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Assignment on Finance in Hospitality Sector

   

Added on  2019-12-03

26 Pages7579 Words138 Views
FINANCE IN HOSPITALITY

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1 Sources of funding available to business..............................................................................11.2 Contribution made by various methods of generating income for a large chain ofrestaurants....................................................................................................................................2TASK 2............................................................................................................................................22.1 Elements of cost, gross profit percentage and selling price .................................................22.2 Evaluating methods of controlling stock and cash...............................................................3TASK 3............................................................................................................................................43.3 Process and purpose of budgetary control ...........................................................................43.4 Analyzing variance of budgeted performance from actual performance andrecommendations........................................................................................................................4TASK 4 ...........................................................................................................................................53.1 Source and structure of trial balance.....................................................................................53.2 Adjustments in financial statements......................................................................................64.1 & 4.2 Ratio analysis and recommendations..........................................................................8TASK 5............................................................................................................................................95.1 Brief notes on fixed, variable and semi-variable costs........................................................95.3 Short term management decision based on break even calculation....................................12CONCLUSION..............................................................................................................................12REFERENCES ...........................................................................................................................131

INTRODUCTIONFinance plays a vital role in the growth of any organization. Along with this, companiesare also required to control their costs. This requires application of various techniques. In thisreport, some of the techniques regarding cost evaluation are presented and probable reason forvariance in performance is also explained in detail. Further, ratio analysis is also done in order toevaluate the business. After that, recommendations are made regarding improvement in businessperformance. Along with these, adjustments are also made in P&L account and balance sheet ofthe firm. Further, ways in which adjustments are made is also discussed in this report.TASK 11.1 Finance plays a vital role in the growth of an organization. In today’s uncertain businessenvironment, it is difficult to raise entire amount from a single source of finance. Hence,business firms collect a specific corpus from various sources of finance in the specificproportion. Some sources though which Aquapet can raise funds are given below:External sources 1Debt/ long term loan – Aquapet can raise loan from banks or NBFC'S at fixed or floatinginterest rates. Advantage- The main advantage of debt is that in this source of finance ownership of owners ofthe company does not get diluted. Hence, they are able to maintain full control on firm. Disadvantages- It depends on the management of Aquapet only that at which interest rate, theytake loan. In past years, it has been seen that firms who raise loan at floating interest rate face alot of problems due to frequent change in the interest rates structure by the central bank andfluctuation in currency in an international market (Mayer, Schoors and Yafeh, 2005). Withincrease in interest rate and weakness in domestic currency debt payment liability on firms getincreased. Hence, it is recommended that firms must abstain from taking loan at floating interestrate.1Venture capital- This is an alternative source of finance of equity. Under this system,there is a firm that provides capital to its client firm and in return, it gets ownership in2

company’s stock. Hence, company does not need to resort to banks for financing theiroperations. The other benefit that this source of finance gives is that it also gets legal entitle togive guidance to the firm regarding business policy and strategy. The main disadvantage ofventure capital is that ownership of existing shareholders gets diluted in the firm. Hence,decision making power of directors gets reduced. Thus, it is an inverse of debt as a source offinance and due to this reason; it is quite popular in USA and Europe.2Equity- When firms wants to start any project they can approach primary market forraising capital through IPO or FPO. The main advantage of this source of finance is that likedebt it is not necessary to pay dividend each and every year. But issue of shares dilutes controlof existing shareholders on the company. Hence, this source of finance has both positive andnegative points. 3Private equity- If firm is not eligible to raise capital from stock market then it canapproach private equity firms for financing their business projects (Galia and Legros, 2004). Themain benefit of this source of finance is that at infant stage firm get a large amount of capitalthat it cannot get from banks or NBFC'S. But in this source of finance company have to sell itsstack to private equity firms. Hence, control of existing shareholders on the company getsreduced which is major disadvantage of this source of finance. 4Short term loan- This loan is available from banks and NBFC'S for short duration sayone year. The main benefit of this source of finance is that firm can fulfill its working capitalrequirements from this source of finance.The main disadvantage is that if loan is taken atfloating rate then finance burden on the company get increased. 5Debentures- It is a written acknowledgment of debt taken by the company from thepublic. In return firm pay interest to the debenture holders. In this source of finance it isnecessary to pay interest in specific time period . If financial condition is not good then paymentof interest may create problem for an organization. This is major limitation of this source offinance. But control of existing shareholders does not get diluted in case of debentures. So, it hasboth positive and negative points.6Consortium finance- Consortium finance is taken when single bank cannot financeentire project and multiple banks are required to finance specific project which will be executedin the domestic land. Like debenture in case of this source of finance it is necessary to payinterest on time and this is major limitation of this source of finance. But in this case3

shareholders control on the company does not get diluted. Hence, this is major advantage of thissource of finance.Internal sourcesRetained earnings- It is a portion of profit that remains after payment of expenses anddebt from company’s revenue (Irwin and Scott, 2011). This is the commonly used source offinance among all categories of organizations whether they are sole trader, partnership orcompany because organization is not liable to pay any sort of finance cost to any institute. Thissource of finance does not have any limitation.Equity, debt and consortium finance are three sources of finance that can be used in orderto finance entire finance requirements. In case of equity 60% stack remains with the companyowners and liability to pay fixed amount periodically also not created. But company power totake decision get reduced. In case company failed to raise capital from equity then it can issuecapital from debt. But due to poor economic conditions banks are following a cautious approachand they may deny from financing a project. Hence, consortium finance is suggested to thementioned firm in which multiple banks will collectively finance firm. This is selected becausein this source of finance owners will have full control of company and due to sharing of riskbanks will also prepared to finance company project easily.1.2 There are many things that play an important role in generating revenue for the firm.Some of them are given below:1Sales- Sales is an item in a company’s P&L account that represents money that a firmearned from sales. For generating sales, large chain of restaurants need to put various sorts ofefforts. This is because; there are numerous hotels in London or in entire UK due to highinbound tourism in the mentioned nation. As a result, there is a stiff competition among firms inthe relevant industry (Eriksson, Katila and Niskanen, 2009). Therefore, Aquapet requiresformulating and implementing some unique strategies in order to flourish its business in therelevant industry.2Home delivery service- In today’s time period, people is busy and they find it difficult tocook their food on time. As a result, home delivery service is increasing rapidly in London.4

Thus, Aquapet by entering in this segment of business can grow at a fast rate in hospitalityindustry. 3Renting place for an occasion- Aquapet can rent a place for specific occasions likeconference on business or social issues and marriage etc. By focusing on this segment, firm canelevate its revenue (Atkinson, 2005). Normally, hotels charge a very high amount for such kindof services and due to this reason, their profitability gets increased. Hence, Aquapet must payclose attention on this segment of business.AdvantagesOnly benefit that a restaurant can get from sale of unused asset is that it will not need togo to bank for financing its operations. By selling assets firm operations will be financedand it will not need to pay any sort of finance cost. So both have advantages anddisadvantage for Aquapet and it needs to follow cautious approach for making prudentdecision. Adoption of this method will lead to saving in terms of finance cost. Hence, economiesof scale will be generated and that saved amount will be used for other productiveactivity.DisadvantagesCompany may sell its assets to finance its operation due to lack of cash and poorperformance of restaurant. But if restaurant changed its policy and it starts earning profitthen in future it may face problems due to scarcity of resources. Hence, firm will againneed to purchase asset in order to met customer demand. This, this strategy is not goodfor the firm.In future price of these assets may increase and become costly to buy. Hence, sale ofasset may prove disadvantageous for the firm in long term.In upcoming time period asset of price may increase at higher rate. Means that if theseasset are sold in future then good profit can be earned in comparison to profit that a firmwill earn if assets ares old on current date. Hence, decision to sell asset on current datemay prove disadvantageous for the firm.5

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