Finance in Hospitality Industry: A Comprehensive Report

This report provides a comprehensive overview of finance within the hospitality industry. It begins by examining various sources of funding, including internal sources like retained earnings and sale of assets, and external sources such as equity shares, bank loans, and debentures. The report then delves into income generation methods, including sales promotion, grants, and sub-letting. It also explores cost elements, including materials, labor, and expenses, and methods for controlling stock and cash, such as economic order quantity, just-in-time inventory, cash budgets, and variance analysis. The structure and purpose of trial balances are discussed, along with adjustments and notes. The report also covers budgetary control, variance analysis, and the calculation and analysis of financial ratios. Furthermore, it explores future management strategies, cost categories, and the application of marginal costing for short-term management decisions. The report concludes with a summary of key findings and recommendations for financial management in the hospitality sector.

FINANCE IN
HOSPITALITY INDUSTRY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
AC 1.1 Sources of funding available for business involved in hospitality industry...................1
AC 1.2 Contribution made by range of methods for generating incomes..................................3
TASK 2............................................................................................................................................3
AC 2.1 Element of cost...............................................................................................................3
AC 2.2 Methods of controlling stock and cash ..........................................................................5
TASK 3............................................................................................................................................7
AC 3.1 Source and structure of trial balance..............................................................................7
AC 3.2 Evaluating business account, Adjustments and Notes....................................................7
AC 3.3 purpose and process of Budgetary control ....................................................................9
AC 3.4 Variance analysis ...........................................................................................................9
TASK 4..........................................................................................................................................11
AC 4.1 Calculating and analysing ratios...................................................................................11
AC 4.2 Future management strategies .....................................................................................11
TASK 5..........................................................................................................................................12
AC 5.1 Category of cost............................................................................................................12
AC 5.2 Contribution per product/customer and explaining relationship..................................12
AC 5.3 Short – term Management decision ............................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Finance refers to management of funds for performing various activities of business and
it includes sources and application of funds. Finance in the hospitality business is related to the
different sources and management of funds by the organisation involved in hospitality industry.
This study will include different sources of funding available for organisation involved in
Hospitality business. Furthermore, it will provide different methods of generating incomes.
Moreover, this assignment will contain the three methods of controlling cost. It will provide
understanding of marginal costing.
TASK 1
AC 1.1 Sources of funding available for business involved in hospitality industry
There are different sources of funding available for the business involved in Hospitality
industry. It consists of internal and external sources of funding:
Internal sources of funding:
Retained earnings: This is the profit of business which are reinvested in the organisation
for performing various activities of firm rather than provided it to shareholders as dividends
(Dopson and Hayes, 2016). These earnings can be used by businesses involved in Hospitality
service sector to perform its various activities in order to increase its profitability.
Advantages
 It is a cheaper source of finance.
 This source of financing is flexible.
Disadvantages
 Improper utilization of funds if the purpose is not clearly stated.
 It does not allow shareholders to enjoy full benefits of earnings of company.
Sale of fixed assets: it is used as source of finance by organisation by selling the worn
out assets in the market which will generate income for the business involved in hospitality
industry to perform its various activities (Riley, 2019).
Advantages
 It helps in rapid disposal of the assets which is not required.
 It is easy way to raise funds.
Disadvantages
 It is a slow method of raising funds.
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 Many organisations do not have surplus assets to raise funds.
External sources of funding:
Equity shares: It can be used as source of finance by raising shares in the market to
generate revenue for operating various activities (Jones, Hillier and Comfort, 2016).
Advantages
 It can be issued without creating any charge on assets.
 It is a permanent source of funding.
Disadvantages
 Businesses in hospitality industry that are using only equity as source of funding then it is
not allowed for trading on equity.
 Raising equity finance is costly and time consuming (Kim and Jang, 2019).
Bank loan: It is borrowed from the bank in exchange of security for specific period to
perform various activities of business in hospitality industry.
Advantages
 It is an easy and safe source of finance.
 Interest rate is fixed for the period.
Disadvantages
 Larger loans have some terms and conditions which organisation have to comply.
 Bank loans require more formalities and paper work.
Debentures: It is a long term source of finance which is used by organisation for
operating its various activities to generate income.
Advantages
 The rate of interest payable is lower than the dividend paid on shares.
 It has fixed rate if interest due to which firm prefer this as source of funding.
Disadvantages
 It is the legal obligation of the company to pay interest and principle amount on maturity.
 Cost of raising finance through debenture is high due to high stamp duty (Jusoh and et.al.,
2018).
In my opinion, bank loan and retained earnings are the most useful option for
organisations involved in hospitality service industry as source of finance as it is more
advantageous and less risky than other form of sources. The businesses in hospitality industry
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should use bank loan and retained earnings as source of funding for operating its various
activities.
AC 1.2 Contribution made by range of methods for generating incomes
Sales promotion : This helps the firm in generating incomes by promoting the services
of organisation through advertising and various other promotional tool to increase the sales.
Grants : With the help of grants, The organisation involved in hospitality industry can
take the funds from government to raise funds. Grants are provided by government to companies
which help theb firm in performing their various activities to generate incomes.
Sub- letting : Organisation involved in hospitality industry by sub- letting the property
for various activities to other firm will help in increasing their income and will also attract more
customers towards the organisation.
TASK 2
AC 2.1 Element of cost
Material : It consists of the items which are required by organisation to run the business
and include the inputs. For example, restaurant have materials such as food ingredients to
prepare the food for customers. It includes materials which are used for manufacturing the
product.
Labour : It includes wages and salaries paid to employees and workers which are
involved in manufacturing and providing the service to customers (Radojevic, Stanisic and
Stanic, 2015). For example, labour for the restaurant are the workers providing the service to
customers.
Expenses : this includes direct and indirect expenses which are related to distribution of
the product and services to customers. It includes selling expenses, distribution expenses etc. For
example, restaurant have expenses such as selling expenses, electricity charges etc.
The following table shows the cost per unit of the restaurant by identifying its variable
cost and fixed cost.
Particular figures
Fixed expenses 5000
Variable expenses 6000
Total cost 11000
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No. Of customers served 200
cost per unit 11000/200 = 55
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Illustration 1: Fixed and variable cost
(Source: Fixed and variable costs, 2018)
Illustration 2: Semi- variable cost
(Source: Semi variable cost, 2016)

b)
Gross profit percentage: It shows the percentage of profit earned by organisation by
dividing the gross profit earned by total revenue (Megeirhi And et.al., 2018).
Selling price: It shows the price which is offered to customers for the products and
services. It is calculated by adding the gross profit margin to the cost of goods sold.
As per the above example, cost per unit is 55 which is derived by dividing the total cost
by the number of customer served. Suppose the gross profit margin of the restaurant is 20%. So
the selling price is derived by adding the gross profit margin to the cost of goods sold which
resulted in to 55+20% = 66 selling price per unit.
Cost 11000(200*55)
sales 13200 (200*66)
Gross profit 2200
AC 2.2 Methods of controlling stock and cash
Methods of controlling stock
 Economic order quantity: It is the ideal order quantity which businesses in hospitality
industry should purchase to maintain the stock level according to the demand in order to
reduce wastage of inventory.
Pros Cons
It helps in minimizing storage and holding cost It requires lot of calculation to determine the
EOQ level.
 Just in Time: This approach of controlling stock helps in increasing efficiency and
reducing the waste by receiving the stock at the time whenever the demand occurs.
Pros Cons
It helps in reducing the waste and helps in
saving the space for organisation involved in
hospitality industry.
There can be situation when there is shortage
of stock and supplier is unable to supply the
inventory.
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 Re- order lead time: This method allows the time between placing an order and
receiving it. It provides time for placing the next order.
Pros Cons
It helps in providing stock for the next order
and increases cash flow because increased
order fulfilment.
There may be lead time variation which affect
the time of ordering and receiving.
Methods of controlling cash
 Cash budget: Using cash budget helps in identifying the future cash requirement of the
firms by comparing the actual cash flow with the standard.
Pros Cons
It helps in identifying the future cash
requirement of organisation involve in
hospitality sector.
Estimated figures are based on assumption
which may provide wrong result.
 Variance analysis: It is related to comparison between the actuals with the forecasted
figures to identify the variances or deviations.
Pros Cons
This assist in measuring the deviations for
increasing cash inflow and reducing cash
outflow.
As it is based on forecasting it may provide
higher variances which is not beneficial for
enterprise operating in the hospitality service
industry.
 Cash flow statements: By preparing the cash flow statement organisation is able to
control the cash by maintaining the record of transactions which caused inflow and
outflow of cash.
Pros Cons
It assists in maintaining record of transaction
for future references.
Cash spending can be delayed and depreciation
and it does not show the real liquidity position
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of the organisation involved in hospitality
service sector.
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TASK 3
AC 3.1 Source and structure of trial balance
Definition: It is a statement which shows closing balances of all the ledger accounts in
the debit and credit side and it is the first step for preparing the financial statements.
Purpose: It's purpose is to prove that all the debit balances are equal to the credit
balances and if there are any variances it provides understanding that there is error in ledger
accounts.
Source and structure: It is a statement with two columns that consist of debit and credit
to identify the error if any in any of the ledger accounts. The figures are provided for the trial
balance from the closing balances of ledger accounts.
Sample trial balance
Procedure: There are three methods of preparing trial balance that consist of total
method, balance method and compound method. Under total method, it is prepared by taking the
debit and credit total of ledger account. In balance method, it is prepared by taking debit and
credit balances of ledger accounts. Compound method, It takes both the total and balances for
preparing the trial balances.
AC 3.2 Evaluating business account, Adjustments and Notes
a) Adjustments in trial balance
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Date Particular Debit (£) Credit (£)
Machinery A/c Dr
To M/s Ramsay machine
tools (being machinery
purchased on credit, but
not recorded ion books)
£200,000 £200,000
Wages A/c Dr
To salaries A/c (wages
incorrectly recorded as
salaries)
£43,000 £43,000
b) After adjustment trial balance
Particular L/F Debit Amount (£) Credit Amount (£)
Opening stock - 86000
purchases 11,36,000
Salaries 1,10,000
wages 61,000
Carriage inwards 26,900
Trading charges 64,000
Carriage outwards 52,500
Rent received 1,78,300
Cash 62,500
Capital 3,44,700
Bank (Overdraft) 37,980
Commission 42,780
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creditors 4,68,000
sales 15,48,700
debtors 2,56,000
Machinery 6,80,000
Total 25,77,680 25,77,680
AC 3.3 purpose and process of Budgetary control
Budgetary control is a process of formulating budgets for controlling the various
operations of organisation to increase the profitability of organisation involved in hospitality
industry (Lu and Kandampully, 2016). It helps in planning, co- ordination, communication and
controlling and evaluating the performance of organisation. Budgetary control main purpose is to
control the various activities of firm to achieve the objectives of company reducing the
deviations (Crossley and et.al., 2018). It is process of determining various actual results with
budgeted figures for the future period.
AC 3.4 Variance analysis
Variance analysis
Material total variance: it is the difference between actual cost of actual number of
units produced with its budgeted cost in terms of material (Li and Singal, 2019).
Direct material price variances: It refers to the difference between actual price paid to
obtain the direct material item with its budgeted price.
Direct material usage variance: It is the difference between standard quantity of
materials which can be used with the actual material used.
Elements Budgeted
performance
Actual
performance
Variance
(Budget
figures –
actual figures)
Causes Actions for the
improvement
Production (in
units)
1200 1000 200 Less
production
Focus on
raising demand
in the market
Sales 150000 126000 24000
Material 50000 46075
Labour 20000 21210
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