That pit in your stomach. That mad dash to see what other checks you wrote. Those frenzied thoughts of what steps to take next. If you have ever overdrawn your bank account before, you know it is a terrible feeling! And if it was for your hotel - oh it’s so much worse!
Now if you are nodding your head and starting to sweat a bit, I’ll assume you know what I’m talking about! In that case, there is a good chance that when payments were approved, one of the four things we’re about to discuss was not considered. And since cash is probably tighter than ever right now, let's make sure we have a system in place to protect us from that!
One more note! If you are confident you already know what I’m about to say, please consider this a friendly reminder and keep reading! Sometimes it isn’t that we don’t know something, it’s that we haven’t made it a routine and the habit has slipped away leaving us in dangerous territory.
1 Bank Balance
The first one is pretty obvious, the bank balance. Unfortunately, just because it is obvious, doesn’t mean that you have a system for ALWAYS checking the bank balance before you cut a check. Of course, if money isn’t in the account, you can’t very well spend it. So if you are EVER, in any way, running lean on cash, checking the bank balance is the first step to take before making any payments.
2 Outstanding Checks
Now some people check the bank balance and see $100,000 and think they have $100,000 to spend. The problem is, there are often many checks outstanding. If you cut $30,000 worth of checks 2 days ago, many of those probably have not been deposited yet. That means, the money is still in your account, but it could be removed at any moment! You always have to look to see what checks are still “outstanding” before you make payments.
So now we’ve got Bank Balance - Outstanding Checks....
3 Upcoming Expenses
What about payments that you haven’t made yet, but they are JUST around the corner? Your bank balance minus your outstanding checks may be $70,000, but do you really have that to spend? If your $20,000 mortgage payment is going to be ACHed from your account tomorrow, you better make sure to leave at least that much in the bank! Other common upcoming expenses you’ll want to consider are payroll, rent, and sales and occupancy taxes. There will be others specific to your property. You’ll also have to adjust how far into the future you look depending on how lean your bank account is running, but I would at least keep expenses due in the next few weeks in mind.
So that means: Bank Balance - Outstanding Checks - Upcoming Expenses…..
4 Expected Revenue
And last but not least, expected revenue. This could be based on actual deposits in transit (guests that have already paid, but your processor just hasn’t deposited the funds yet) OR upcoming reservations (the guests have made reservations for the next few days but haven’t actually paid yet). Now people tend to like this one! It means ADDING to the money you can spend, which is fun. But I caution you to be conservative here.
One, because you don’t have that money yet, and an unforeseen problem with those expected stays or with your processor could mean a delay in receiving funds.
Also, if you cut checks for $60,000 based on money that you expect to receive over the next week, what if all the people that receive those checks deposit them tomorrow? Now that isn’t likely, but you get my point.
Future cash in is an appropriate consideration, but you are best served when it is a conservative estimate!
Also make sure to keep in mind any other parties that could be spending money out of that account! Are there debit cards being used for that account? Does the owner make distributions from that account? It is important to keep communication lines open between anyone using the distribution account.
So there you have it! Before cutting a batch of checks, make sure to run these numbers to see how much money you can safely spend! Always be conservative and leave a buffer when you can. It’s easy to do and your simple report will look something like this: