BIZ201 - Accounting: Crystal Hotel Financial Scenario Analysis Report

This report presents a comprehensive financial analysis of Crystal Hotel Pty Ltd., comparing its performance to industry benchmarks. The analysis encompasses various aspects of the business, including revenue, cost of sales, personnel costs, and operating costs, to evaluate profitability, efficiency, liquidity, and solvency. Key financial ratios are computed and compared to industry averages, providing insights into the hotel's financial health. The report also identifies three additional industry-specific benchmarks, such as Revenue per Available Room (RAR), cost per occupied room, and labor cost ratio, to further assess the hotel's performance. Findings indicate that while the hotel's profitability aligns with industry standards, its room revenue lags behind comparable hotels, and efficiency ratios highlight areas for improvement in inventory management and receivables. Based on these findings, the report offers recommendations regarding potential investment in hotel upgrades to enhance room revenue and customer recovery.

Subject name: BIZ201 Accounting for Decision Making
Assessment title: Scenario analysis - Individual
Date: 18th April, 2020
Student name:
ID:

Executive Summary:
The report discusses the financial performance of Crystal Hotel Pty Ltd. and compares the financial
performance to the industry benchmark for this category of hotel. The report focusses on various
parameters of the business such as revenue, cost of sales, Personnel cost, unallocated operating
costs and total cost proportions.
The report also discusses the profitability, efficiency, liquidity and solvency of the business, through
various rations computed in this regard and the comparison of such ratios with the industry
benchmarks for companies with similar hotel operations.
The report also provides information on 3 additional industry specific benchmarks which the
company could use, in order to track the performance of the company, as compared to the other
comparable companies in the industry. These indicators are peculiar to hotel industry and are used
across the industry by the experts, to track the performance of a hotel and also to benchmark it with
the performance of other hotel.

Contents
Introduction:..........................................................................................................................................4
Discussion:.............................................................................................................................................5
Comparison of financial performance with industry.........................................................................5
Based on the number of rooms.....................................................................................................5
Based on the rate charged per night.............................................................................................5
Ratio analysis:....................................................................................................................................5
Profitability:...................................................................................................................................5
Efficiency:......................................................................................................................................6
Liquidity:........................................................................................................................................6
Solvency:........................................................................................................................................6
3 additional industry specific benchmarks:.......................................................................................6
RAR (Revenue per Available Room):..............................................................................................6
Cost per occupied room:...............................................................................................................7
Labour cost ratio:...........................................................................................................................7
Conclusion:............................................................................................................................................7

Introduction:
Crystal Hotel Pty. Ltd. owns a 3.5-Star hotel at a prime location in Sydney, the hotel has 160 rooms
with the average price of $150 per night. In addition to the rooms, the hotel has a function room
with maximum capacity of 250 guests and a conference room with a maximum capacity of 200
guests.
The hotel is at a prime location but has become quite out-dated. The hotel currently serves majorly
corporate clientele, hotel is used by the corporates for the stay of their expat employees. Most of
these are long term contracts, wherein the invoices are raised on credit at the end of the month, for
all the stays in a month and payment is made after a credit period.
The management of the company is planning to invest in the hotel to upgrade the hotel in order to
attract more tourists but since that would involve significant cash outflow, the management wanted
us to look at the financials for the hotel and compare the financial indicators to the industry
benchmarks and provide an opinion on the performance of the hotel.

Discussion:
Comparison of financial performance with industry
The analysis of the performance of Crystal hotel, is as under:
Based on the number of rooms, i.e. more than 150:
Compared to the industry average of 65%, crystal’s revenue from rooms is 50%, this is primarily due
to the old construction of the hotel and reduced occupancy of the hotel and the food and beverage
revenue for crystal is 29% of total revenue, as against the industry average of 25%. Revenue from
halls for the company is 16.91% against the industry average of 6%.
Similarly, the room cost of sales of crystal is 9.3%, against the industry average for such category of
hotel is 8% and the labor cost for rooms is 18.91%, against the industry average of 13%. The F&B
cost of the company is 9.16% against the industry average of 8%. Personnel cost for food and
beverage of the company is 21.3%, against the industry average of 11% (Eshna Verma (2020)).
Based on the rate charged per night, i.e. $ 150 per night:
Compared to the industry average of 58%, crystal’s revenue from rooms is 50%, this is primarily due
to the old construction of the hotel and reduced occupancy of the hotel and the food and beverage
revenue for crystal is 29% of total revenue, as against the industry average of 30%. Revenue from
halls for the company is 16.91% against the industry average of 4%.
Similarly, the room cost of sales of crystal is 9.3%, against the industry average for such category of
hotel is 7% and the labor cost for rooms is 18.91%, against the industry average of 12%. The F&B
cost of the company is 9.16% against the industry average of 9%. Personnel cost for food and
beverage of the company is 21.3%, against the industry average of 13%.
Based on the above analysis, the performance of Crystal Hotel Pty. Ltd., is below the industry
benchmark for this category of hotels. The company is able to generate lesser revenue from rooms,
as compared to the other hotels, this is primarily due to the old construction of the hotel, which
leads to only corporate bookings, for their expat employees.
Whereas, on the other hand, the company’s revenue from food and beverage is higher than the
industry benchmark based on both revenue and number of guests. And also, the costs incurred by
the company is higher than the industry benchmarks for cost of sales as well as personnel costs.
Unallocated operating cost of the company is 12.52% of revenue as against the industry average of
14%.
Ratio analysis:
Profitability:
The company’s gross profit and net profit ratio, i.e. 79% and 12.7% respectively are almost similar to
the industry average, i.e. 81% and 11%, this indicates that the company is able to generate profits,
similar to the other companies in this sector.

Whereas, the return on assets and return on equity of the company, i.e. 20.48% and 27.72% is far
above the industry average of 8% and 9% respectively, this is primarily because the hotel is old and
the investment made in the hotel has been depreciated and the asset base has become significantly
low and hence, the return in terms of % of assets has become high as compared to the industry
average (Dorron Nissim and Stephen H. Penman (1999)).
Efficiency:
The company has a inventory turnover ratio of 5.62 as compared to the industry average of 8.6%,
this indicates that hotel is not being able to manage its inventory efficiently and it needs to focus on
ways to increase the inventory turnover ratio.
Similarly, the average collection days for receivable of the company are 64.59 days, as against the
industry average of 35 days, this is primarily due to the composition of customers of the company.
The company majorly has corporate customers, who are invoiced on credit and at the end of the
month, for all the stays during the month.
Liquidity:
The company has a current as well as quick ratio, significantly lower than the industry average.
Current and quick ratio of the company stands at 1.26 and 0.68 respectively, against the industry
average of 3.2 and 2.12 respectively.
This indicates that the company has got higher amount in the current liabilities, which is bringing
these ratios below the industry average for these ratios.
Solvency:
The company has a debt to equity ratio of 28.75%, indicating that for every 100 $ of equity, there is
28.75 $ of debt in the capital structure of the company. The industry average for this parameter
couldn’t be computed easily, as it varies significantly across the companies, depending on the
sources of funds, available with the promoters of the company.
The interest coverage ration of the company stands at 53.27, impliying that the company has
sufficient levels of EBIT, to be able to cover 53 times of the interest liability, that the company has, at
present Mohammed Nuhu (July, 2014).

3 additional industry specific benchmarks:
RAR (Revenue per Available Room):
This number implies the amount of revenue that the entity will be able to generate, by renting one
available room for one night. This number provides a good basis for across company comparison of
projected revenue, based on forecasted occupancy.
Cost per occupied room:
This parameter computes the cost that the company would incur in case the room is occupied for
one night. This is another important parameter which is tracked and compared across industry, to be
able to derive the amount of profit that the hotel would be able to generate through each occupied
hotel room.
Labour cost ratio:
Since labour cost account for a significant cost for a hotel, the labour cost ratio is an important
parameter, it measures the labour cost as % to revenue that the hotel earns. A comparison of this
ratio across hotels, provides an idea of the total labour cost that the hotel incurs and whether that is
on higher side or lower side (Prof. Nandini Srivastava, Rekha Maitra (2016)).
Conclusion:
Based on the above analysis across various parameters, i.e. financial performance, ratio analysis
dealing with Profitability, Liquidity, Solvency and Efficiency and the comparison of these ratios as
well as financial performance to the industry averages and benchmarks, it is evident that, though,
the profits, being generated by the hotel are in line with the industry averages, both from gross and
net profit perspective, the hotel is not able to generate room revenues, equivalent to those
generated by other comparable hotels.
Further, the efficiency ratios indicate that hotel needs to work on two significant areas, i.e. Inventory
and receivables, as the receivable days for the hotel are high as compared to industry average.
So, in case the management is of the opinion that investing money in upgrading the hotel would be
able to lead to an increase in the room revenue for the hotel and also improve the recovery period
from customers, as that would also mean an increase in the walk-in customers, with cash payment
terms, then, it is advisable for the management to invest in upgrading the hotel.

References:
Dorron Nissim and Stephen H. Penman (1999), Ratio analysis and equity valuation, retrieved on 19th
April, 2020, Available at
https://pdfs.semanticscholar.org/5ee8/f4ad044c3a09b42383b8403b0390ed7b8920.pdf.
Eshna Verma (2020), Financial performance – Understanding its concepts and importance,
retrieved on 19th April, 2020, Available at https://www.simplilearn.com/financial-
performance-rar21-article.
Mohammed Nuhu (July, 2014), Role of Ratio Analysis in Business Decisions: A Case Study NBC
Maiduguri Plant, retrieved on 19th April, 2020, Available at
http://www.mcser.org/journal/index.php/%20jesr/article/download/4399/4302.
Prof. Nandini Srivastava, Rekha Maitra (2016), Key Performance Indicators (KPI) in Hospitality
Industry: An Emphasis on Accommodation Business of 5 Star Hotels of National Capital
Region, retrieved on 19th April, 2020, Available at https://www.arcjournals.org/pdfs/ijrth/v2-
i1/4.pdf.