Finance in Hospitality: A Comprehensive Guide for Restaurant Owners

This report delves into the financial aspects of the hospitality industry, focusing on the challenges and opportunities faced by restaurant owners. It explores various sources of funding, including internal options like retained profits and external sources like bank overdrafts and business angels. The report also examines methods for controlling stock and cash, emphasizing the importance of inventory management systems like EOQ and JIT. Additionally, it discusses the elements of cost, gross profit percentages, and selling prices for products and services offered by a restaurant, providing valuable insights for optimizing profitability and cash flow.

Finance in Hospitality
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Table of Contents
Introduction......................................................................................................................................3
1.1 Review of the sources of funding (8 sources) available to Paul................................................3
1.2 Evaluate the contribution that the sale of the old oven, the sub-letting of the unused space and
the selling of recipes for commission can make on the business’s profitability and cash flow......5
2.1 Discuss elements of cost, gross profit percentages and selling prices for products and services
offered by a restaurant.....................................................................................................................6
2.2 Evaluate methods of controlling stock and cash in the restaurant.............................................7
Reference list.................................................................................................................................10
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Introduction
Finance is a significant part of every business. It is important even for non-profit seeking
companies to manage its finances. Finance plays an important role in the field of hospitality as
well. Since there is a rapid growth in the sector of hospitality, the need of managing finances in
the sector is also increasing. This report contains the discussion of the various aspects of finance
within the sector of hospitality. The report comprises of different discussions on the eight
sources of finance that can be used in a hospitality organization and the contribution of different
sources of finance for measuring the cash flows and profitability of a hospitality organization. It
also contains evaluation of various elements of costs, gross profit and selling prices along with
evaluating different methods that can be used for controlling the cash and stock in hospitality
organizations.
1.1 Review of the sources of funding (8 sources) available to Paul
In order to fund the different activities and investments in a business, the business requires
seeking out for a wide range of sources from which it will be able to generate funds (Peirson
et
al., 2014). However, the sources are not always internally available in a company. Sources of
funding can be external as well. The internal sources from which Paul can be generating funds
for his restaurant business are the following -
 Factoring - As stated by Tanrisever
et al. (2015), factoring can be referred to as the type
of debt financing used in a business in which funds are raised through selling of the
accounts receivables or the invoices of a company to factors, who are usually a third
party, at a certain rate of discount. In simple words, factoring is selling of debts to
agencies in exchange of money. The different invoices or the accounts receivables of
Paul’s restaurant can be sold off to third parties or agencies for generating funds for the
restaurant’s new energy efficient oven that is intended to be bought. Retained profit - According to Elsas
et al. (2014), retained profits refer to the amount of
money retained in a business after dividends have been paid off to the shareholders of the
company. This amount retained in the company can be used further as a fund for its
different operations. For example, the retained profit in the small restaurant in Redbridge
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owned by Paul can be used for funding its different types of operations such as the
purchase of the new energy efficient intergrated oven needed in the machine. Sale of unused assets - The unused assets of a business can also be utilized for generating
funds for a business. The sale of such assets helps in raising good amount of funds. Paul
can also be seeking for unused assets in his restaurant such as the old oven that is not
used anymore, which can act as a good source of fund for Paul for his restaurant business.

Owner financing - The funds invested or capital introduced by the owner of a business
himself or herself is also a good source of funding (Chen and Elston, 2013). The biggest
advantage of this investment is that the burden of repayment is absent in this source. Paul
can be investing additional capital into his restaurant business in order to generate funds
for the purchase of the new oven he intends to be purchasing for his restaurant.
On the other hand, the following are external sources from which Paul can be generating funds
for his restaurant business is the following -
 Bank overdraft - According to Cowling
et al. (2016), bank overdrafts are the short-term
external source of funding in which bank allows a certain sum of money to its customers
and allows them to draw money in spite of having no funds in the account. It is an
agreement of loan in which banks extend credit to customers to certain maximum amount
called the overdraft limit. Paul can also be relying on bank overdraft over funding its new
oven. Trade credit - Purchasing goods and services from suppliers on credit is known as trade
credit (Carbo‐Valverde
et al., 2016). The credit agreement between a business and its
suppliers also acts as a source of funds for a business. Paul can also be negotiating with
its suppliers and agree to purchase inputs at trade credit. Business angels - Another external source of funding are the business angels. Business
angels are the wealthy entrepreneurial individuals or people who provide good amount of
funds and invest capital into businesses in exchange of the return of a proportion of
equity shares in the business (White and Dumay, 2017). Paul can also be seeking out for
business angels for funding his restaurant’s new oven, as business angels often take
personal risks in order to own shares of a growing business.
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
Crowd funding - The practice of funding a venture through fund raising from a large
number of individuals who contribute relatively small amount of money through the
mode of internet is known as crowd funding (Kirby and Worner, 2014). Paul can also be
using the crowd funding as a source of fund for the new oven he intends to purchase for
the restaurant. The biggest advantage of crowd funding is that is a fast way for raising
finance without any upfront fees.
1.2 Evaluate the contribution that the sale of the old oven, the sub-letting of the unused space and
the selling of recipes for commission can make on the business’s profitability and cash flow
The current situation of the restaurant business of Paul has three main sources of income
available to it. All the three sources available to the business can be used for increasing the
profitability of the business along with adding to its cash flows. The following are the
contribution of the three sources of income available for Paul’s restaurant -

Sale of the old oven - The old oven of the restaurant can be sold off for £3000, which will
be helping the company in enhancing its cash flows. This amount can also be used for
generating funds for its new oven, as one fourth of the amount of the new oven can be
recovered from the sale of the old oven.

Sub-letting of the unused space - Sub-letting the unused space will be generating income
in a business at the end of every month. This will help in enhancing the restaurant’s cash
inflows and will be quite profitable as well for funding the purchase of its new oven.

Selling of recipes for commission - The selling of the recipes of dessert can also be
helping Paul’s restaurants in generating funds in the restaurant. The amount at which the
recipes will be sold has almost negligible cost of sales and thus the entire amount will be
the profits of the company. On the other hand, selling the recipes for commission will
also enhance the cash flows of the restaurant. The new oven intended to be purchased can
also be purchased using this commission.
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2.1 Discuss elements of cost, gross profit percentages and selling prices for products and services
offered by a restaurant
In accountancy, cost can be defined as the cash amount or any amount that is equivalent to cash
is given up for an asset, including all kinds of costs needed to be spent for getting an asset in
place and making it ready to be used (Mishan, 2015). In order to ensure proper control of cost
and making effective managerial decisions on cost management, the different elements of cost
must be identified. There are three elements of costs, which are as follows -
 Materials (Direct and indirect) - The costs spent by a company can be divided into two
categories - direct material and indirect material. Direct materials are the ones that can be
identified, conveniently measured as well as directly charged to products of a company.
For example, the costs spent in a restaurant for different input materials such as tables,
chairs, knives, cutlery, fruits, vegetables, etc. are its direct material costs. On the other
hand, the indirect material costs are the costs spent by a company on material, which
cannot be directly traced into cost units. For example, the postage expenses, the printing
costs, the stationery expenses, etc. are indirect material costs of a restaurant.
 Labor (Direct and indirect) - The labor costs of a company can also be segregated into
direct and indirect. Direct labor costs refer to the labor expended in a company for
alteration of the condition and composition of the products of the company. On the other
hand, indirect labor costs are the costs spent on labor, which cannot be directly charged to
the products that are manufactured in the company. For example, the wages of the chef
and waiters of a restaurant are its direct labor cost while the feeds paid to the manager of
the restaurant are the indirect labor costs.
 Overheads expenses (direct and indirect) - The overheads spent by a company can be
defined as the aggregate of the indirect labor, indirect materials and other indirect
expenses of a company. These expenses made by a company are not directly attributable
to cost units. For example, a restaurant business spends various expenses for
bookkeeping, insurance, cleaning, legal fees, advertising, etc. However, none of these
costs is attributable to any cost unit and thus considered as indirect overhead expenses of
the restaurant. On the other hand, the overhead expenses spent in a restaurant such as
excise duty and royalty are its direct overhead expenses.
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According to Kjaer (2016), the gross profit percentage or margin is a financial metric that
assesses a firm’s financial stability and health through revealing the proportion of money left in
the firm after accounting for the cost of sales of the firm. The following is the formula of
deriving gross profit margin -
[Sales Revenue – COGS] * 100 / Sales Revenue
Thus, there are two basic elements of the gross profit percentage. The first element is the sales
revenue while the second element is the cost of goods sold. For a restaurant, the sales revenue
refers to the amount of money generated from rendering the different products and services of
the restaurant. On the other hand, cost of goods sold in a restaurant refers to the costs spent in the
restaurant for providing its customers with those products and services.
The selling price of a restaurant also comprises of certain elements (Danzigert
et al., 2014). The
elements are as follows -

Direct cost - The selling price offered to customers by a restaurant involves three types of
direct costs, which are direct material, direct labor and direct expenses.

Share of overheads - The overheads that are involved in the selling prices offered by a
restaurant are the production overheads, the administrative overheads and the selling and
distribution overheads.

Profit - Profit is the third and the last element in the selling prices of a company. The
products and services sold by a restaurant are sold after adding a certain amount of
increment. This amount is the profit of the restaurant.
2.2 Evaluate methods of controlling stock and cash in the restaurant
Controlling cash and stock is necessary for every business. Hospitality organizations also require
controlling cash and stock. The inventory management system helps a company in effective
stock control (McCullough and Blomgren, 2014). The following are the methods of stock control
and inventory management that can be used in the restaurant business of Paul - Economic Order Quantity (EOQ) - The economic order quantity or the EOQ method
refers to the order quantity, which minimizes a company’s inventory ordering costs as
well as inventory holding costs (Chen
et al., 2014). This method can be applied in case
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of a restaurant as well. The following formula can be used in computing the EOQ of a
company -
 Just in Time (JIT) - The JIT is an inventory control method in which stock is delivered
only when they are required and utilized immediately (Shay, 2015). There are no costs of
holding inventories in a company if it uses the JIT method. The JIT can be used in Paul’s
restaurant as well.

Radio Frequency Distribution (RFID) - The RFID can be referred to as the method of
controlling stock in a company with the use of a tiny microchip on stock items with
which the movement of stock is evaluated and the stock remaining in hand can be traced
(Ahson and Ilyas, 2017). This method can also be used in Paul’s restaurant. The
microchip interrogated by the RFID reader can be transmitted and received using radio
signals, helping the restaurant in controlling its stock.

Stock taking (FIFO and LIFO) - The stock taking helps in physically verifying he
quantity of items in a company and the conditions of the items held in the company as
warehouse or inventory. The two stock taking methods that can be used in Paul’s
restaurant is the FIFO and LIFO method (Gordon
et al., 2016). While the FIFO method
records oldest stock as first sold out, the LIFO method records the sale of the most recent
inventory first.
On the other hand, in order to control the cash in the restaurant business of Paul, the following
are the methods that can be used -

Bank reconciliation - The bank reconciliation statement also helps a company in
controlling its cash (Klein, 2015). This method helps in matching the balances in the
accounting records of an entity, the cashbook with the information from the company’s
bank statement. Using the bank reconciliation method will be helping Paul’s restaurant
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for ascertaining the frauds or the mishandling of cash that has taken place in the
restaurant.

Dual cash control - The establishment of cash handling policies in a business helps it in
reviewing the cash transactions made in the business (Zhao
et al., 2015). The policy of
dual cash control is one of the most effective cash handling policies. It helps in creating
an extra security layer in the cash management of a company, which its employees are
unaware. The risks of frauds taking place in the restaurant of Paul will be reduced due to
dual cash control, leading to decrease in its errors and increase in availability of backup.

Implementation of cctv cameras - Implementing cctvs within the office premises of a
business helps in cash control as well. Implementing cctvs in Paul’s restaurant will be
helpful for tracking the behaviour and movements of the staff working in the restaurant,
which help in detecting the cash mishandling or frauds taking place in the restaurant.

Proper bookkeeping records - The cash related problems in a company could also be
reduced with the help of maintaining proper bookkeeping records (Milanovic and
Trajkovic10, 2017). Ensuring the proper maintenance of bookkeeping records can be
useful for controlling the cash of Paul’s restaurant as well.
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quantity.
International Journal of Production Economics,
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The CPA Journal,
85(3), p.6.
McCullough, K. and Blomgren, S., 2014.
Inventory management system. U.S. Patent
Application 13/958,179.
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Milanovic, F. and Trajkovic10, M., 2017. POSSIBILITIES OF MONITORING THE
MAINTENANCE IN THE ACCOUNTING RECORDS.
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