Financial Management in the Hospitality Industry: Planning, Budgeting, and Reporting

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Student Name
Advanced Diploma in Hospitality
Date of Submission

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Introduction
Financial information helps businesses operating in the hospitality industry to
plan, control, evaluate and make decisions. Hotels and other business in the industry
rely on their previous operating and financial information to create future budgets
and conduct profitability and ratio analysis. This paper seek to provide insightful
information about financial decisions and management in the hospitality sector. The
study is two sections. The first section addresses planning for financial management.
The second section addresses creation and implementation of budget. The study
also analyses the importance and application of budget reports.1
 Planning for financial management
a) Analysing profit/ loss of a company
The profit or loss of a company is obtained from the income statement. The
income statement summarises the revenues and expenses of a company during a
financial year. Profit is realised when revenues are higher than expenses, while
losses are incurred when expenses are higher than the revenue. Revenue comes
from sales, while expenses come from the expenses incurred to generate income.
Common expenses in the income statement are cost of sales, administrative and
selling cost, advertising and marketing cost, technology, interest expense, and taxes.
b) Investigate how a company realised a profit/loss
1 J. Edward Vanderbeck and Mitchell R Maria,
Principles of Cost Accounting (New Jersey:
Cengage Learning, 2015).

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Profit or loss depends on the ability or inability of a company to generate
revenue. Analysing the profitability of a company is important in making decisions.
Some of the reasons which lead to profit or loss are analysing the ability of a
company to; a) generate revenue; b) manage expenses, and efficiency to receive
debts from customers as well as pay creditors. Therefore, the investigation should
revolve around determining the profit/ loss realised from each product and service
categories. Likewise, the proportionality of the cost associated with each product/
service to the general cost should be known. The decision that led to profit/ loss
should also be reviewed to improve operational efficiency.2
c) Predict future expenses
Some of the business expenses include rent, employee wages, insurances,
advertising, legal fees, vehicles, production expenses, and office. An expense
forecasting help companies to estimate their expenses over a long period. A new
business should base its forecasting of expenses on the industry benchmarks and
market research/ information. The past and current market information can be to
predict future expenses precisely. An established business should rely on its
previous records to forecast its expenses. However, a manager of such a company
should factor in expected changes such as additional/ reduction of employees and
an increase in costs.3
d) Analysing the company’s cash flow trends
Analysing the trend of a company’s cash flow is the best way of understanding
its financial health. The trend of a company’s cash flow can be analysed using
2 Alnoor Bhimani, Horngren T Charles, Datar M Srikant, and Raja Madhav,
Management
and Cost Accounting (New Delhi: Pearson Education Limited, 2015).
3 Ibid. 79,

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financial ratios. Ratios are essential in measuring the ability of a company to manage
its cash.4
Managers are interested to know how long it would take to sell inventories,
collect debts from debtors, and pay creditors. The process of analysing a company’s
cash flow trends should start by obtaining recent financial statements. Three ratios
that are commonly used to measure cash flow trend are;
 Account receivable turnover ratio
 Account payable turnover ratio
 Inventory turnover ratio
Account receivable turnover ratio
The ratio examines how long it takes debtors to pay the amount they owe a
company. Account receivable turnover ratio is calculated by dividing outstanding
annual credit receivables by total annual credit receivables. The obtained figure is
multiplied by 365 days. A lower number of days shows that the company is efficient
in collecting its debts from customers. Likewise, a higher number of days shows that
a company’s debt collection policy is ineffective.5
Account payable turnover ratio
Account payable turnover ratio is used to calculate the number of days in a
year; it would take a company to pay its creditors or vendors. More days means that
a company prefers to hold debts longer before making payments. On the other hand,
4 Alnoor Bhimani, Horngren T Charles, Datar M Srikant, and Raja Madhav,
Management
and Cost Accounting (New Delhi: Pearson Education Limited, 2015).
5 Parker, Robert H. Parker,
Accounting in Australia (RLE Accounting): Historical Essays
(Sydney: Routledge, 2013).