problem with focusing on the pure accounting definition is that it ignores the need to compare earned revenue and corresponding statistics between flexible date ranges for internal management reporting or decision support. The various analysis capabilities needed by owner/operators may or may not cover the same date range or accounting period used in the financial statements.
Until recently, few software systems have been able to support the precise measurement of earned revenue so that management reports agree with financial reports and the data doesn’t change each time a report is run. Yet almost all reservation systems who don’t support this level of management reporting claim to support “accrual accounting.”
At the heart of the problem is the way reservation revenue is stored and reported in older reservation systems. Most campground reservation systems store revenue by reservation totals (rather than day by day), irrespective of the length of reservation or the number of accounting periods the reservation might extend across. Then, the systems allocate the stored reservation totals into earned and unearned revenue at the time reports are run. These allocation processes require complex and lengthy calculations, which make it virtually impossible to provide ad-hoc analysis reports for management evaluation. There are several problems with the allocation approach including (a) revenue reports often generate different totals each time they are run, (b) future re-runs of the same revenue reports may not agree with general ledger, (c) allocation processes are inadequate for providing analysis and comparison reports, and (d) allocation methodologies limit real-time consolidated reporting for individual and multi-property operation.
Here is an example of the problem: Let’s assume a 4 day reservation booked at $25 per night, or $100 total, is recorded and stored in one lump sum in the system. Assume the reservation includes 2 days in June and the first 2 days in July. At the end of June, you run an earned revenue allocation report that shows $50.00 earned in June, or 2/4 of the total (2 of the 4 days were included in June). Now assume on July 2, the guest extends two additional days through the 4th holiday, at $50 per night due to higher holiday rates. Now the total of the reservation is $200 for 6 days. If you rerun the June earned revenue report, 2/6 of $200 is $66.67 rather than the original $50.00 previously reported. The same scenario can happen if you make adjustments or add ancillary charges to the reservation in July after the June allocation report is run. Anytime you change the total of the reservation, you run the risk of affecting the allocation calculation and ultimately the consistency of the earned revenue calculation. We call this scenario “revenue creep” and it can drive an owner/operator crazy when the revenue reports are different each time you look at them and they never seem to agree to the revenue booked in the general ledger. Your numbers may be close, but they are never exact. So that begs a question: How can you ever get completely comfortable with your revenue reporting if the numbers constantly change? How do you know there aren’t other problems that are being hidden by the changing totals?
To solve this problem, the best practice in software design is to store the revenue amounts in daily buckets that correspond to each site night of the stay. That way, changes to the reservation in later days only affect the later days and do not affect the revenue calculations for days already earned (previous days) since revenue for each day is frozen at the end of that day. If you adjust a previous frozen day, the adjustment amount is recognized on the day entered. Under this design, there is no revenue creep and the daily buckets in the database become the foundation for dynamic management reporting and revenue statistical comparison. If designed properly, the database also makes forecasting and “what if” modeling much easier. Also, since the data is already split into revenue recognition days, the management reports always agree with the same data used to book unearned revenue into the general ledger accounting system, and one collection of revenue numbers are a reliable subset or superset of another collection of numbers.
There is another misconception in the industry related to the Accrual Accounting.
I have frequently heard owner/operators state they must have their reservation system integration with QuickBooks or another general ledger system for efficiency purposes. What they really means is that their current reservation system does not provide adequate revenue analysis reporting and they need to import all the detailed revenue data into their accounting system to freeze the revenue creep and provide basic revenue reporting out of their general ledger system. The problem is that these accounting systems really do not support the statistical analysis reporting needed to make informed yield and business investment decisions. If the reservation system truly provided accrual accounting and sophisticated revenue analysis reporting, then the only thing that you would really need to import into QuickBooks is a monthly summary journal entry, which can be entered and balanced as fast as it can be imported. If the reservation system database is designed properly, the revenue reports would agree with the summary totals imported into QuickBooks and the trust and reliability of your financial information would increase.
As we have discussed, a properly designed reservation software system can meet the multiple demands of accurate financial revenue reporting, accurate accrual revenue comparisons, improve the ability to measure and analyze business trends, and reduce time to generate financial statements and management reports. Operationally it is important to the ongoing success of the business to be able to analyze revenue statistics by flexible date ranges, generate subsets of inventory analysis and have access to quick query and filter criteria in order to make informed business decisions. True Accrual Accounting is a must to compete in today’s competitive and information rich environment!
Hercules is version 2.0 of the ReservationFriend front office management software, developed by Friend Communications. It is an enterprise class reservation system containing the latest Web 2.0 designs, including windows type drag and drop technology through a web browser, accrual accounting and statistics tracking foundation at the core, and state of the art dynamic reporting capabilities. The product was designed with direct input of park owners, operators and managers across North America, resulting in unprecedented ease-of-use, intuitive designs and feature rich functionality. The product also acts as the booking channel manager by providing simultaneous and real-time access for front office users, online reservations and connection to the Global Distribution System used by general travel. It features a broad range of accounting and reporting analysis tools not seen in other front office packages. For more information on Hercules and other Friend products, visit www.herculesfrontoffice.com.