There is a common arrangement in the hotel business where the hotel receives goods and/or services in exchange for rooms, food, and/or beverages. Overwhelmingly, trade-out is used to purchase advertising. For this reason, and this article will discuss this arrangement, but the purchased product is irrelevant.

Important Trade Out Terms

Keep in mind the following points when doing trade-outs:

The hotel is still the buyer and the advertising source is still the vendor. The only difference is the method of payment for the advertising. Instead of money, you are paying with goods and services.

The contract should include the provision that the vendor is not to receive any portion of the rooms, food, or beverage until that amount of advertising has already been received. This is not barter; the hotel has purchased advertising and should not pay for anything it has not received.

There should be an expiration date for the validity of the trade out (usually six to nine months). Clearly, the shorter, the better.

The contract should exclude certain dates from availability, both for rooms, food, and beverage. Clearly, blackout all possible or close to sellout dates for rooms, among others. Also, exclude high traffic holidays from food and beverage such as Mothers Day, Valentine's Day, etc.

The contract should specify the exact dollar value for each room, food, and beverage which they will receive, each good and service itemized. In addition, it is important to consider not giving dollar for dollar exchanges.

Frequently $100 (retail price) of food is exchanged for $200 of advertising, particularly if it is food which is traded out.

Make Exchanges Equal 

The Director of Sales, in conjunction with Accounting, should determine the actual cost of what the hotel is exchanging for the advertising as the required analysis into whether or not to execute this arrangement.

For instance, the cost of providing one room night with a rack rate of $100.00 is different than the cost of providing one dinner priced at $100.00. Faced with costs of 25% in the Rooms Department versus 85% in the Food Department, the actual cost of giving them away is dramatically different. This analysis should be done prior to the execution of the contract.

Always separate the proportion of rooms, food, and beverage being exchanged and allocate a cost to each. 

It is best to look at the average of the prior three months' expenses in each department, bearing in mind the time of year in which the vendor will be consuming the services to adjust these costs appropriately. 

After the contract has been executed, Accounting should be given a copy of the cost calculations attached to a copy of the contract.

Invoicing and Record-keeping 

When Accounting receives an "invoice" for the advertising which has run, it is essential not to enter this into Accounts Payable.

Some vendors issue an actual invoice for the retail price of the advertising and those invoices can accidentally get entered into Accounts Payable. Because we have received the advertising, we have incurred a liability, but not a cash liability. The vendor is now free to consume rooms, food, or beverage according to the terms of the contract. 

However, this liability does not belong in Accounts Payable and it is essential to keep all trade-out balances in a separate account which can be monitored separately from other payables.

Accounting should retrieve the contract from the files and determine the cost of the advertising which has been received on the basis of the proportion of rooms, food, and beverage in the arrangement. Assign a dollar amount of actual cost for the invoice to be written down to. The amount of advertising received must be determined either from the vendor or from the contract in order to assign the hotel's cost.

The first entry at the left illustrates how to enter the invoice easily and correctly.

Accounting

When the vendor has consumed the rooms, food or beverage, the vendor should sign for the services on the folio or check and it should be treated as other receivables. However, during the night audit or reconciliation process, this revenue and the settlement need to be adjusted off. 

The steps for this depend upon your accounting system; that applies to the final entry necessary to complete this transaction, as illustrated in the second entry in the gray box.

Of course, the final entry depends on exactly what was consumed by the vendor in order to determine the allocation to the departments.

The foregoing entry provides both for the Accounting Department to ensure proper allocation and accounting of this transaction and for the relevant department incurring the actual cost of the advertising to be relieved of the costs and their impact on the departmental profit and percentages. If the departments are not receiving any revenue from these guests or patrons, they should be credited with the associated costs. This transaction is to reduce advertising expense and Sales & Marketing should incur the total cost of this transaction.

A final and very important point: consult with your Certified Public Accountant, lawyer or other competent professional before implementing any procedure like this. Tax laws change frequently and taxes, particularly sales taxes, may be impacted. Neither the author nor this publication assume any responsibility for the consequences of using these procedures and do not intend to set policies and/or procedures for individual properties or the hotel industry.

That said, trade away; it will help you leverage your dollars into more advertising or purchases of supplies.