Evaluating Break-even Point and Budgeted Loss for a Business Unit
Added on 2019-12-03
21 Pages6145 Words161 ViewsType: 161
Finance
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Finance in hospitality
Table of ContentsIntroduction................................................................................................................................1Task 1.........................................................................................................................................11.1 Sources of funding within business and service industry................................................11.2 Methods of generating income for a large chain of restaurants.......................................2Task 2.........................................................................................................................................22.1 Elements of cost, gross profit percentages.......................................................................22.2 Methods of controlling stock and cash in a business and service environment...............3Task 3.........................................................................................................................................43.3 Process and purpose of budgetary control.......................................................................43.4 Variance analysis of Yuri’s budget..................................................................................5Task 4.........................................................................................................................................53.1 Source and structure of trial balance................................................................................53.2 Business accounts, adjustments and notes.......................................................................64.1 Ratio analysis...................................................................................................................84.2 Recommendations for future management strategies......................................................9Task 5.........................................................................................................................................95.1 Classification of costs......................................................................................................95.2 & 5.3 Contribution per unit and break-even analysis....................................................10Conclusion................................................................................................................................11References................................................................................................................................12
List of tablesTable 1: Trial balance’s performa..............................................................................................6Table 2: Income statements - adjustments.................................................................................6Table 3: Balance sheet - adjustments.........................................................................................7Table 4: Ratio Analysis for R. Riggs.........................................................................................8Table 5: Calculation of Variable Cost per Unit.......................................................................10Table 6: Sensitivity analysis.....................................................................................................10
INTRODUCTIONIn present scenario, hospitality industry is growing at significant pace. The growth inindustry needs to be accompanied by its financial or monetary growth (Helfrit, 2001). It isessential for businesses in hospitality sector to plan their financial resources in an effectivemanner. The financial planning involves proper allocation of financial resources and efficientforecasting future. The report proposed herewith emphasizes on providing an in-depthoverview of financial planning within hospitality sector. The research report presentedherewith helps in generating deep understanding of financial planning within hospitalityindustry. TASK 11.1 Sources of funding within business and service industryThe organization needs to acquire funds through suitable sources of finance so as tomeet its monetary requirements. The varied ranges of financial sources that are available tobusinesses in hospitality sector are described underneath in detail. Bank loans: The organization can acquire funds through bank loans so as to meet allkind of financial requirements (Nikbakht, 2006). The banking units in present scenario tendto provide varied range of loan facilities. This in turn helps in meeting short to long-termfinancial requirement on part of the organization. Equity capital: The businesses in hospitality sector can acquire funds through issuingequity shares. The financing option helps in meeting business requirement for long-run. Theacquisition of funds through equity capital does not involve regular interest payments.However, financing option results in dilution of ownership among shareholders. It can betherefore claimed that the source of financing helps in meeting business requirement for longrun. Retained earnings The businesses in hospitality sector can utilize funds that are savedas a part of reserves and surplus. It is the source of funding that helps in meeting financialrequirement at free of cost. Henceforth, it is considered to be suitable to meet financialrequirements in short and very-short run. Issue of debentures: The large-scale businesses within hospitality industry can issuedebentures so as to meet financial requirement (Grahl, 2009). It is the costlier source offinance that helps in meeting business requirement for long-run.The organization in present case needs to acquire £ 50000 for purchase of machinery.The bank loans are considered to be suitable source of financing for acquisition of machinery.1 | P a g e
It is through bank loans that the hotel unit is able to acquire funds so as to purchasemachinery. 1.2 Methods of generating income for a large chain of restaurants It is essential for businesses to generate sufficient amount of income on continuousbasis. The large chain of restaurants helps can generate income through following ways: Product development: The restaurant unit can offer wide range of eatables so as tosuit taste buds of customers. This in turn helps in attracting large number of customers andincreasing profitability on part of the organization. Market expansion in foreign markets: The large-scale restaurant units can expandtheir operations in foreign markets. In present scenario, Asian markets offer wide range ofgrowth opportunities (Deakins, Galloway and Morrison, 2002). It can be therefore claimedthat expansion in foreign markets helps in generating more amount of income on part ofrestaurant unit. Market expansion in domestic markets: Opening up more number of branches indomestic country also helps in generating of additional income. Henceforth, opening up ofmore branches in domestic country also leads to increasing profitability. Franchising: The large chain of restaurants can offer franchisee to open up newbranches. This in turn helps in increasing revenue and income earned on part of the restaurantunit. The restaurant units can therefore earn additional income by offering franchising todifferent businesses. TASK 22.1 Elements of cost, gross profit percentages Elements of cost The businesses tend to incur varied range of costs while carrying its manufacturingand operations. The different elements of costs incurred on part of the organization includesfollowing elements: Material costs: The costs incurred on part of the restaurant unit in acquiring rawmaterials (Hirsch, 2000). The organization tends to incur sufficient amount of expenditure onacquiring materials for supporting manufacturing process. Labour costs: In order to support operations, the business unit needs to pay wages andsalaries to its employees. In case of hospitality sector, employees tend to represent the2 | P a g e
business unit. Henceforth, the organization needs to incur high amount of labour costs formanagement of business operations. Administrative and other expenses: The business unit needs to incur administrativeand other expenses apart from labour and material costs (Hildreth, 2004). The businesses inhospitality sector needs to incur sufficient amount of administrative expenses for the purposeof managing operations. Gross profit percentage The organization can judge its profitability by estimating gross profit ratio whichindicates percentage of profit earned after meeting all direct expenses (Friedlob and Schleifer,2003). The formulas mentioned below helps in estimating gross and operating profit ratio asmentioned underneath.Grossprofitratio=GrossProfitNetSales∗100Operatingprofitratio=OperatingProfitNetsales∗100Operating profit Ratio for marks and Spencer for 2013:Operatingprofitratio=838.229382.37∗100Operatingprofitratio=8.93%As per the estimations, marks and Spencer has earned operating profit ratio of 8.93%.It can be claimed that the organization is able to earn sufficient profitability after meeting alldirect expenses. However, the organization is able to increase profitability by reducingoperating and other business expenses. 2.2 Methods of controlling stock and cash in a business and service environment In order to achieve operational excellence, the organization needs to adopt strictcontrol mechanism. The business unit needs to adopt appropriate strategies for controllingstock and cash flow. The lists of techniques through which stock can be controlled withinbusiness unit are described underneath in detail. Economic order quantity: The organization needs to determine economic orderquantity that helps in determining level at which inventory needs to be re-ordered (Theekeand Mitchell, 2008). It is through estimation of economic order quantity that the organizationis able to order appropriate quantity of inventory at adequate intervals. 3 | P a g e
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