Financial Analysis of Hotel Bluebird: Sources, Methods, and Strategies

This report analyzes the financial aspects of the hospitality industry, with a specific focus on Hotel Bluebird located in Scotland. The study examines various sources of funding available to hospitality businesses, including internal and external sources like retained earnings, sale of fixed assets, bank loans, and debentures. It explores diverse methods for generating income, such as sales, commissions, sub-letting, and social media strategies. The report delves into cost and profit elements, including materials, labor, and overheads, and discusses the role of setting selling prices based on cost-plus pricing and competitor analysis. Methods of controlling stock and cash are evaluated, including inventory management systems and cash flow statements. The assignment also covers the trial balance, its sources, and structure, and evaluates business accounts, adjustments, and notes. It examines the purpose and process of budgetary control, including variance analysis, and assesses business performance through calculations and analysis. Finally, the report recommends future management strategies, categorizes costs (variable, fixed, and semi-variable), calculates per-product contributions, and justifies the use of break-even analysis for short-term decision-making.

FINANCE IN THE
HOSPITALITY INDUSTRY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Sources of funds available for Hotel Bluebird........................................................................1
B. Range of methods for generating income in Hospitality organization ...................................2
TASK 2............................................................................................................................................3
A. Elements of cost and profit and role of setting selling prices in the service business
environment.................................................................................................................................3
B. Methods of controlling stock and cash....................................................................................4
TASK 3............................................................................................................................................4
A. Trial balance and its sources and structure and also evaluate business accounts, adjustments
and notes......................................................................................................................................4
B. The purpose and process of budgetary control and budgetary variance relating to hotel blue
bird...............................................................................................................................................5
TASK 4............................................................................................................................................6
A. Calculating and analysing business performance ..................................................................6
B. Recommending appropriate future management strategies....................................................8
TASK 5............................................................................................................................................8
A. Categorising and explaining costs as variable, fixed and semi-variable.................................8
B. Calculating per product contributions and relationship between cost/profit and volume.......9
C. Discussing and justifying use and significance of Break-Even analysis for short-term
decision-making.........................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Finance in the hospitality industry is related to managing the sources of funds available
for each organization. Bluebird Hotel will be included in this assignment which is located at
Scotland. The Hotel is having three main departments for operations which include
accommodation, contract services and restaurant and bars which presented 52%, 38 % and 10%
of sales in 2017. This study will include different sources of funds available for hospitality
business. Furthermore, it will include different methods used for generating incomes. Moreover,
it will include elements of cost and profit for determining the selling price. Also, it will include
different methods of controlling stock and cash. It will also evaluate trial balance and sources
and structure for hospitality organization. This assignment will provide the purpose of budgetary
control in hospitality organization.
TASK 1
A. Sources of funds available for Hotel Bluebird
Funds are required by hospitality organization to perform various operations of the
business. Finance is required for acquiring assets of the firm, restructuring of firm and to meet
the cash requirement for business to perform various operations(Qi and et.al., , 2018). Bluebird
hotel require finance to perform its various activities to provide quality services to its customers
such as high infrastructure facility etc.
There are various sources of funding available for businesses such as:
Internal source and external sources
Internal sources of funds are acquired from with the organization to perform various operation of
business. Internal sources of funding includes Retained earnings, sale of fixed assets, owner’s
capital, debt collection etc.
 Retained earnings: Retained earnings are the profits of the organization which the firm
uses to perform its various operation rather than giving it to the shareholders as
dividends.
 Sale of fixed assets : sale of fixed assets is used as an internal source of funding for the
organization as it assist in removing the unused machinery and plant to get funds to
perform various operations(Beck, J2017). Fixed assets includes plant and machinery,
building, furniture etc.
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External sources of funds are acquired by organization from the outside to perform its different
functions. External sources of funding includes bank loans, debentures, trade credit etc.
 Bank loans: Bank loans are the external sources of funding available to the
organization to perform its various operations. Bank provide loans but the organization
have to pay interest to acquire loan from bank.
 Debentures: Debentures are the external sources of finance. Company issue debenture
to the public on which firm have to pay interest (Chong, 2015). Debenture is redeemable
after completion to the period.
Hotel Bluebird in order to perform its various operations acquire different sources of
funding which helps the firm in operating its various activities. Hotel Blue bird acquire bank loan
which is an external sources of funding to perform its various activities.
B. Range of methods for generating income in Hospitality organization
There are various methods through which income for the hospitality organization can be
increased. Income methods include income generation by sales, commission, sub- letting,
sponsorship, grants, tracking mechanisms.
Sales: Sales is a method through which hospitality organization can increase its revenue.
Hospitality organization can provide high quality products and services to customers in order to
increase customer base.
Commission: Commission is the method of generating income. Commission is provided
by third party for completing a particular work (Dogru, 2017). Hospitality industry can acquire
commission by completing the particular task.
Sub – letting: It is the option through which hospitality organization can generate more
income by sub- letting its property to different individual to perform various activities at
different location.
Social media: Social media are the method through which hospitality organization can
generate more revenue. Company by increasing its online presence can attract customers from
different regions through which brand image of organization also get increased and also assist in
increasing its profitability. Social media sited include Facebook, Instagram etc. through which
hospitality organization can provide its customers various hotel packages and discounts.
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Hotel bluebird in order to generate more income uses the above method to increase its
revenue. Hotel Blue bird is providing high quality product and services to customers to increase
its revenue.
TASK 2
A. Elements of cost and profit and role of setting selling prices in the service business
environment
Elements of Cost-
Materials: materials refers to the input required to provide the product and services
which include accommodation, restaurant and food services.
Labor: labor is included as the element of cost in the service business environment as
labor is required by organization to provide products and services to the customers.
Other direct costs: The other direct costs is identified that offeror does not treat the
same as direct material cost or direct labor cost. It includes special tooling and test equipment.
Variable overheads: The manufacturing costs varying roughly in direct relation to
change in production output. This concept is utilized for modeling future expense level of
business and determine the lowest price at product or service can be sold. Example, production
equipment, utilities etc.
Fixed overheads: The cost do not vary as a result of changes in activity and are needed
for operating business in effectual manner. Example are rent, insurance etc.
Elements of Profit-
Sales: sales is the element of cost because cost of the product is determined to identify its
selling price by adding profit to it. Sales is regarded as the element of cost to identify its product
selling price on the basis of cot of that service.
Determining selling price
Cost plus profit margin is used which involves adding markup to cost of goods and
services for arriving at selling price. Hence, after adding certain profit percentage and cost,
selling price is attained. The selling price of the service is determined by identifying the
customers’ demands for that particular a service (Dimitropoulos, 2018). Selling price of services
in the business environment is also determined by identifying the selling price of the same
service offered by the competitors to get an idea about the price prevailing in the market.
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Cost of the product and services is related to its overall cost which is incurred by
organization to provide that service to its customers (Pereira-Moliner and et.al., 2015). Elements
of cost includes sales, materials, labor, capital, gross and net profit etc.
Gross and net profits: gross and net profits are taken into consideration as elements of
cost to derive the profits acquired by the organization by providing that service.
Hotel blue bird in order to identify its selling price of the products and services determine
the product and service demand in the market to find out the selling price of the product. The
selling price is determined by Hotel blue bird after identifying the price of its competitors and the
level of service quality to provide better service quality to customers at affordable prices to
increase its customer’s base in all over the regions.
B. Methods of controlling stock and cash
Stock and cash are required to be controlled in order to reduce the over utilization of the
resources. Stock is the inventory which is required by organization to produce the product.
Stock can be controlled by adapting methods such as management of inventory in proper way by
making sales budget etc (Perez and del Bosque, 2014). To forecast the demand in order to
maintain accurate inventory level in the organization. Stock of the organization is controlled by
implementing inventory management system in the firm to track the inventory on the daily basis.
Another method through which organization can control the cost is making proper
accounts for inventory in order to record the closing inventory at the end to identify the level of
stock. Cask can be controlled in the company by making cash flow statement which assist in
identifying the inflow and outflow of cash (Crossley and et.al., 2018). Cash control is necessary
to maintain the minimum cash balance for operating various functions of the organization. Cash
control is required by organization to identify its have the minimum balance of cash in the
organization. Cash can be controlled by making proper cash account which will assist the firm in
determining the closing cash for the period.
Hotel blue bird adopted inventory management system in order to control the stock to
reduce the over utilization of the stock. Hotel blue bird is also maintaining cash flow statements
in order to determine the cash inflows and outflow. It also involved in preparing cash budget to
identify the future requirement of cash to control the cash outflow to increase its profitability.
Hotel blue bird is also making sales budget to identify the demands of customers to control the
stock of the enterprise.
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TASK 3
A. Trial balance and its sources and structure and also evaluate business accounts, adjustments
and notes
Trial balance is the statement which is prepared on the basis of ledger accounts and this
statement include the debit and credit balances. The balances of the debit and credit are identical.
Trial balance is prepared in order to identify that the amount posted in the ledgers are
mathematically correct.
Trial balance is a statement which contains two columns one include debit balances and
the other include credit balances (Jones, Hillier and Comfort, 2016). Trial balance is matched if
the principles of double entry are correctly applied to the ledgers. The main function of the trial
balance is to identify the defect due to which trial balance balances of debit and credit are not
identical. There are various errors which can be identified with the help of trial balance which
include error of omission, error of original entry etc. The trial balance get the information from
the summary of sales, purchase and ledgers maintained by the organization.
Example of Trial balance
Trial balance as at 31st March
2018 Debit Credit
Sales 3850
Gross profit 2140
Net profit 1850
Bank 1780
Debtors 1600
Prepaid expenses a2200
Bank overdraft 1950
Creditors 1040
Capital 2780
stock 1900
Long-term debt 1850
11470 11470
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Business accounts are prepared for sole proprietor, partnership and company. The
organization prepares the business accounts to identify the profitability and position of the
business on the basis of information provided in the accounts (Iaquinto, Jancenelle and
Macpherson, 2017). The organization normally maintain three accounts that include profit and
loss account, balance sheet and cash flow statement.
Profit and loss account is prepared to determine the net profit or loss for the period on the basis
of incomes and expenses relating to the period (Fakharyan and et,al., 2014). Balance sheet is
prepared by to know about the financial position of the organization and cash flow statement is
prepared to know about the cash inflow and outflow for the particular period.
B. The purpose and process of budgetary control and budgetary variance relating to hotel blue
bird
Purpose of budgetary control
 Budgetary control is a continuous process which is required to achieve the organization
goals and objectives (Ma and et.al., 2019).
 It is important to monitor the performance by making comparisons between actual and
standards to identify the variances which affect the performance of the business.
 It compels for planning where management is forced for looking ahead which is
responsible for setting targets, issues must be anticipated with objective and direction to
Hotel Blue bird.
 The ideas and plan must be communicated as they are effected through budgetary control
for ensuring about awareness with necessities as formal system.
 It coordinates the activities of multiple departments along with organization's sub unit of
business entity.
 The employees are highly motivated with objective of raising performances through
budgetary control.
Process of budgetary control
Budgetary control process include setting the standards for the income and expenses to
compare them with the actual to identify variances in order to take necessary steps to increase the
profitability of the organization.
 Establishment of plan along with target or performance which will directly coordinate
each business activity.
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 Tracing actual performances
 Comparison of planned and actual performance.
 Extracting variation or differences and reasons with this aspect.
 Acting immediately with reference to remedy to situation.
Variance analysis
Expected Actual Variance
Sales 3000 2850 150
Profit 4150 4000 150
Material 1250 1450 -200
Labor 1000 860 140
Budgetary variance is used as tool for attaining objective for generating margin as it
collects input through each department. It is significant difference among budgeted along with
baseline amount of revenue or expenses as actual amount. The amount of actual revenue might
vary substantial through expectations.
TASK 4
A. Calculating and analysing business performance
Financial Statement Analysis by Ratio Analysis
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Ratio Analysis
Liquidity ratio
Current assets 7480
Current liability 5770
Current ratio 1.30
Quick assets 3380
Quick ratio 0.59
Interpretation: There is measurement of liquidity of Hotel Bluebird with context of
current and quick ratio. It has been evaluated that organization's liquidity is not up to mark as it
is not enough liquid to repay its obligations.
Profitability ratio
Gross profit 2140
Net sales 3850
Gross margin ratio 55.58%
Net profit 1850
Net margin ratio 48.05%
Interpretation: It has been articulated that organization is undertaking profit as its gross
margin is about 56%. In the similar aspect, it is observed that it has presence of few expenses as
its net profit is 48.05% which is approx to 50%.
Efficiency ratio
Sales 3850
Net working capital 1710
Working capital turnover ratio 2.25
Sales 3850
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Inventories 1900
Inventory turnover ratio 2.03
Interpretation: in the above table, there is measurement of efficiency with two
parameters such as working capital and inventory turnover ratio. It signifies that there is
contribution of 2.25 with reference to sale revenue. In the similar aspect, its inventory turnover is
2.03 which shows that it could write off 2.03 times for selling its inventory.
Solvency ratio
Debt 1850
Equity 2780
Debt equity ratio 66.55%
Interpretation: In this aspect, it had measured solvency or capital structure which is not
acceptable as it is reverse of ideal structure as 40:60 which shows huge debt as of 66.55%.
B. Recommending appropriate future management strategies
From the above analysis, it had been analysed that it must use budgetary control
techniques and variance analysis for attaining success. As its liquidity is not good so it must
imply with working capital framework and in this aspect, its solvency ratio with capital structure
is not good so it should follow optimal capital strategy. Furthermore, employee engagement must
be given huge priority along with leveraging high impact leadership practices. It should lay
special emphasis on profitability and liquidity as they decrease cost and raises turnover,
productivity along with efficiency. In the similar aspect, it could expand in innovative market
sectors or development of innovative products and services. As its cash management could be
also performed with adoption of risk management strategy and must imply framework for
projecting future cash flow through assets.
TASK 5
A. Categorising and explaining costs as variable, fixed and semi-variable
Particulars Amount
Beds required (in number) 50
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SP (Selling Price) 25
Wages and salaries 400
Other expenditures 40
Hotel rent 1000
Telephone charges 1000
Electricity and internet charges 500
Other overheads 6000
Administration expenditure 5500
It can be analysed that various costs are provided which is incurred in Bluebird hotel for
the best manner possible for attaining daily operations.
 Fixed costs are those which are fixed and does not change direct in relation to production
(Argyres, Mahoney and Nickerson, 2018). In simple words, it has to incurred whether
firm incurs loss or profit. It includes rent, administration expense, other overheads. The
fixed cost such as rent to be paid, administration expenses and overheads for production
purpose are to be incurred. Business has no other choice than to skip these expenses.
 Variable costs are in direct relation to volume of production. When production increases,
these costs also increases and vice-versa (Chen and et.al., 2018). It includes salaries,
other expenditures and selling price per person. The variable cost such as salaries are
provided only when seasonal work arises. While, selling price is in relation to volume of
production and inflation, if it increases or decreases, selling price fluctuates directly.
Thus, all these expenses are variable costs.
 Semi-variable costs are those which are partly variable and partly fixed. It includes
electricity and internet charges, telephone charges etc. The semi-variable costs are
variable but it increases with the production as more volume is required as demand arises.
In relation to this, electricity and internet charges is semi-variable costs and telephone
charges as well. This is because these expenses vary in direct proportion to volume.
B. Calculating per product contributions and relationship between cost/profit and volume
Contribution-
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The contribution is useful term which represents portion of sales not being consumed by
variable costs and as a result, this portion is consumed by fixed costs. Formula for calculating
contribution is: Sales – Variable costs
CVP (Cost Volume Profit) Analysis-
The CVP analysis is utilized for determining how changes in costs and volume leads to
affect company's operating and net profit. It is based on assumption that sales price per unit
remains costs. Thus, it is useful analysis for assessing changes observed in volume and costs
affects net profit up to a major extent.
Sales = 50 * 40 = 2000
Contribution = 15 * 2000 = 30000
Total fixed costs = 11500
SP Per unit 25
Variable cost Per unit 10
Contribution Per unit 15
Fixed cost
Other overheads 6000
Administration expenditure 5500
Total costs 11500
Total Profit = Contribution – fixed costs
= 30000 – 11500
= 18500
It can be analyzed that total sales is 2000 and with contribution per unit of 15, sales and
contribution are multiplied with to arrive at contribution of 30000. While, variable cost is 10,
Total fixed costs' comes to 11500. Thus, profit of 18500 is arrived.
C. Discussing and justifying use and significance of Break-Even analysis for short-term
decision-making
The significance of break-even analysis is that costs, volume and profit can be effectively
ascertained. This helps business to assess how many goods are to sold to accomplish break-even.
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It is the point at which firms earns no profit no loss (Nagarajan and Visagamoorthi, 2018). Thus,
strategies are implemented for achieving higher profits at least more than break-even. Hence, it is
useful for short-term decision-making. The break-even analysis is based on the assumption that
fixed costs remain constant at volumes of output, selling price remains constant, variable cost
will fluctuate in direct proportion to volume of output. Moreover, there will no changes observed
in general price level. Thus, it can be said that it helps management to decide and take decision-
making for maintaining profitability at least in short-term as general price level and volume of
output remains unchanged.
CONCLUSION
Hereby it can be concluded that finance plays crucial role in firm. The funds must be
used in accordance to requirement so as to fully utilize them. Moreover, setting prices of costs
such as semi-variable, variable and fixed costs are also significant. Financial ratios are useful for
providing financial health of business. Budgetary control is important for correcting deviations.
Lastly, through break-even analysis, Bluebird comes to know about quantities to be sold. The
outcome that can be generated from the above report is that financial information and
ascertainment of various costs is helpful for business in analyzing its profitability. Moreover,
there are various sources of finance being available to Bluebird which it could avail in
accordance to requirement.
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