Importance of Break-Even Analysis in Hospitality Management

This report highlights the importance of break-even analysis in taking short-term decisions, particularly in the hospitality industry. Budgetary control tools are crucial for identifying deviations and taking corrective actions within a suitable timeframe. The receipt of cash by organizations should be recorded through cash receipts to maintain daily sales records, preventing issues with sales turnover and cash shortages. Break-even analysis is essential for planning profits effectively, making it beneficial for organizations relying on such analysis for short-term decisions.

FINANCE IN
HOSPITALITY
INDUSTRY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A) Identifying sources of funding for the business and evaluating contribution made by
methods in generating income................................................................................................1
TASK 2............................................................................................................................................3
A) Discussing elements of cost and profit and selling prices for the organisation................3
B) Methods of controlling stock and cash and cost and benefit of any two methods in
organisation............................................................................................................................3
TASK 3............................................................................................................................................6
A) Explaining trial balance and assessing the source and evaluating business accounts.......6
B) Discussing purpose and process of budgetary control and analysing budget variances.. .8
TASK 4..........................................................................................................................................11
A) Calculation of financial ratios for the firm......................................................................11
B) Recommendation to perform appropriately in future course of action...........................11
TASK 5..........................................................................................................................................12
A) Categorising costs as variable, fixed and semi-variable of firm.....................................12
B) Calculation of per product contributions and relationship between Cost Profit and Volume
..............................................................................................................................................12
C) Discussing use and significance of Break-Even analysis for decision making...............14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
In the present era, companies lay high level of emphasis on financial management aspects
which in turn contributes in the attainment of organizational goals and objectives. Effective
financial management enables a firm to employ funds in productive activities and thereby helps
in achieving goals.
The present report is based on the case scenario of AB which in turn provides deeper an
insight about sources that can be used for meeting monetary requirements. Further, report also
entails how budgetary control tools assist in making control over expenses. It will also shed light
on the financial position and performance of business unit through ratio analysis.
TASK 1
A) Identifying sources of funding for business and evaluating methods in generating income
There are various methods of raising funds which can be used by business in order to
achieve benefits in future course of action. The sources of finance are as follows-
1. Family and Friends-
It is a source of finance that can be taken from friends and family and as such, business
may achieve daily operations quite effectually. It can be raised by organisation because trust
prevails and is one of the safest forms for generating finance. The main reason behind this is that
business does not have to pledge goods and thus, funds can be easily generated.
2. Angel investors-
Angel investors provide funds to organisation which is quite helpful for accomplishing
operational activities in an effective way. They provide finance and in return ownership is taken
in the business by them. In simpler words, some part of shares is imparted to such investors in
relation to amount of loan provided. Thus, ownership is provided with respect to funds initiated
to organisation (Jones and et.al., 2016.).
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3. Loans from bank-
It is another common source of raising finance by taking loans from banks. In addressing
this, company has to repay principal amount along with interest accrued on the same. Moreover,
solvency position of firm should be high so that it may be able to repay loan without any
difficulty and as a result, funds can be effectively utilised.
3. Retained Earnings-
Profits are attained by organisation in a particular financial year by accomplishing stated
targets in the best possible way. In relation to this, some part of profit is shared among
shareholders and remaining part is retained in the business to effectively attain operational tasks.
It can be used by firm as it is good source of internal finance for meeting daily activities.
Moreover, no liability to repay amount is found as it is generated from internal earnings of
business.
There are various sources of generating income which will be helpful for Astors
Belgravia to attain income with much ease. The hotel has exotic food and spacious rooms which
attracts most of the customers in effective way. One of the main methods to generate extra
income is that consumers may be provided with attractive offers in relation to the food which
will be mailed to their respective mail ids. This provides effective sales to business as customers
are imparted with new offers and mailing method is cost-effective as well. Thus, prospective
customers will be lured towards fresh offers and discounts and as a result, technology has
provided new ways to do business and attain sales (Kallmuenzer and Peters, 2018).
Another method is organising contests which is useful technique to promote products in
the best possible manner. By this way, customers are attracted towards business by organising
contests, relationship with regular and new consumers may be broaden with much ease. Social
media is also important way of promoting organisation and as such, income can be generated in
effectual way. Astors Belgravia may be benefited as there are various websites where people are
connected to each other and as such, discounts can be offered by hotel on such social media
websites and thus, sales will be injected as customers will be lured to buy items quite effectively.
Thus, these are some of the methods which could be helpful for t hotel to attain income in
effectual manner.
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TASK 2
A) Elements of cost and profit and selling prices for organisation
There are various types of cost such as material, labour and cost of overheads. In the
hotel, these costs play essential role in assessing profit and selling prices in the best possible
manner. It can be bifurcated that material cost which remain as a part of food. For instance,
ingredients mixed in flour for making food such as bread. Hence, direct cost is incurred in
making products. Moreover, materials cost are food, beverages, tobacco and related costs which
are included in overall expenditures of material (Kasemsap and et.al., 2018). On the other hand,
labour costs are included as well to determine selling prices. Salaries, overtime expenditures and
wages are termed as labour expenses. Depreciation, advertisement provided to people is indirect
expenses. While, overheads are marketing, maintenance, administration costs incurred.
In relation to this, total cost arrived by adding material, labour and overheads and as
such; it is included in the selling price of item. On the other hand, fixed and variable expenses
are provided as well. As the name suggests, fixed expenditures are to be incurred whatever be it
sales or production. While, variable expenses are incurred as per level of volume which means
that if production will be less, costs will be adjusted in accordance to the production level.
Hence, these are included in the selling price of goods. Hence, gross profit can be computed by
taking purchase price and total costs. For example, if purchase price = 90, Kitchen percentage =
170, gross profit will be 170 - 90 = 80. The gross profit can be calculated in terms of percentage
such as Gross profit * 100 / Kitchen percentage. Therefore, substituting the formula, = 80 * 100 /
170 = 47. Thus, gross profit is 47, cost is 90, then accordingly, selling price can be get = 47 + 90
= 137
B) Methods of controlling stock and cash and cost and benefit of any two methods in
organisation
There are various important methods of controlling stock which are mentioned above:
 Economic Order Quantity: It is analysed as standard formula which has used to arrive
at a proper balance between too much or very little stock. It is can be quite complex
calculation so that it may be find easier for company to utilise the software of stock. The
model of EOQ is considered as important for every business and for hospitality industry
as well. This method of inventory control helps in the holding and ordering costs which
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has been analysed as not much quality and not less quantity of inventory. This is also
considered as standard formula and it considered as cost effective method as well for
ordering quantities of stock. Further, through arriving at EOQ, the major and standard
quantities have ordered by the enterprise and such wastage has not been found.
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 Just In Time Approach: It is considered as the management study that aligns various
raw material orders from the suppliers directly with schedules of production.
Organizations employs this inventory strategy in order to increase efficiency and
decrease wastage through receiving products only as they are needed within process of
production and thereby reducing the cost of inventory.
 In this context, this approach will be effectively useful for restaurant because this
approach will help in decreasing the wastage and spoilage of resources within
organization. Further, the closing stock is required to be analysed by management in
order to make products in estimated resources and without any wastage. This aids to
accomplish the continuous growing requirement of customers and tends to reduce the
unnecessary wastage of important as well as valuable stock.
In addition to this, there are some important methods of controlling cash that has been found and
listed below:
 Balancing: For controlling the cash, there is major requirement of balancing every
business transaction which has been occurred within business. In this context, when the
cash will be received by organization, they should provide cash receipts to customers in
order to maintain record of sales on daily basis. It helps in removal of issues in
calculation of sales turnover and shortage of cash. There should be a perfect balancing of
the transaction of cash within registers and software because it helps the restaurant in
taking and maintain record of each and every cash receipts along with the cash
withdrawal. This method will tend to reduce cost of business enterprise and helps in
achievement of high profitability in hospitality sector as compared to competitors.
 Securing cash: It is considered as most important method that is used for securing the
cash which involves installation of cameras in the premises mainly as the cash collection
counter so that all transaction would get recorded and manager should review all footage
cash counter once within a week. Further, other security systems must be installed within
enterprise to control the cash collected from selling of products and services to
customers.
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 Routine reconciliation: It is also a method of checking the cash transaction which
involves development of reconciliation statement to match actual cash with the expected
cash. Effective reconciliation of bank accounts will provide support to restaurant business
in effectively controlling the cash. This will tend to provide clarification to the restaurant
and no discrepancies have been happened.
However, through approach management of restaurant will be able to management their
stock and achieve high profitability through maximization of cost. These methods will provide
support in increasing business opportunities at workplace. Further, it can be said that effective
management of hotel will tend to raise the business operations of enterprise in hospitality sector.
High financial capabilities will also provide support to the organization in management of
business activities.
TASK 3
A) Trial balance and assessing source and evaluating business accounts
Particulars Debit Credit
Capital 104
Cost of distribution
Administration costs
Bank Balance 50
Cash and Cash Equivalent
(CCE) 4
Bank Borrowings 50
Furniture and Fixtures 150
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Accumulated Depreciation on
Furniture and Fixtures 45
Receivables 10
Payables 15
214 214
The trial balance is one of the important statements which are prepared to effectively
carry out differences if any observed in books of prime entry or ledger accounts. In simpler
words, arithmetical accuracy can be judged with the help of preparation of trial balance. Ledger
accounts are termed as impersonal accounts. The structure of trial balance can be evaluated of
Astors Belgravia listed in the above trial balance.
 Current assets are Bank balance, CCE and receivables
 Fixed assets are Furniture and Fixtures and accumulated depreciation on the same
 Non-current liabilities is Bank borrowings highlighted in trial balance
 Current liabilities are Capital and payables
Balance sheet till 31st December 2017 Amount
Current Assets
Deposit In Banks 19000
Cash In Hand 20000
Receivables 34000
Total Current Assets (CA) 73000
Furniture And Fixtures 18800
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Buildings 294500
Fleet Of Vehicles 35880
Tax 5000
Total Assets 427180
Liabilities And Shareholders' Equity
Liabilities
Current Liabilities (CL)
Payables 8300
Wages To Be Paid 35000
Interest Payables 4500
Total Liabilities 47800
Shareholders' Equity
Capital 331580
Total Liabilities And Shareholders'
Equity 427180
The balance sheet is prepared of the hotel for the period of 31st December 2017 and it
shows the assets and liabilities in the best possible manner.
B) Purpose and process of budgetary control and analysing budget variances
The main objective behind control over budget is to ensure planning of effective ways in
which budgeted output will be effectively measured from actual output.
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From the above extent, it has been analysed that the restaurant will be able to manage
wastage up to great extent and will result in maximization of higher profits from t business with
ease. In addition to this, the cost of capital has been identified as effectively and this will lead to
rise in profitability of business enterprise with ease (Jones, Hillier and Comfort, 2016).
Moreover, the capital cost can be forecasted in an easiest way through budgetary control.
Further, this will help an enterprise to be effective and appropriate in possible ways. The main
objective of budgetary control has been that if there is presence of important deviations among
the actual and the budgeted output. This will aid the management of restaurant in corrective
actions in order to eradicate such as important deviations that hinders the business performance
(Dopson and Hayes, 2016).
Below give is the process of budgetary control that needs to be utilised by managers to
accomplished business objectives.
Budget Committee: This has been made by organization for execution and development of
budget. This important budget has been prepared after referring the departmental heads.
Collective decision would be made by organization for its sales (Dopson and Hayes, 2016).
Budget Centres: these are also considered as different departments which the budget for the
appropriate period has been effectively prepared. This centre has been considered as vital for an
organization to perform effectively. This will provide support within allocation of budget for
controlling cost. It is necessary as it control cost. The allocation of funds to each department is
done with ease.
Manual of Budget: it is related with roles and responsibilities of various important personnel
executive .T he has been appointed by managers in order to make changes within the budget
which has been prepared to specify the relationship between
Officer: This is generally done by him in accordance with the demand of situation. Deviations
are analysed and corrective actions are being taken.
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The budget is prepared for hotel and variances analysis can be applied by using such technique in
an effective way.
Particulars Budgeted Figures Actual Figures
Customers in the hotel 20000 15000
£0.00 £0.00
Sales revenue 2000 1700
Cost of Goods Sold 1500 1390
Gross profit 500 310
Administrative costs 200 210
Selling and distribution expenses 150 90
The variances can be calculated from the above listed budgeted and actual figures and
taking each and every element. Variances are computed below-
1. Sales revenue variance = Budgeted value – Actual value
= 2000 – 1700
= 300
2. Cost of Goods Sold = Actual sales value – Budgeted sales value
= 1390 - 1500
= -110
3. Gross profit = Actual value - Budgeted value
= 310 - 500
= -190
4. Administrative costs = Actual costs - Budgeted costs
= 210 – 200
= 10
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5. Selling and distribution costs = Actual costs - Budgeted costs
= 90 – 150
= -60
It is recommended to the management of hotel that it needs to initiate control upon
expenditures in order to earn good quantum of revenue. This is evident from the fact that selling
and distribution expenses have increased up to a high extent. Cost of Goods Sold also needs to
control so that profits may be maximised quite effectively.
TASK 4
A) Calculation of financial ratios for the firm
Particulars Formula 2017
Gross profit ratio Gross profit / revenue * 100 73.08%
Operating profit ratio Operating profit / revenue * 100 50.00%
Current ratio Current assets / Current Liabilities 7.6 : 1
Average receivables period
Ending receivables / Cost of
Goods Sold / Number of days 21.06 days
Average payables period
Ending payables/ Cost of goods
sold / Number of days 10.53 days
Debt Equity ratio Firm's debt / Stockholders' Equity 0.20%
B) Recommendations to perform in future
It can be interpreted from above ratios that Astors Bulgravia needs to improve upon debt
equity ratio as it should be increased up to 0.40 % which is suggested by market experts and
needs to maximise as there should be perfect mix of debt and equity so that firm may be able to
finance its activities by utilising debt and equity in optimum manner. On the other hand,
company should improve upon current ratio as it is 7.6: 1 which more than ideal ratio of 2: 1.
This shows that business is not effectively using its current assets to carry operational activities
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(Avilova, Ermakov and Gozalova, 2014). It is recommended to utilise current assets for carrying
daily tasks. Apart from ratios, it is recommended that hotel should implement well-mannered
strategies so that profitability aspect of company may be enhanced in a better way. Furthermore,
it should use social media tool to establish relationship with customers by offering discounts.
TASK 5
A) Categorising costs as variable, fixed and semi-variable of firm
Number Of Beds In
Hotel 600
Selling price £40 per person
Cost of wages £400.00
Other costs £40.00
Salaries £80.00
Rent for the hotel £1,000.00
Electricity bill £500.00
Telephone expenses £1,000.00
The various costs can be bifurcated on the basis of above statement.
Fixed costs – Rent for the hotel
Variable costs - Cost of wages, other costs, selling price of bed per person, salaries
Semi-variable costs - Electricity bill and Telephone expenses
B) Calculation of per product contributions and relationship between Cost Profit and Volume
Marginal Costing
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Sales 24000
Less: Variable Costs
Cost Of Wages 400
Cost Of Printing 40
Salaries 80
520
Less Semi Variable Costs
Electricity Bill 500
Telephone Expenses 1000
Contribution 1500
Less Fixed Costs
Rent For The Hotel 1000
Net Profit 500
In relationship of cost profit and volume, P/V ratio can be calculated below-
P/V ratio = Contribution / Sales
= 1500 / 24000
= 0.06 %
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C) Use and significance of Break-Even analysis for decision making
Illustration 1: Break-even chart Source: accountingnotes.net
The break-even analysis is not used that shows the point at which neither loss nor profit is
attained by company. This implies that if firm sales go below break-even point, then losses will
incur and it is required those sales should not go below such point. It can be assessed from the
break-even chart which shows break-even point is attained at 2500 activity level and cost is 50.
Thus, at this point neither profit is garnered nor loss is incurred (Claveria, Monte and Torra,
2015).
There is immense significance of break-even analysis in taking short-term decisions
(Aisha. 2018 ). One of the main reasons is that cost-volume and profit is studied in depth at
levels of output. Strategies can be implemented to reduce cost and attain more production,
thereby, garnering more profits quite effectually. Profits may be easily planned with the help of
break-even analysis and thus, organisation is benefited by relying on such analysis to take short-
term decisions.
CONCLUSION
By summing up this report, it has been concluded that bank loans and personal savings
are the most effectual sources which helps in getting funds. Further, it has been articulated that
budgetary control tools are highly prominent in identifying deviations and taking corrective
actions within suitable time frame. When the cash will be received by organization, they should
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provide cash receipts to customers in order to maintain record of sales on daily basis. It helps in
removal of issues in calculation of sales turnover and shortage of cash.
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