Understanding Financial Ratios in Hotel Management

International hotel
management

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
a) Calculating and analysing financial ratios...............................................................................1
b) Discussing why an understanding of ratios and their fluctuations is essential for Hotel
management.................................................................................................................................7
c) Benefits and limitations of ratio analysis in decision making within hotel and tourism
industry........................................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial management is a procedure of managing the financial performance and position of an
organisation (Ahrendsen and Katchova, 2012). This procedure is the combination of various
activities including procuring and utilization of funds, recording and transacting financial records
and many more. The main aim of this report is to build an understanding about the financial
management in hotel and tourism industry. For this purpose, the organisation which has been
given is operating in hotel industry and named as Gatsby Grange. This organisation is a small
chain of Boutique within the region of United Kingdom and Northern Ireland.
In this report, the financial ratios of Gatsby Grange will be calculated by using their financial
statements. This report will include an analysis of ratios and their fluctuations in order to
understand why they are important for hotel management. Lastly in this report, benefits and
limitations of ratio analysis will be identified and analysed that impact the decision making of
hotel and tourism industry (Kansal, Joshi and Batra, 2014).
MAIN BODY
a) Calculating and analysing financial ratios
Ratio analysis is a financial technique to identify the true financial performance and position of a
business organisation (Mathuva, 2015). These ratios are calculated using the financial statements
of a company which are income statement, balance sheet and cash flow statement. In the present
case of Gatsby Grange, the ration analysis has been conducted for three ratio families which are
profitability, liquidity and gearing.
Profitability ratios
This family for the ratios is associated with the profit making ability of an organisation (Olson
and Groves, 2012). The ratios of profitability are the metrics which helps in analyse the relative
income of an organisation against the revenue, costs and assets. Ratios which are selected to
compute profitability of Gatsby Grange are net and gross margin.
Net profit margin
Net profit margin
Formula Net income / net sales * 100
2018 2019
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Net income 4008 4073
Net sales 5500 6000
Calculation 4008 / 5500 * 100 4073 / 6000 * 100
Result 72.87% 67.88%
The above tabular and graphical analysis shows that the ability of Gatsby Grange to earn
net profit against their revenue is quite high as the net profit margin of this company was 72.87%
in 2018 and 67.88% in 2019. Even after having high capability of earning profits, the trend of
this ratio is degrading which means the capbilities of Gatsby Grange are continously decresaing.
Gross profit margin
Gross profit margin
Formula Gross income / net sales * 100
2018 2019
Gross income 5050 5150
Net sales 5500 6000
Calculation 5050 / 5500 * 100 5150 / 6000 * 100
Result 91.82% 85.83%
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