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Finance in the Hospitality Industry
TABLE OF CONTENT
INTRODUCTION ............................................................................................................................... 3
TASK-1--LO1- 1.1: SOURCES OF FUNDING AVAILABLE TO BUSINESS AND
SERVICES INDUSTRIES ................................................................................................................ 3
LO1- 1.2: CONTRIBUTION MADE BY A RANGE OF METHODS OF GENERATING
INCOME WITHIN A GIVEN BUSINESS AND SERVICES OPERATIONS .................... 4
TASK-1LO2- 2.1: ELEMENTS OF COSTS, GROSS PROFIT AND SELLING
PRICES FOR PRODUCTS & SERVICES ................................................................................... 5
TASK-1LO2- 2.2: METHODS OF CONTROLLING STOCKS AND CASH IN A
BUSINESS & SERVICES ENVIRONMENT .............................................................................. 7
TASK-2LO3- 3.1& 3.2: STRUCTURE AND SOURCES OF THE TRIAL BALANCE
& BUSINESS ACCOUNTS, ADJUSTMENTS AND NOTES ................................................. 8
3.1.1 STRUCTURE AND SOURCES OF THE TRIAL BALANCE ........................................................................... 8
LO3- 3.3: PROCESS AND PURPOSE OF BUDGETARY CONTROL AND ANALYZE
VARIANCES FROM BUDGETED AND ACTUAL FIGURES, OFFERING
SUGGESTIONS FOR APPROPRIATE FUTURE MANAGEMENT ACTION .............. 11
TASK-3LO4- 4.1: RATIO ANALYSIS AND CONSISTENT INTERPRETATION OF
HISTORICAL BUSINESS PERFORMANCE .......................................................................... 13
LO4- 4.2: RECOMMENDATION FOR APPROPRIATE FUTURE MANAGEMENT
STRATEGIES .................................................................................................................................... 14
TASK-4 LO5- 5.1: CATEGORIZE COSTS AS FIXED, VARIABLE AND SEMI-
VARIABLE ......................................................................................................................................... 14
TASK-4 LO5- 5.2: CALCULATE CONTRIBUTION PER PRODUCT/CUSTOMER
AND EXPLAIN THE COST/PROFIT/VOLUME RELATIONSHIP FOR A GIVEN
SCENARIO ......................................................................................................................................... 15
TASK-4 LO5- 5.3: JUSTIFY SHORT-TERM MANAGEMENT DECISIONS BASED
ON PROFIT/LOSS POTENTIALS AND RISK (BREAK-EVEN) CALCULATIONS
FOR A GIVEN BUSINESS AND SERVICES OPERATION ................................................ 16
M1 IDENTIFY AND APPLY APPROPRIATE STRATEGIES, ....................................... 17
M2 SELECT/DESIGN AND APPLY APPROPRIATE STRATEGIES .......................... 17
M3 PRESENT AND COMMUNICATE APPROPRIATE FINDINGS ........................... 17
REFERENCE ..................................................................................................................................... 18













Introduction

Hospitality industry included hotels, restaurants, rent-a-car companies and other
related organizations to the food industry. In this industry emphasis is given on
customer service in order to gain profitability and sustainability in the industry.
Financial accounting has a vital role to this industry. Usually this industry is very
competitive. And as this industry is service oriented and competitive price of products
and services in this industry among organizations are very closer. So, proper cost
management and monitoring provides a great difference in the profitability for
organizations in this industry. This case will analyze overall financial performance for
a company to support the management to take investment decision.



Task-1--LO1- 1.1: Sources of Funding Available to Business and Services
Industries


For any kind of business source of funds is very important because financing decision
involves cost for the organization. Cost of the fund depends on from where the fund is
coming. Therefore from where the fund will be collected is a very vital decision.
There are many sources of funds available for business. The Enchanted Valley B&B is
a sole proprietorship business. Some feasible sources of fund for a sole proprietor are
as follows:

A. Retained Earnings
This is simply the part of profits that is kept for future investment opportunities.

B. Loan from Bank
Taking loan from banks can be another source of fund. Usually companies go for this
option when the rate of interest on borrowed fund is lower than their return on
investment.



C. Private Investors
In todays business world there are some private organizations that provide funds to
sole proprietorship organization as loan, line of credit, equipment lease, or financial
partner of business. Financial partner of business does not interfere in to the operation
of business they just receive part of the profit from the business.

D. Business Grant
Based on certain criterion federal government or many private organizations provide
funds to sole proprietorship businesses. Based on income standard, size of business,
chance of local business stimulation local government provide funds to sole
proprietors.

E. Sponsorship
This is a very lucrative financing source for sole proprietorship. It is simply collecting
funds from some other organization and gives them opportunity to promote their
names with them.

F. Trade Credit
This is another option for sole proprietorship businesses. They can purchase their
necessary raw materials and other products from suppliers on credit and pay them
back after receiving the money from sales.

G. Borrowing funds from Relatives and Friends
This can also be an option for fund for relatively small scale sole proprietorship
business. They simply can borrow the fund from their relatives and friends.


LO1- 1.2: Contribution Made by a Range of Methods of Generating
Income within a Given Business and Services Operations

Hayes & Miller (2011) in their paper indicated that income generation and
contribution towards hospitality can be done in some ways like: sales, commission,
sponsorship, grants, etc. Brief explanations of these terms are as follows:

Sales
In hospitality industry sales items are providing rooms, foods to the guests, different
kinds of beverages, laundry services, offering different kinds of entrainments,
transport services, and some other related services. By providing these kinds of
services to the guests they generate income.

Commission
In many cases third party suppliers provides some services to the guests or tourists.
From those services organizations can earn commission income.

Sponsorship
This is a great opportunity for organizations to earn money by giving chance to other
organizations to promote their name in to hospitality industry.

Grants
Sometimes organizations in the industry receive some kind of grants from government
as the organization is acting as a stimulator in local economic activities.

Premise Sub letting
Sometimes resort or hotel owners can sub-let their unused premise to small gift shops,
flower shops, and these types of others small shops and can earn money.


Task-1LO2- 2.1: Elements of Costs, Gross Profit and Selling Prices for
Products & Services

Cost Components
In the hospitality industry typical cost components are:
Materials
Material costs are involved in the final products or services provided to the customers.
For example: glassware, silverware, Knives and forks etc.



Consumables
These are the main cost elements in the hospitality industry. These includes, foods and
beverage items.
Labor
Here labor costs means salary to the waiters, all staffs of kitchen, cleaning staffs,
office staffs and others who are working at the front office.

Overhead Cost
These costs are indirect costs. Usually we cannot measure these costs with the final
products of services. Admin personnel salary, electricity costs, stationary costs are
included as overhead costs.

Selling Prices for Products & Services
In the hospitality industry organizations follows combinations of pricing strategy
usually based on time of the year.

Price in the Peak/Off peak Season
In the tourism industry we all observe that when the time is peak for tourism,
organizations in this industry charges higher prices for every services. On the other
hand, in the off peak season organizations offer various kinds of discount or lower
prices to attract more customers. In the off peak season number of tourists become
fewer that is why organizations offer various kinds of discounts on their services to
attract more customers.

Conventional Pricing
In this case separate profit margin has been set for each service. Separate margin for
food, beverage, rooms, and others services. In this method gross profit is calculated by
deducting cost of sales of each item.

Absorption Method
In this method variable cost is used. At first organization calculate per unit cost of
each item then total overhead cost on per unit basis then they add their required profit
margin.

Marginal Costing Basis
In this method they classify the costs as variable costs and fixed cost. Then based on
variable cost per unit they set the selling price in such a way that they get their
required profit margin.

Backward Pricing
In this method all organizations in the industry set a common price for every service.
Price at different organizations is same. After a certain time period all the
organizations met at a meeting and revise the prices if required.


Task-1LO2- 2.2: Methods of Controlling Stocks and Cash in a Business
& Services Environment

Controlling Stock

For proper inventory management organizations need to compute economic order
quantity point and level of re-order point.
If this can be done efficiently then they can avoid unnecessary inventory purchases.
Need to create JIT (Just in Time) inventory management system.
As in the hospitality industry main cost items are food and beverage items and these
are perishable items, JIT system will reduce wastages, and extra cost on inventory
dandling.

Introduction of software to track down the inventory for most accurate information
regarding inventory and proper decision.
Stock monitoring to eliminate the chance of theft
Physical stock counting at the end of financial year for a better preparation of
financial statements

Controlling Liquid Money

Organizations need to manage their working capital very efficiently for smooth
functioning of the organization.

There should be more than one person to handle the cash for elimination of risk of
theft and any manipulation.
Reconciliation of cash book with the bank for proper cash management
Cash counting on random basis for better monitoring
These activities will eliminate chance of misconduct by the personnel of the
organization.




Task-2LO3- 3.1& 3.2: Structure and Sources of the Trial Balance &
Business Accounts, Adjustments and Notes

Final accounts analysis
3.1.1 Structure and Sources of the Trial Balance

Under three ledgers we can categorize the trail balance: general ledger, sales ledger
and the purchase ledger (Kotas and Conlan , 2007).

Suppliers are included in purchased ledger, personal accounts of customers related to
sales ledger and general ledger includes impersonal accounts, like nominal accounts
and real accounts.

Income and expense accounts fall under nominal accounts and assets and equity
accounts fall under real accounts.

Trial balance Structure

Fixed Assets, Current Assets and Contra Assets
Long term and Current liabilities
Capital of Owners Contra Account
Revenue Contra
Expenses
At the end all these debits and credits are summarized.

Trial balance of The Enchanted Valley B&B:

Fixed Assets and Contra Assets: Building /Equipment /Acc. Depreciation

Current Assets: Bank/Cash/Customers

Current Liability: Suppliers

Long Term Liability: Long term bank loan

Owner's Capital: Retained earnings and Share capital

Contra Revenue: Opening Stock

Revenue: Sales

Expenses: Personnel Salaries/ interest on loans/Marketing and communication
expenses/Utility expenses




3.1.2 Evaluation of final accounts

Income Statement

Income Statement of The Enchanted Valley B&B for the year ended 31
st
December
2013


Amount in '000


Sales 2,040/-

Less: Cost of Goods Sold
Inventory (01/02/2012) 49/-
Purchases 1,360/-
Total Purchase (1,409/-)
Inventory at hand (31/01/2012) 51/-
_________________________________________________________________
Gross Profit 682/-

Admin & Operating Expenses

Insurance 64/-
Wages & salary 267/-
Depreciation 62.5/-

Energy Cost 49 (478.5)

Selling & Distribution Expenses
Marketing and Communication expenses 79/- + 36/-

Finance Expenses
Interest on Debenture (200 *6%) 12/-
Interest paid on Bank Loans 4 (16)
_____________________________________________________________________
Profit before Tax 108.5/-

Less: Income Tax 39/-

Profit after Tax 69.5/-

Less: Dividend declared (15)

Retain Earnings 54.50





Balance Sheet

Position Statement of the Enchanted Valley B&B as December 2013

Assets '000

Fixed Assets Cost Acc. Dep. NBV

Buildings 400.000. 400
Equipment 250. 112.5 1375
___________________________________________________________________
Total 650. 112.5 5375

Current Assets

Inventory 51
Debtors 92
Insurance (Advance) 3
Bank 3
Cash 1150
_____________________________________________________________________
Total Assets 687.5

Equity & Liability

Equity & Reserve

Stated Capital 100

Reserves - Retained Earnings (157 + 54.5) 211.5 311.5

Non Current Liabilities

6% Debentures 200
Long Term Bank Loans 60. 260

Current Liability
Creditors 45
Salary payable 5
Interest payable on Debenture 12
Income tax payable 39
Dividend payable 15. 116
____________________________________________________________________
Total Equity & Liabilities 687.5




LO3- 3.3: Process and Purpose of Budgetary Control and Analyze
Variances from Budgeted and Actual Figures, Offering Suggestions for
Appropriate Future Management Action



Process and purpose of budgetary controls.

For planning, coordination and controls budgetary control is used.

Purpose of Budgetary Controls

For business targets achievements
Responsibilities delegation to the staff
For efficient resource utilisation
For taking corrective measures
Coordination of works
For future policy formulation
For measuring Performance

Process of Budgetary Controls


Budget Period

Usually for one year; sometimes continuation of previous time

Budget Approach

Selection of a suitable method for budget preparation

Budget Implementation

After approval of the budget from management it should be implemented as per plan

Measurement of Performances

Compare and measure the actual and planned budget

Identify the differences between the actual and planned budget

Conduct a variance analysis.

Corrective measure if necessary

Variance analysis

Raw Material Variances Calculation

Raw Material Total Variance = Standard Cost - Actual Cost

= (10,000* $ 10) - $ 98, 200
= $ 1,800 F / +

Raw Material Price Variance = Quantity Used (Standard Price - Actual Price)
= (11,700 * $ 10) - $ 98,200
= $ 18,800 F / +

Raw Material Usage Variance = Standard. Price (Standard Usage - Actual Usage)
= $ 10 (10* 1,000) - 11,800 )
= $ 16,000 (A) / -

Analysis of variances

It is observed that $ 1,800 favorable total raw material variance from the budget. It
means actual material cost is less, so it is within control.

We got $18,800 favorable raw material price variance from the budgeted figures. This
means actual price is less than the budgeted price. But $16,000 adverse raw material
usage variance from the budget. Indicates RM usages are in out of the controls.

Suggestions

Initiate corrective actions to eliminate the over usage of Raw Materials
Apply new procedures for wastage reduction
Make sure to implement new controls to monitor the Raw Material usages.
Observe such variance is controllable or not. If yes, then take corrective action. If not
then revise the process





Task-3LO4- 4.1: Ratio Analysis and Consistent Interpretation of
Historical Business Performance



Ratio analysis (See Appendix A for Calculation)

Profitability Ratio

Gross Profit Ratio decreased by 15.14% compare to 18.33 % of this year with 21.60%
of last year.
Net Profit Ratio decreased 30.56% compare to 3.59% of this year with 5.17 % of last
year.
Return on Capital declined by 31.73% compare to 8.24% of this year with 12.07% of
last year.
Increase in expenses and cost of sales is the reason behind this decline.

Liquidity Ratio

Current Ratio increased 0.52 times

Quick Ratio declined 0.50 times in comparison to 2.43: 1 of this year with 2.93: 1 of
last year.
This happened due to over fund usage on closing stock.

Efficiency Ratios

Inventory Turnover Ratio declined by 36.25 times compare to 17.37 times of this year
with 53.62 times of last year.

Debtors Turnover Period declined by 7 days compared to 39 days of this year

Creditors Turnover Period also Declined by 5 days compare to 25 days

This happened because of over fund utilization on stock, increase of debtors &
creditors.



Ratios for Investors

EPS decreased by 0.21 compare to 0.25of this year
Because of low profit earned during the operation period and issuance of new shares
this decline.



LO4- 4.2: Recommendation for Appropriate Future Management
Strategies

Lowering selling price hence sale should go up and resulting higher revenue
Reduction in unnecessary fund utilization on inventory. Implementation of JIT
inventory system
Reduce expenses
Larger credit period from suppliers by negotiation
Follow proper cash flow management
Promotional activities to gain more customers
Fixed assets should be used more efficient ways to generate more income



Task-4 LO5- 5.1: Categorize Costs as Fixed, Variable and Semi-Variable


Fixed Cost

Hotel Operation Expenses- 150000

Variable Cost

VC of Food sales per Client - 8
VC of Beverage sales per Client- 2.1


Semi Variable Cost

Semi- variable cost means both fixed and variable components for a given activity. It
remains as fixed up to a certain level and beyond that it will be variable based on the
volume or activity.

Variable Cost per occupied room - 13
VC of Minor operations departments per room - 1.1



Task-4 LO5- 5.2: Calculate Contribution per Product/Customer and
Explain the cost/profit/volume Relationship for a given scenario


Computation of Contribution per product / customer (in )
(Appendix-B)

Selling Price 120 20 8 2 150
Variable Cost (15) (7) (2.4) (1.2) (25.6)
Contribution 105 13 5.6 0.8 124.4
(Per product/customer)

Net Profit Computation (in )
Sales (150 * 100 * 365) = 5, 475,000
Less: Variable Cost (25.6 * 100 * 365) = (943,400)
Contribution (124.4 *100* 365) = 4, 540,600
Less: Fixed Cost = (1,600,000)
Net Profit = 2,940,600

Break Even Point Computation
BEP (in units) = Fixed Cost
Contribution per customer
= 1,600,000
124.4
= 12,861.74
12, 862 (Customers)
BEP (in ) = BEP (in units) * Selling Price
= 12,862 * 150
= 1,929,300

Cost -Volume -Profit Relationship Value ( 000)
Total Revenue ( 5,475)
(5,475)
Profit ( 2,940.6)
Profit
BEP
(1,929) VC ( 934.4)
Loss FC ( 1,600)

(Customers)
0 BEP (12,862) (36,500)

Cost-Volume -Profit analysis explains how operating decision and marketing decision
affects the net income based on the relationship between costs (VC and FC), volume
and selling price.

To reach at break-even point the Enchanted Valley Bed & Breakfast needs to sell
12,862 rooms to the customers. Breakeven point means at that level revenue is equal
to the total cost and the profit is zero. They can achieve contribution of 124.4 from
every customer and if they achieve the expected sales level of 36,500 customers, then
they can enjoy 2,940,600 profit.



Task-4 LO5- 5.3: Justify Short-term Management Decisions Based on
Profit/loss Potentials and Risk (break-even) calculations for a given
business and services operation


Safety Margin (units) = Expected Customers - BEP Customers
= (365 * 100) - 12,862
= 36,500 - 12,862
= 23,638

Safety Margin (in ) = Margin of Safety (units ) * SP
= 23,638 * 150
= 3,545,700

Degree of Operating Leverage = Contribution Margin
Net Profit
= 4,540,600
2,940,600
= 1. 54 (low risk)

Safety Margin means is that amount or units of sale above the sales. If they can attain
it they can generate 3,545,700 turnover out of 23,638 customers. It implies this hotel
investment is worthy.

Degree of operating leverage is 1.54 since it generates lower risk to the future
profitability of the hotel. Therefore it is justifiable to investment.


M1 Identify and Apply appropriate Strategies,

Relevant theories and techniques of accounting and finance have been
followed.
The most effective approach for studying and researching the method to be
used for better result needs to get into the organisation.

M2 Select/design and Apply appropriate Strategies

All the methods of accounting and finance and techniques have been followed.
As per theories all the points have been discussed.
The actual sources of information were the related websites, relevant books
and articles and also the company websites.
The information taken from the relevant secondary sources are being justified
through the relevant theories and techniques of accounting and finance.
For synthesizing and processing the complex information for research, all
information has taken from updated sources.

M3 Present and communicate appropriate findings

All the methods of accounting and finance and techniques were appropriate.
As per theories all the points have been discussed.
The sources of information were related to the study. The research has been
studied in lights of all the information.
In this study there found some unfamiliar context to which the researcher has
not focused on. The applied theories of accounting and finance were
appropriate in learning overall accounting and finance methods.






Reference

Banjerjee, B. (2010), Financial policy and Management Accounting, 7 th ed.
Prentice Hall Ltd.
Barrows, C. W. & Powers, T. (2009), Introduction to the hospitality Industry, 7 th
ed. John Wiley & Sons Inc.
Hansen, D. R., Mowen, M. M. & Guan, I. (2009), Cost Management: accounting &
control, 6 th ed. Cengage Learnings
Hayes, D. K. & Miller, A. (2011), Revenue Management for the Hospitality
Industry, John Wiley & Sons Inc.
Kotas, R. & Conlan, M. (2007), Hospitality Accounting, 5 th ed. Thomson Learning


Appendix A & B
Ratio Analysis
Profitability Ratios
Last Year
This year
Variance
Gross Profit Ratio
= GP *100
Sales = 1,920 *100
8890
= 21.60 %
= 2,300*100
12,550
= 18.33 %
= 3.27%*100
21.60 %
= 15.14%
Net Profit Ratio = NP *100
Sales
= 460 *100
8890
= 5.17 %
= 450*100
12,550
= 3.59 %
= 1.58%*100
5.17 %
= 30.56%
Return on Capital
= EBIT *100
Equity S/holders fund
= 460 *100
3,810
= 12.07 %
= 450*100
5,460
= 8.24 %
= 3.83%*100
12.07 %
= 31.73%
Liquidity Ratios
Computation
Last Year
This Year
Variance
Current Ratio
= CA: CL
= 1,770: 560
= 3.16: 1
= 3,090: 840
= 3.68: 1
= 0. 52
Quick Ratio
(Acid Ratio)
= (CA- Stock): CL
= (1,770-130): 560
= 2.93: 1
= (3,090-1,050): 840
= 2.43: 1
= 0.50
Efficiency Ratios
Last Year
This Year
Variance
Stock Turnover Ratio
= Cost of Sales
Avg. Stock
= 6,970
130
= 53.62 times
=10,250
590
= 17.37 times
= 36.25 times
Stock Turnover Period
= Avg. Stock * 365
Cost of Sales
=130 * 365
6,970
= 7 days
= 590 * 365
10,250
= 21 days
= 14 days

Debtors Turnover Period
= Avg. Debtors * 365
Credit Sales
=1,120 * 365
8,890
= 46 days
= 1,325 * 365
12,550
= 39 days
= 7 days
Creditors Turnover Period
= Avg. Creditors *365
Credit Purchases
(COS)
=560 * 365
6,970
= 30 days
= 700 * 365
10,250
= 25 days
=5 days
Financial Ratios for investors
Last Year
This Year
Variance
Earnings per Share
= Profit attribute to ordinary share holders
No: of Ordinary Shares
= 460
1,000
= 0.46
=450
1,800
= 0. 25
= 0.21