Finance in Hospitality Industry

Finance in Hospitality Industry TABLE OF CONTENTS INTRODUCTION 1 TASK 11 AC 1.1 Sources of funding available for business and service organisations in the hospitality industry 1 AC 1.2 Methods of generating income: 2 TASK 23 AC 2.1 elements of cost:3 AC 2.2 Evaluation of methods of Controlling Stock and Controlling Cash in hospitality business and services environment.3 Methods of Controlling Stock:3 Methods of Controlling Cash: 4 TASK 35 AC 3.1 Trial Balance:5 3.2 Preparation of new trial balance and explanation of adjustment

Finance in Hospitality Industry

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
AC 1.1 Sources of funding available for business and service organisations in the hospitality
industry........................................................................................................................................1
AC 1.2 Methods of generating income:.......................................................................................2
TASK 2............................................................................................................................................3
AC 2.1 elements of cost:..............................................................................................................3
AC 2.2 Evaluation of methods of Controlling Stock and Controlling Cash in hospitality
business and services environment..............................................................................................3
Methods of Controlling Stock:.................................................................................................3
Methods of Controlling Cash:..................................................................................................4
TASK 3............................................................................................................................................5
AC 3.1 Trial Balance:..................................................................................................................5
3.2 Preparation of new trial balance and explanation of adjustment and notes..........................5
AC 3.3 process and purpose of budgetary control:......................................................................6
3.4 Analysis of variances from actual and budgeted figures.......................................................7
TASK 4............................................................................................................................................9
4.1 Calculation and Analysis of ratios.........................................................................................9
4.2 Recommendation of management strategies for two theme parks based on ratio calculated
...................................................................................................................................................10
TASK 5..........................................................................................................................................11
AC 5.1 Fixed, Variable And Semi-Variable:.............................................................................11
AC 5.2 Contribution per product or customer and Margin of safety:.......................................11
AC 5.3 short-term management decisions:................................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Accounting is a language of business. Financial accounting reflects the financial position
of a business while management accounting focuses on overall performance of business and
includes decision making process. The present report is about the use and application of
accounting techniques in a business of hospitality organisation. These techniques assist the
mangers of business to take financial decisions. The report is based on determination of sources
of fund allocation of such funds, application of sot and budgetary control systems to enhance
profitability. An evaluation on the basis of ratios is carried out for two different parks to
determine the financial position and profitability condition of the parks. On the basis of such
finding management strategies are also suggested to those parks as well.
TASK 1
AC 1.1 Sources of funding available for business and service organisations in the hospitality
industry
Organisations have to select the that funds out of various sources according to their need and
access. Some sources of fund are as follows:
Internal sources:
 Retained earning: it is the usage of profit in the business. It is known as Ploughing back
of profit earned.
Advantages Disadvantages
In this source of finance, no additional issue of
shares of capital and no dilution of ownership
and control in the business (Pedersen., 2017).
This source of finance are not practically
beneficial as its cost is equal to the cost of
equity.
 Sales of asset: Business sells off its assents and generates cash.
Advantages Disadvantages
It gives a short term and long term financing
according to kind of asset sold.
Business have to incur capital loss as assets are
sold on its scrap value.
External sources:
 Issue of share : Share are issued in Capital market.
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Advantages Disadvantages
Organisations can issue share in the market
according to their need and it is divided in the
small amount so anyone can purchase share.
Cost of issuing shares are more than the
issuance of bonds and debentures.
 Lending form bank: Loans are taken form bank by paying interest.
Advantages Disadvantages
Interest rate are fixed throughout of your
period so payment can be easily estimated.
Loans are not flexible as interest has to be paid
on not using the resources.
 Hire purchase: Asset are purchased in instalment.
Advantages Disadvantages
In this possession of asset can be taken without
full payment of asset.
Due to instalment, higher price are charged on
this then its original cost.
AC 1.2 Methods of generating income:
 Sales Promotion: Sales promotion is method of generating income. In the context of
hospitality
 Industry, sales promotion tools are used like coupon, samples, packages etc. are used to
secure different corporate clients. Direct sales are the highly beneficial tool to identify the
service related need of clients so hotel can serve their customer in customized form made
available in accordance of them which is the core functioning of this industry.
 Commission: In hospitality industry, various tour and travels businessman approaches to
hoteliers for letting their client and customer travel in their facility. For that they give
commission to them. So it is methods of generating incomes for hoteliers (Cogneau,
Dupraz and Mesplé-Somps., 2018.). In other case new hotel can approach to that travel
agencies for let their customer to go to new hotels so new hoteliers can get a new
customer base through paying commission.
 Sub-Letting: For generating incomes, many hoteliers sub let some part of their hotel to
those attractive activists or amusements persons. By this subletting rent are the sources of
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income and customer coming to that sublet part are attracted to come into their hotels. It
is double beneficial sources of generating incomes.
TASK 2
AC 2.1 elements of cost:
Basic element of cost: Cost is that amount incurred for getting activities and things done. 3 basic
element of cost are material, labour and expenses which are as follows.
 Material: Material is required to produce something. For example- grocery material are
required for preparing food in hotels.
 Labour: Human resources are used for putting their efforts in making the product and
rendering services. Kitchens chefs, servants are required in hospitality industry, their
wages and salaries are cost of labour for industry (Boubaker, Mansali and Rjiba., 2014).
 Expenses: All the amount incurred other than material and labour for the productivity and
rendering services are termed as expanses. Like electricity expenses, rent of parking or
other assets, salaries of guards etc. are expanses.
Other type of cost:
 Fixed, variable and Semi-variable costs: Fixed costs is that costs which don't change
according to production and it has to be incurred at no production level. For example-
rent and depreciation of building etc. Variable cost are those cost which depends upon the
level of production and services. Like food are prepared according to number of
customers. Semi-Variable cost includes the both variable and fixed cost element. It
increases after a certain level of production and services.
Gross Profit Percentages: ((Revenue- costs of goods produced)/ revenue)*100
Selling Prices: Price on which services are rendered. It includes cost of goods produces,
expanses and profit margin etc.
AC 2.2 Evaluation of methods of Controlling Stock and Controlling Cash in hospitality business
and services environment.
Methods of Controlling Stock:
Economic order quantity: It includes the carrying cost and ordering cost. At the minimum
of these cost, that quantity lot are ordered which is in accordance of need of hotels.
Advantages Disadvantages
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It keeps the ordering and holding cost
minimum.
No consideration of market rates fluctuation.
Just in time technique: In this all stock transaction is done according to schedule directly.
Advantages Disadvantages
Eliminate the warehouse need and related cost Creates disruption for supply chain mediator
Regular checking: For controlling the stock, its proper checking should be done.
Advantages Disadvantages
Proper record can be maintained of stock
ordered, consumption, safety stock need,
condition of stock etc.
Human error so no 100 % effective
Methods of Controlling Cash:
Cash budgeting:
Advantages Disadvantage
Ensures cash usages and sources in accordance
of requirement
Chances of manipulation and inflexibility
Use of technology to control cash:
Advantages Disadvantage
Software generates reliable accounting with
accuracy
Technical problem results in delay in getting
information (Boubaker, Mansali and Rjiba.,
2014.).
Manage account receivable and account payables:
Advantages Disadvantage
Proper control on this ensure cash management Difficulty in cash generating on time.
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TASK 3
AC 3.1 Trial Balance:
Definition: Trial balance can be defined as it is a tabular statement of various balances of ledger
accounting on the specific date.
Purpose:
 For checking arithmetic calculation and accuracy
 Assist in making Financial statements at the year endings.
 Helps in identifying errors
 Helpful in doing comparison
 Adjustments can be done easily.
Source and structure: Source of trial balance is all the ledger accounts balances which are
prepared with double entry system (Ball and et.al., 2016). Trial balance is the tabular formate list
in which two columns i.e. debit column and credit column are there. In this double entry system
is followed. At last the total column are there in which both side total is written.
Sample trial balance:
Procedure:
 For preparing trial balance, firstly preparation of various related ledger accounts and find
the balances.
 Then note down the name of ledger account in the account name column
 Then write the balance or total amount, debit balance or total on the debit side and credit
balance or total amount on the credit side.
 Then add the debit and credit side column, after that balance are found and adjustment
are done.
3.2 Preparation of new trial balance and explanation of adjustment and notes
New trial balance with adjustments:
Particular adjustments Debit (in ￡) credit (in ￡)
Opening stock 86000
Purchases 1136000
Salaries -43000 110000
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Wages 43000 61000
Carriage inward 26900
Trading charges 64000
Carriage outward 52500
Rent received 178300
Cash 62500
Capital 344700
Bank (overdraft) 37980
Commission 42780
Creditors 200000 468000
Sales 1548700
Debtors 256000
Machinery 200000 680000
2577680 2577680
Notes: A machine purchased for m/s Ramsay on credit was recorded as- the amount of
machinery at debit side is increased by 200000 and amount of creditor was increased by 200000
at credit side of trial balance (Adjusted trial Balance, 2018). So both sides of trial balance are
equalised.
Wages of 43000 was wrongly charged as salary (Thier, Ludolph and Timmann, 2015).
Adjustment is done as- the amount of salaries is reduced by 43000 and wages are increased by
43000 which nullifies the effect in trial balance as both adjustment are done at both side of trial
balance.
AC 3.3 process and purpose of budgetary control:
Process of budgetary control:
 For budgetary control first of all objectives are defined for doing that control which can
be for controlling avoidable expenses.
 Business planning are done for establishment of desired goal to be achieved.
 According to that plans, budget are prepared for different cost centres.
 In budgetary control, actual result are compared with the standard budgets for finding the
differences between both.
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 Then that deviation are informed to management with responsibility of individual.
 According to these differences, management take the corrective actions and revise the
budgets in accordance of fluctuated environment.
Purpose of budgetary control :
 It ensures setting objectives for future planning.
 It ensures the preparation of various budgets of different cost centres and for
organisations as a whole.
 It helps in operating the various departments and cost related areas or centres
economically (General objective of budgetary control, 2018).
 It eliminates the wastages of sources and ensures the optimum utilisation of resources.
 It helps in estimating the need and scope of future capital or long term expenditure.
 It helps in motivating the employees by setting objectives and responsibility of
individual.
3.4 Analysis of variances from actual and budgeted figures
Direct material price variance is calculated as: (SP – AP) * AQ
The material total variance Amt.
Standard price 10
Actual price 9.5
Difference(per unit) 0.5
Actual quantity 4850
Direct material price variance 2425
Direct material usage variance is calculated as: (SQ-AQ) *SP
Direct material usage variance Amt.
Standard quantity 1200
Actual quantity 1000
Standard price 10
Material usage variance 2000
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Total material variance is calculated as: (SQ*SP)-(AP*AQ)
Material total variance Amt
Standard quantity 1200
Actual quantity 1000
Standard price 10
Actual price 9.5
Total material variance 2500
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TASK 4
4.1 Calculation and Analysis of ratios
Grimes theme park Giants House theme park
2014 2015 2014 2015
Profitability ratios
Gross profit 24000 26400 60000 55000
Net profit 10000 11000 25000 20000
Sales revenue 40000 44000 100000 95000
GP ratio 60% 60% 60% 58%
NP ratio 25% 25% 25% 21%
Liquidity ratios
Current assets 38000 37000 120000 125000
stock 15000 14000 50000 48000
Current liabilities 44000 35000 110000 105000
Current ratio 0.86 1.06 1.09 1.19
Acid test ratio 0.52 0.66 0.64 0.73
Efficiency Ratio
Cost of goods sold 16000 17600 40000 40000
Stock 15000 14000 50000 48000
stock turnover ratio 1.07 1.26 0.80 0.83
Profitability ratios: these ratios are related with assessment of financial metrics of a
business as its ability to generate revenues to meet the expenses incurred in the course of
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business operations (Vahlberg and et.al., 2017). The tow ratio calculated here are gross profit ans
net profit ratio.
Liquidity ratio: these ratios are indicator of company's ability to meets its financial
obligation with the available current assets. These mean if all the immediate financial obligations
are to be mat do company have sufficient available funds to meet such liability.
Efficiency ratios: these are ratios which shows the ability of company by effective use
its assets and management of its liabilities (Ziaja and et.al., 2016). Efficiency ratio shall not be to
high and an increase in a ratio reflects either increase in cost or decrease in revenue. 50% is
considered as a maximum optimal efficiency ratio for an organisation.
4.2 Recommendation of management strategies for two theme parks based on ratio calculated
Management strategies for Grimes theme park: the sales revenue of park have
increased from 2014 to 2015. with a rise in sales the gross profit and net profit have also
increased. There is an amount increment in profits but no percentage increment this means with
increases in sales cost have also increased at same percentage. The park does not have an
effective liquidity position (Keshavarz-Ghorabaee and et.al., 2018). The current liability are
more than the current assets owned by park for both the years. The cost of goods sold and stokes
maintain are almost at same level.
The Grimes theme park is suggested to increase its currents assets, without a large
increase in stock, as this will take park to a good liquidity position. The cost incurred must be
lowered in order to achieved percentage increment in the profits.
Management strategies for Giant House theme park: the park has seen a decrease in
the sales revenues. With a fall in sales the gross profits and net profits have also fallen down.
With amount reduction there is a percentage reduction in profits which means with fall in sales
the cost remains the same. The company is at acceptable liquidity position but does not enjoy a
good immediate liquidity position. The stock maintained it have increased but the cost of goods
sold are same.
The Giant theme park is suggested to reach the previous level of sales with the same cost
to increase its profit generations. It shall also increase its current assets by enhancing by
increasing cash and cash equivalents except stock. This will take firm to an optimal current
ration of 2;1 and acid test ratio to 1:1.
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TASK 5
AC 5.1 Fixed, Variable And Semi-Variable:
Particulars Figures
selling price per customer 25
variable cost (per guest) 15.5
contribution 9.5
Fixed cost 380
BEP (in units) 40
BEP (in value) 1000
AC 5.2 Contribution per product or customer and Margin of safety:
Contribution per product or customer:
Particulars Figures
selling price per customer 25
variable cost (per guest) 15.5
contribution 9.5
Margin of safety:
Particulars Figures
BEP sales 1000
Actual sales (when 80 people are
booked) 2000
Margin of safety 1000
Actual sales (when 100 people are
booked) 2200
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Margin of safety 1200
AC 5.3 short-term management decisions:
Break-even point is that point on organization faces the condition of no profit and no loss. For
precaution organization have to maintain margin of safety stock and cash. Management have to
maintain BEP level plus safety margin (Rifkin., 2014). If break even point is more than risk is
less and if break-even point is less or near to 1 means more risk. So we should maintain safety
margin as per need.
CONCLUSION
From the above report it can be concluded that for a business hospitality industry to fund
the business there are many sources available. To have funds is not enough, a proper allocation
and use of such funds is necessary for a business to have a long term existence in industry. Form
the two parks the Giant theme park is at better liquidity position while the Grimes theme park is
enjoying a better profitability position.
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REFERENCES
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