What purpose is your service charge serving?

What do you do with your service charge and how do you account for it? It is a grey area for many hotel operations, with hotels and management companies all having their own way of dealing with this somewhat miscellaneous credit. However, where a hotel puts this charge when accounting its rooms revenue could be misleading, and even alter the market’s benchmark rate.

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By  Sarah Campbell Published  March 4, 2006

|~|Comment-picL.jpg|~||~|What do you do with your service charge and how do you account for it? It is a grey area for many hotel operations, with hotels and management companies all having their own way of dealing with this somewhat miscellaneous credit. However, where a hotel puts this charge when accounting its rooms revenue could be misleading, and even alter the market’s benchmark rate. For example, in Dubai, the service charge is set at 10%. A hotel with a room rate of US $200 will charge an additional $20 service charge. Now, if that hotel adds this sum to its top line accounts it shows a room rate of $220. The question is, does this figure then become the hotel’s rate with regards to its benchmarking efforts? If so, this could alter its market position and place it above hotels that are not recording the service charge in their top line. Such accounting practice could lead to inflated rates in the market, as other hotels follow the lead and add 10% to their rates before adding the 10% service charge. Then we come to management contracts, and the service charge allocation gets murkier still. If a hotel is accounting for its service charge in its top line, this means that a percentage of this total figure will be taken for management fees, and end up in some international HQ bank account, nowhere near the pocket of the staff providing the service. The alternative, of course, is to place the service charge as a credit to the bottom line. The rate stays at $200, a debit of X is taken for housekeeping (the service) and other operating expenses, and a $20 credit is then added. The final sum represents the profit. Now, in a buoyant market like Dubai this hotel will appear to have a higher profit margin than the first. Financially it is more successful, but its market position may be lower. Of course, all of this deals with the money men (or women) and not the line staff, who are still working hard to provide the service. For a healthy market like Dubai, service charge is credited back to the staff, usually as a month-end bonus. For some, this bonus is often more than the actual basic salary, and works as an attractive incentive to up service levels in order to increase profitability. Basically everyone wins. However, in depressed markets, the service charge is often a sore point with both the money counters and the line staff. In Egypt last summer, hotels in Sharm El Sheikh faced problems with lower than expected occupancies. Hotels at the Red Sea resort often pay summer service charges double the amount of the basic salary. But following the attacks in Naama Bay, the bottom fell out of the market and managers were forced to rethink their payment strategy. Service charges took a hit as accountants tried to minimise losses. No doubt service levels remained high, but service charges plummeted. I would be interested to hear how other hotels in the region deal with the service charge credit, and whether or not you think a set percentage rate and rules should be set on dealing with this. Sarah Campbell, Senior Editor sarah.campbell@itp.com||**||

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