Definitely Doug 1/5/24: Are You Leaving Money on the Table?

Happy New Year! This week’s topic might sound less exciting than a New Year’s Eve party, and it is a long one. But stick with me and you will discover ways to collect what will be in some cases significant amounts of “found money” (and to improve your operations as well).

That topic is financial reconciliation. In a perfect world, hotels would not need this; every dollar and cent recorded in one system would be perfectly reflected in every other system. But we all know that in the world of hotels, no technology is perfect.

Financial reconciliation (as I will use the term here) is any process that can help to identify and resolve discrepancies that would otherwise cost money – wherever two systems ought to have the same number but do not. Commissions earned should equal commissions paid. Funds collected should equal bank deposits. Related to this is the ability to find transactions which, if not corrected, will result in paying more or collecting less than the hotel should, including for commissions and taxes.

There are other forms of reconciliation, such as analytical reconciliation, where a number or ratio does not make sense and you need to determine why (“reconcile” an apparent anomaly). But I will leave those for another day, and focus just on financial reconciliation, as defined above.

Financial reconciliation got my attention when I started seeing new vendors emerge in the last 18 months or so, typically focusing on one specific (and in many cases previously unrecognized) issue. I was shocked when I heard some of the revenue/expense recovery numbers, sometimes running into $10,000 or more per month for a full-service hotel, not to mention labor savings from eliminating manual processes.

I was able to validate that these were not just silly marketing claims from vendors, but ones that hotel executives stood behind. So I started looking more deeply. The costs are usually minimal and (especially for the solutions that got my early attention, involving Online Travel Agency revenues and commissions) involve no financial risk to the hotel; you pay only for results. Many hotels already have some of these capabilities today (primarily through existing accounting, enterprise resource planning and business intelligence solutions), but vendors say that many hotels are not using them.

To be sure, not every financial reconciliation process will generate a big return, but the closer I looked, the more places I found where hotels are leaving money on the table. Every hotel is different, and some may be managing some of these processes well today through existing tools. But the one thing that became clear to me is that if you are not using reconciliation software to identify and fix discrepancies, you are almost certainly experiencing unnecessary revenue and expense leakage, unnecessary cost for manual labor, or both.

Manual processes can certainly help, but many discrepancies are difficult to find and the accuracy rate is often low; many errors are simply never caught. Furthermore, manual processes require expensive labor, often from the general manager or financial controller, since reconciliation often involves fiddling with numbers that cannot be trusted to front-line staff. Put these factors together and there are few hotels that should not at least be considering automated solutions. Not every capability will be cost-effective for a given hotel, but several will be.

Automatic data reconciliation also speeds up month-end closing processes. Some platforms are now approaching real-time reporting of profit and loss statements and balance sheets, where every transaction is recorded and reconciled daily; manual interventions are needed only where exceptions are found. This can enable month-end closing in a day or two with minimal effort, versus the many days or weeks if everything is left to month-end. Problems that are identified quickly can often be resolved in a way that prevents future errors, which themselves would require effort to correct at month-end close. At the group level, reconciliation (together with the right accounting and analytical tools) can provide much better and quicker visibility of performance at each hotel, and improved cash flow management.

Data that is made more accurate by reconciliation can also support better and deeper analytics and decision making. Many hotels know that certain of their reported numbers are wrong, but simply cannot justify the time required to figure out why and correct them. Yet these same numbers may be important for planning, expense minimization, staff planning, and other purposes. Bad details (even if the totals may be right) can lead to bad decisions. Doing reconciliations automatically and daily provides more accurate and timely information to help managers achieve their budgetary goals; waiting until month-end closing eliminates the possibility of making mid-month course corrections.

In researching this topic, I was supported by interviews with senior executives at several companies, including Actabl (Profitsword), Aptech, Data Plus, Docyt, Evention, Hotel Investor Apps, MDO, reconcileOTA, and x-quic. I thank them all for their valuable contributions and for helping to educate me on many complex processes. I also reached out to M3 and Nimble Property, who did not respond to my request for an interview.

The remainder of today’s article will do a deeper dive into some of the specific reconciliation capabilities that are most important, and key evaluation criteria. I will identify some of the key vendors who claim to have solutions in each category, but do not claim that my list is exhaustive. Many of the companies I spoke with started in one or two areas but are discovering how much value other reconciliations may have for hotels and are rapidly expanding and rolling out new capabilities, and numerous partnerships and even acquisition discussions are occurring in the space. I recommend speaking to your own preferred accounting or business intelligence solution providers about what else they can do for you, as well as to companies that focus on specific reconciliation issues not typically handled by those solutions.

If you simply cannot wait to find the big bucks I promised, you can skip ahead to the two sections on Online Travel Agencies (OTAs), but I’m going to start with the basics of reconciling the most important third parties, which are your banking relationships. You may already be doing this at some level, and probably have capabilities in your accounting, business intelligence, or enterprise resource planning (ERP) platform, but are you doing as much as you should?

Banking Reconciliation

Bank reconciliation processes help ensure that the cash and credit card revenues you collect are correctly making their way from the Property Management System (PMS) and/or Point-of-Sale System (POS) to your bank account. Of the companies I interviewed, Actabl, Aptech, Data Plus, Docyt, Evention, Hotel Investor Apps, and MDO all support this in some fashion, and x-quic plans to roll out the capability this quarter. Bank reconciliation can also be applied to corporate credit card accounts, matching expenses to purchase orders, invoices, or expense reports.

Minimally, the daily totals of cash collected and credit cards charged should be reconciled to the general ledger and bank deposits. Normal time lags, such as the typical 2-3 days between processing a credit card charge and deposit of the funds, should be considered and receipts reconciled as the deposits appear. They should be flagged if they do not appear within the normal time frame, or if the amounts differ in unexpected ways.

This process has been greatly simplified by the emergence of intermediaries like Plaid, which many of the vendors I spoke with use. These services allow vendors (with your permission) to log in to your bank or credit card accounts (view only!) and pull daily transactions and month-end statements electronically. Discrepancies can arise from incorrect or incomplete transactions in the PMS or POS, from configuration issues such as a new revenue or tax account that was set up in one system but not another, or for other reasons. Finding and correcting the cause quickly will help avoid repeated issues in the future.

Most commonly, these reconciliations are conducted at the account level rather than transaction by transaction. The PMS or POS reports daily revenue by department and payment type (e.g. cash, American Express, MasterCard, Visa) to the accounting system, and reconciliation ensures that both systems agree and are in balance. It also verifies that the anticipated deposits have been reported by the bank. Resolution of errors is typically manual, as they commonly require fixing the configuration in one system or the other so they match, or correcting PMS or POS transactions that were recorded incorrectly. Sometimes they may require contacting the bank for more information.

With greater and greater computer power, some solutions are now starting to extract and reconcile more detailed folio- or check-level detail, which can make it faster to research and correct these issues. One solution can even reconcile individual credit card transactions from the payment terminal to the gateway to the processor to the bank deposit, making it very simple to investigate imbalances, for example a card that was swiped and recorded in the PMS but never made it even as far as the payment gateway. While not common, these errors can be very time-consuming to track down manually, and the capability can be quite useful for large hotels with high transaction volumes.

From an accounting standpoint, discrepancies occur frequently, and are typically recorded in a variance account of some type (for example, a credit card chargeback account). Variance accounts themselves need to be reconciled, since what goes in should come out as soon as the issue is resolved (e.g. a bad record fixed in the PMS). A transaction that is posted to a variance account and not reversed quickly needs to be investigated, as it represents a known problem with the financial records.

Banks and credit card companies are notorious for charging account fees, the structure and documentation for which is often opaque. A few vendors provide the ability to verify (at least to within a range, and sometimes exactly) that the fees being charged are aligned with the contractual arrangements.

Cash is a special case because it is vulnerable to physical theft or careless loss by employees. Most hotels and other cash-accepting businesses already reconcile cash drawers, ensuring that each employee checks out a certain amount of cash at the start of their shift, and returns a (probably different) amount at the end. In most hotels this is a manual process, and if the net cash collected by all employees in a day does not match the totals from the PMS and/or POS, a detailed transaction review may be needed to determine which employee was short (or over) and why. Larger hotels now often use cash recycler machines to manage this process. They can dispense cash to an employee at the start of a shift and count the returned cash at the end, recycling it for dispensing to employees on subsequent shifts.

Either way (but especially with cash recyclers), reconciliation can help, especially if the PMS or POS can report cash receipts not only by department and account, but by the employee who handled the transaction. Discrepancies can often be identified and corrected much more easily because the reconciliation identifies whose cash drawer was short or over. It may (if it has folio or check details) even be able to identify the specific transaction causing the problem.

Cash recyclers also act as a bank account of a sort, providing secure storage for cash as it is recycled, and recording withdrawals that are made in order to deposit excess funds in a bank account. Some of the products can reconcile cash recycler accounts with daily activities, as well as reconciling funds transfers from the cash recycler to a regular bank account.

Some solutions offer varying capabilities for reconciling bank postings of expenses with invoices, expense reports, receipts, and the like, if these have been recorded in an accounts payable module. Charges appearing on the bank statement are matched with expected transactions, and anomalies reported. This can help hotels discover erroneous or fraudulent transactions faster, and can also raise alerts when documentation for an expense is required but has not been posted. The matching logic, historically quite simplistic, has gotten much more intelligent in recent years. The better systems can (for example) match five invoices for a project with two associated payments (for example a deposit and a balance) simply based on the total amounts matching.

Reconciling PMS and POS Data with Financial Accounting

As an intermediate step to reconciling PMS and POS activity with bank accounts, it is common to reconcile first to the financial accounting system, and then to the bank accounts. This reconciliation helps ensure that the financial accounts produced by the sales systems match the one used to prepare the profit and loss statement. Many systems do this, including (of the ones interviewed for this article) Actabl, Aptech, Data Plus, Docyt, Hotel Investor Apps, and MDO.

Synchronization errors can occur for several reasons, most commonly because the chart of accounts changes in one system (usually the PMS, which may be controlled by the franchisor) and has not been updated in the accounting system. Low-paid line staff may post a transaction incorrectly, perhaps using an option that should not have been available to them but was, because the PMS was not configured correctly.  It is useful to be able to see discrepancies immediately and correct them, so that new errors do not continue to appear on future days (each of them otherwise requiring manual correction at month-end).

Some systems provide tools to help correct discrepancies automatically, or to suggest specific corrections for approval by a manager, or by providing specific instructions on how to investigate and resolve them.

Virtual Credit Cards from OTAs

If your hotel processes virtual cards from Online Travel Agents (OTAs) and you have not engaged a reconciliation solution, it is probably the simplest no-brainer opportunity I have ever seen for recovering funds (often in significant amounts) that are rightfully yours but that you are missing today.

The solutions I saw, from reconcileOTA and x-quic (under the name OTA Savings), are compelling and basically zero risk (they take a percentage of the recovered funds). Hoteliers I spoke with, even ones that had been managing the process manually, saw immediate and large increases in collections, and the process can even be tested on a year’s worth of historical reservations to generate a one-time pickup of uncollected revenue from the past; in some cases, hotels have “found” as much as $50,000 to $100,000 from the lookback (after the vendor fees). In many cases the hotel was already doing manual reconciliation, so the funds represent errors the manual process missed!

Where does this money come from? When an OTA collects funds for a reservation, it sets up a virtual (one-time use) credit card that can be charged on or just before the arrival date for the net amount to which the hotel is contractually entitled. If changes are made to the reservation through the OTA, then the amount will be adjusted accordingly. But if changes or cancellations are made directly with the hotel or brand call center, or if the guest is a no-show or shortens their stay after check-in, the OTA is not automatically notified.

The hotel often has no easy way to identify transactions fees (no-show, cancellation, early departure, etc.) should be charged to the virtual card, because the PMS is set up to post room and tax each night. With direct reservations, cancellation fees can be charged at the time the guest cancels. That is not possible with a virtual card, however, which is chargeable only at or close to the arrival date. If an OTA guest cancels, the hotel must instead record transactions that can be processed at a future date, and then charge the card when that date arrives.

This is hard for hotels to do manually because there are many ways that reservation changes can arise, at different points in time, with different staff members involved. Most PMS and reservation systems are not capable of saying “set up an automatic charge to this credit card for this amount on this future date” as the result of a reservation cancellation or change (although one might well ask, why not?).

Other sources of errors can be application of incorrect tax rates or service fees by the OTA, which can result in authorization amounts being greater or lesser than the amount due. Hotels can contest any that are short. And while OTAs can come back to the hotels if they authorize too much, but rarely do because the amounts are typically small; nevertheless, the hotel can collect them.

The vendors mentioned above address this problem with a simple solution. They obtain login credentials from the hotel that provides them the ability to extract OTA transactions from the OTA extranet, and they verify that every virtual card has been charged the total authorized amount. No integration with the PMS is required, although if the vendor has it, it can also verify that the authorized amounts are correct.

One vendor estimates that across all U.S. hotels, $500 million a year is left unclaimed on virtual OTA credit cards. This money is not refundable to the guest; either the hotel claims it or the OTA keeps it (which would you prefer?). Several sources verified that even for limited service properties, it is not unusual to find $1,000 or more per month in unclaimed revenue, and recovering it is as simple as charging the virtual card after it has been activated. For larger or more upscale hotels, double, triple, or quadruple that amount is common. Large hotels with heavy OTA dependency may find $100,000 a year or more.

Key differences to consider in evaluating solutions is whether they simply ensure that the full authorized amount is taken from VCCs, or whether they also reconcile reservation data with the PMS to verify that it is the right amount. If the authorized amount is short, then the hotel can contest it with the OTA, and the better solutions support that process. Also, make sure that your vendor handles every OTA that produces significant volume for your hotel. Another difference is whether the vendor collects the money by charging the cards on behalf of the hotel (one vendor has found a way to do this), or whether the hotel has to do this itself manually based on a list produced by the solution.

Maggie Golec, General Manager of the 88-room Hilton Garden Inn Gettysburg PA, told me that the software she uses generated $6,000 in found money in the first eleven months of 2023, and also saved her about five hours of her own time per week doing manual reconciliations, trying to match every reservation manually and inevitably missing some.

Jason Ngo, Director of Sales and Revenue at the 532-room Hotel Nikko San Francisco, said his hotel had saved about $100,000 in the first year, and he further estimates labor savings at around 667 hours a year, or about one-third of a full-time manager.

OTA Commissions

Aside from virtual cards, many hotels pay commissions directly to OTAs for reservations where the guest pays the hotel direct. Docyt, MDO, and x-quic can reconcile these transactions for many PMSs; reconcileOTA can also do so for three PMSs with which it has connectivity through an Application Programming Interface (API). I am told that Wyndham has launched its own program for franchisees as well, but have not verified or seen it.

The process involves reviewing reservations from the PMS to verify whether they match what the OTA has, and updating the OTA system with cancellations, no-shows, date changes, rate changes, and the like. The software then verifies the amount of the commission based on the agreement with the hotel, and produces a report of discrepancies. Some solutions also submit the discrepancies to the OTA directly.

Reconciling commissions is more difficult than capturing uncharged revenue from virtual credit cards, because it requires integration with the PMS to extract actual reservations and revenue.  API connectivity is preferred, since after deployment it will rarely if ever require attention from the hotel or vendor. But some vendors can extract data without APIs, at least from most PMS systems. This typically involves setting up the PMS to produce and email a report, which can then be parsed by the software to extract the necessary data. In a few cases where access to the PMS is strongly secured, the hotel may have to produce and email the report manually, but usually this can be set up to be automatic.

While many of the discrepancies found may be small, they add up, and there are some specific situations where they can be large. Unscrupulous travel agents are known to make fake reservations through OTAs, often in the name of a celebrity and for an expensive suite for many nights. If a no-show is not detected and reported to the OTA, the travel agent can receive a large ($1000+) commission this way, even though the guest never showed up or paid.

Key considerations in evaluating a solution for OTA commissions include whether the vendor can support your PMS, whether it covers the OTAs that are important to your hotel, and whether it looks at every aspect of the reservation: the dates booked, the cancellation and early departure policies, any minimum length of stay requirement that might not be met after a change, what is owed, whether you can recover the commission from the OTA, and whether you can charge the guest.

Compensation

Gratuities calculations are often complex; they may be based on various tip pooling arrangements, collected in either cash or by credit card, and disbursed through regular payroll runs, cash from the till at the end of the shift, credit to a bank or debit card through early wage access, or a combination.

Particularly if there are early disbursements, they must be recorded and reconciled so that they are not also paid a second time through payroll by accident. Verifying that the total tips collected (by whatever means) matches the amount paid out for each date is critical. It can also be quite complex given that tips earned on one day may be paid out on widely differing dates: the same day, the next payroll date, some date in between, or a combination of any or all. Of the companies I spoke with for this article, only Evention currently plays in this space.

This reconciliation process can further help ensure that payroll taxes are withheld in the right period, avoiding potential penalties. While tips paid through the payroll system should get properly reported, tips paid in cash or using a third party may need to be reported in a different tax period than the one used for payroll.

Other types of variable compensation, such as upsell commissions or distribution of automatic service charges, face similar issues. Upsell commissions may be calculated in a spreadsheet based on data extracted from a PMS, which will inevitably have errors. Reconciliation can highlight discrepancies between the total amount calculated for payout, and what the total amount “should” be based on underlying transactions.

Accounts Payable

Some vendors specifically offer support for reconciling actual expenditures (payments) against purchase orders, invoices, and/or deliveries. Data Plus, Docyt, and Hotel Investor Apps all provide support at least some of these, as do many other accounting and ERP packages, but the extent of integration varies. Aspects to consider include whether and how purchase orders are matched with invoices, deliveries, and payments. It should also be possible to view the entire ordering, fulfillment, and payment cycle for each transaction, as well as any discrepancies.

Sales and Occupancy Taxes

Sales and occupancy taxes can be challenging, especially for hotels with a lot of extended stays or tax-exempt clients. It is surprisingly easy to overpay these taxes, and if reconciliation is done manually, it may be hard to complete it before the associated tax filing deadline. Of the companies I spoke with, Actabl highlighted this capability, and x-quic plans to roll out a capability this quarter.

While the tax rates are usually fixed, exemptions need to be properly tracked and documented to ensure tax compliance and avoid penalties. One of the common issues is when a guest books a short-term stay but then decides to stay much longer. Commonly, any stay over 30 days becomes nontaxable. While the guest may request refund of the taxes paid before they decided to extend, many hotels forget to make the necessary adjustments on the books to recast the revenue as nontaxable, and may end up paying taxes that they already refunded to the guest.

Revenues from OTA bookings may in some cases include taxes that have already been collected. These may not be broken out, however, either because the PMS cannot handle it, or because staff are not aware of the correct setup and procedures. Reconciliation can identify and potentially correct the accounting so that the correct taxes are accrued and paid. Similarly, award stay reimbursements may include a tax component that should be accounted properly.

Revenue sources such as cancellation or early departure fees may be entitled to more favorable tax treatment, but not all PMSs are able to handle this (or may not be configured to do so).

Call Center Fees or Commissions

Many hotels utilize third-party contact centers, which are often compensated based on the number or value of reservations processed. As with OTAs, changes to reservations that are made by the hotel (as well as no-shows) will typically not be reflected in the vendor’s invoice, and in at least some cases the commission may not be due or may be lower than initially calculated.  Reconciliation can help ensure you are not overpaying these third parties. x-quic is currently rolling out a reconciliation solution for this with one major third-party call center provider.

Other Reconciliations on the Radar

Reconciliations have become a hot topic among many of the companies I spoke with, for the simple reason that they often represent found money, and with improved accessibility of data from multiple systems, they are now relatively inexpensive to automate. Here are some of the other capabilities some of the companies are exploring; I expect some of these to appear on the market within the next year.

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• Other travel agency commissions. Aside from OTAs, some vendors are looking at commissions for transient reservations, groups, sports teams, and events. These services do not overlap commission clearing and payment systems (such as Onyx Centersource) but rather perform a pre-audit of commissions due before they are submitted for payment. This could be particularly helpful with more complex contracts that might include free room allotments, commission on F&B spending, or other considerations.

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• Discrepancies between PMS and POS data. Much of the financial and other reporting from POS systems is handled through the PMS, based on data reported to the PMS from the POS. Discrepancies can arise with things like meal periods and covers reporting. While these may not result in financial loss, they can lead to misleading statistics. For example, a POS banquet check might not include the number of covers, or a POS data feed might misclassify some transactions to the wrong meal period. Reconciliation can detect at least some of these errors and prevent bad data from getting into operational reports.

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• Comped POS checks. When a sales representative or other staff member pays for a meal in a hotel restaurant, the checks are often not properly coded to their department. This is typically a manual process that the server must remember to do in the POS. While this may not usually result in a financial loss, it can mean that the hotel loses control and oversight of staff spending, and costs may end up in the wrong departmental account. A new sales manager who is over-generous with comped meals may not be identified until months later (if at all).

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• Reward stays and upgrades. One vendor was evaluating requests from hotels to reconcile the amounts they are reimbursed for award stays. The amount of the reimbursement often varies based on factors not fully known at the time room and tax are posted; for example the reimbursement rate is often higher on nights when the hotel exceeds some occupancy threshold. PMSs are generally not designed to handle rates that are not known until after the stay, but they do require a rate that can be billed to a folio; this will in many cases turn out to be wrong. So this is a logical task for reconciliation.

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• Franchise fees. Some hotels want to reconcile and audit franchise royalties, loyalty fees, reservation fees, and the like. Where the PMS is controlled by the franchisor, this may be less of an issue because changes made in the PMS should in most cases be reflected in the franchise bill already. Where the franchisor does not have access to the PMS data, however, there are many more opportunities for discrepancies, as the franchisor may only have central reservations system data, which may not reflect no-shows, changes made directly at the hotel, and stay reductions or extensions.

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• Balance sheet. If shareholder transactions (e.g. equity added or withdrawn, dividends paid, shareholder loans made or repaid) are hitting the hotel’s bank account, some systems are looking at capturing this in real time and making the balance sheet adjustment immediately. This can help in calculating and filing quarterly taxes by the due date to avoid penalties.

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• Sales commissions. Brand or management company commission schemes are often impossible to fully implement in hotel’s sales and catering (S&C) system, and this can lead to discrepancies. Sales managers may see a commission on a particular booking in the S&C system and will expect an explanation if the actual commission, based on the full scheme rules, is less.  A reconciliation report can provide this explanation and also ensure the correctness of commissions paid.

Conclusion

Reconciliation tools can play an important role in maximizing a hotel’s profit. They can find money that would otherwise be lost forever, they can reduce the labor required for time-consuming manual processes, they can speed up financial and tax reporting, and they can improve both the timeliness and accuracy of operational data. Better yet, many of them are readily available at little or no additional cost in systems hotels already have, or at a price that is based purely on success. Not every hotel will find value in every opportunity covered above, but almost all should find a few of them to be useful.

While reconciliation tools can identify and often resolve (or assist in resolving) discrepancies, hotels need to consider carefully which discrepancies should be resolved automatically as opposed to requiring human review. Where human review is needed, the hotel will want software that makes this very simple and intuitive, such as providing a list of transactions and proposed actions, allowing a manager to exclude or change certain ones but then to automatically process the others.