Stonebridge Companies manages a number of branded hotels for a range of investors. The company’s portfolio includes select-service, extended-stay, mid-scale, and full-service hotels, with brands including well-known franchises such as Hilton, Marriott, Starwood, and InterContinental. The major responsibility of Stonebridge is to provide services for staffing and payroll, procuring guestroom amenities for hotel guests, operating restaurants and meeting facilities, marketing the hotels and related services, and executing a host of other activities.
As the business grew the company’s back-end legacy systems and processes created significant challenges for Stonebridge. According to Nasim Mansurov, vice president of information technology, who was interviewed in the insiderPROFILES article titled “Stonebridge Companies Moves Its Hotel Management to SAP ERP,” Stonebridge Companies faced the following business challenges:
- Time-consuming, labor-intensive processes for preparing monthly financial reports for investors and management
- Too much reliance on paper-based, manual processes throughout the organization
- Too many data silos, creating security and access problems
- A bulky, costly invoice processing workflow
- A lack of integration between payroll and employee time tracking management systems
Stonebridge Companies opted for an SAP ERP system because of its ability to integrate the Financials, HR, and Payroll functionality into a unified system without the need for numerous interfaces. The company also said it received complete assurance of cooperation from top management of SAP America.
Stonebridge implemented the following modules of SAP ERP Central Component (SAP ECC) 6.0:
- SAP ERP Financials (Finance, Managerial Accounting, Cash Management)
Company Code vs. Profit Center
Each hotel was defined using company codes, although initially Stonebridge considered setting up its hotels as profit centers and departments (e.g., room, food, beverages) as segments under one company code. However, as Stonebridge proceeded with the business blueprint discussion, it discovered that the company code approach to map each hotel best suited its needs. See Figure 1 for a diagram that compares the company code and profit center approaches.
A comparison of company code and profit center approaches
Here are some of the main reasons why Stonebridge made the decision to use company codes:
- Acquisitions. Every hotel in Stonebridge Companies was a legal entity, but the company was very frequently selling and buying the hotels. Selling a hotel is a simple task compared with buying a new hotel and making it operational. In an SAP system, it is easier to set up a master data record compared with setting up an organization structure. When you configure an organization structure, you have to do top-to-bottom configuration settings to make the company code (organization structure) work. For example, you have to set up a company code and assign the company code to other organizational structures such as chart of accounts, controlling area, and payment programs. Later, you have to extend the master data to the new company code. Creating master data does not involve as many steps as creating an organization structure. In SAP ECC 6.0 you can obtain the balance sheet and profit and loss (P&L) statements at the profit center through document splitting. Stonebridge Companies had two options for mapping its business process: having a hotel defined as a profit center in one company code or having each hotel mapped to a company code. In the first approach, it is difficult for businesses to do equity reporting through a retained earnings account. At the year’s end, all the balances of the P&L account are transferred to a retained earnings account. This retained earning balance is further distributed to investors based on predefined criteria. Each hotel has its own set of investors. The system becomes very complex if there is only one retained earnings account as in the case of a profit center approach.
- Intercompany transactions. Companies don’t have as much flexibility for intercompany transactions in profit center accounting (PCA).
- 1099 reporting. Companies are required under law to annually report their payments to 1099 vendors to the Internal Revenue Service (IRS). Each separate legal entity needs to issue its own set of 1099 reports to be in compliance with IRS regulations. This step would have to be done manually if legal entities were mapped as profit centers. In the SAP system, the 1099 is produced at the company code level using the employer identification number (EIN) of the issuing company code.
- Vendor optimization. Stonebridge Companies requires that if the same vendor supplies two different sets of hotels, it is defined as two different vendors. For example, Home Depot supplies Hilton Garden Inn and Marriott Courtyard. Even though the supplier is the same, it is defined as different vendors. Stonebridge’s business team also requires each hotel to have access to its vendors only. In a profit center approach, however, all vendors are in a single company code, and the requirements could not be satisfied.
- Check printing complexity. The payer’s address on the check is printed from a payment method at the company code level using SAP payment program configuration (transaction code FBZP settings). If legal entities are defined as profit centers, the code producing the check form has to be modified to generate the correct payer’s address. You would need a source such as a custom table to have the right company name and address on the check.
- Period-end close. Combining all hotels and corporate offices into one company code forces all entities to be on the same closing schedule, the same currency, and the same fiscal year variant. The hotels follow different closing structures, and it is not possible to perform period-end closing on these hotels if they are defined as profit centers.
- Authorizations complexity. If hotels are defined as profit centers, a complex authorization profile is required to fulfill the Sarbanes-Oxley compliance requirement. SAP does not provide strong authorization control at the profit center level in a company code as compared with the company code only.
- Automatic payment program. An automatic payment program (APP) picks the data from SAP tables BSIK, BSID, and BSEG, but a profit center does not update these tables for vendors and customers by document splitting. If you replace the company code by profit center, you cannot run an APP based on a profit center.
- Risk mitigation. A company code approach requires less customization, and most business processes can be mapped with standard SAP functionalities. Enhancement packages are easy to implement if the system has most of the solution out of the box.
- Future SAP support. Staying within SAP’s standard structure enables the company to obtain future support from SAP and an outside consultancy without requiring a large learning curve because the functionality is standard SAP.
- Integration with asset accounting. It is difficult to segregate assets if hotels are defined as profit centers. Asset accounting functionality depends on a chart of depreciation and company code.
Finalization of the Chart of Accounts
When Stonebridge started the implementation, no reference from SAP was available for any industry-based chart of accounts for the hotel industry. Stonebridge faced major challenges in terms of capturing the business processes and deciding which business process goes to which GL account.
(Note: I suggest for future SAP implementations that you plan a considerable amount of time to decide on the chart of accounts.)
After moving to an SAP system, Stonebridge set up the final structure of the chart of accounts in the SAP system as follows:
- Balance sheet account. This account includes current assets, fixed assets, current liabilities, long-term liabilities, and equity.
- P&L account. This account includes income, cost of goods sold (COGS), and expense.
- Asset accounts were further classified into bank accounts, receivables, city ledger, guest ledger, intercompany, inventory, prepaid, and hotel industry-based long-term liabilities. This classification includes accounts specific to the hotel industry such as building, concrete, elevators, and franchise fees.
- Liabilities accounts were further classified into payables, intercompany, taxes, insurance, accrued fees, line of credit, and payroll.
- Equity accounts were further classified into investor initial contributions, additional capital, distributions, and retained earnings. Other equity accounts were stock issued, paid-in capital, treasury stock and year-to-date net income.
These P&L accounts were part of major discussion as the implementation team had to decide the fit based on the type of accounts (e.g., revenue, payroll expense, or COGS) and other expenses or departments. For example, should an account be classified just as a revenue account or should it be classified as a room revenue account? The implementation team found that revenue of one department differed from others. Therefore, the team decided to go for department-based accounts, which are further classified into revenue, cost of goods, payroll, and other expenses.
The major departments of a hotel are as follows: rooms, property management, food, beverage, telephone, parking, gift shop, health club and spa, golf course, retail, recreation, and laundry. Departments can have any combination of types of accounts. For example, a rooms department has only income, payroll, and other expense accounts, but food has all the accounts: income cost of goods, payroll, and expense.
A payroll account was a different category in the expense accounts because Stonebridge’s business team asked to specify each position by GL accounts (e.g., a guest services manager in the room department).
Interfacing with the Property Management System
A hotel has a number of interfaces such as banks or automated data processing (ADP) for payroll. However, I discuss only the property management system (PMS). A bank interface with SAP is very much a standard process, and PMS is one of the most important interfaces with SAP ERP Financials in the hotel industry.
The PMS works exactly the same way as a point-of-sales (POS) system in retail. All the revenue flows from the PMS to the SAP system. Each franchise has its own PMS, and this is a unique characteristic of the hotel industry. For example, Hilton’s and Marriott’s systems are known as OnQ and Fosse, respectively.
The posting happens mainly to revenue-based accounts. The mapping of PMS and SAP GL accounts is done in the SAP system because it is easy to monitor and control an SAP system compared with PMS, which is a franchise system. Stonebridge’s business team follows a unique set of postings, which can differ on a case-to-case basis. Workflow is created for the approval of final postings (Figure 2).
Data flow in PMS and the SAP system
Authorization Because of the Complexity of Business
Stonebridge requires complex authorization objects to fulfill the business requirement. According to Stonebridge’s requirement, even if you were the general manager of a hotel, you only have access to that particular hotel’s company code. If this general manager is doing the input search on the company code, he can see only his hotel. In the standard SAP system, a list of all company codes appears when one particular company code is searched. The same concept is applicable for the master data record, so this general manager can’t see the number or name of master data of other company codes. HR managers can’t see the financial data and vice versa. The SAP team worked very closely with auditors for the implementation of an authorization security policy.
Accounts payable workflow is one of the most important functions in the hotel industry. There are two important reasons why SAP workflows were needed:
- In the legacy system, the workflows were bulky, complex, and not cost efficient. These workflows led to inconsistencies and spoiled relationships with vendors.
- Some hotels use paper-based and manual processes for invoicing.
SAP workflows are more efficient, cost-effective, and automated. Business users can drill down through the system to find individual invoices, their statuses, and the name of the specific manager who may hold an invoice.
The workflow was integrated through a document management system called Live Link. The invoices were first scanned through Live Link, which triggers the workflow in the SAP system. The workflows depend on the type of hotel and type of expense. Types of hotel include limited-service and full-service hotels. Types of expenses include operating and capital.
Figure 3 shows the workflow for the full-service hotel.
Invoice processing workflow for the full-service hotel
Achieving Reporting Requirements
The financial reporting requirements are due to statutory and industry-specific requirements as well as obligations to investors. The following external reports are required in the hotel industry:
- Balance sheet
- P&L statement
- Cash flow
- Trailing 12 months
The major challenges to fulfill the reporting requirement are as follows:
- Because Stonebridge was one of the first hotel management companies to implement SAP ERP, the company found that when it came to reporting, its industry-specific needs required customized reports.
- SAP reports were not able to fulfill the requirement because of complex calculations, data feeds from different tables, and specific format requirements.
- Although Stonebridge is a privately owned company, external reports are shared with the investors. The investors wanted to see the same structure and format in the report as in legacy systems.
- Microsoft Excel was tightly integrated with SAP external reporting. The downloaded Excel file of these reports must have predefined column and row width, font, and other predefined properties.
The Balance Sheet Report
The balance sheet report requirement is statutory, and it uses most of the standard characteristics. Businesses also use comparative balance sheets of the current month and the same month from the previous year. It also provides variance in absolute numbers.
The P&L Statement Report
The P&L statement report provides an overview of the P&L statement of the hotel industry. The report is different from other industry P&L statements in the following ways:
- Statistical key figures (SKFs) are used to capture key figures such as guest rooms occupied and guest rooms available. SKFs’ analysis, such as guest room occupancy percentage, is an integral part of the P&L report.
- Budgeting, which is the most important process in this industry, is incorporated in the statement.
The P&L statement is the most important report in the hotel industry. The report structure is divided into two parts:
- Summary report. This report provides the overall financial health of the company. It captures all departments and determines net income.
- Detail report. This report provides the details of P&L of each department such as room or food. The details are provided in terms of revenues, COGS, payroll and operating expenses, and finally departmental profit or loss.
The system is customized to give each individual department report, an entire department report, a summary report, and a combined summary and detail department report. The desired output format can be downloaded in an Excel sheet. The departments depend on the limited- and full-service hotel, so the structure of the reports also changes according to types of hotels.
The P&L report is represented by the following column characteristics:
- Current month
- Year-to-date statement
The current month of the P&L report is divided into six subparts (six different column characteristics):
- % Income
- Variance to Budget
- Prior YR (Prior year same month)
- Variance to Prior YR
As Figure 4 shows, the year-to-date statement is also divided into six subparts (six different columns characteristics):
- % Income
- Variance to Budget
- Prior YR
- Variance to Prior YR
A sample P&L report
The data was gathered from the following SAP tables:
Some of the key formulas used in the summary report and room department are:
- Occupancy percentage = total rooms occupied/total rooms available
- ADR = total room revenue/total rooms sold
- RevPar = total room revenue/total rooms available
Departmental profit is calculated as follows:
Total departmental profit = total department income – total department expense (total departmental cost of sales + total departmental wages, taxes and benefits + total departmental operating expenses)
The expense and revenue characteristics in the report change based on the types of departments. For example, the rooms department does not have any cost-of-sales expense. Some departments only have expenses.
Major revenue departments are as follows: room, food, beverage, telephone, parking, gift shop, and health club and spa. The entire revenue department also has expenses, and there are solely expense departments such as administrative and general, sales and marketing, repair and maintenance, energy, and franchise fees.
I don’t cover the whole P&L report calculation in this article, but this overview provides you with insight about the P&L reporting structure.
The Cash Flow Report
The structure of a cash flow report in the hotel industry is similar to other industries. Stonebridge uses the indirect cash flow statement showing cash flow from operation, investment, and financials. These three activities are further divided into subcategories such as operational activities into accounts receivable or prepaid expenses and financial activities into additional capital from owners or investors. This report showed two figures — one for monthly and another for year to date. The year-to-date figure shows the cash flow from the first month to the current or given month. For example, if the given month in the input screen is November, then cash flow shows November’s cash flow as well as January to November in another column.
The Trailing 12 Months Report
Because the hotel business is a seasonal industry, the trailing 12 months report provides a good comparative analysis (Figure 5). The financial analysts of the hotel industry use this report to make strategic decisions. This report is used to provide the picture of company’s financial health in the last 12 months including the current period. The report structure is almost similar to the summary P&L report except the sales and expense figures are from last 12 months. This report helps hotels make strategic decisions regarding promotional activities. For example, the months that have holidays have more rooms occupied compared with other months. Management analyzes the revenue by comparing the different months’ sales figures and provides the promotional discount for the months having fewer sales.
A sample of a trailing 12 months report
Major Benefits from the SAP ECC 6.0 Implementation
Implementing SAP ECC 6.0 provided Stonebridge with the following benefits:
- An automated reporting structure that can use the SAP integrated functionality such as drilldown, rollup, and multidimensional views. A strong security element of an SAP system also supports Sarbanes-Oxley compliance and is appreciated by the business, investors, and all stakeholders.
- An end-to-end solution for invoice processing and payment starts from the hotel receiving an invoice and ends at bank reconciliation of the vendor payment. This solution saves time, resources, and money.
- The scalability of SAP ERP 6.0 provides an impetus to face business challenges. In the future, Stonebridge is looking for modules to help the hotel construction side of its business, as well as SAP Customer Relationship Management and other SAP solutions to enhance specific aspects of the hospitality business.
- SAP provides the IT ecosystem that creates an environment in which all the stakeholders benefit because it mitigates the risk and brings the reliability and confidence of accurate data. This environment helps the business team to make faster and correct strategic decisions.