Volume 27, Number 5 October/November 2012 Why It's Difficult to Define Rooms Revenue 10 Tips for Successful Presentations Running private clubs like a business Including Information Protections in Contracts The Newly Expanded USFRC Responsibly Managing Employee Retirement Plans Plus: Key Performance Indicators; Interview with the USFRC 7th Edition committee chairs; 2012 HFTP Paragon Award Winner: Howard Field T HE J O U R NA L O F H O S P ITA LITY FIN A NCIAL AND TECHNOL OGY PROF ESSIONAL S ® C O N T E N TS The journal of hospitality FINANCIAL AND TECHNOLOGY PROFESSIONALS Volume 27, Number 5 OCTOBER/NOVEMBER • 2012 HFTP® and HITEC® are registered service marks of Hospitality Financial and Technology Professionals. GUESTROOM 20X is a service mark of Hospitality Financial and Technology Professionals. Submissions and Inquiries Individuals interested in submitting an article for publication should contact the editor. The Bottomline is a peer review journal. All materials submitted for publication are reviewed by members of the editorial review board or recognized experts in the field. The Bottomline (ISSN 0279-1889), the journal of Hospitality Financial and Technology Professionals, Inc., is published bimonthly with two special editions by HFTP®. Copyright © by Hospitality Financial and Technology Professionals. All rights are reserved. All opinions expressed herein represent the views of the authors. The Bottomline and HFTP disclaim any responsibility for views expressed or statements made in any articles published. HFTP disclaims any liability with respect to the use of or reliance on any such information. The information contained in this publication is in no way to be construed as a recommendation by HFTP or any industry standard, or as a recommendation of any kind to be adopted or binding upon any member of the hospitality industry. Written consent must be obtained from HFTP before reprinting articles. Subscription fee of $30 for HFTP members is included in the membership fee. HFTP is headquartered at 11709 Boulder Lane, Suite 110, Austin, Texas 78726. Periodicals Postage Paid at Austin, Texas. POSTMASTER: Send address changes to The Bottomline, 11709 Boulder Lane, Suite 110, Austin, Texas 78726, (512) 249-5333. F eatures 10 16 20 24 30 32 34 Starting From the Top Line Rooms Revenue: Why is it almost impossible to define Total Sales in the hotel industry? By Howard Field It’s the 21st Century: Do You Know Where Your Data Are? With today's contracts and agreements, it is inherent to address information collection and intellectual property issues By Ruth Walters, JD Now Presenting … Ten tips for a successful presentation By Agnes DeFranco, Ed.D., CHAE and Steve D’Erasmo, CHTP Private Clubs: To Be Or Not To Be — A Business? What it means to run a private club like a business By Philip Newman, CPA and Robert Salmore, CPA The Newly Expanded USFRC The soon-to-be released guide includes statements for CIRAs, schedule changes, and new and updated appendices By Ray Schmidgall, Ph.D., CPA, CHAE Behind the Revision HFTP past presidents Leonard Bartello and Wendy Zurstadt, serving as chairs on the revision committee, talk about the process, and debates, that brought the USFRC 7th Edition Who Me? A Fiduciary? Responsibly managing employee retirement plans By Ned McCrory, CPA and George L. Zoglio, CPA D epartments 5 6 8 38 Between the Lines A Look Back and a Look Ahead — This year has brought numerous accomplishments for HFTP, and puts it in a position for more to come Q&A From The HFTP Research Institute Key Performance Indicators — Measuring progress toward financial goals HFTP News & Notes 2012 HFTP Paragon Award Recipient: Howard Field The Bottomline Resource Guide The Bottomline 3 THE BOTTOMLINE STAFF Frank Wolfe, CAE Executive Vice President/CEO [email protected] Eliza R. Selig Editor/Director of Communications [email protected] Jennifer Lee Advertising Sales / Director of Marketing [email protected] Attend live sessions over your high-speed Internet connection. HFTP members have access to free, interactive sessions with live audio, chat and slide presentations. Get Started Visit the Membership/ProLinks section of the HFTP web site at www.hftp.org to view the upcoming webinar schedule. Archived Sessions ProLinks Webinars are recorded and available to members for viewing on demand. Archived topics include e-commerce, millennial learners, green IT, Wi-Fi and more. 2011–2012 HFTP OFFICERS President Lisa Funk, CHAE The Dow Hotel Company Seattle, Wash. Vice President Raman P. Rama, CHA, CHTP, CHAE JHM Hotels Greenville, SC Treasurer Jerry Trieber, CPA, CHAE, CFE, CFF Crestline Hotels and Resorts Fairfax, Va. Secretary Daniel Conti Jr., CHAE, CAM The Ritz Carlton Golf Club & Spa, Jupiter Jupiter, Fla. Immediate Past President Thomas G. Smith, CHAE Westmoor Country Club Brookfield, Wis. 2011–2012 EDITORIAL ADVISORY COUNCIL Chair Robert Salmore, CHAE, CPA McGladrey & Pullen LLP Council: Stacy Antmann, CHAE The Club At Boca Pointe Bryce Bonet Cornell University John Burns, CHA Hospitality Technology Consulting Manuel Carrillo, Jr. La Rinconada Country Club Ab Echenberg, CHAE, CHTP AME Consulting Sal Galioto, CHAE Hyatt Hotels Corporation Julie Rueckert Hames, CHAE Vesta Hospitality Heung Michael Kwag, Ph. D., CHA Boston University School of Hosp Admin Tony Llanos The Chancellor Hotel on Union Square Charles Monroe, MBA, MHCIMA, CHAE University of South Florida Arlene Ramirez, MBA, CHE, CHAE The Clubs At Carlton Woods Franklin John P. Sikich, CPA, CHAE Franklin John Patrick Sikich, CPA Jerry Trieber, CPA, CHAE, CFE, CFF Crestline Hotels & Resorts, Inc Tanya Venegas, MBA, MHM University of Houston ® 4 October/November 2012 11709 Boulder Lane, Suite 110 • Austin, TX 78726–1832 +1 (512) 249-5333 • (800) 646-4387 • Fax +1 (512) 249-1533 www.hftp.org • www.hitec.org ❘❙ Between the Lines ❙❚ A Letter from the HFTP President A Look Back and a Look Ahead This year has brought numerous accomplishments for HFTP, and puts it in a position for more to come Lisa Funk, CHAE I don’t know about you, but at the end of a year, I always like to take a moment to look back and reflect on my recent experiences. I am finding as I come to the end of my year as your global president there is so much that HFTP has accomplished and we should all feel very proud of the progress we have made as a global leader in hospitality finance and technology education and resources. In this past year we celebrated two major milestones — the 40th Anniversary of HITEC, the largest hospitality technology conference in the world and HFTP’s 60th anniversary. These are milestones that few associations achieve; and, rather than slowing down, we are actually getting stronger with age. Our continued growth is no surprise to me as more and more individuals are coming to HFTP to meet their educational needs. I had the opportunity to travel the globe this year — Hong Kong, London, Switzerland and Australia — to discuss our new initiatives and to listen to professionals in other parts of the world about what they want and need from HFTP. From the most recent press clips published in a variety of news outlets, it is clear HFTP is needed around the world. We have also heard from many associations that want to work with us to accomplish common goals. It is through these partnerships that we will be able to offer additional benefits to our membership. One of my favorite roles this past year was to visit our chapters. There is nothing I love more than meeting with our members and discussing their needs. We are a family and through my travels, that was reiterated over and over again. Although the dynamics differ from chapter to chapter, overall their sense of hospitality is vibrant. This is just one more reason why HFTP is so successful. I am so grateful to our Global Board of Directors for listening to our membership and moving forward with many initiatives that are important to them — from global expansion to developing new resources, such as the Global Hospitality Accounting System Users Guide. It is clear that the directors on the Board have put forth many hours to achieve the goals that were outlined for them this year. They have also set a firm foundation for those who will come after. We are blessed to have some of the very best in our industry sitting on our board of directors and I would like to thank those whose terms are coming to a conclusion this year: John Burns, CHA; Scott Campbell and Calvester Legister, CHAE. It is because of their dedication, and of our other directors, that we are able to exceed our expectations each and every year. I have had the honor of serving on the global board with Tom Smith, CHAE over the last seven years. His contribution to our association has been immense and this year he will complete his service on the Executive Committee. I can’t thank him enough for his mentorship and his friendship throughout the years. His enthusiasm and love of HFTP are infectious. When I was installed as your president last year I said, “I serve at the pleasure of our members,” and I want to thank all of you for allowing me that opportunity. HFTP has had an amazing year and I have had the honor of seeing it from the front row. I look forward to our continued success! Lisa Funk, CHAE is the corporate controller for The Dow Hotel Company in Seattle, Wash. The Bottomline 5 ❘❙ Q&A from the HFTP Research Institute ❙❚ Key Performance indicators Measuring progress toward financial goals am looking for an article or research Q Idocument that gives a list of key performance indicators for food and beverage operations. Can you steer me in the right direction? A Key performance indicators (KPI), which can also be referred to as key success indicators (KSI), help an organization progress towards its overall goals. “Once an organization has analyzed its mission, identified all its stakeholders and defined its goals, it needs a way to measure progress toward those goals” (Reh, 2012). When established, KPIs help organizations and their employees focus on the important aspects of the business, guiding them towards success. Larger organizations may have multiple levels of key performance indicators in place. For example, at the corporate level there will be overall KPIs for the entire organization; but then each division, region, brand, department, etc. should also have its own set of key performance indicators. The following list provides characteristics of organizational key performance indicators. Staff and Employment KPI Characteristics Kitchen Management • • • • • • Quantifiable measurements Must be agreed upon before put into place Reflect the critical success factors of the organization Must reflect the organization’s goals Long-term considerations Limit the number of KPIs to maintain focus Departmental Examples The following are basic examples of KPIs for various departments. These provide a jumping off point for managers to define measurements for their organizations. 6 October/November 2012 • Wage Cost Percentage: Wage costs as a percentage of sales • Total Labor Cost Percentage: Include items such as salaries, wages, bonuses, taxes and benefits • Total Labor Hours: How many hours worked per department • Sick Days Taken: Sometimes a measure of morale • Staff Turnover: Divide the number of people employed during a certain time period by the total number of positions • Average Length of Employment: Divide the total number of weeks worked by the total number of staff • Average Hourly Pay: Divide total payroll by the number of hours worked by all staff • Food Cost Percentage: Cost of food sales divided by food revenue • Food Costs per Cover: Food costs divided by total covers • Kitchen Labor Percentage: Compare kitchen labor against food sales • Kitchen Labor Hours: Compare hours worked against sales to measure productivity • Stock Value: Food stock should be less than a week's use • Kitchen Linen Costs: Cost of uniforms, aprons, teatowels, etc. ❘❙ Q&A from the HFTP Research Institute ❙❚ Front of House and Restaurant Management • Total Sales per Cover: Total sales divided by the number of covers • Number of Customers: Measure of popularity • Table Turnover: Factors impacting table turnover include cooking time, seating, service and clearing • Linen Costs: Cost of uniforms, aprons, table clothes, napkins, etc. • Front of House Labor Percentage: Hours worked divided by sales • FOH Labor Hours: Hours worked compared to sales • Revenue per Available Seat Hour (RevPASH): Number of 'seat hours' divided by total revenue Bar and Cellar Management • Sales per Head: Indicates how beverage/wine specials appeal to customers and how well staff is selling • Gross Profit on Sales: Difference between what is sold and how much it costs • Stock Value: How much money is tied up in the cellar • Stock Turnover: How fast is the cellar stock selling • Carrying Cost of Stock: Take the current interest rate for borrowing money, apply it to the stock value, and divide by 52 to get a weekly figure • Sales / Stocktake Discrepancies: Measure the difference between what is used (from comparing two stocktakes) and what has been sold Sales and Marketing • Number of Customers: Measure of popularity • Sales per Head: Should be calculated for all areas • Response Rates for Marketing Campaigns: How many people responded and what effect did it have on profit • Bookings: Current week, current month, and at peak times (holidays) • Sales Inquiry Conversion Rate: Number of inquiries that turn into actual sales Management of Finance and Administration • Cash Position at Bank: How much cash is available after reconciliation • Total Accounts Due: How much money is owed • Return on Investment: Percentage return on the amount that has been invested • Sales and Costs: Actuals versus budgeted figures • Computer and Technology Efficiency: Measurements such as computer system down-time, accuracy of the POS system, etc. These are just a few examples. If you need further information or examples of KPIs please contact the HFTP Research Institute. ■ KPIs: The Bad and Good The following were provided in the article “Key Performance Indicators (KPI)” written by F. John Reh. Bad Example: ✗ Title of KPI: Increase Sales ✗ Defined: Change in Sales volume from month to month ✗ Measured: Total of Sales By Region for all region ✗ Target: Increase each month Why is this a bad example of a KPI? This example is vague and does not provide the detailed information needed to execute the measurement properly. The following questions need to be answered and incorporated to make this KPI more definitive. Does this measure increases in sales volume by dollars or units? If by dollars, does it measure list price or sales price? Are returns considered and if so do they appear as an adjustment to the KPI for the month of the sale or are they counted in the month the return happens? How do we make sure each sales office's volume numbers are counted in one region, i.e. that none are skipped or double counted? How much, by percentage or dollars or units, do we want to increase sales volumes each month?(Note: Some of these questions may be answered by standard company procedures.) Good Example: ✔ Title of KPI: Employee Turnover ✔ Defined: The total of the number of employees who resign for whatever reason, plus the number of employees terminated for performance reasons, and that total divided by the number of employees at the beginning of the year. Employees lost due to Reductions in Force (RIF) will not be included in this calculation. ✔ Measured: The HRIS contains records of each employee. The separation section lists reason and date of separation for each employee. Monthly, or when requested by the SVP, the HRIS group will query the database and provide Department Heads with Turnover Reports. HRIS will post graphs of each report on the Intranet. ✔ Target: Reduce Employee Turnover by 5% per year. Resources: • Profitable Hospitality.com. (2012). Key Performance Indicators for Restaurants, Cafes, Catering, Clubs & Hotels. Retrieved September 17, 2012 from www.profitablehospitality.com. • Reh, F. John. (2012). Key Performance Indicators (KPI): How an Organization Defines and Measures Progress Toward Its Goals. Retrieved September 17, 2012 from management.about.com. The Bottomline 7 ❘❙ HFTP News & Notes ❙❚ 2012 HFTP Paragon Award Howard Field The hospitality sector specialist advisor was selected for his expertise in and advocacy of the Uniform System of Accounts for the Lodging Industry (USALI), as well as other standardized accounting systems. Established in 1999, the prestigious award recognizes individuals who have made a significant and lasting contribution to both HFTP and the hospitality industry. Based close to the city of St Albans, Hertfordshire in the United Kingdom, Howard is the author of guides to the USALI 9th and 10th editions, as well as other finance-focused reference books for the industry. His best known work is A Practical Guide to the Uniform System of Accounts for the Hospitality Industry. He is currently serving as lead consultant for the Global Hospitality Accounting System Users Guide, which is being produced by HFTP. "Howard Field has been in the forefront of setting and developing accounting standards for the hospitality industry not only in the U.K., but also internationally," says Fritz Ternofsky. "His personal commitment, knowledge and integrity is asked for as far wide as Hong Kong and the U.S." He has worked within the industry for over 45 years, starting as a controller for the Royal Garden Hotel in London. He advanced in his career, serving in top financial positions for multiple hospitality companies, including Commonwealth Holiday Inns of Canada and The Savoy Group. In these positions, he experienced the challenge to finding good finance professionals to hire. In response he formed FM Recruitment, specialists in financial personnel for the hospitality industry. "I was probably one of his first placements, and benefitted at that time from his career advice first-hand," said Jillian Malone, managing director for FM Recruitment. "Howard epitomizes the best of the breed when it comes to services to our sector — always thinking how he can best be of service to others and mentoring the leaders of tomorrow." Howard is a founding member of the British Association of Hospitality Accountants (BAHA) — now HOSPA, a professional association based in the U.K. for hospitality professionals in finance, revenue management and IT. He continues to work with the association in a leadership capacity and was instrumental in forming a formal relationship between it and HFTP, by which the organizations 8 October/November 2012 work together on industry resources and education. Along the same lines, he has also helped HFTP forge a relationship with the Hotel Controllers & Accountants Association (HCAA) of Hong Kong. "One of Howard's endearing trademarks is his constant willingness to help others, be it colleagues, organizations or students,"says Derek Wood, managing director of Derek Wood Associates Ltd. and a director on the HFTP Board. "He will always give up his time at a moment's notice to give advice or the benefit of his vast expertise. I can think of no one better qualified to receive this year's Paragon Award." ■ HFTP Paragon Award Recipients 1999: Alice Banks, CHAE • Henry "Buddy" Weeks, CHAE 2000: Frank Santos, CHAE, CHA 2001: Katherine Cavanagh, CHAE 2002: Raymond Schmidgall, PH.D., CPA, CHAE Frank Wolfe, CAE 2003: Len Bartello, CPA, CHAE, CHTP 2004: John Cahill, CHA, CHTP 2005: Wendy Zurstadt, CPA, CHAE, CHTP 2006: Richard Braa, CHAE 2007: Robert Patasnick, CPA 2008: George Glazer 2009: Stephen LeBruto, CPA, CHAE, Ed.D. Agnes DeFranco, Ed.D., CHAE 2010: Stephen Doherty, CHAE, CHTP 2011: Frank Agnello, Jr., CMA, CHAE ❘❙ Industry Standards ❙❚ Starting from the Top Line Why is it almost impossible to define Total Sales in the hotel industry? By Howard Field W hen I took on the role of lead project consultant for the HFTP Global Hotel Accounting Users Guide project, I thought this would give me the chance to address some of the many definition issues which users of hotel management accounts come across. Wouldn’t it be useful for there to be some standard wording which could be understood by operators, owners and their advisors — and for teachers and students? No harm in having this as an idealistic objective, so I set out to start with the top line, with a definition of Total Sales — or Total Revenue as it is called in the Uniform System of Accounts for the Lodging Industry (USALI). And more specifically in this article, revenue under the Rooms category. What follows shows just how challenging the task of arriving at one definition, and why it will continue to be. I have tried to explain why, as well as to share some thoughts about how current revenue management, accounting and statistical practices often produce a high degree of blindness, and how they could lead to even better results. Not everyone uses the term Sales or Revenue. Alternatives are Turnover and Income. Sometimes the term Gross is used instead of Total. Revenue or Income are often more inclusive terms than Sales (see Wikepedia on ‘Revenue’ for a useful explanation about usage of these terms, and the comparison between the United Kingdom and the United States). The fact that the USALI exists, and is so widely used within the industry should make the task easier. Not that easy, as I will explain by starting with how the USALI defines Total Revenue, and I will continue to use the word Revenue for this article. Howard Field is a hospitality sector specialist. His concentration is on standardized accounting systems, and has authored guides to the USALI 9th and 10th editions, as well as other financial guides for the industry. Howard is currently the lead consultant for the Global Hospitality Accounting System Users Guide, which is being produced by HFTP. He is also the recipient of the 2012 HFTP Paragon Award. 10 October/November 2012 A Look at Rooms Revenue ❘❙ Industry Standards ❙❚ Defining Total Revenue, Per the USALI The USALI does not give a full definition of Total Revenue — which is why it is difficult to draft the relevant clause in leases, management or franchise agreements. The USALI’s current edition is the 10th edition, which was published in 2006. This edition requires that its categories and allocations are followed precisely in order for hotel accounts to be stated as being in conformity with the Uniform System. So how it arrives at Total Revenue in this edition is where I will focus. For Total Revenue, the most important factor is to distinguish between revenue and expenses, then to address the allocations between the revenue categories. To accomplish the latter means understanding the elements from which this is derived, and how allocations of revenue are made. A technicality which can have an impact on revenue allocations relates to taxation. Rates of value added, sales and other taxes may vary according to the revenue type. Taxation definitions for these purposes could materially affect a hotel’s ability to follow the USALI standards. The USALI breaks down a hotel’s business into four main categories or departments. These are termed: • Rooms • Other Operated Departments • Food and Beverage • Rentals and Other Income These are treated as the principal sources of the hotel’s revenues, with detailed directions on what comprises the revenues in each category. Adding together the Total Revenue lines in these categories produces the hotel’s overall Total Revenue. A shortcut to a definition where the Uniform System applies might be ‘Total Revenue comprises revenues from Rooms, Food & Beverage (food and beverage encompasses meals and drinks and the hotel catering business), Other Operated Departments, Rentals and Other Income, as stated by the USALI.’ A Closer Look at Rooms Revenue In this article, I will specifically examine and comment on the Rooms revenue category. Sometimes hotels use terms for Rooms such as Apartments, Accommodation or Bedrooms. Rooms is described in the USALI as the hotel’s primary source of revenue. Some hotel developments incorporate so many other facilities, that Rooms may not contribute the highest percentage of Total Revenue. (Note that it is not the physical sale of a room which is being referred to here, it is the revenue from the rental of the room as accommodation.) The Bottomline 11 ❘❙ Industry Standards ❙❚ Issues with Rooms Revenue Package (or Inclusive) Revenues In this situation, a formula related to ‘market value’ is mandated by the USALI. This is used to allocate the balance of the revenue for the services directly provided by the hotel, after first deducting any amount payable to third party vendors (for items in the package provided by them). Practices in hotels often vary from the USALI formula. The result is that revenue allocations across the categories will not have been made in the same way by all hotels. There is then the problem of whether services and use of facilities provided by the hotel and incorporated in the rooms or package price should be accounted for as revenue, or if they represent a recovery of a cost. If revenue, then the question is should this be in the Rooms category, or one of the other revenue categories. If a cost recovery, then how should it be reflected in the other revenue or cost centers. The USALI takes some six pages to describe how the Total Rooms Revenue is derived and sub-categorized. The basic factors covered include: • Defining individual and small groups as transient rooms revenue; • Defining groups of 10 or more rooms as group rooms revenue; • Treating independently contracted blocks of rooms let for periods over 30 days as contract rooms revenue; and • Adding as other Rooms revenue, such items as: Revenue from guaranteed payments for rooms reservations where the guest did not arrive or cancel within the required period, Day use revenue from guest rooms rented for purposes other than overnight accommodation or where catering is not provided (if catering is provided, then the revenue is recorded in Food & Beverage), and Fees for early and late departures, and charges for cribs and rollaway beds. Following this so far? This is where it starts to become much more complicated. Issues With Rooms Revenue There are several issues which arise with Rooms revenue. Those highlighted by the USALI include: 12 October/November 2012 1. Package (or Inclusive) Revenues: In this situation, a formula related to ‘market value’ is mandated by the USALI. This is used to allocate the balance of the revenue for the services directly provided by the hotel, after first deducting any amount payable to third party vendors (for items in the package provided by them). Practices in hotels often vary from the USALI formula. The result is that revenue allocations across the categories will not have been made in the same way by all hotels, even if they state that their management accounts and statistics comply with the USALI. There is then the problem of whether services and use of facilities provided by the hotel and incorporated in the rooms or package price should be accounted for as revenue, or if they represent a recovery of a cost. If revenue, then the question is should this be in the Rooms category, or one of the other revenue categories? If a cost recovery, then how do you reflect this in the other revenue or cost centers? Such decisions will affect where revenue and expense amounts are shown in the accounts and the related departmental operating statistics. A current hot topic relates to Internet access. There is not yet an industry standard for whether hotel guests are charged for Internet access or if it is an overhead expense. Prospective guests who check whether Internet access is subject to a charge before mak- ing their reservation may not select the hotel, and hotels that do charge for this access may not receive return business from guests who object. However, those hotels that treat the Internet charges to their guests as revenue, will often argue that they make a good recovery or return on investment from charging for this service. This situation will have to change. Data indicates that the cost of providing the average level of Internet access required by guests who actually use it is less than US$2 per access. The costs of providing other utilities consumed by guests, such as water, electricity and climate control, where no specific charges apply, are materially greater than those for a guest’s Internet access in a full service hotel. This suggests that the idea of charging for Internet use should be seriously reconsidered. A case is often made that Internet charges should apply where use is greater than a standard level. Technical developments are likely to continue to reduce the cost of providing Internet access, and, guests will expect reliable, secure and adequate access to be provided. Is this provision any different from allowing unlimited access to TV, use of heating or air-conditioning, or taking hot showers? Where there is a specific charge for Internet access, under the USALI this is allocated to Revenue in the Telecommunications sub-category of Other Operated Departments. Note also the USALI’s approach is that where an incidental service is provided, such as part of a brand standard, no revenue allocation is made. This means that there will be variances in the revenue and statistical recording between hotels that make a charge and those that have rates which offer differential services between classes of guest or room. Common examples of these are where breakfast is inclusive in the standard room charge, or where a facility such as access to an executive lounge with free food and beverage items is inclusive within certain guest or room categories. ❘❙ Industry Standards ❙❚ Issues with Rooms Revenue Wholesaler Revenues The ways in which hotel rooms and other services are being marketed, using technology and various forms of intermediary, are blurring the lines between wholesale and retail. This trend will continue, and in the meantime the subject causes confusion and impacts how hotel revenues and the related costs are managed. Added to which are issues such as sales, value added and tourist taxes, and consumer price protection legislation. As an accountant, I am coming to the view that what should be shown in hotel operating accounts is the revenue based on charges before accounting for discounts or commissions, with the values of wholesale discounts and retail commissions being shown separately as deductions to arrive at net revenue. If this direction were to be followed, achieved room rates should be based on the net revenue, which in the end is the most important measure. 2. Wholesaler Revenues: The USALI identifies as wholesalers intermediaries who contract for allocations of rooms that they then resell to travel agents or to the open market, often through the Internet as a dot-com wholesaler or an Online Travel Agent (OTA). These rooms are generally blocks that have been significantly discounted, by typically 25–30 percent. Here, the transaction is treated as one between the hotel and the wholesaler. The net rate received by the hotel from the wholesaler, instead of the rate at which the wholesaler resells the room, governs the revenue to be included in Rooms for these sales. Where rooms are sold at rates controlled by the hotel through retail travel agents, or intermediaries acting in a role which introduces customers (such as for residential conventions or functions) to the hotel, the transaction is treated as between the guest or customer and the hotel. The rate paid by the guest or customer is based on the agreed retail rate for the room, and this is the revenue amount included in Rooms. Under the USALI a corresponding liability is recorded for commission, payable to the agent or intermediary that is allocated to commission expense in Rooms. In the case of packages which include the room and other services, the agent or intermediary may receive a commission on the whole package. 14 October/November 2012 The USALI indicates that commission is generally treated as a Rooms expense, regardless of whether other services are provided. The ways in which hotel rooms and other services are being marketed, using technology and various forms of intermediary, are blurring the lines between wholesale and retail. This trend will continue, and in the meantime the subject causes confusion and impacts how hotel revenues and the related costs are managed. Added to which are issues such as sales, value added and tourist taxes, and consumer price protection legislation. As an accountant, I am coming to the view that what should be shown in hotel operating accounts is the revenue based on charges before accounting for discounts or commissions, with the values of wholesale discounts and retail commissions being shown separately as deductions to arrive at net revenue. If this direction were to be followed, achieved room rates should be based on the net revenue, which in the end is the most important measure. For franchise, management and related agreements where fees and other charges are based on revenues, the case might also be made that these costs should be deducted from revenue, especially when they are incurred through being attached to a brand attached to the franchise or management company. 3. Resort Fees and Surcharges: These are described in the USALI as fees and surcharges payable in addition to the room rate to allow the guest to use facilities such as fitness, spa, pool, transfers from airports, sport and recreation facilities, and for local phone calls or Internet access. The USALI states that such charges are recorded as revenue if the services are normally supplied by departments within the hotel (for example, if it has its own spa), allocated based on the relative value of the components normally supplied by the relevant departments. If it is not possible to allocate the services to a revenue producing department, the amount is recorded as Other Rooms Revenue in Rooms. There must be a history about when resort fees and surcharges were first introduced by hotels. For some they were added when the market made it difficult to raise room rates, others used them as a way of generating revenue for facilities that were costly to provide. And for some, when market demand was at a level where valuable revenue could be raised from guests making use of the facilities. These charges are not universally applied, and recent market comment suggests that there are growing objections to their level and justification. As with other add-on charges or inclusive services, variances occur in practice for brand, market or other factors. This means that accounting for them as revenue or cost recoveries can cause confusion in how the Resort Fee and Surcharge revenue is allocated. This is especially true when compared with how the USALI treats Package revenue elements, where interpretations of ‘market value’ and ‘relative value of components normally supplied’ have to be considered. 4. Mixed-ownership Lodging Facilities: The USALI describes these as relating to hotels where condominiums have been developed, creating ‘mixedownership’ entities. Examples are timeshares, fractional or whole ownership. Whether they are operated as a ❘❙ Industry Standards ❙❚ hotel business, and revenues should be treated as Rooms, will depend on the facts and circumstances in each case. The USALI gives some guidance on this subject, but due to its complexity, and other legal factors which differ internationally, will not be further dealt with here. 5. Service Charge: One common, and major, issue for international hotels is the treatment of service charges. The USALI is based largely on U.S. standards, where service charge does not generally apply on Rooms. The subject is only addressed in Food and Beverage, where it is stated that service charges automatically added to any food or beverage sale must be recorded as Other Revenue in Food & Beverage. It follows that, if a service charge is automatically added to a room charge, this should logically be accounted for as Other Revenue in Rooms. The Total Revenue for Rooms and all the relevant statistics would include this revenue. This would be a deviation from the current edition of the USALI, and would need to be specifically provided for in a Total Revenue definition to avoid disputes. Service charge in the hospitality industry generally is a complex subject, that needs to be discussed separately, and will be the subject of another article. 6. Other Material Issues: As has already been illustrated, department allocations and whether an item is revenue or a cost recovery is most important where specified revenues are linked to commission, franchise or management fees, rents or other obligations. Regardless of whether the USALI applies, I have to ask whether focusing on the room unit and revenue per available room are the most meaningful ways to measure yield and performance. With so many sources of hotel business, and the range of rate combinations offered to meet market requirements, a standard tariff rate Issues with Rooms Revenue Resort Fees and Surcharges The USALI states that such charges are recorded as revenue if the services are normally supplied by departments within the hotel, allocated based on the relative value of the components normally supplied by the relevant departments. But, these charges are not universally applied. As with other add-on charges or inclusive services, variances occur in practice for brand, market or other factors. This means that accounting for them as revenue or cost recoveries can cause confusion in how the Resort Fee and Surcharge revenue is allocated. This is especially true when compared with how the USALI treats Package revenue elements, where interpretations of ‘market value’ and ‘relative value of components normally supplied’ have to be considered. for a hotel room is almost irrelevant. Hotel room rates are freely quoted in the media, often without qualification as to their nature and origin. There is a significant difference between rates which are derived from retail sources related to prices quoted for marketing purposes, and the net rates which are derived from accounting records and from actual revenues achieved. Generally, revenues quoted for retail businesses will be gross, which can be inclusive of taxes (commonly VAT is included in published retail sales data). Hotel prices as quoted for marketing and sales purposes do not always include taxes, and therefore they will not reflect the total amounts payable for accommodation. Statistics for rooms revenues drawn from quoted tariffs, and retail sources such as the Internet, will differ materially from those reported using USALI definitions for average room rates and total rooms revenues. The USALI statistics will always be net of taxes, and after internal accounting allocations have been made. It has become common for hotel revenue, room rates, performance, yield management and other market and operating statistics to be related solely to rooms. Therefore the significance of non-rooms revenues and multiple occupancy has often been lost. Hotels may have extensive facilities used by nonresidents. Hotels often have major restaurant and bar operations which attract outside trade. The same applies to meeting and banquet, leisure and spa facilities. These sometimes generate more than 50 percent of the hotels’ revenues. As well as the number of guest rooms, the capacity of a hotel can be measured by the potential number of guests who can be accommodated, and the revenue can be assessed against the number of sleepers or bed spaces occupied. These alternatives are especially significant for hotels with tourist or convention facilities. Even more relevant to today’s hotel industry structures, where the property ownership is very often separated from its operation, are measures related to a hotel’s revenues as real estate. In this context, concentration on Rooms related statistics may be less relevant than considering revenues per unit of area of the hotel. In this way, owners can compare returns from their investments in different classes of real estate, such as retail, residential and offices. ■ Editor's note: This article is the first chapter from a longer paper. It is to be followed up with more on the subject. Further related issues to be covered will include those arising from the Global Hotel Accounting Users Guide project, and from the author's long career in the hotel industry. The Bottomline 15 ❘❙ Information Protection ❙❚ It’s the 21st century: do you know where your data are? With today's contracts and agreements, it is inherent to address information collection and intellectual property issues By Ruth Walters, JD A lot of ink has been spilled over a lot of years about the everexpanding use of technology in the hospitality industry, including by the author of this article. In other words, it seems the Internet, and probably Facebook and smart phones, are here to stay. This means standard approaches to the most common hospitality industry contracts must also change to account for the rising importance — virtual omnipresence — of guest and employee information, online content and other “intangible property” in the daily operations of hotels, restaurants, tour operators, cruise lines and every other hospitality industry player one might care to imagine. Brands, guest information, photos, YouTube videos and mobile apps are all valuable assets that owners want to protect, whether hoteliers, Web developers or movie producers. Contracting in the 21st century is much like contracting in other centuries, with its own set of challenges and outcomes to be analyzed, anticipated and, in some cases, avoided. Scenarios of Data Challenges Moving from the theoretical to the actual, below are some examples hospitality industry actors in various positions have faced over the last couple years: SCENARIO 1. Hotel Fantastic, a U.S. hotel, contracts with a tech- nology supplier located in India that provides a cloud-based solution to allow Hotel Fantastic’s general manager to communicate with, schedule, monitor and otherwise manage hotel employees and contractors in real time. The information flows among the devices the general manager has provided to all employees, and everything is stored on the hotel’s servers, carefully managed by the crack IT team. However, the supplier is permitted — by contract — to monitor traffic and access the hotel’s servers to perform upgrades and maintenance. What types of protections should appear in the contract with regard to all the personal information — both employee and guest — to which the supplier may have access from time to time? What country's laws apply? SCENARIO 2. An employee of the marketing department of Hotel Fantastic starts tweeting under a user name that does not use the hotel’s brand, but that clearly indicates who it is. The tweets are work-related and the employee has thousands of followers. Hotel Fantastic’s director of marketing and promotions, is Ruth Walters, JD is of counsel with Garvey Schubert Barer where she focuses on hospitality operations and general intellectual property and technology transactions. She is a frequent speaker at HFTP educational conferences, including the 2012 HFTP Annual Convention. 16 October/November 2012 ❘❙ Information Protection ❙❚ perfectly happy to allow the employee to tweet because guests and potential guests really love it. Except the employee is thinking about leaving. Who owns the user name? Who owns the tweeted content? Can Hotel Fantastic prevent the ex-employee from blogging under the same user name? SCENARIO 3. Hotel Fantastic’s revenue manager identifies a hot new online travel agent (OTA) and signs a distribution agreement which gives the OTA a virtually limitless ability to to the hotel’s network. The e-mail states that copyright infringement is a violation of the ISP’s Acceptable Use Policy — to which the hotel agreed when it purchased the ISP’s voice and data services, and that Hotel Fantastic must remedy the infringement or risk suspension or cancellation of the ISP’s service. Hotel Fantastic offers its guests free Wi-Fi via a simple, universal log-in provided at check-in and, like most other hospitality industry businesses, does not have technology Information and intellectual property issues arise in matters as basic as a hotel management agreement or as complex as a cloud provider’s access and use license. As well as in contexts that no one except lawyers actually consider to be agreements or have legal implications, like guest and employee privacy policies. use Hotel Fantastic’s trademarks and other intellectual property (images, promotional copy, etc.) to publicize the hotel. The revenue manager and general manager are thrilled with the reach and geographical scope of this OTA. Bookings increase. Then, Hotel Fantastic realizes the OTA is bidding on and purchasing keywords from all the major search engines that contain its trademarks, and driving traffic away from Hotel Fantastic’s home site, actually decreasing the hotel’s profit from the relationship. Is bidding on keywords containing the hotel’s trademarks trademark infringement? Can Hotel Fantastic make the OTA stop if it isn’t? SCENARIO 4. Hotel Fantastic’s IT manager receives an automatically generated e-mail notice from its ISP that an illegal BitTorrent download of a popular movie has been traced back 18 October/November 2012 to track the Internet activity of guests by room, MAC address of devices or any other means. Hotel Fantastic determines it was not an employee who downloaded the movie, so it must have been a guest. What actions can or should Hotel Fantastic take to preserve its relationship with the ISP? What if Hotel Fantastic receives a letter indicating that it will be sued by the rights-holder unless it settles immediately for $5,000? What is Hotel Fantastic’s potential liability? Can it be avoided by contract? SCENARIO 5. Hotel Fantastic, wanting to become ever more fantastic, retains a third-party spa operator to design, operate and service a luxury spa on its property. The spa operates almost entirely independently of the hotel, including the operation of its computer systems. The spa systems interface with the hotel’s PMS, and the spa also maintains separate client databases and paper files, which are stored both on property and off-site at the spa operator’s third-party hosting services provider. The spa collects guests’ names, addresses, phone numbers, e-mail addresses and a range of health information about guests receiving services. Hotel Fantastic does not disclose to guests in its own data collection policies that such information will be shared with any third-part providers. The spa’s systems are breached and guest information, including financial information, is vulnerable. What are the hotel’s legal obligations with regard to the breach? Can the hotel demand the spa’s assistance if it gets sued? What about the legal requirements to notify guests that their data have been breached? Where Data Protection is Needed Even the most common practices of many hospitality industry members trigger a number of legal obligations, concerns and questions that must be addressed in any agreement negotiated with any of the parties above. Information and intellectual property issues arise in matters as basic as a hotel management agreement or as complex as a cloud provider’s access and use license. As well as in contexts that no one except lawyers actually consider to be agreements or have legal implications, like guest and employee privacy policies. Foundational technology agreements — the very basic nuts and bolts of Internet access and voice services for a hotel — can create problems. For example, many ISPs require the ability to monitor not only the amount of traffic coming from an IP address, but the nature of that traffic, up to and including reading e-mails, monitoring downloads and keeping records of web sites visited. While ISPs may assure a hotel that they will never actually do this, the fact that they are permitted to by agreement triggers legal obligations on behalf of the hotel. It must, for example, inform guests that their communications may be monitored in any public-facing data ❘❙ Information Protection ❙❚ privacy policy, as well as those applicable to hotel employees. Or take the standard hotel or restaurant management agreement. Who owns the information sitting in the hotel’s databases? How can they use it? If the owner decides to bring in a new operator, can the old operator take that data or is it left for the owner to share with the new operator? May the owner share data among any other properties it owns under different management? The basic group sales contract has also undergone significant changes in the last few years. Savvy groups — and even the smallest are becoming more sophisticated about their own obligations to their group members — now include robust and complex confidentiality provisions in their standard form agreements. Hotels are required to keep confidential any and all information about the group they may encounter, including, for example, the housekeeping staff who clear the room afterwards and see group meeting agendas left, coffee-stained and crumpled, on the table or the floor. Hotels must analyze carefully the amount of risk they are willing to assume in these situations, and keep a sharp eye out for possible improper uses of information collected from the group. On the other hand, the hotel must also protect its own ability to collect information from group members if such group members choose to provide it directly to the hotel. Overreaching promises by an eager sales director to a big group can severely limit the hotel’s ability to retain group attendee information and use it for its own marketing purposes. Every hotelier knows that customer lists are valuable pieces of property, but contracting in the 21st century complicates the precise nature of every actor’s obligations regarding them. Valet parking, night cleaning, staffing agency agreements, co-branded promotional campaigns, management agreements, OTA distribution agreements, mobile app development agreements — both old and new relationships in the hospitality industry — must take into account the prevalence and liability associated with, at base, the collection and flow of massive amounts of information between and among parties, states and countries. In each situation, the contracting partners must determine how to allocate the liability associated with the collection, storage, use and modification of such information — whether guest health data, digital TV channel content, Pandora content playing in the lobby or information collected via pay-on- nal policies are also recommended. A simple issue checklist for each agreement is also a good idea — what data are being collected, stored and used, how, by whom and where, what other intellectual property (trademarks and copyrighted materials, usually) are being created, licensed, distributed sold, how and by whom. Once these basic facts are identified, the legal concerns are also identified and clarified. With such attention, Hotel Fantastic might have made different choices about its With certain notable exceptions, the legal issues raised by information collection and exchange, and the wide-spread distribution and licensing of all forms of intellectual property are not particularly complex. It’s more a matter of paying attention and making sure information collection and intellectual property issues are addressed in every agreement where they are or may be at issue. foot valet parking stations transmitted wirelessly to the hotel or valet parking company’s own databases. Forming an Agreement With certain notable exceptions, the legal issues raised by information collection and exchange, and the widespread distribution and licensing of all forms of intellectual property are not particularly complex. It’s more a matter of paying attention and making sure information collection and intellectual property issues are addressed in every agreement where they are or may be at issue. Which, as suggested above, is just about every one a standard hotel, restaurant, club or other industry actor might enter into in the normal course of its business. Given the pervasive nature of these bits and bytes in the 21st century, clearly delineated and enforced inter- employee agreements, presence or absence of social media use policy, guest data privacy policy disclosed on its site, and an intellectual property license to the OTA. Then again, it might not have. A final word about contracting, which cannot be said enough times: contracts are there to protect the parties when things go wrong. The more issues raised and addressed in an agreement, the more smoothly things may occur if and when a relationship ends, even under less than ideal circumstances. There is a balance to be struck between planning for a depressing future and getting a few words down about a product or service the parties are thrilled to provide or obtain. In the 21st century, the Information Age to the nth power, data and intangibles in all their myriad forms must be considered in that balance. ■ The Bottomline 19 ❘❙ Professional Development ❙❚ Now Presenting … 10 Tips for a Successful Presentation By Agnes DeFranco, Ed.D., CHAE and Steve D’Erasmo, CHTP A s financial and technology professionals, we are often asked to share our expertise in our respective disciplines. Balancing a statement, evaluating a property for investment, or choosing the right property management system, no problem. However, there are times that when we have the most important information to communicate, and we even have a great PowerPoint or a new and sassy presentation on Prezi, it seems that the message is not getting across. What is one to do? Public speaking, whether to a group of five or to a group of 5,000, can be nerve-racking. How can we be sure that we are engaging the audience? There are many cues that we are also sending out to the audience while we are presenting that can add to our message or distract our audience from our message. How do we engage our audience? Let’s look at our top 10 tips to share. Organize As in any kind of preparation, the most important step is to organize. Proper organization and planning is crucial to a successful presentation. This includes your topic, your content, the timing of the entire presentation, and the opening moments to catch the attention of your audience. Envision your presentation from beginning to end as if you are watching a movie. Your presentation needs to have a grasping beginning and a memorable ending, with a flow that will capture your audience’s interest throughout. Do not forget “why” you are making the presentation. State the goal of the presentation so your audience will know why they need to listen to your material. Audience Your presentation is for the audience, not for you. To make sure that your presentation is successful, you need you know your audience. Is your audience your colleagues at work (from the same hotel or club) or are they affiliated professionals of the hospitality industry? If possible, have a list of the names and affiliations of the participants beforehand so you may even be able to tailor some of the remarks to make the presentation more relevant to the audience. During the presentation, watch for the eyes, expressions, and body language of the participants. Note their reaction to your comments. Watch! You may even want to ask them for their expectations and address such concerns. It is also good to stop once in a while to check for understanding. Listen! To make the presentation more interactive, depending on the topic, try to see if it is appropriate to employ activities that would allow for meaningful participation. Agnes DeFranco, Ed.D., CHAE is a professor and associate vice president of undergraduate studies at the Conrad N. Hilton College at the University of Houston. She is also an HFTP Global Past President and recipient of the HFTP Paragon Award. Steve D’Erasmo, CHTP is director of hotel information systems for Intercontinental Hotels Group 20 October/November 2012 ❘❙ Professional Development ❙❚ Site / Environment Setting the site and environment is of utmost important. If you are presenting a major financial investment decision to your board that will affect and set the goals for your company in the coming years, you want the site to be very business-like. If you are doing a training session for your executive team or to the managers as to why or how they need to read their financials to make decisions and it is more of a discussion setting, arrange the room to be less formal. For topics like this, there needs to be discussion and thus setting the room which fosters that type of peer information exchange needs to be intentional. A few points that can apply to any topic: Get to the site early to check the room set up to ensure there is adequate and appropriate seating. Check the equipment set up. Turn them on and use them. As participants are coming in, welcome them, introduce yourself, and greet them by name. Use that time to chat with them and stress the objective of the presentation. As you do this, you are also helping yourself; by giving yourself time to calm down. Depending on the size of the audience and how familiar they are with each other, you may want to do an ice-breaker or warm-up exercise and have participants introduce themselves. Style When we are presenting, our style is very important. Style is how we deliver the message. First, keep calm and de-stress before you start. Some deep breathing and mental preparation of going through the content, quizzing yourself of the flow and transition points, all these help! Practice! Be yourself. Remember one thing - there is not a “perfect”. Each of us has our own style. Some of us smile more than others. Others use hand gestures more than others. Whatever we do, do the dry run, be prepared, be yourself. Nothing is worse to try to force yourself into behaving in a way that you are not. That will come out so easily and may even be mistaken as disingenuous. Be passionate about the message and the goal of the presentation. Visual Materials Part of your style is also how you use or don’t use visual materials. According to OSHA, retention of strictly oral presented information is only 10 percent and retention of strictly visually presented information is 35 percent. However, the synergy of using both is not the sum of 45 percent but is as high as 65 percent. Visual material has a huge impact of how much material of the presentation is retained. Visuals can be anything the participants can see, from electronic images, to slides, to actual objects and models, to handouts. Regardless, remember two cardinal rules for the use of visuals: ❘❙ Professional Development ❙❚ 10 Presentation Tips 3. Environment 1. Organize Proper organization and planning is crucial to a successful presentation. 2. Audience Know your audience and tailor your presentation to make it relevant to the participants. (1) less is more in print, and (2) do not over use technology. Practice the use of your visuals. It will not be good if your model falls apart or your chart is drawn incorrectly. Verbal Communication We communicate with words and so verbal communication is a big part of our presentation. Verbal communication includes the words we use and how we use them. The choice of words, how efficient we use them, use of colloquial expressions, sports references, and inclusive language are all part of verbal communication. And yes, the use of distracting vocal mannerisms such as constantly clearing your throat or use of non-word distracters like Mmms, Ahs, Errs, Likes, and You Knows are all part of verbal communication. We need to be aware of the proper use of the positive elements and eliminate the use of the negative ones. Our articulation, grammar and pronunciation are similarly important. Since we do live 22 October/November 2012 Make sure the room set-up fits the type of presentation you're giving. 5. Visuals Carefully plan your visual material, as its use has a huge impact on how much info is retained. 4. Style Know your own style, and be yourself. in a global economy and the hospitality business is a global business, be aware of our accents. Some of us talk slower than others. We talk at a rate of 125–150 words per minute, but the human brain can process 300 words on the average. Therefore, the rate, pitch and inflection we use can wake the brain or put it to sleep. Let’s wake the brains and dazzle them with our vocal varieties. Non-verbal Communication. While visual materials and their proper use is a top 10 tip, our own non-verbal communication also makes it to the list. Non-verbal communication starts with our own appearance. Our grooming standards are important as participants will focus on any distractions we have, the way we style our hair, a torn hem, clothes that do not fit quite well, and for gentlemen, a messy tie knot. Always empty your pockets so there is no inadvertent jingling of coins or keys. Non-verbal communication also includes making the ever so important 6. Verbal Communication Be selective with the words you use, and thoughtful of the rate, pitch and inflection of your speech. eye contact. This does not mean your eyes sweeping the room constantly. This means making a point to “make” that eye contact with every participant by speaking to that one person for at least five seconds before you move on to the next person. Just as a good actor will use the entire stage, non-verbal communication also means moving around the room to keep it fresh. Use the entire room, but use the similar rule as in eye contact. Do not aimlessly walk back and forth in the front of the room. The better practice would be walking to a certain spot, stop, making eye-contact, drilling the point into the audience, then moving to another part of the room. Humor Humor, humor, humor. The world will be quite dull without it, but too much will also not be appropriate. We are making a business presentation, we are not doing a stand-up comic routine. Humor should be used to make a point and emphasize a learning ❘❙ Professional Development ❙❚ 7. Non-verbal Communication Be conscious of your movements and appearance: make eye contact and walk around the room. Presentation Resources 9. Expect the Unexpected Be ready for glitches by having multiple back-up plans. Give Your Speech, Change the World: How To Move Your Audience to Action by Nick Morgan High Impact Presentations Dale Carnegie Training 9 Quick Tips For Successful Presentations From A Steve Jobs Event from Forbes.com 8. Humor Humor should be used to make a point and emphasize a learning concept, not to replace it. concept, not to replace it. If you want to tell a joke on someone, always tell it on yourself — and never use a member of the audience as the object. If you have the slightest concern, don’t use it. What is humorous in one situation or culture may not be the same in another, and many things do get lost in the translation. The Unexpected, Expect Them There is a kernel of truth in the phrase “expect the unexpected.” What if there is a power failure the morning of the presentation at your house and you are running late? What if there is power or equipment failure in the room that you are presenting? What if you forget one of the 10 handouts, and that is the most important one? What if everything is perfect and you started your presentation and there is a disruptive participant? How would you handle all the “what ifs”? Well, start expecting them. Have two alarm clocks and one on battery, in case you lose electricity during the middle of 10. Don't Rush the End Your ending is a good moment to reiterate your point and thank the audience. the night. No handouts, no problem, let people know that you will have the entire presentation in their mailbox before they get back to their respective offices. Disruptive participant? If all their questions and comments are leading the presentation off track, nicely thank her or him for the questions and that you promise you will answer them at the end of the presentation. In other words, have your plans B and C in your hip pocket. Be positive, do not let anything distract you. The End Often times, some presenters are so thankful that time is up or that they are in a hurry that they do not end the presentation properly. The ending or conclusion is perhaps the most important part. Seize the opportunity to reiterate the goal of the presentation, the reason for your evaluation or recommendation. Use this time to remind the audience why they spend their precious moments with you. Invite any questions and answers par- Presenting Effective Presentations with Visual Aids at: www.osha.gov/ doc/outreachtraining/htmlfiles/ traintec.html Tips on Making Presentations at: www.kent.ac.uk/careers/ presentationskills.htm Creating an Effective PowerPoint Presentation at: mason.gmu. edu/~montecin/powerpoint.html ticipants’ concerns. And, do not forget to thank them. A simple “Thank You,” a sincere one, will show that you are there for THEM, not for yourself. No one will care about your message until they know you care about the message and THEM. Vitality is key. Your attitude towards the subject matter impacts participants. This is also the time for a few parting words that you absolutely need the audience to remember. Use the ending to make the big splash. All speakers are judged in some measure on the sincerity, interest, energy, enthusiasm and concern they show for their subject matter and their participants. You breathe life into the presentation. You connect with the participants. You make the message. Through the consistent use of these Top 10 presentation skills, your presentations will be dynamic and memorable and you will be conveying your message in a very forceful and effective way. ■ The Bottomline 23 ❘❙ Club Management ❙❚ Private Clubs: To be or not to be — a business? What it means to run a private club like a business By Philip Newman, CPA and Robert Salmore, CPA M uch has been made throughout the last few years of the need for clubs to run like businesses. The question that emerges is what this declaration actually means in real, operational terms. After all, if clubs have not operated like businesses for more than one hundred years of the industry, then how have they operated? Like charities? While board members and commentators call for a more business oriented mindset, the boardroom debates can lead to a tense atmosphere, and yet questions about what operating like a business is and whether it is applicable to the club environment are often left unanswered. Students in business schools worldwide learn early in their education that businesses exist to create, market, deliver and sell widgets (products or services). The mission of a profit driven enterprise is simple: to produce as many or as much as the market demands, at the quantity to satisfy that demand and at the lowest possible cost of production, in the effort to sell at the highest price accepted by the market. Perfecting this process will inevitably lead to profits and a return for the owners, or shareholders, of the business. While many facets make this business model more complex in implementation, the basic tenet is simple. Drive revenue up, drive cost down and put the difference into the pockets of shareholders, perhaps after setting aside some capital to reinvest in order to improve the means of production (i.e. capital maintenance). Can clubs apply this thought process? Possibly, but they must tread carefully. Defining a Mission Given that most private clubs are non-profit organizations, the economic model is by definition rather different than the aforementioned business model. As with all non-profits, clubs exist because a group of people came together with a mission — to socialize, golf, play tennis, etc. Non-profit, thus club economics begin with the determination of this mission aligned to the wishes of members. Once that mission has been defined, costs can be outlined and a budget built to accomplish this mission. This thought warrants emphasis. Budgets are built from the bottom with costs, not from the top with revenue. Once the cost of achiev- Philip Newman, CPA is partner, club and resort services, at McGladrey, LLP and has over 20 years experience in public accounting. Robert Salmore, CPA, CHAE, is a general services director at McGladrey, LLP. He has over 30 years of experience in the hospitality industry. Both are frequent speakers at HFTP educational events, including the 2012 HFTP Annual Convention. 24 October/November 2012 Hospitality industry, this is your wake-up call. The expertise of XETA Hospitality joins the resources of Windstream. It’s a whole new day. XETA®, a leader in planning, integration, management and support of hospitality voice and data systems, is now part of Windstream®. Talk about single-source solution — the new Windstream is a $6 billion communications powerhouse with the resources to handle hospitality challenges from Voice/PBX and HSIA to Circuit Provisioning and Converged Networks. Our 3,000+ hotel customers now enjoy a level of expertise, technology and personalized service that sets a new industry standard. How can we help you? 1.877.456.7422 | [email protected] www.xeta.com/hospitality WINDSTREAM INTEGRATED SOLUTIONS GROUP HOSPITALITY WINDSTREAM INTEGRATED SOLUTIONS GROUP HOSPITALITY Voice | HSIA | Converged Networks | 24/7 Help Desk & Proactive Monitoring | Integrated Solutions ❘❙ Club Management ❙❚ The business approach that requires the elimination of unprofitable or inefficient production lines can only be applied in the private club world with much delicacy and after consultation with a club’s primary stakeholders, its members. ing the mission (e.g. to have the best golf course, tennis program or dining facility in the area), members need to decide the desired method of financing — dues or user fees. The goal for nonprofit clubs cannot be to drive revenue unless the club changes its mission by adding more services or increasing the quality of existing services. Those changes would, in turn, increase costs, which would then require more revenue from the members. Another method to increase revenue at clubs exists that does not involve changing the amount or quality of services — to increase the number of people willing to pay for those services. This can be the result of an enlarged membership or the opening of the doors to nonmembers (i.e. a semi-private club). Notwithstanding potential tax, legal and privacy issues around nonmember use of the facilities, the primary concern to emerge from the latter modification would be the reaction of current members who will wonder why they joined a private club and paid an initiation fee and monthly dues when a nonmember has access to the same amenities. While this is a precarious path for clubs to consider, it is one that has become an economic necessity for many. Concepts, such as yield management, have crept into the club world. Borrowed largely from the hotel and airline industries, yield management addresses filling capacity by setting prices that will attract increased market interest at any given time. A number of clubs have worked this into their golf management philosophy in an attempt to determine the number of rounds courses can handle 26 October/November 2012 and what the general public will pay. Companies, such as Boxgroove, have emerged as facilitators in this market space and it has been common practice for management companies at public golf facilities for years. Nonetheless, private clubs must be prepared to respond to the concerns of members when nonmembers start to appear in the locker room. Cost Cutting As witnessed recently, many forprofit businesses react to a tumultuous financial climate with drastic price reductions intended to attract increasingly scarce disposable income dollars. While many companies will not express much concern when customers who typically shop at low-end outlets are suddenly able to frequent and purchase from high-end retailers, private clubs must consider long-term effects of such occurrences. Clubs have wrestled with the idea of lowering initiation fees, and even dues, in recent years. Desperate to retain dues dollars and members, many resorted to removing financial barriers that were historically a primary mechanism to protect the mission of the club and preserving standards. Lowering admittance standards, and thus provoking members to question whether the club mission is still the one into which they bought, is a very real concern for clubs today. It can certainly seem like a Catch-22 scenario. Decrease entrance barriers (economic or other) to maintain revenue because of the resignation of some long-term members and run the risk of alienating many more members. Maintain standards at a level that requires long-term members to pay more individually to offset the rising cost of exclusivity with a diminishing member base and be prepared for the onslaught of complaints. If ever there was a time for open and honest economic communication with members, now is the time. Consider the expense side of our private club income statement. Cash optimization is a business practice focused on efficiency (i.e. to obtain the most value possible from every dollar of expense). Many clubs have replaced this concept with simple cost cutting measures — too often without reflection on the mission of the club and desires of the members. The business approach that requires the elimination of unprofitable or inefficient production lines can only be applied in the private club world with much delicacy and after consultation with a club’s primary stakeholders, its members. While it may be inefficient to provide service at a poolside food and beverage outlet, no amount of cost accounting analysis will convince members whose kids use the pool every day in the summer, that the need for that amenity is anything less than priceless. A club’s ability to implement corporate style cost-cutting or ‘rightsizing’ measures is subservient to the needs and wants of the general membership. Depreciation Depreciation is an expense that invites much discussion in private club financial circles. For some, it is an irrelevant non-cash charge. Others routinely preach the mantra of ‘funding depreciation’ as the foundation upon which to build a good capital reserve policy. Clubs routinely charge depreciation ‘below’ the line to avoid skewing operating results. Historically, the theory has been that depreciation is in effect ‘funded’ by initiation fees or similar capital charges. It was not covered by routine sources of operating income. Two items need to be addressed when considering this approach: ❘❙ Club Management ❙❚ 1. In the commercial business world, depreciation is an expense, an operating expense; and 2. The inflow of initiation fees from new members has all but disappeared for many clubs. Arguably then, clubs need to consider funding all or some portion of depreciation from operations. Too many clubs appear satisfied with breaking even for the year before depreciation, while not noticing that members’ equity on the balance sheet has declined from one year to the next because depreciation has exceeded inflows from capital dollars. When pondering why clubs might fund depreciation, many come to the conclusion that it is to have money in the bank when the time comes to replace or expand facilities. However, this thought process is flawed. Depreciation is the allocation of the historical cost of an asset over the period of its useful life. Inflation guarantees that the typical replacement cost of an asset is significantly greater than its historical cost. Therefore, a club that is building its reserve for future capital needs on the basis of historical cost, will have a shortfall when the day actually comes to replace the asset. Long Range Planning Best business practices dictate that funding for capital reserves is based on estimated future costs of replacement — not the cost to purchase the asset years earlier. A component of running a club like a business in this context is appropriate capital amenity maintenance, which starts with a professional opinion of needs and timelines. Clubs are advised to consider independent reserve studies by specialists as part of their long range planning. Meanwhile, capital reserve experts are not the only type of consultant available to clubs. For-profit business long ago adopted the practice of retaining consultants with both positive and negative consequences. (Regard- ing the latter, the cult classic comedy Office Space should be mandatory viewing for all executives.) Nearly every facet of club operations can be served by a marketplace of experts: marketing and sales, member relationship management, executive recruiting, construction project management, operational effectiveness, strategic communications, strategic planning, board governance. The list of skilled resources upon which club management can call continues — if boards of directors sanction the cost. While every discretionary spending decision has some element of costbenefit analysis, boards of directors often adopt a rather simplistic approach to what is required to enhance business management competencies at their clubs. Board members may need to be oriented in the intricacies associated with the multi-faceted operation their club represents if they are to be expected to appreciate the benefits of using consultants as often as they do in corporate business dealings. The Bottomline 27 ❘❙ Club Management ❙❚ At a minimum, the governance structure should be reviewed for relevance and effectiveness as thoroughly as club operating performance. Decision-makers Increased demands for timely, relevant information to support more rapid decision making have migrated into the private club world. As software companies strive to keep pace with the demand for information, shorter decision cycles should dictate more autonomy for management, while being wary of information overload and the subsequent phenomenon known as analysis paralysis. While careful consideration of information is required prior to a significant business decision, clubs are not yet prepared for the extreme manner of data mining associated with such industries as baseball as depicted in the film Moneyball. Another question that must be addressed in the quest for more rapid decision making is whether club boards and committees are ready to remove themselves from the decision tree. Taken to the extreme, some club commentators are asking whether there is even a place for committees in the modern, professionally operated private club. Consider how the club committee structure compares to the business world. Management by committee led to many problems at corporations, such as General Motors. If attention is turned to another powerhouse of the U.S. economy, General Electric (GE), one can observe a governance structure that calls for a board of 13–17 members and only five standing committees, of which only the audit committee appears to meet on a monthly basis. If members of clubs feel strongly about operating like a business, consider why clubs would maintain the same governance structure as days gone by when they were reportedly 28 October/November 2012 not running like a business. Logic would dictate that trust in professional staff is demonstrated through empowerment with legitimate authority from the board. While some board members will inevitably question the financial costs associated with a committee structure, question whether the staff time preparing for and attending monthly committee meetings has ever been subjected to the same level of cost-benefit analysis applied to various areas of operations. At a minimum, the governance structure should be reviewed for relevance and effectiveness as thoroughly as club operating performance. Strategic Management Successful businesses not only need sound strategic planning and formulation, but also sound strategy execution. However, in most organizations, including clubs, a strategic management process is absent. While generally accepted tools are used to manage finances, members, processes and employees, rarely is one applied to the management of strategy. The Balanced Scorecard is an approach that strategically focused organizations can use to fill this void. The Balanced Scorecard calls for a mix of past, present and future measures. It incorporates a broad range of metrics into an integrated system while ultimately focusing on a few key strategic goals. Organizations, such as Mobil, Wendy’s and Hilton Hotels, have instituted a Balanced Scorecard approach and achieved breakthrough results. The scorecard methodology allows these businesses to be strategically focused by placing strategy at the center of the management process to reflect a natural cause and effect logic in business performance. The Balanced Scorecard looks at performance through four lenses. Each is essential to achieve organizational goals. • Learning and growth: To achieve our goals, how must we learn, communicate and grow? • Internal: To satisfy our members, in which business process must we excel? • Member: To achieve our vision, what member needs must we serve? • Financial: To satisfy our members and other stakeholder (e.g. lenders), what financial objectives must we accomplish? For each of the four categories of the scorecard, the organization must identify possible performance measures. Club management must measure how effectively and efficiently a process or service satisfies the member. Measures should allow clubs to identify improvement opportunities and to make decisions based on facts and data. Ideally, properly set measures should help: translate member expectations into goals for staff, evaluate the quality of processes, track improvements, focus efforts on members and support organizational strategies. Too often private clubs possess two separate and distinct documents in their strategic plans and annual budgets. Rarely are these two critical tools linked together and yet one cannot be legitimate or useful without the other. Clubs often evaluate department heads and employees purely on an ability to achieve a budget which they played little part in setting. If the strategic plan can be defined through the critical success factors, and the ability to deliver those factors can be measured through key performance indicators, then maybe, just maybe, strategic plans can be cascaded to the employee level so that club professionals are empowered to deliver exactly what members say they want — for clubs to run like businesses. ■ Virtually, you Can HaVe it all. mitel® hospitality solutions mitel.com/industry-solutions/hospitality ❘❙ Industry Standards ❙❚ The Newly Expanded USFRC The soon-to-be released guide includes statements for CIRAs, schedule changes, and new and updated appendices By Ray Schmidgall, Ph.D., CPA, CHAE T he 7th edition of the Uniform System of Financial Reporting for Clubs (USFRC) will soon be released by the Club Managers Association of America (CMAA) and HFTP. This new edition results from a revision process involving nearly 30 club industry professionals and over 18 months of hard work. It provides guidance for additional types of clubs than in the past and greater guidance than prior additions. The 7th edition is over 70 pages longer than the prior edition. This new edition includes sections covering basic financial statements for both country and city clubs as in the past, and for the first time statements for Common Interest Realty Associations (CIRA) clubs. The basic financial statements include the Statement of Financial Position, Statement of Activities and the Statement of Cash Flows. The Statement of Activities for internal use also includes 26 departmental schedules. Nine of these schedules are new or have major changes. Updated and new appendices are included. The new appendices cover common interest realty associations and accounting best practices. Members of the revision committee included representatives from both CMAA and HFTP. Ian D. N. Fetigan, CCM, CAM chaired the club managers subcommittee, Wendy Zurstadt, CPA, CHAE, CAM chaired the controllers subcommittee, while Leonard Bartello, CPA, CHAE, CHTP, CAM chaired the consultants subcommittee. These three professionals served as chairs of the same subcommittees during the prior revision. Twenty-three additional professionals served as members of these three subcommittees. All these club industry professionals are to be commended for their labor of love in producing the 7th edition. Basic Financial Statements The basic financial statements have been modified to reflect both the changing nature of the club industry and technological advances. In the Statement of Activities for Country Clubs (external), the changes under the Revenue caption on this exhibit from the prior edition include: • Social events replaces entertainment • Racquet shop has been added • Marina has been added • Fitness/spa has been added • Telecommunications has been deleted • Special purpose funds has been added • Investment income has been added Ray Schmidgall, Ph.D., CPA, CHAE is the Hilton Hotels Professor at The School of Hospitality Business at Michigan State University. He is the general editor of the 7th edition of the Uniform System of Financial Reporting and author of several hospitality accounting and finance textbooks. Schmidgall is a recipient of the HFTP Paragon Award. 30 October/November 2012 ❘❙ Industry Standards ❙❚ The changes under Operating Expenses include: • Social events replaces entertainment • Racquet shop has been added • Marina has been added • Fitness/spa has been added • Telecommunications has been deleted • Special purpose funds has been added • Marketing and membership has been added • Information technology has been added A few expenses and other items near the bottom of the Statement of Activities have been modified as well. The balance of special purpose funds at the end of the year were shown on the Statement of Financial Position in the 6th revised edition. A new schedule is provided for these activities and they are reported on the Statement of Activities according to the 7th edition. CIRA Clubs Many more CIRA clubs have been established since the 6th revised edition. Therefore, the 7th edition includes the Balance Sheet, the Statement of Revenues and Expenses, the Statement of Cash Flows and the departmental form of the Statement of Revenues and Expense for CIRA clubs. An appendix devoted to explaining the types of clubs provides understanding of different types of clubs. A schedule for reporting Common Area Maintenance unique to CIRA clubs is also included. Departmental Schedules Several department schedules have been added while titles of some have been revised to reflect current usage. A total of 26 schedules are included in this new publication and the line items of each schedule are clearly defined. New schedules include marina, special purpose funds, information technology, marketing and membership, security, and common area maintenance. Departmental schedule titles that have been changed to reflect more current usage include social events 7th Edition Available December 2012 The new edition will be available for purchase on CMAA’s marketplace site at www.cmaa.org/marketplace. HFTP members are eligible for a discount on their purchase. replacing entertainment, fitness/spa replacing health and fitness, and housekeeping replacing house laundry. All schedules include additional line items that clubs will find useful for reporting their operating results. As in the past, no club should blindly follow the prescribed schedules but modify them to meet their informational needs. Appendices The appendices to the uniform system provide additional information and guidance to club executives. The fifth edition of the USFRC had five appendices covering 43 pages. The expense dictionary and Illustrated Statements and Schedules with Working Trial Balance was added to the sixth edition and other appendices were expanded so that 100 pages were devoted to appendices. The expansion continues with the 7th edition of the USFRC as two additional appendices have been included. An appendix explaining CIRAs is new to this edition as well as Accounting Best Practices. Other appendices have been updated. The sample chart of accounts uses a four digit numbering system. Additional ratios are provided in the ratio analysis and statistics appendix. The club taxation appendix has been updated by the foremost club industry tax experts. The expense dictionary includes many additional terms. The revised reporting system is extensively illustrated providing users with greater guidance. Accounting Best Practices A dozen major topics are covered in this appendix to the 7th edition. The best practices range from safeguarding cash to labor considerations. Sixteen suggestions are provided for the food and beverage department, purchasing and receiving, and mitigating fraud. Three suggestions provided under the food and beverage department category follows: 1. Menu abstracts are a listing of all items sold on a menu and include the number of items sold during a specific period of time. This tool is used to determine the popularity of an item and whether specific items should remain on revised menus or eliminated. 2. Recipe cards are an important tool in identifying proper ingredients and amounts for each menu/bar item, the cost of each item and the preparation instructions. A copy of all recipe cards should be maintained in the accounting office while the originals are kept in the chef’s and bar manager’s office. 3. Rebate programs are typically available to the food and beverage industry and should be sought out to save the hundreds of dollars a month available. These should be watched closely to ensure the rebate is issued to the club and not the purchaser. Expanded in Scope The 7th edition of the USFRC is expanded in its scope by providing recommended statements for CIRA clubs and more departmental schedules for all clubs. New Appendices have been added covering a discussion on types of clubs and on accounting best practices. The chart of accounts, illustrated statements and the expense dictionary have been expanded. Clearly the new edition provides financial statements that enable clubs to provide more detailed financial information to all users. ■ The Bottomline 31 ❘❙ Industry Standards ❙❚ behind the revision HFTP past presidents Leonard Bartello and Wendy Zurstadt, serving as chairs on the revision committee, talk about the process, and debates, that brought the USFRC 7th Edition I n existence for 80 years, one might think there isn't much more to add to the Uniform System of Financial Reporting for Clubs (USFRC). But, as the industry changes so do financial reporting models. The last edition was released in 2003, and the revision committee found that there was a lot to change for this new version, including making it more inclusive of different club types. A committee of close to 30 club professionals from CMAA and HFTP worked on the update. Leading the charge were Wendy Zurstadt, CPA, CHAE, CAM, representing club controllers; Leonard Bartello, CHAE, CHTP, CPA, CAM, representing club consultants; and Ian Fetigan, CCM, CAM, representing club managers. In addition Ray Schmidgall, Ph.D., CPA, CHAE, was the general editor. We asked the two HFTP past presidents, Bartello (LB) and Zurstadt (WZ) for some insight on the revision process. still provide a uniform or standardized basis for financial reporting. We wanted to make it as all-encompassing as possible while still maintaining the ease of use. Why would someone want the revised version? What are some items in this version that users should be aware of? LB: The "P" in HFTP stands for professional. Being professional implies commitment to maintenance of expert and specialized knowledge in hospitality finance and technology. Since 1932, the uniform system has been the single most important tool for club accounting managers. That is to say, the results of 80 years of evolution can be found in one single published source. The 7th Revised Edition makes all others obsolete (albeit collectors items). WZ: The revised version includes residential club communities. The prior editions were targeted for the 501C7 type club, or the traditional non-residential clubs. We added schedules to encompass many different types of clubs. What were some things that came up as the process was coming along? LB: Accounting truly is an art with much room for individual interpretation. Some items addressed took on a life of their own while stimulating healthy debate. In the end, most were resolved unanimously while a few ended in respectful disagreement. WZ: During the process we often had the “oh my gosh” moments; as well as “how did we miss that in the last edition” and “how do we make this better.” A lot has changed in 10 years, when we worked on the last edition, and we marveled how these changes affected this edition. LB: Two significant hot topics are: A change in accounting for special purpose funds was missed in the 5th and 6th editions. Some history: back in 1993 the Financial Accounting Standards Board [FASB] issued statement 117 [FAS 117] on Financial Statements of What were the primary goals for the committee when it started on the revision? LB: Our goals were to correct errors that were undetected when the Sixth Edition was released (an issue that we might not face with the 7th edition if an electronic version is released, allowing for real time corrections). In addition we made changes in line with new accounting pronouncements and modern trends and terminology. Also we wanted to enhance the book’s usefulness with additional topics. WZ: The 6th edition was focused on being more relevant and user friendly. It was written to help the professional staff of a club, as well as those governing the club. This edition brings to light the many different types of clubs, yet 32 October/November 2012 The results of hard work (L to R): Leonard Bartello, Ray Schmidgall, Wendy Zurstadt and Ian Fetigan display a copy of the USFRC, 6th Edition. ❘❙ Industry Standards ❙❚ Not-For-Profit Organizations. It made numerous revolutionary changes to the way most private clubs report financial information. A basic requirement of FAS 117 is that all changes in an organization's net assets must be reported in the statement of activities. Flying under the radar of most club accountants, special purpose funds that account for activities such as: donations to the staff holiday fund and related expense, dues for various clubs within a club like the men's and women's 18 and 9 hole clubs and related expenses, and the popular hole in one fund have been washed through a liability account in the statement of financial position. This practice violates FAS 117. The 7th edition illustrates a new department for special purpose funds. Users of the club financial statements will be able to track the revenue and expenses of each fund and will have a more enhanced view of accountability and comparability. Also, inspired by the great recession of 2007, membership drive incentives have taken on a life of their own. Clubs have found endless ways to entice membership retention and replenishment. We find these incentives often come with long lasting and significant financial impact. They seem to be implemented with little or no involvement with accounting professionals. This edition includes both short and long term liabilities for these incentive programs which emphasizes the need to account for the added expense they create. WZ: Also, there will be some “unfamiliar” schedules, i.e. Common Area Maintenance & Security that may only pertain to bundled/residential communities. The users need to understand that this reference book is a recommended guideline for a variety of clubs and they need to identify which reports fit their club. And most importantly, what reports they could be using that will enhance their existing financial statements. What are the benefits to being part of a committee such as this one? LB: My entire 30 plus year career in hospitality accounting has thrived with voluntary involvement within HFTP, its functions and committees. HFTP provides the pot and ingredients to make the soup that nourishes the growing hospitality professional. It provides a network of great friends and colleagues that does not exist anywhere else. To sum up, I gained much more from my involvement on this committee of 12 than I contributed as an individual. WZ: I agree with Len on this. While I know the countless hours he contributed, it never fails to amaze me how we walk away, as chairs, feeling like we learned more in the process. The interaction, the sharing of knowledge, the pro and con debates! It is so educational, informative and balances the workload really well. Any last comments? LB: I am honored to be part of the group of professionals entrusted with updating the USFRC 7th Revised Edition. To experience how fierce competitors in business can put aside individual gain and spend many valuable personal hours to research, discuss, debate and concur was amazing. These individuals are to be commended for their superior dedication to the hospitality club industry and the art of accounting. WZ: The fact that CMAA and HFTP gave Len, Ian and me the opportunity to come back as chairs for this revision, really touched me. We worked so well 10 years ago and it is still the same labor of love today that it was then. Ray Schmidgall kept us organized, on task and on target. I think the picture shown here says it all! ■ THANK YOU! HFTP Members on the Revision Committee Frank Agnello, Jr., CMA, CHAE Director of Finance The Wyndgate Country Club David Manglos, CPA, CHAE Chief Financial Officer Austin Country Club Gavin Arsenault, CCM General Manager Rock Barn Golf & Spa Philip Newman, CPA Partner McGladrey, LLP Leonard Bartello, CHAE, CHTP, CPA, LCAM Owner Forty Years Consulting Mick Nissen, CHAE, CHTP Controller Sharon Heights Golf and Country Club Jay DiPietro, CMA, CCM President/General Manager Boca West Country Club Richard O'Leary, CPA Director PKF Certified Public Accountants James Hankowski, CPA Partner Condon O’Meara McGinty & Donnelly, LLP Benjamin Peck, CCM, CHAE Chief Financial Officer Sawgrass Country Club Paul Koojoolian, CCM, CHAE Controller St. Francis Yacht Club Kevin Reilly, JD, CPA Partner Witt Mares, PLC Note: This list includes HFTP participants only, and is not the full committee. Raymond Schmidgall, Ph.D., CPA, CHAE Professor Michigan State University Jerilyn Schnitzel, CHAE, CHTP, CAM Owner Schnitzel Hospitality Consulting Thomas Smith, CHAE Chief Financial Officer Westmoor Country Club Mitchell Stump, CPA President and Owner Club Tax Network, Inc. Tammy Tassitano, CPA Partner McGladrey, LLP Wendy Zurstadt, CPA, CHAE, CAM Chief Financial Officer Polo Club of Boca Raton The Bottomline 33 ❘❙ Financial Management ❙❚ Who Me? A Fiduciary? Responsibly managing employee retirement plans I f you are reading this, you probably have a hunch you might be. Many employers choose to offer their employees a retirement plan, typically a 401(k) plan. The employer (now the “plan sponsor”) provides this valuable fringe benefit to: • Provide a comprehensive and competitive compensation package; • Allow the employees (now “plan participants”) to save money for retirement on a tax-deferred basis; and • Promote employee recruitment and retention. Along with the benefits derived from offering these plans, comes an ever-growing, sometimes unbeknownst, level of fiduciary responsibility assumed by the plan sponsor. The proliferation of the 401(k) plan (and its cousin, the 403(b) plan) has significantly increased the total amount By Ned McCrory, CPA and George L. Zoglio, CPA of assets invested in such U.S. plans. An estimate by the U.S. Department of Labor (DOL) indicates that there are currently three trillion dollars invested in 401(k) plans. Accompanying this increase is the increased risk for errors, mismanagement, fraud or irregularities that can result in financial loss. Throw in the fact that there is quite often a general lack of understanding by plan participants as to the inner workings of the plan, and it’s easy to see why both the DOL and the IRS have made oversight and scrutiny of 401(k) plans a top priority. Ned McCrory, CPA is principal at Batchelor Frechette McCrory Michael & Company, in charge of the firm's Private Club Practice Group. George L. Zoglio, CPA is an audit manager with Batchelor Frechette McCrory Michael & Company. Both are frequent speakers at HFTP educational events, including the 2012 Annual Convention. 34 October/November 2012 ❘❙ Financial Management ❙❚ Who is a Fiduciary? The Employee Retirement Income Security Act of 1974, known as ERISA, requires the plan to have at least one named fiduciary. However, the actual fiduciaries under a plan can be, and generally are, more than the one named. When determining who is a fiduciary, ERISA considers the functions performed on behalf of the plan. Therefore, ERISA would consider a fiduciary anyone who performs the following functions: • Exercises any discretionary authority or control over the management of the plan; • Exercises any authority or control over the management or disposition of the plan’s assets; • Renders investment advice with respect to plan investments for a fee; and • Exercises any discretionary authority or responsibility in the administration of the plan. Under ERISA guidelines, fiduciaries would include named trustees, custodians of plan assets (i.e. banks, insurance companies), record keepers of participant balances and investment advisors. Fiduciaries may also include employer personnel performing plan administrative and accounting functions, plan committees and the plan sponsor’s Board of Directors. All of these groups generally provide services and/or oversight for a plan. What are the Responsibilities of Plan Fiduciaries? You have discovered you are a plan fiduciary; what are your responsibilities? Just as with other types of fiduciary arrangements, a plan fiduciary’s primary responsibility is the duty to “act in a prudent manner.” For a 401(k) plan, this specifically means acting solely in the best interest of the plan participants and their beneficiaries. These acts would include: • Ensuring that plan provisions, including applicable laws and regulations, are followed; DOL and IRS “Top Ten” Plan Compliance Issues Based upon recent examinations of employee benefit plans, the DOL and IRS have identified the 10 most common compliance errors made by plan sponsors: 1. Failure to sign the plan document and plan amendments. 2. Failure of the plan sponsor to follow the terms of the plan, whether or not the failure resulted in a better or worse outcome for the participant. 3. Failure to follow the definition of compensation as described in the plan document. Common inconsistencies include the treatment of commissions and bonuses, certain taxable fringe benefits, and other miscellaneous compensation such as moving allowances. 4. Failure to adjust employer matching contributions when a participant changes the amount of their elective deferral. 5. Failure in determining whether the plan is considered “top heavy.” Such errors include failure to identify highly compensated employees and errors in reporting eligible compensation to be used in the computation. 6. Failure to deposit participant deferrals and loan repayments on a timely basis. 7. Failure to include all eligible employees in the annual census 8. Failure in implementing the annual IRS maximum amount of participant deferrals. The maximum deferral to a 401(k) plan for 2012 is $17,000; $22,500 for an individual 50 years of age or older. 9. Failure to follow the plan provisions for participant loans including repayment period. 10. Failure to follow the plan provisions for hardship withdrawals. • Diversifying plan investments (many plans allow participants to make their own investment selections, referred to as “self-directed” investment plans); • Paying only “reasonable” plan expenses; and • Ensuring that the plan does not participate in any “prohibited transactions.” Ensuring that plan provisions are followed as documented in the plan is of paramount importance. Remember that contributions (both employee and employer) and related investment earnings are tax-deferred. Failure to follow the provisions of the plan document can result in penalties. Egregious, continual and uncorrected errors and related plan failures may result in the IRS revoking the plan’s tax-exempt status, subjecting all participant account balances to immediate taxation. Fiduciaries should offer enough investment alternatives to minimize the risk of large losses. To achieve this objective, the plan should offer a broad range of prudently selected investments so that participants can customize their own personal “portfolios” based upon their own risk tolerance and investment objectives. What are “reasonable” plan expenses? There are no hard and fast guidelines. The onus is on plan sponsors to ensure they have performed some sort of due diligence to ensure costs are not more than what “a prudent buyer” would pay. The Bottomline 35 ❘❙ Financial Management ❙❚ Recent Regulatory Updates Participants are becoming increasingly responsible for their own investment decisions. Results of a survey conducted by the DOL indicated that many participants either did not have access to, or understand, critical information when making investment selections. Such information includes the nature of the investments, the actual rate of return and fees charged by the Third Party Administrator (TPA). In an effort to increase participant education and plan transparency, the DOL issued regulations requiring new disclosures from TPA to plan sponsors and plan sponsors to plan participants. The new disclosures from TPA to plan sponsors (also referred to as • Standardized methodologies when calculating and disclosing expense and return information. The first quarterly statements to include such information must be issued to participants by November 14, 2012. Failure to provide any disclosures under these new regulations would be considered a breach of fiduciary responsibility and may render fees paid to that CSP a “prohibited transaction.” Common Compliance Errors As part of their shared monitoring and oversight responsibilities, the DOL and IRS have published a list of top 10 compliance issues identified dur- In an effort to increase participant education and plan transparency, the DOL issued regulations requiring new disclosures from third party administrators to plan sponsors, and plan sponsors to plan participants. Section 408(b)(2) disclosures) were effective as of July 1, 2012, and required “covered service providers” (CSP) to disclose to plan sponsors CSP services, compensation charged (both direct and indirect) and potential conflicts of interest. CSP include not only the custodian and record keeper, but also accountants and lawyers who provide services to a plan. The CSP services must be included in a written (and signed) contract if the annual compensation paid to the CSP is $1,000 or more per year. The new disclosures from plan sponsor to plan participants (also referred to as Section 404c disclosures) are effective for plan years beginning on or after November 1, 2011, and require plan sponsors to provide the following to plan participants: • Quarterly statements of plan fees and expenses deducted from their accounts; • Core information about the investments available under the plan; and 36 October/November 2012 ing plan examinations. Plan sponsors should be aware of these compliance issues as “hot areas.” A couple of them are discussed below (refer to the sidebar on page 35 for a complete list). Failure to deposit participant deferrals and loan repayments on a timely basis. For plans with 100 or more participants, DOL Section 2510.3–102 requires that plan sponsors deposit participant deferrals (including participant loan repayments) “as of the earliest date such contributions can be segregated from employer assets, but in no event later than the 15th business day of the month following the month in which the participant contribution amounts are received by the employer…” At first glance, it would appear that plan sponsors do not have to deposit such amounts until the 15th business day of the following month. However, the DOL has stated in communication that the 15th is not a safe harbor. If an employer can administratively segregate the participant contributions from its general assets earlier, then the earlier time frame is “the deadline.” In determining such a deadline, consider the statutory deadline to deposit Federal withholding and payroll taxes. Since most companies determine and deposit these payroll taxes within three business days from the date the payroll is paid, then a plan sponsor would be hard pressed to assert in the event of a DOL/IRS audit that they could not determine and deposit participant contributions and loan repayments within the same three business day time frame, since the source of the information is most likely the same payroll reports. For plans with fewer than 100 participants, the DOL has established a “safe harbor” for deposits of seven business days after the payroll has been paid. It is important to remember when counting the number of participants in a plan; all eligible employees (as defined in the plan document) are included, whether or not the eligible employee actually elects to defer contributions. Failure to follow the plan provisions for hardship withdrawals. Many plans include a “hardship withdrawal” provision. Under certain specific circumstances, the hardship provision allows a participant to receive a distribution from his or her account balance while still employed with the company. The provision provides the participant comfort in knowing he or she can access their funds in the event of an unforeseen emergency. The specific provisions for hardship as defined under the plan may include distributions for the payment of: • Substantial medical expenses; • Rent or mortgage payments to avoid eviction or foreclosure; • Higher education expenses. Recent economic conditions have increased the occurrence of these distributions. While many TPA offer the sponsor and participant the convenience of applying for such a distribution online, it is ultimately ❘❙ Financial Management ❙❚ the plan sponsor’s responsibility to approve the withdrawal. In approving a hardship withdrawal, the plan sponsor must retain clear and objective documentation to support the hardship circumstances. While this can be a sensitive task given the circumstances, failure to do so may result in the distribution being considered a “prohibited transaction.” Tough Times = Terrible Temptations Just as you need to implement sound internal controls in your organization to minimize the risk of errors or irregularities, a plan sponsor must do the same for its 401(k) plan. Think a fraud can’t happen? Consider these actual fraud examples, courtesy of the AICPA Employee Benefit Plan Audit Quality Center: Example 1. A human resources manager requested distributions for terminated employees that had been gone from the company. The manager was successful in three cases for over $10,000. The fraud was discovered when a bank finally refused to authorize the deposit due to the discrepancy between the depositor name and the account holder’s. Example 2. A plan administrator redirected plan forfeitures to pay personal credit card balances. Example 3. A human resources employee processed fraudulent loans against participant accounts. To conceal the fraud, she manually prepared annual participant statements to hide the loans. She was successful because the TPA sent the participant statements directly to the plan sponsor for mailing as opposed to mailing them directly to participants. Just as segregation of duties can minimize errors and irregularities in your organization, it can do the same for your 401(k) plan. Duties should be segregated such that the activities for initiating plan transactions (i.e. participant loans, distributions, calculating employer matching contributions) are segregated from those employees responsible for recording, approving and monitoring such transactions. Best Practices for Plan Sponsors Now that you know you are a fiduciary and are aware of the many land mines that await, what can you do to prove that you are executing your fiduciary responsibilities? Here are a few suggested “best practices” to consider. Identify all plan fiduciaries. Ensure that they are all aware of their shared responsibilities including the latest regulatory requirements. Consider periodic consultation with a legal expert in ERISA. Establish an investment committee. Consider establishing a committee to periodically review investments for returns and fees, and benchmark against other investments. Include an outside investment advisor to provide objec- termination, eligible compensation, participant elections and loan, and distribution approvals. Monitor the plan’s employee dishonesty bond coverage. A plan is required to maintain fidelity bond coverage in the event of a misappropriation of the plan’s assets. ERISA requires that the plan be the named insured, the coverage be at least 10 percent of plan assets (generally subject to a maximum of $500,000) and that there be no deductible. Ensure that the coverage never lapses and the amount of coverage changes, if necessary, when plan assets increase. Adopting and documenting these practices can minimize a fiduciary’s liability in the event of an error. Just as segregation of duties can minimize errors and irregularities in your organization, it can do the same for your 401(k) plan. tive advice. Also consider including a number of participants on the committee who are not accounting, finance or management related (i.e. dining and housekeeping staff). This not only results in a knowledgeable labor force, but also increases plan participation amongst those employee groups. Document the minutes from the meetings. Monitor your service providers. There is a great danger in adopting a “set it and forget it” attitude in employing TPA. Periodically monitor the fees charged and evaluate the level of service and responsiveness. Many TPA also have an annual audit performed by a CPA firm referred to as an “SSAE No. 16” report. This audit report evaluates the effectiveness of the numerous automated transactions and controls implemented by the TPA. Get a copy of the report and read it. Evaluate your plan’s internal controls. Continually monitor and evaluate the ability of your data collection systems to gather and report critical information such as dates of hire and What If an Error Does Occur? Despite your best efforts, occasionally errors or mistakes will occur. If this happens, no need to panic; the DOL has a program for plan sponsors to correct self-identified errors. The Voluntary Fiduciary Correction Program (VFCP) affords plan sponsors the opportunity to identify and correct certain transactions such as improper loans and delinquent contributions. Plan sponsors can submit an application under the VFCP to have the error corrected, and if applicable, must repay any lost earnings or other financial shortfall caused by the error. Yes… YOU are a fiduciary Offering a 401(k) plan demonstrates your desire to remain competitive and make an investment in your employees. However, failing to understand and properly execute your fiduciary responsibilities can make that investment far costlier than anticipated. ■ The Bottomline 37 The Bottomline Resource Guide ClubPay www.clubpayroll.com ClubPay offers best in class solutions for payroll outsourcing, integrated HR management, time and attendance, biometric time clocks, compliance tools and online applicant tracking. All solutions seamlessly communicate with each other and are customized to meet the unique requirements of the club industry. ClubPay solutions are flexible and can scale to meet the needs of any size club, from 25 to over 1,000 employees. MITEL www.mitel.com Good communication is at the heart of every successful hotel. Mitel hospitality customers enjoy scalable, reliable communications, optimized to meet the needs of their industry. 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