Financial Management for the Hotel Industry

This report provides an analysis of the financial statements of Gatsby Grange, a chain of boutique hotels in the UK. It includes ratio analysis and discusses the relevance and benefits of ratio analysis in the hotel industry. It also highlights the limitations of ratio analysis. The report concludes with recommendations for improving the financial health of the organization.

Financial Management for the Hotel
Industry

EXECUTIVE SUMMARY
This report provides an analysis of the financial statements of Gatsby Grange which is
chain of boutique in UK. The ratio analysis of the company's financial statement is carried out
which states about the overall performance and financial position of the company. The liquidity
ratio, profitability ratio, solvency ratio and the efficiency ratio is derived. Along with that the
relevance of having knowledge and understanding of financial ratios in the hotel sector with the
key benefits and limitations of ratio analysis within the hotel and tourism industry. Based on the
findings, it can be concluded that the overall financial health of the organization is good just
proper steps is required to be taken for enhancing its liquidity. Other than this, it is very
important for the hotel organizations for having understanding about the relevance of ratio
analysis within the organization and the benefits it will add to the business.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
TASK 1............................................................................................................................................4
Analysis of financial statements..................................................................................................4
CONCLUSION................................................................................................................................9
TASK 2............................................................................................................................................9
REFERENCES..............................................................................................................................10

TASK 1
Analysis of financial statements
a) Ratio analysis
Calculati
on
Absolute
differenc
e
Relative
performan
ce
2018 2019
Profitability
Return to capital
employed(ROCE) 64.38 % 64.92 % 0.54 % 0.84 %
Asset turnover 0.88 pence 0.96 0.07 8.27 %
Gross profit turnover 91.82 % 85.83 % -5.98 % -6.52 %
Net operating profit
turnover 72.87 % 67.88 % -4.99 % -6.85 %
Liquidity
Current ratio 2.29 pence 2.01 pence -0.28 pence -12.41 %
Acid test 0.52 pence 0.50 pence -0.02 pence -4.28 %
Creditor days(money
owing) 648.9 days 373.59 days -275.30 days -42.43 %
Debtor days(money
owed) 106.18 days 109.5 days 3.32 days 3.13 %
Gearing
Gearing 1(Leverage) 8.69 % 8.93 % 0.24 % 2.74 %
Gearing 2(Dept to
capital) 8.00 % 7.75 % -0.25 % -3.13 %
Interest cover 200.4 times 226.28 times 25.88 times 12.91 %

Efficiency
Inventory turnover 1176.11 days
1151.7
8 days -24.33 days -2.07 %
Non-current asset
turnover 1.22 pence 1.29 pence 0.07 pence 5.57 %
Profitability ratio: This ratio states about the profitability position of the business
(Bragg, 2018). There are different types of ratios which is being utilized by the organization for
the purpose of determining their profitability from various aspects.
Return on capital employed
The return on capital employed has shown an increase in trend taking 2018 as the base
year. The absolute difference between the two is 0.54 while the relative difference is 0.84%
which is positive showing upward trend.
Asset turnover ratio
This ratio states how effectively company is utilizing its assets for generating sales. There
is increase in ratio with 0.07 which is almost an increase of 8.27% which is a good indicator of
company's efficiency.
Gross profit turnover
The gross profit of the company has shown a decline trend. It has reduced by 6.52%
considering 2018 as the base year. This may be because of increase in cost of sales.
Net operating profit turnover
This ratio has also shown a decline of 6.85% which is a point of concern for the company
is required to monitor expenses to improve it.
Liquidity ratio: This ratio indicates about the liquidity position of the business entity.
Current ratio
The current ratio of the company is good s it is approximately 2 and is effective in
managing it.
Acid test ratio
The acid test ratio is very less and is decreasing showing downward trend. Thus,
company needs to invest more in its current assets other than inventory.

Creditor payment days
It shows the time company takes to make payment to its creditors. Average number of
days has shown a huge decline which is because of the fact that the company is paying its
creditors quickly.
Gearing ratio: This is the financial ratio which is used for measuring and comparing the
financial leverage which depicts the organization's capital structure and sources of funding.
Gearing 1 (Leverage)
The higher ratio indicates that the company is having more leverage in its capital
structure. There is an increase of 2.74% which shows an upward trend.
Gearing 2 (Debt to capital)
There is a downward trend in the debt to capital. This means that the company is paying
off its debt or is using other sources of funds for financial needs.
Interest coverage ratio
The interest coverage ratio depicts the ability of the company to have enough profits to
pay its interest obligations. It is favourable to have higher ratio. The ratio has increased by
12.91% in the year 2019 taking 2018 s the base year.
Efficiency ratio: This ratio is used to analyse how well the company is utilizing its assets
and liabilities in generating income.
Inventory turnover ratio (Days outstanding)
It depicts the ability of the company to sell its inventory as fast as possible (Lee and Lee,
2018). In case of Gatsby Grange, the inventory turnover ratio has decreased by 2.07%. It is
favourable to have higher ratio as it indicates that the company is effectively managing its
inventory. Even though the ratio is sound but company needs to ensure that it does not reduce.
Non-current asset turnover
This ratio states about the ability of the company in using its non-current assets in
generating revenue for the organization. It can be seen that the non-current asset turnover ratio of
the Gatsby Grange has increased by 5.57% which indicates upward trend and also highlights the
efficiency of the company in making effective use of it non-current current assets.
Based on the above analysis, it can be concluded that the profitability position of the
Gatsby Grange is moderate and is required to implement remedial steps to improve it. The
liquidity position of the company is good but much more efforts is required to be put in place to

increase its quick ratio. The overall gearing ratio of the company is sound as it is working on
reducing the debt obligation from its capital structure and the efficiency ratio is very sound
which can be considered as the strength of the company.
b) Essentials of ratio analysis for hotel management
The hospitality industry is the largest industry within the service sector. It is very
important for it establish certain crucial financial ratios which can be used for analysing the
financial performance of the companies. The hospitality industry is heavily dependent upon the
fixed and tangible assets. It is essential to understand the financial ratios in hotel industry as well.
Some of the key factors are -
 The liquidity ratio will provide the stakeholders with the relevant information with
respect to the ability of the company in meeting its short term obligations. It makes the
liquidity ratio an integral part of the industry. The most important ratio will be current
ratio as for the hospitality industry have lot of current liabilities such as salaries, short
term leasing equipment and other liabilities (Arif and et.al, 2016). Also, it is a cyclical
industry, which requires to have enough current assets for meeting it all current liabilities
and also in the event of economic slowdown. This makes it crucial for hotel management
in having an understanding the financial ratios.
 The financial leverage ratio is also important in understanding the different sources of
funds along with the solvency position of the company. This ratio is useful in measuring
the ability of the company in paying off its long term debt obligations. In hospitality
industry, it is very important to have low debt ratio which indicates that the company is
greatly using its assets in outweighing its debt which was used to purchase it. There, it is
essential to gain insight about the ratios and what it indicates.
 Along with the other ratios, the profitability ratios is plays an important role. It states
about how much profit is being generated by the companies in respect to revenue. This
draws attention towards the factors leading to increase or decrease in the profitability of
the company (Yhip and Alagheband, 2020). This makes it important for hotel
management to grab some knowledge about the financial ratios and what does it reflect
about the financial performance of the company. Based on this key business related
decisions can be taken by the management.

Thus, above three factors shows the essential requirement of having an understanding
about the financial ratios and how it can utilize in an effective manner. This will support the
companies in formulating and implementing strategies which will help in improving its
performance.
c)Benefits and limitations of ratio analysis in decision making within hotel industry
Interpreting the financial statements of the organization is very crucial for all the
stakeholders and ratio analysis is one of the vital tools for the purpose of financial analysis and
financial management. There are certain advantages as well as disadvantages of ratio analysis in
the hotel and tourism industry. A detailed analysis of the same is given below.
Benefits:
 The ratio analysis will provide support in validating or disproving the decisions with
respect to the financing, investment and operating decisions of the organizations
(Myšková and Hájek, 2017). It provides the summary of entire financial statements in the
comparative figures which provides assistance to the management of the organization in
evaluating and comparing the financial position of the business along with the outcome
of the business.
 It provides simplified formate of the complex accounting statements and the other
financial data into simple ratios in terms of liquidity, profitability, solvency and so forth.
This results into effective analysis of the financial data and in taking effective decisions.
 The ratio analysis helps in identifying the key weaknesses or place of issue and brings it
to the attention of the management. It also provides assistance to the organization in comparing with the other firms, industry
standards and the intra firm comparison. It will assist the business entity in comparing
and understanding its financial position in the economy.
Limitation:
 The information used in ratio analysis is based on the historical data which are released
by the organization. Therefore, the ratios might not provide or represent the future
performance of the company.
 Since, the financial statements are being released periodically which caused time
difference between each release. In case, when the inflation occurs between these periods
then the actual prices may not be reflected in the company's financial statements. Thus, it

is different to compare numbers from different periods until they are adjusted for the
inflation.
 In situation when the organization accounting policies and the procedures being followed
by the company are changed then it will have significant impact over the financial
reporting (Franklin, Graybeal and Cooper, 2018). The financial metric used in ratio is
changed then the outcome after the change will be incomparable with the outcome before
change. Thus, it requires the analyst to be updated with the changes in the accounting
policies.
 Any change in the operational structure of the company whether it is from supply chain,
product selling etc. When there is significant change then the comparison of the outcome
before and after change might be misleading the overall conclusion with respect to the
organization's performance and growth.
 The analyst is required to be aware of seasonal effect on the financial ratios. This is the
major limitation of financial ratios because of its inability to adjust the ratios with respect
to the seasonality effect and this consequently lead to false interpretation of the financial
results.
 Ratio analysis is dependent upon the information provided by the business organization
in its financial statements. Thus, this information can be easily manipulated by the
organization in order to report better performance than its actual performance. Therefore,
ratio analysis might not reflect the actual nature of the business performance as the
manipulative data cannot be detected through simple analysis. This incurs the need for
the analyst to be aware of all the possible manipulations and should consider due
diligence before reaching any conclusion.
CONCLUSION
It can be concluded that financial statement analysis helps an organization in taking
effective steps in improving its financial position. It is important for hotel industry to have
knowledge and understanding about the ratios and its implication so that business can be
managed appropriately. Gatsby Grange should either increase its current assets or reduce its
current liability for improving its liquidity position. It should also reduce its expenses and
increase its revenue for enhancing its profitability. Otherwise, the overall financial position is
good.

TASK 2
Covered in PPT.

REFERENCES
Books and Journals
Arif, T. M. H. and et.al, 2016. Financial Statement and Competitiveness Analysis: A Study on
Tourism & Hospitality Industry in Bangladesh. International Journal of Financial
Research. 7(4). pp.180-189.
Bragg, S. M., 2018. The Interpretation of Financial Statements. AccountingTools, Incorporated.
Franklin, M., Graybeal, P. and Cooper, D., 2018. Use Information from the Statement of Cash
Flows to Prepare Ratios to Assess Liquidity and Solvency. Principles of Accounting,
Volume 1: Financial Accounting.
Lee, B. H. and Lee, S. H., 2018. A study on financial ratio and prediction of financial distress in
financial markets. The Journal of Distribution Science. 16(11). pp.21-27.
Myšková, R. and Hájek, P., 2017. Comprehensive assessment of firm financial performance
using financial ratios and linguistic analysis of annual reports. Journal of International
Studies, volume 10, issue: 4.
Yhip, T. M. and Alagheband, B. M., 2020. Financial Statement Analysis. In The Practice of
Lending (pp. 47-94). Palgrave Macmillan, Cham.