Hospitality Finance: Cost, Volume, and Profit Analysis

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FINANCE IN THE HOSPITALITY
INDUSTRY
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Table of Contents
Introduction....................................................................................................................................3
Task 1............................................................................................................................................4
P1.1...............................................................................................................................................4
P1.2...............................................................................................................................................4
Task 2............................................................................................................................................6
P2.1...............................................................................................................................................6
P2.2...............................................................................................................................................7
Task 3............................................................................................................................................9
P3.1...............................................................................................................................................9
P3.2...............................................................................................................................................9
P3.3.............................................................................................................................................10
P3.4.............................................................................................................................................10
Task 4..........................................................................................................................................12
P4.1.............................................................................................................................................12
Task 5..........................................................................................................................................15
P5.1.............................................................................................................................................15
P5.2.............................................................................................................................................15
P5.3.............................................................................................................................................16
References..................................................................................................................................17
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Introduction
In the developing business scenario, Hospitality management has achieved a different level in
all industries whether related to food services, accommodation, in places and so on. This
industry which is developing at a speedy pace also requires huge finance to enhance its
position. As this industry is developing it will acquire larger part of GDP in coming years.
Finance is something which takes lot of planning, and mind application as it not necessary that
every firm or industry has adequate amount of funds at all present time. Finance also plays an
important role in business as it provided guidance about funds and available and how to invest
them wisely. In simpler terms financing is called as an art of money management. It acts as the
backbone of business and plays a crucial role in success and failure of the business. So it in the
coming years we may see the huge demand for finance in each and every industry of economy
whether hospitality or other sectors.
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Task 1
P1.1
Businesses and service sector which is said as the portion of the economy which produces both
tangible and intangible good and services for the economy and business which is also working
for the society requires the huge amount of finance or money for its continuous growth and
development. Finance plays an important role for the small, medium or large enterprises
because even a small development or to invest in something first question that is raised is how
would be it done or say from where the money will come. Financial services encompass where
sources form where funds can be raised for a broad range of businesses. Precious capital is
hard for small businesses. Financing is a basic need to start up a business and also raise it to a
level of profitability. The major sources of finance available for any business are debt and
equity. But it also depends on the size and nature of business the need for money (Arif, et. al.,
2016).
Government grants in today scenario for an encouraging start-up has also a new source of
finance. Equity financing simply means to raise funds from the public for investment. The public
is the owner of business or company and at the same time, they were also expecting the return
on their money that has contributed. On the other hand, debt is an obligation that is taking loans
or issue debentures to market and taking loans from financial institutions (Salehi, et. al., 2014).
In this case, the firm has to give interest. But before raising funds from any sources it is
necessary to think from each and every point such as repaying capacity of firm, credibility,
social ability, reputation and mortgage if any, because if raise funds from equity it requires high
profitability for business to keep owners happy by giving them better returns so that they invest
more. And in case of debt to pay interest from time to time it is necessary to have sufficient
profits. Therefore, it can be said that there are sources of funds available in the market but it
requires proper financial planning and review of sources from time to time for business and
services.
P1.2
According to some famous saying, there are many methods of generating income in the said
industry of hospitality. Income generation is important for any industry for sake of employment
and living. Some methods may be Sales: In case of industry which is engaged in providing
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services such as hotels, amusement park, food and beverages sales of hotel rooms, tickets of
amusement parks and selling of food and beverages quantity determines sales: revenue
generation which is the important source of the contribution. Commission: Commission which is
generally earned on a percentage basis and after completion of required criteria also plays an
important role. But it can be said that it varies according to sales or other activity as the
commission is not fixed. Sponsorship: In today's world sponsorship is the new way of
generating income as enterprises receive from other organizations to promote their names.
Grants: grants are generally received from the government organizations to promote business
at the starting stage.
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Task 2
P2.1
Every product has various elements included in the cost of a component. Cost of a product and
a service can never be defined without its elements. Cost of a product includes three types of
elements, which are material, and expenses. Three significant elements of cost are as follows:
1. Material: Material included in the making of a product can be classified into two types of
material as follows:
 Direct material: Direct material consists of costs of items provided to an enterprise. All items
which become a fundamental part of the final product which can be suitably granted to particular
physical units of those items are known as direct material. For e.g., paper would be a direct
material for the paper manufacturing industry, bricks and cement will be treated as direct
material when building a house by a contractor.
 Indirect material: Indirect materials consist of secondary items provided to an enterprise. All
items which are used for subordinate purposes and cannot be granted to particular physical
units of those items are known as indirect material. For e.g., cleaning chemicals and disposable
appliances for hospitals etc.
2. Labour: When raw materials of a component are transformed into a final product
endeavoured by humans is termed labour. Labour is further classified into two terms as follows:
 Direct labour: Direct labour are the humans, which plays a vital, mobile and the direct segment
in the production of a specified product is known as direct labour. For e.g., wages and salaries
etc.
 Indirect labour: Cost of indirect labour can never be conveniently & particularly allocated to
specified products. For e.g., salesman fees and directors’ fees etc.
3. Expenses: Expenses as the vital component of costs states that the cost of a service
allocated to bluebird hotel and a hypothetical cost of the use of possessed assets. Expenses
are further classified into two types:
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 Direct expenses: Direct expenses are those expenses which are specifically granted to a
specified situation, units of services and units of products. For e.g., hire charges of machinery,
designs of manufacturing units etc.
 Indirect expenses: indirect expenses are those expenses which can never be specifically
granted to specified units of services and products. For e.g., factory rent, insurance, office rent,
etc.
The components of gross profit percentage consist of gross profits and revenue earned during a
particular period. Gross profit means the cost of goods sold during a particular period will be
deducted by revenue earned during that particular period. Gross profit will be derived while
preparing income statement of an enterprise and calculated by using the following formulae:
Gross profit = revenue –the cost of goods sold
The selling price of a product and services will be determined by a pricing strategy to maximize
profit on products and services. The selling price of a product and service has six basic
elements to be included pricing strategy are as follows:
 Defining goals
 Fixed and variable costs
 Competition among rival players in the market
 Target customer base
 Brand
 Strategic alignment
P2.2
Stock controlling is very essential in a business environment to evaluate what is in your
storehouse, how we can lower the costs of our products and how to prevent and detect fraud.
There are various types of other systems which rely on inventory controlling to access current
accounts, to provide financial reporting on various aspects and real-time understanding. There
are basically four types of inventory control methods which are as follows:
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 Reorder level (ROL): Reorder level basically depicts about the actual time between placing an
order and actually receiving the order.
 Batch control: batch control essentially helps to maintain goods with the help of number
batches. Batches make sure that the right number of elements is present or not, to cover the
needs of enterprises until the next batch.
 First in first out (FIFO): This system depicts that no stock of perishable nature lying in the
warehouse degenerate by tracking the movement of goods in each successive stages.
 Economic order quantity (EOQ): Economic order quantity is the quantity of order that minimizes
the holding costs and ordering costs of items. It basically drives the balance between holding
too much and too little inventory.
There are various reasons why cash needs to be controlled in a business enterprise. Firstly,
managing cash flow ensures the availability of money at any time to meet outstanding
expenses. Secondly, to manage profitability cash needs to be properly managed and controlled
and thirdly, vital to understanding various types of monetary terms affects the decisions of
investors. Following methods are there to control cash in a business environment:
 Prevention and detection of frauds
 Organizing cash handling approaches
 Maintain cash logs
 Set up strategies
 Accountability meetings.
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Task 3
P3.1
The trial balance is generally considered to be bookkeeping of worksheet of all the balances of
ledgers are consolidated or compiled into credit and debit balances. It is generally considered to
be an important part of accounting as every entity or firm is required to prepare trial balance to
check arithmetical accuracy of accounts because the total of debit and credit column is equal
and if there are differences it highlights mistake. Basically, there are three types of errors: error
of omission in which an entry is omitted to be recorded: error of principle in which entry is
principally recorded in wrong account means example: machinery purchased is recorded in
purchase account rather than machinery account. Sources of trial balance can be categorized
as general ledger, sales ledger, purchases ledger where purchase ledger consists of personal
accounts of creditors from whom purchases have been made and sales ledger consists of a
personal account of debtors to whom sales have been made. Therefore, trial balance basic role
is to detect errors and just identification of errors.
P3.2
Every firm, entity, company (in this case Blue Bird Hotel) is required to prepare its accounts at
year end and daily recording of transactions in chronological order. There is a process of
preparing accounts at year-end. The starting step includes the recording of transactions in the
journal after that ledger is prepared than trial balance and at last balance sheet and statement
of profit. In order to overcome these errors adjustments are required to be made. At times,
there are few events and transactions which have occurred during financial year whose entry
could not be made but which may have the impact on accounts so these kinds of transactions
are also recorded as they have the impact on next year accounts. Adjusting entries are
important because their treatment is done only at the year-end. These adjustments are
important to depict a closer view of the reported results and financial position of the entity.
Adjustments are mainly related to closing stock, purchases, sales, if there are any outstanding
amounts, prepaid amounts and so on. Also while preparing accounts if adjustments are done it
is required to form notes of the same which will be easy for the users of financial statement to
have an understanding of events occurred their impact and economic criteria of the same so
that they will be aware of the current position of the firm blue bird hotel.
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P3.3
In general terms, budgetary control refers to the technique of guiding management through
budgets reports to coordinate, evaluate day to day operations in accordance with the goals of
the budgets. Budgetary control is a useful tool used by the management to accomplish
objectives within criteria of the budget which is fixed by management. It serves as the plans,
objectives, and programmes of the firm and depicts in financial or quantitative terms in
organizations. It acts as a job description of the firm. It is a helpful tool as it helps in continuous
comparison of actual and planned results of the firm to express whether there is follow up of
budget or any departure from the budget. Budgeting is generally closely related to planning,
controlling, organizing and directing, supervising. If there are deviations from budget immediate
actions are taken. It can also be said that budgetary control technique has helped in financial
planning. It has played an important role in reducing or eliminating unproductive tasks to
improve efficiency and effectiveness. Quick reporting, detailed organization structure, frequent
comparison, definite plan is some of the factors contributed by budgetary control at a great
pace.
P3.4
Column
1 Column2
Column
3
Column
4
Column
5
Column
6
Column
7 Column8
Variances
analysis :
Budgete
d
Figures:
Actual
figures Variances
Sales Volume 100 90
Sales
value 1000 990 10
Variable cost 500 495 5
Fixed
costs 200 210 -10
700 705
profit 300 285 5
This table depicts the variances among revised and actual results. Sales volume has been
reduced which may be due to any reasons whether changing the taste of customer, the price
may be high, expectations by-product could not be filled and many more (Bai and
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Buvaneshwaran, 2015). Variable costs have reduced due to reducing in the sale and fixed cost
incorporated is high. It may be useful for the management to have a glance at the present
situation to make better decisions in the future.
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Task 4
P4.1
BLUE BIRD HOTEL
Information:
Current assets = 685000
Current liabilities=750000
Cost of goods sold = 500000
Average inventory =190000
Gross profit =500000
Sales = 1000000
Net profit =827500
Current ratio = current assets / current
liabilities
Inventory turnover ratio = cost of goods sold /average inventory
=685000/750000
=.91times
0.91
Gross profit ratio = gross profit / sales
=500000/190000
=2.63times
net profit ratio = net profit / sales
=500000/1000000*100
=50%
=
827500/1000000*100
= 82.75%
Analysis
 CURRENT RATIO: Current ratio in an enterprise depicts the ability of a company to pay its short
term liabilities in a situation of crisis. If the current ratio of an enterprise is more than one, it will
indicate that if the enterprise liquidates all of its assets it will still be in a condition to pay its
obligations and if the current ratio of an enterprise is less than one, then it will not be in a
condition to pay its obligations. Here as in the above case of blue bird hotel, the current ratio
is .91 times that indicates if BLUE Bird HOTEL liquidates all of its current assists it will only be
able to recover 91% of its current liabilities.
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