Hospitality Finance: Cost, Profit, Cash Control, and Variance Analysis

This report delves into the financial aspects of the hospitality industry, specifically focusing on cost analysis, profit margins, cash management, and budgetary control. It begins by outlining the key elements of cost, including direct materials, direct labor, direct expenses, and overheads, and then moves on to discuss profit margins and sales price determination. The report then explores various methods for controlling cash and stock within a business environment, emphasizing budgeting, setting targets, proper authorization, and physical control of cash, as well as techniques for inventory control such as minimum stock levels, stock reviews, and just-in-time inventory management. Furthermore, the report explains the process of budgetary control, from consulting with managers to taking remedial actions, and provides a detailed analysis of variances between actual and budgeted results, along with suggestions for improvement. The report concludes with an analysis of variance, focusing on a case study of a steel spoon manufacturer named Ciprian, and provides suggestions for improvement in production, marketing, and labor training. The report offers a comprehensive overview of financial management in the hospitality sector, providing practical insights and strategies for effective financial control.

Finance in Hospitality
Task 2 and Task 3

2.1 Elements related to Cost, Gross profit and
selling price
Elements of cost in products and services
 Direct Material: Material refers to those substances that are used in
business for either production or sale. For example in case of restaurant
business material would be food material like flour, veggies, etc. However,
direct material refers to the cost of those material that are a major part of
finished goods. For example, raw material that becomes finished goods.
 Direct Labour: Cost of those labours who are associated with the process
of production. For example in restaurant business, direct labour cost would
be salary of cook's.

Continued...
 Direct Expenses: Directly associated expenses to the products other than
direct labour and direct material are referred as direct expenses. For
example, cost of tissue paper in a restaurant.
 Overheads: Overheads are those cost which are not related to finished
products. In other words it is an aggregate of indirect expenses, indirect
labour and indirect material.
 Selling and Distribution Overheads: Those expenses which are related to
selling of products like marketing or selling overheads.

Elements of profit margin in products and
services
 Revenue: Revenue is also known as sales. It is the aggregate of cash sales
and credit sales made during a financial year. Revenue is the sum of
amount that is earned during a year whether received or not.
 Cost of Goods Sold: It includes the variable cost of goods that have been
sold during a financial year. Variable cost is those cost that changes with
the change in production or final sales.

Continued..
Profit: This is the difference between revenue and cost of goods
sold. If the difference is positive, it is profit and if the difference is
negative it is a loss.
Specified percentage of profit: many businesses also keep a
specific percentage of percentage which is added on cost to
determine sales price.
Elements of sales price in products and services
All the above elements of cost and profit margin are the
elements of sales price, because sales price of a unit can be
determined after the determination of total cost of per unit and then
adding a profit margin to total cost per unit.

2.2 Various methods of controlling cash and
stock in business environment
In order to attain organizational goals and objectives, it is
necessary for an organization to control its cost and manage its
inventory. There are various methods by which an entity can manage
its inventory and control its cash. Following are the cash control
ways for a Restaurant:

Methods to control cash:
 Budgeting: Budgeting is a management tool that by forecasting and by
evaluating past year expenses of different functions helps managers of an
organization in preparation of Budgets. Budgets can be prepared for the
consumption of expenses. By using this budgeting tool, management can control
its flow of cash.
 Setting Targets: another way of controlling cash flow from the business is by
setting targets for various expenditure.
 Proper Authorization: Restaurant owner should give proper authority to people
in order to handle cash or to make cash transactions on behalf of the restaurant.
For this a trustworthy cash manager can be appointed by the organization
 Physical control: Physical cash that remains in the organization at the end of the
day must be secured. This can be done by making policy like, only that much
amount should remain in business that is required to handle customer
transaction or by moving excess cash to the safe.

Methods of Inventory Control:
In a restaurant business in following ways, inventory can be controlled:
 Minimum stock level: management can determine minimum level of stock
that is required to be maintained in restaurant for smooth running of
operations. After determination of minimum level, stock then can be re-
ordered when it reaches to the minimum level.
 Stock review: Stock can be reviewed on regular basis and on every
review, order can be placed to return stock at predetermined level.
 Just-in-time: This method stock control aims at reducing cost by cutting
stock to a minimum level. As per this method, items are ordered when they
are actually needed and are used immediately.
Further many inventory management software's are available in the
market that can be used to control stock such as Hotel ERP, property
management system etc.

3.3 Budgetary control and its process
It is the process of identifying and controlling cost to be incurred in
future by an organization by preparing budgets for the specific expenses
and controlling so that the budgeted expenses does not exceed. However,
the main purpose of budgetary control is to compare the actual results with
the budgeted results. This process enables manager to monitor various
functions of the business. Below diagram presents that how a restaurant
business set its budgetary control system:

Budgetary Control in restaurant

Budgetary Control Process:
1) Consult with managers: The first step in budgetary control
process is consulting with managers regarding the preparation of
budget for different activities like sales, use of raw material,
administrative expenses, etc.
2) Make assumptions and Predictions: For the preparation of
budget various assumptions and predictions have to be made by
management such as expected sales, expected expenses, expected
profit etc.
3) Set detailed budgets to meet objectives: After the assumption
and forecasting of future activities, budgets are them prepared in
order to attain organizational goals and objectives. For example, of
the objective of business is to maximize sales, more resources will
be allocated to the sales budget so that sales can be maximized