Financial Management in Hospitality Industry

The assignment provided is related to financial management in the hospitality industry. It involves formulating categories of costs (fixed, variable, and semi-variable), calculating contribution per unit, and justifying short-term management decisions. The solution requires analysis of a case study and application of relevant concepts from finance and accounting.

FINANCE IN HOSPITALITY

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1: Reviewing the sources of finance available to business..................................................1
1.2: Various forms of income generation methods................................................................3
TASK 2............................................................................................................................................3
2.1: Discuss Elements of cost, gross profit percentage and selling price...............................3
2.2: Evaluate methods cash and stock control system............................................................4
TASK 3............................................................................................................................................5
3.1: Assess the source and structure of trial balance..............................................................5
3.2: Evaluate the business accounts and adjustments.............................................................6
3.3: Process and purpose behind preparation of budgetary control.......................................7
3.4: Analysing variances from budget and actual figures......................................................8
TASK 4............................................................................................................................................9
4.1: Calculating various ratios of the given companies..........................................................9
4.2: Recommend future management strategies ..................................................................10
TASK 5..........................................................................................................................................10
5.1: Formulate categories as Fixed, variable and semi-variable .........................................10
5.2: Calculation of contribution per unit..............................................................................11
5.3: Justify Short-term management decision......................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES .............................................................................................................................12

INTRODUCTION
Finance is the lifeblood of every business whether it is hospitality or any other industry,
without finance it is Impossible for the businesses to operate in the market successfully.
Procuring finance for the business is one of the most essential and critical task of the managers.
Because of the existence of the complexities in the business , financial models are evolved for
achieving the common objectives of the organisation. Therefore it is a great opportunity for the
managers for introduction of individual jobs and the reasons that has motivated them to select the
right path for attainment of objectives in business. This will assists the accounting managers in
understanding the techniques of accounting in hospitality sector such that more enhanced results
can be generated in given time period( Yuan, Li, and Zeng, 2018).
The motive behind the analysis is to formulate financing decisions in the hospitality
industry so as to improve the effectiveness of financial management. This project will perform
an evaluation about the various sources that are available for the purpose of funding and the
techniques that are available for income generation. Understanding the elements of cost and
systems are discussed under the report.
TASK 1
1.1: Reviewing the sources of finance available to business
There are various sources of funding that are available for the “Trident group” from
where they can manage the funds for the operations of business. The sources of funds are
broadly divided in two categories namely Long term sources and short term sources, these are
discussed in brief as under:
Short term Finance:
This is a source of finance which the company undertakes so as to get the additional
funds for the regular operation of the business. The short term finance is available for one
accounting year and the company has to repay the amount in that particular time. Some of the
basic components of short term finance include:
 Bank overdraft: This facility is provided by the banks to the current account holders ,
under this the bank will allow the business to withdraw the amount up to certain limit.
Under the bank overdraft the account holder is allowed to withdraw the extra amount
from the bank then the existing balance in his account. Under this method, the bank may
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also require the business to put some collateral and they charge a certain fixed interest on
the extra amount withdrawn for each day until the amount is repaid.
 Accounts receivable financing: Many of the commercial banks and other small financial
institution provide the facility of discounting the invoice. Under this method the
business , transfers their commercial bills to the banks, against which the bank makes the
payment by deducting a small fee. And when the due date occurs the bank collects the
payment from the customer. This is considered as one of the most famous short term
financing generally among the small traders.
 Customer advances: There are various companies that have a good brand image, which
insists the customers to make the advance payments before selling or providing goods
and services to them. This technique is applicable on the large orders which require a
long time to accomplish. This provides the business the funds for the operations that will
be required to execute those orders.
Long term Finance:
 Long term loans from banks: The businesses which have surety regarding their
earnings in the future or the companies who are confident about the consistency of the
profits in the business, are generally the ones who opt for loans from bank as they are
cheaper then equity but the interest payments are required to be consistent whether there
is profit or loss( Tsai, Pan, and Lee, 2011).
 Equity Financing: When the companies operate on large scale, they generally require a
source of funding which provides them a large amount of money. Under this the
companies issue shares to the general public and those who buys the shares become the
shareholders and the company is required to pay dividends to them.
 Retained earnings: Retained earnings are those part of the profits which the company
retains after distributing the profits of the company to shareholders. Sometimes the
company uses these retained profits to fund the activities of the business.
 Venture Funding: This is also a good source of funding which the businesses can opt in
the early stages of their operations. The venture funding is provided by financial
institutions to the company in the early stage and then they withdraw after the company
has developed to a certain position.
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1.2: Various forms of income generation methods
The companies have different methods from where they can generate the income for
sustaining the operations of the business. At a certain point of time the company can undertake
any combination of these techniques and utilise them which is crucial kind of planning related to
business. These are discussed as under:
 Fee-for-service: This is a form of charging component for the business where they
charge customers for the social services so as to recover the cost of service provisions(
Sisson, and Adams, 2012).
 Products and Services: Under this income generation method, the income is earned by
manufacturing and sales of product or by re-sailing the products or through mark-up.
The income generation through providing services include merchandising the skill set of
a person or providing expertise to the market who is willing and able to pay.
 Investment Dividend: The Income that is generated by the business with help of the
Investment done by the company are best for the purpose of funding the operations of
business. Under this interest or dividend received from the investment done by the
company are included.
TASK 2
2.1: Discuss Elements of cost, gross profit percentage and selling price
The Cost is the approximation regarding the amount which the company has to pay for
the total capital that is acquired by the business and in the production of the products and
services. Some of these elements are quite significant for improving the operations and
productivity of the business:
Direct material: These are those costs that are related to the to the manufacturing and
production department of the company. The cost related to the production department vary with
the output level that the company is producing. Primarily enclosing material and half developed
products are the examples related to direct material(Paster, 2013).
Indirect material: These are considered as those material which is used in the
production process as the secondary tool for easing the handling of the physical units. The
examples of these includes oil and waste and stationary products.
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Direct labour: The direct labour constitutes that employees who are involved in the
production and manufacturing process relates to goods and services of company. This is called as
direct as this impacts the cost of goods and services directly( Lupton, 2013).
Indirect labour: The indirect labour are those employees and workers which do not
impact the cost of goods and services directly or that labour which is not engaged in the
production process. The indirect labour are that employees which are involved in activities such
as selling and administration which impacts the cost indirectly.
Expenses: This refers to the cost which is incurred during the operations and production
activities of the business. The expenses of the company are are further classified into two broad
categories namely Direct expenses and Indirect expenses.
Overheads: The overheads of the company are also the combination of variable and
fixed costs. The overheads of the company are related to factory, office, selling and distributions.
Gross profit percentage: The gross profit percentage of the company is calculated as
gross profit that is made by the company divided by the total revenues made by company during
a year. The basis for calculating the gross profit is the net revenue of the company it is done as
under:
GPP(Gross profit percentage) : Gross profit / Total sales* 100
Selling price + COGS+ Gross profit= This has been observed that net profits of the
company are calculated by deducting the other overheads from gross profit margin. Firstly , the
company prepares the trading account for the determination of gross profit and then calculates
the net profit by preparing income statement.
2.2: Evaluate methods cash and stock control system
This is significant for the companies in hospitality sector such as Oberoi group to
determine the operation of the company in much efficient manner. According to which it is
necessary to maintain the cash and stock as these are major elements of workigncapital of the
company( Liu, 2012).
Cash Control methods:
 Set cash flow limits: The companies should set a standard limit on spending of cash and
managers should regularly forecast the cash balances.
 Making payment getaway more simplified: the managers recommend and focuses on
removing the payment options through cheque as it requires time to encash.
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 Provide healthy package to guest: By using a fixed package rates the companies in
hospitality sectors would assists in controlling cash transactions from extra flows.
Stock control techniques:
 Identification of annual policies related to inventories: This will assist the company
for the analysis of maximum and minimum levels of inventory which has to be kept in
storehouses. There are different techniques such as LIFO, FIFO which assists the
managers in the examination of inventory level of the company.
 Inventory turnover ratio: this refers to the sum total of time which the company
requires to sell the goods in the inventory. It is calculated as cost of goods sold divided
by the Average inventory of the company.
 ABC costing: This technique of inventory management assists the managers in
dividing the total stock of the company according to the durability of the goods.
TASK 3
3.1: Assess the source and structure of trial balance
Trial balance of the company is prepared using the journal book and ledger of the
company. The preparation of trial balance is the first step in the preparation of financial accounts
of the business. The managers of the Oberoi group makes use of the trial balance to initiate the
preparation of income statement as per the dates specified in the company. In the preparation of
trial balance the accountant must ensure that credit balances and debit balances are matched in
the accounts. Each transaction is posted firstly in trial balance and then it goes to financial
statements which guides the accountants in rectifying the errors in financial statements that are
daunting the activities of the company( Kapiki, 2011).
Particulars L/F Debit Amount
(in £)
Credit Amount
(in £)
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
–
–
–
–
–
–
86,000
1,136,000
110,000
61,000
26,900
64,000
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Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Commission
Creditors
Sales
Debtors
Machinery
Ramsay tools
–
–
–
–
–
–
–
–
–
–
52,500
62,500
42,780
256,000
6,80,000
178,300
344,700
37,980
268,000
1,548,700
200000
Total 2,577,680 2,577,680
3.2: Evaluate the business accounts and adjustments
Trading and income statements of ABC Ltd
Particular Amount Particular Amount
To opening stock 86000 By sales 1548700
To purchase 1136000
To wages 18000
Add: Transfer from salaries 43000 61000
To carriage inwards 26900
To gross profit 238800
Total 1548700 1548700
By Gross profit 238800
To salaries 153000 By rent received 178300
Less: Transfer to wages 43000 110000
To trading charges 64000
Carriage outwards 52500
To commission 42780
To Net profit 147820
Total 417100 Total 417100
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3.3: Process and purpose behind preparation of budgetary control
Purpose of Budgetary control:
 The budgetary control assists the managers in the comparing actual results with the
budgeted ones so that company can ensure that resources and finance of business are
utilised in an efficient manner.
 The main motive behind the preparation of budgets is to reduce and eliminate the
amount of wastages by utilising resources as defined in budgets, which increases the
profitability of company( Gursoy, Rahman, and Swanger, 2012).
Process:
 Gathering of information from relevant sources.
 Keeping in record all sources of income.
 Keep track record of monthly expense.
 Dividing expenses under various heads.
 Estimation of monthly income and expense.
 Making adjustments to reduce expense.
 Cutting expenditure.
 Review budget Monthly.
 Planning for infrequent expenses.
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3.4: Analysing variances from budget and actual figures
(A): The material total variance
Material total variance
Particular Standard Actual Variance Results
Total units sold 1200 1000 200
Standard cost of a products 60000 47500 12500 F
(b): Total material price variance
Total direct material variance
Particular Standard Actual Variance Results
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Total units sold 50000 47500 2500 F
(c): Total material usage variance
MUV: Selling price ( Actual quantity * Standard quantity)
: 50(1000-1200)
: -10000 Adverse
TASK 4
4.1: Calculating various ratios of the given companies
Profitability ratios: The profitability ratios are ascertained by the companies in order to know
about the profit making ability of the company and how efficient and consistent company is
generating profits. The profitability ratios are calculated in proportion to the total revenue of the
company. The ratios which are calculated under this head include net profit margin, gross profit
margin etc.
Liquidity ratios: These are the ratios which are estimated by the company for measuring the
ability of the company to meet the short term obligations and the liquid assets of the company.
The ratios which are calculated under this include current ratio, acid test ratio, defence interval
ratio etc( Engel, Fischer, and Galetovic, 2013).
Efficiency ratio: This ratio is calculated to measure how efficient the business is in utilising the
assets and other resources of the business. It is the duty of the managers to ensure that the assets
of the company are optimum utilised for the better productivity. The turnover of the company is
considered under its calculation:
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4.2: Recommend future management strategies
The company needs to perform a proper analysis in order to initiate a new venture and for
efficient business planning. Formulating Strategies will be very essential for the business to
initiate better future activities that will impact the position of the business. According to the
nature of the business shaping and forming valuable decisions for attaining maximum
profitability in the business. The business can inculcate and incorporate lot of small missions
and objectives that will prove to be crucial for the betterment of organisation.
TASK 5
5.1: Formulate categories as Fixed, variable and semi-variable
According to the mentioned scenario:
Fixed cost: These are those cost who are fix in nature and that are not changed by the
company increases the production up to a certain level. Example- rent of building(Chen, 2012).
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Variable cost: this is the cost which increases with the increase in the units of production
produced by company. Example: Raw material
Semi-variable: This is the cost which is fixed to the some extent and after that it
becomes variable. It is inclusive of both variable and fixed cost.
5.2: Calculation of contribution per unit
5.3: Justify Short-term management decision
The case study shows a typical case under which management accounting can assists the
managers in finding valuable outcomes. This kind of information assists the managers in taking
valuable decisions in short time period so the profitability can be enhanced.
CONCLUSION
As per the above project, it has been concluded that finance is the significant part in
hospitality for the decision making as well as in efficient operations of business. The report will
provide an understanding about the various sources and about ratios that are calculated. The
analysis of financial statements using trial balance.
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REFERENCES
Books and Journals:
Chen, M. H. , 2012. State dependence in the influence of monetary policy regime shifts on
hospitality index returns. International Journal of Hospitality Management. 31(4).
pp.1203-1212.
Engel, E., Fischer, R. and Galetovic, A. , 2013. The basic public finance of public–private
partnerships. Journal of the European Economic Association. 11(1). pp.83-111.
Gursoy, D., Rahman, I. and Swanger, N., 2012. Industry's expectations from hospitality schools:
What has changed?. Journal of Hospitality & Tourism Education. 24(4). pp.32-42.
Kapiki, S. T. , 2011. The impact of economic crisis on tourism and hospitality: results from a
study in Greece. Browser Download This Paper.
Liu, H., 2012. The hospitality business management problems and solutions analysis. 中中中中中中 (中中中). 2. p.275.
Lupton, J.R., 2013. Hospitality. In Early Modern Theatricality.
Paster, D. J. , 2013. Session 2-4-E: Financial Evaluation Commonalities and Distinctions
Expressed by 10-Ks with Two Libertarian Hospitality Segments: Casino Gaming and
Gentlemen’s Clubs.
Sisson, L. G. and Adams, A. R. , 2012. Identifying Gaps in Curriculum with the Identified
Knowledge, Skills and Abilities Important to Hospitality and Tourism Management
Graduates.
Tsai, H., Pan, S. and Lee, J. , 2011. Recent research in hospitality financial management.
International Journal of Contemporary Hospitality Management. 23(7). pp.941-971.
Yuan, B., Li, J. and Zeng, G. , 2018. Corporate liquidity management and technical efficiency:
Evidence from global listed hospitality enterprises. International Journal of Hospitality
Management. 74. pp.40-44.
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