Financial Management for Hotel Industry

This document provides an overview of financial management in the hotel industry, focusing on the financial analysis of Gatsby Grange. It includes a discussion of profitability ratios, liquidity ratios, efficiency ratios, and gearing ratios. The importance of ratio analysis and its benefits and limitations in decision making in the hotel and tourism segment are also evaluated.

FINANCIAL MANAGEMENT
FOR HOTEL INDUSTRY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
a. Financial analysis of the Gatsby Grange..................................................................................1
b. Stating an importance of ratio and fluctuations for the hotel management ...........................6
c. Evaluating the benefits and the limitation of ratio analysis that helps in decision making in
hotel & tourism segment .............................................................................................................6
TASK 2............................................................................................................................................8
Presentation..................................................................................................................................8
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financial management refers to process of managing the financial resources of company. It involves activities such as
procurement and utilisation of the funds in most appropriate manner for adding value to the company. It is important for the
management for ensuring that resources are utilised in best manner by effective allocation. Present Report is based over the financial
analysis of Gatsby Grange which is part of the Boutique chain in UK and Ireland. Financial analysis is done using ratio analysis for
identifying the profitability, efficiency, liquidity and gearing ratio of company.
TASK 1
a. Financial analysis of the Gatsby Grange.
Gatsby Grange
Particulars Formula 2018 2019 Change
Profitability Ratios
Return on capital
employed
Net operating profit/Employed
Capital 64.38% 64.92% 0.84%
Employed Capital Total assets – Current liabilities
(7565-
1339) 6226
(7890-
1616) 6274
Net profit 4008 4073
Gross profit turnover Total Sales – COGS/Total Sales 91.82% 85.83% -6.52%
COS 450 850
Turnover 5500 6000
Net operating profit
turnover Operating Income/ Turnover 72.87% 67.88% -6.85%
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Net Income 4008 4073
Revenues 5500 6000
Assets Turnover Sales / Capital Employed 88.34% 95.63% 8.26%
Turnover 5500 6000
Capital Employed 6226 6274
Liquidity Ratios
Current assets 3065 3240
Current liabilities 1339 1616
Inventory 1450 1420
Quick assets 1615 1820
Current ratio Current assets / current liabilities 2.29 2 -12.41%
Acid test ratio Current assets - Inventory / Sales 1.21 1.13 -6.62%
Debtors 1600 1800
Creditors 800 870
Days 365 365
Debtor days
Trade Receivables /Credit
Sales*365 106.18 109.5 3.13%
Creditor days Trade Payables / Credit Sales *365 53.09 52.93 -0.31%
Gearing Ratio
Long-term debt 150 145
Shareholder's equity 6076 6129
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Gearing 1 (Debt Capital /Debt Equity)*100 0.02 0.02 -4.17%
Long-term debt 150 145
Shareholder's equity 6076 6129
Gearing 2 (Debt Capital /Debt + Equity)*100 0.02409 0.02311 -4.17%
Interest 20 18
Operating profit 4008 4073
Interest Cover Operating profit / Interest 200.4 226.278 12.91%
Efficiency
Inventory 1450 1420
COS 450 850
Inventory turnover Inventory/COS*365 1176.11 609.765 -48.15%
Turnover 5500 6000
Non current assets 4500 4650
Non current asset turnover Turnover / Non Current Assets 1.22 1.29 5.57%
Financial Analysis
Profitability Ratios
Return on Capital Employed
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This ratio is used for analysing the efficiency of the management in utilising the capital resources for generating returns.
Return on capital employed of the company is 64.92% and no major fluctuations are seen in the return. It shows that company is
effectively using the existing resources for generating return for the company. A company with high ROCE is seen as highly efficient
in using the resource by properly allocating the resources over the places where they could be used properly (Benavides, and et.al.,
2017). ROCE of company is high which will help in attracting new investments from the investors as it gives confidence that their
funds will be more effectively used by the company to maximise their returns.
This is used for analysing the efficiency of management in generating returns for the company. Asset turnover of company is
high which shows that strategies of the management for running the business are running efficiently. High returns over equity make
the business attractive for investors. They invest in companies that are generating high returns over the equity. This shows that
business is performing extremely well and has high growth prospects. Firm is required to maintain stability over the returns by laying
effective strategies.
Gross Profit Margins
The ratio is used for evaluating the gross profits of company. It is the amount left with the company after covering all the costs
associated with the sales of goods. Company is having gross profit of 85.83% in 2019 and has shown downward movement of 6.52%.
the decline is seen as the cost of sales have increased of the hotels. Being service industry gross profit is high. It could be evaluated
from the ratio that it is using cost efficient strategies for controlling and reducing the cost of sales. Gross profit of the firm should be
high as it has to carry out number of transactions for running the operations (Hirshleifer, Hsu and Li, 2018). Insufficient gross profit
may reduce some of the expenses that are essential for promoting the growth of the organisation. It has to maintain control over the
increasing costs as it may further reduce the gross profit of company.
Net Profit Margin
Net profit margin of the Boutique is 67.88 %. There is a downward movement of 6.85% from last year. This is seen due to
decrease in the gross profits of company. Net profits of Boutique are high this is essential for the business. High profitability brings
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several opportunities for the company. It represents the image of management and their efforts. Firm is seen as having highly effective
leaders who are driving the company towards success for achieving the goals and objectives of the organisation. It has to effectively
control the business operations and costs and expenses for maintaining the profitability. Net profit represents whether carrying on the
business is successful or not during the period.
Asset turnover ratio-
It has been seen from analysis that asset turnover ratio of the company is increasing which means that company is utilising its
assets effectively. A company must utilise the assets of company for generating higher sales for having higher returns. It is making
efficient use of the assets to generate revenues.
Liquidity Ratios
Current Ratio
Current Ratio is 2 in 2019 and was 2.29 in 2018. Downward movement of 12.41% in the ratio is seen from last year. Current
ratio assess the ability of company to meet the short term obligations from the available assets. Current ratio is adequate as per the
industry standards and is required to be maintained. Further increase will represent blocked investment in the Boutique therefore it has
to ensure that the liquidity does not fall or move above the set standards. All the stakeholders are concerned with liquidity of company
as inadequate funds may affect the operations of business affecting the working of the entity. Strong liquidity represents it has having
strong and big capital base and is able to meet the requirements of company. Inadequate assets to meet the obligations will require the
Boutique to borrow funds from external sources that will increase costs of the hotel.
Quick / Acid test ratio
It is a measure of the liquidity excluding inventory from the current assets. Stocks are not considered liquid as they could not
be sold immediately in case of need. Therefore they are not considered current for measuring liquidity (Ardekani, Distinguin and
Tarazi, 2020). Quick ratio of company is 1.13 and has decreased from 1.13 in 2018. It could be evaluated that company is able to meet
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the current liabilities from the available assets. It can make short term investments to earn short term returns that could be used for
meeting the working capital requirements of the business. Management has to effectively manage the activities for having adequate
cash flows. It should increase quick ratio by implementing effective strategies and managing the resources.
Efficiency Ratios
Creditor Days
Creditor days of Boutique are 53 and has remained same as per last year. These days are half of the debtor days. Credit period
should be higher so that company could manage the funds for payments. It should increase the creditor days to further extent for
having adequate cash cycle to meet the cash requirements of business. Operations of the business will be affected without the efficient
cash inflows.
Debtor Days
Debtors Days are 109 which is not high as per the industry average. The debtor days should be decided as per the cash cycle. It
is having high debtor days as it is one of the strategy to promotes sales of the hotel. When credit is given to the customers sales is
increased to considerable extent (Burns and et.al., 2020). It has to manage the cash cycle for meeting the working capital requirements
of business.
Inventory Days
Inventory days are used for assessing the efficiency of management in moving the goods from factory. Inventory days are
significantly high as Boutique is serving in service industry. It has large stocks of inventory that are very slow moving. Management
has reduced inventory days to 609 which is half from last year. Stocks level is same but cost of sales had increased decreasing the
inventory days.
Non-current asset ?
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The ratio is used for measuring the efficiency of management in generating over the non current assets. it could be analysed
from the ratio that boutique is making efficient use of the non current for earning revenues. Management of the company is effectively
using the non current assets and has achieved a growth of 5 % from last year
Gearing Ratio
Gearing 1 Leverage ?
It is used for assessing the proportion of debt capital in the total capital structure of the company. from the above analysis it
could be seen that boutique is having gearing ratio of 0.02 that represent that it is having 2% of debt in the total capital structure of the
boutique. There is very low financial risk in the business as it does not have high debt. It is self sufficient for meeting the requirements
of business and in carrying out the operations of business
Debt to capital
It is used for assessing the proportion of debt in the capital of company. Boutique is having debt equity of 0.02 over the two
years. It is having very low debt in proportion to the equity. It could be evaluated that it does not uses debt for raising funds to meet
the capital requirements or funding the operations of business. (Muthee, Adudah,and Ondigo, 2019). Debt equity is also used for
analysing capital structure of the firm. It should use debt for raising funds for business as it provides tax benefits over capital cost and
also interest cost.
Interest cover ?
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The ratio is used for measuring the amount of interest in the operating profits of company. It could be analysed from the above
ratio that boutique is having very low interest expense as compared with the operating expenses. Company does not uses debt capital
for meeting the funding requirements of business.
b. Stating an importance of ratio and fluctuations for the hotel management
Ratio analysis includes evaluation of the data from historical and current financial statements for understanding financial
performance and the position of an enterprise in overall industry. It helps in setting out the trend of the company's performance over
the period that reflects whether the firm is achieving growth or not. Understanding final report are critical for the hotel management as
it helps in making comparison of the numbers presented in statement. Furthermore, it enables in estimating the numbers from profit &
loss statement and the balance sheet for future (Arkan, 2016). Ratio analysis seems as crucial in understanding the ability of firm in
generating profit and developing efficiency in using its assets and inventory.
With hospitality sector, it is extremely essential for defining set of the financial ratios which could be used for assessing
organizations around an overall industry, irrespective of the operations. Hotel management industry comprises heavy proportion of the
fixed and the tangible assets and thus needs specific set of financial ratios for accurately analysing industry & performance of each
company (Andjelic and Vesic, 2017). As hospitality sector encompasses with several sub sectors, it seems as difficult for comparing
the companies within the hospitality segment. Some helpful ratios could be put for achieving the comparative analysis against the
benchmark.
For hospitality sector, companies are having lot of short term liabilities in form of the wages and salaries, current equipment
leasing and the current liabilities. This industry is seen as cyclical, that makes it imperative for the firms having sufficient current
assets in order to cover the short term obligations even in the economic downturn. The stakeholders desire for seeing high CR higher
than 1 for determining the company within hospitality sector remains as strong. The companies functioning under hospitality industry
have high amount of long term debts so it essential for such firms to measure their debt ratio. The D/E ratio of an entity need to have
the low debt ratio which means that long term assets outweigh debt used for purchasing it.
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c. Evaluating the benefits and the limitation of ratio analysis that helps in decision making in hotel & tourism segment
Benefits-
 Ratio analysis is used as the powerful tool of the final report assessment and establishes numerical or the quantitative
relationship in between the two figures of final report for ascertaining strengths & weaknesses of an entity and its current final
state and the historical performance. It enables several interested users in making evaluation of various aspects of company's
performance.
 The trend in the sales, cost, profits and the other facts could be known by calculating ratios of the appropriate accounting
figures for previous years (Barth and Miller, 2018). Such trend analysis with the use of ratios seems as useful in planning &
forecasting the future activities of business.
 It indicates a degree of an efficiency in utilization and managing its assets where different efficiency ratios reflects the
operational efficiency.
 Ratios are counted as an effective means of the communication & plays a crucial role in stating the progress made by business
enterprise to owners or the other parties.
 It could be used for controlling performances of the different divisions or the functions of an enterprise and also control costs.
 It helps the managers in taking decisions as like whether to make supply of the goods on credit to firm, whether bank loan
would be made available etc.
Limitations-
 Ratios are computed from information recorded in final report which includes estimations and assumptions that in turn affect
quality of the ratios.
 Final report facilitates historical information as they do not reflect the current conditions and thus is not found as useful in
predicting future.
 Different policies of accounting relating to valuing inventory and charging depreciation makes an accounting data &
accounting ratios of the two companies as non-comparable.
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 No fixed or set of standards could be laid down for the ideal ratios. For instance- CR is said to be as ideal if the CA resulted
twice the CL (Pasciuto and et.al., 2017). But this might not be counted as justifiable in the situation that have adequate
arrangements with their respective bankers for facilitating funds when it requires, it might perfectly ideal if the current assets
equates to or little higher than CL.
 It is tool that considers quantitative analysis and the qualitative factors are been ignored at the time of computing ratios.
 With the use of this tool, there are chances of window dressing which reflects presenting the final report is such manner for
showing better position of company than what it actually shown. For example- low depreciation is been charged, revenue
expense is been treated as the capital expense.
TASK 2
Presentation
Overview
It has highly efficient performance over the years and strong financial position. This is highly profitable boutique with returns
and profits. It has sound growth opportunities for business expansion. It is highly liquid firm with the sufficient assets for meeting
short term obligations of the enterprise. Management is highly efficient in meeting the cash requirement by effectively managing the
cash cycle. It can further improve efficiency of the cash cycle by managing the debtor and creditor days. It is having strong capital
structure with low debt and low financial risks. It could raise funds through debt for meeting the requirements of business.
CONCLUSION
It could be concluded that Gatsby is performing efficiently in the market earning high revenues. Financial analysis is essential
for measuring the performance and position of the enterprise. Financial analysis is done using ratio analysis which shows the
efficiency of management in using the resources of company for generating returns and maximising wealth of shareholders.
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REFERENCES
Books and Journals
Benavides, J., and et.al., 2017. Long Term Winter Stocker Profitability (No. 1377-2016-109926).
Hirshleifer, D., Hsu, P.H. and Li, D., 2018. Innovative originality, profitability, and stock returns. The Review of Financial
Studies. 31(7). pp.2553-2605.
Shrotriya, V., 2018. Analysis of Liquidity Management of Dabur India Limited through Liquidity Ratios.
Ardekani, A.M., Distinguin, I. and Tarazi, A., 2020. Do banks change their liquidity ratios based on network
characteristics?. European Journal of Operational Research.
Burns, G.J., and et.al., 2020. Measurement of single-and double-escape HPGe efficiency ratios for 60Co. Journal of Radiological
Protection. 40(2). p.N17.
Muthee, B., Adudah, J. and Ondigo, H., 2016. Relationship between Interest Rates and Gearing Ratios of Firms Listed in the Nairobi
Securities Exchange. International Journal of Finance and Accounting. 1(1). pp.30-44.
Andjelic, S. and Vesic, T., 2017. The importance of financial analysis for business decision making. In Book of proceedings from
Sixth International Scientific Conference Employment, Education and Entrepreneurship (pp. 9-25).
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki
Finansowe, Ubezpieczenia. (79). pp.13-26.
Barth, J. R. and Miller, S. M., 2018. Benefits and costs of a higher bank “leverage ratio”. Journal of Financial Stability. 38. pp.37-52.
Pasciuto, I. and et.al., 2017. Overcoming the limitations of the Harmonic Ratio for the reliable assessment of gait symmetry. Journal
of biomechanics. 53. pp.84-89.
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