A hotel owner himself, Navjeet Chahal founded Chahal & Associates in California in 2003 with a focus on his fellow small businesses and hospitality providers to help them navigate expenses, revenues and other tax-related concerns. Chahal said his deep knowledge of management and operations allows him to identify differences between hotel lines.
For example, Hampton and Holiday Inn Express are going to have different labor and food costs from Hilton, because one offers free breakfast while the other provides room service. As a result, Chahal said it's necessary to not only provide clients with customized financial services but also to break down numbers such as average daily rates, which designate the average rental revenue per occupied room. Clients need to understand the reports and know what to do with them, especially if their businesses blend with other hospitality industries such as restaurants.
"I believe restaurants are very difficult to manage, especially in the aftermath of the pandemic," said Chahal. "There is a real shortage of people for cleaning crews, which are paid somewhere between $15 to $25 an hour. But things are even worse at restaurants because they are not only dealing with a labor shortage and lack of automation, but also with skyrocketing food prices."
Inflation has slowed the economy, and restaurants' margins have shrunk to the point that Chahal & Associates has observed a 10 to 15% drop in sales in the last two months, even for online platforms such as
To develop a relationship with clients, Chahal said the firm uses a "monthly meaningful contract," which starts with preparing a business's financial statements before examining them together on a Zoom call. An accountant's role is to help make sure that sales remain higher than labor and food costs, which is possible by adjusting prices to remain competitive while avoiding the risk of charging too much. At the moment, most large restaurants struggle to maintain a 9 to 15% margin, and a mere 3% rise in food costs can lead to a restaurant's downfall.
"We teach them how to manage labor when business is slow, to look for other alternatives when food gets too expensive, and to make sure that they update prices with menu changes," said Chahal. "Each hospitality industry has a specific terminology, like table turnover for restaurants, and it's essential for accountants to stay on top of the field by attending training sessions, conferences or even franchise meetings."
In addition to having a specific terminology, each hotel may have its own model to structure how money is spent, and each franchise may have its own recommendations for accountants to track their expenses. Some of them are common in the hospitality industry, such as utilities and online marketing, which generally represent 10% of a business's budget, while others are unique to hotels. For example, they spend a significant amount of money remodeling their premises, such as their lobby and furniture, and some franchises even have strict guidelines when redesigning results from customer complaints.
And sometimes, legislative changes get in the way, such as the Tax Cuts and Jobs Act.
The act and its bonus depreciation rules impacted a wide range of industries. Chahal said a hotel spending a million dollars on a reconstruction project would now only be able to write off $800,000 of that cost. Additionally, some establishments in the highest tax bracket end up paying 50% of their income on federal taxes, which can slow down remodeling projects. Chahal observed that most changes in legislation occur around Christmas, which is when the hospitality industry prospers most, and he deplores the lack of concern for small businesses.
"Rates and laws are constantly changing in the state of California, and the big hypocrisy is that the state doesn't even adhere to all federal regulations, because it's all about convenience," explained Chahal. "So it's our job to train our staff to find these connections and inconsistencies to break them down to our clients and help them make the best decisions for their business."
Competition represents another challenge for hotel owners. For example, a Hilton doesn't only need to compete with newer branches, but also with other Hiltons that may offer bigger rooms or more services. The emergence of Airbnb is also a phenomenon that hotel owners need to look out for, and Chahal said they'll need to consider this change when making accounting- or tax-related decisions. Hotels also face challenges from the local economy.
Chahal said the hotel industry went from stick-built construction, which relies on a wooden-framed structure, to molecular construction, which consists of pods prefabricated off-site and fitted together in a unified structure. Such a change has dramatically reduced construction costs and time, going down from an average of two years to 10 months, because pieces are pre-assembled with beds and toilets, and all that is left to connect are the pipes and other complex elements.
"It's a great trend in metropolitan areas such as Los Angeles or San Francisco because they're short on labor, and it's much easier to have a crane assemble all of that than to track several men," said Chahal. "From an accounting perspective, relying on these new technologies and booking systems such as Expedia allows our clients to save a lot of money. Unfortunately, it means that we no longer hire the local guy to build our hotels, but that was inevitable as we continue to help them consolidate their brand."
This is the latest installment in our "Riches in Niches" series of accounting firms that are finding success in specific verticals. You can see other installments here:
