nance in the Hospitality Industry

Table of contentIntroduction3Task-1--LO1- 1.1: Sources of Funding Available to Business and Services Industries3LO1- 1.2: Contribution Made by a Range of Methods of Generating Income within a Given Business and Services Operations4Task-1LO2- 2.1: Elements of Costs, Gross Profit and Selling Prices for Products & Services5Task-1LO2- 2.2: Methods of Controlling Stocks and Cash in a Business & Services Environment7Task-2LO3- 3.1& 3.2: Structure and Sources of the Trial Balance & Business Accounts, Adjustments and Notes83.1.1 Structure and Sources of the Trial Balance8LO3- 3.3: Process and Purpose of Budgetary Control and Analyze Variances from Budgeted and Actual Figures, Offering Suggestions for Appropriate Future Management Action11Task-3LO4- 4.1: Ratio Analysis and Consistent Interpretation of Historical Business Performance13LO4- 4.2: Recommendation for Appropriate Future Management Strategies14Task-4 LO5- 5.1: Categorize Costs as Fixed, Variable andSemi-Variable14Task-4 LO5- 5.2: Calculate Contribution per Product/Customer and Explain the cost/profit/volume Relationship for a given scenario15Task-4 LO5- 5.3: JustifyShort-termManagement Decisions Based on Profit/loss Potentials and Risk(break-even)calculations for a given business and services operation16M1 Identify and Apply appropriate Strategies,17M2 Select/design and Apply appropriate Strategies17M3 Present and communicate appropriate findings17Reference18

Introduction

Hospitality industry included hotels, restaurants, rent-a-car companies and other related organizations to the food industry. In this industry emphasis is given on customer service in order to gain profitability and sustainability in the industry. Financial accounting has a vital role to this industry. Usually this industry is very competitive. And as this industry is service oriented and competitive price of products and services in this industry among organizations are very closer. So, proper cost management and monitoring provides a great difference in the profitability for organizations in this industry. This case will analyze overall financial performance for a company to support the management to take investment decision.

Task-1--LO1- 1.1: Sources of Funding Available to Business and Services Industries

For any kind of business source of funds is very important because financing decision involves cost for the organization. Cost of the fund depends on from where the fund is coming. Therefore from where the fund will be collected is a very vital decision. There are many sources of funds available for business. The Enchanted Valley B&B is a sole proprietorship business. Some feasible sources of fund for a sole proprietor are as follows:

A. Retained EarningsThis is simply the part of profits that is kept for future investment opportunities.

B. Loan from BankTaking loan from banks can be another source of fund. Usually companies go for this option when the rate of interest on borrowed fund is lower than their return on investment.

C. Private InvestorsIn todays business world there are some private organizations that provide funds to sole proprietorship organization as loan, line of credit, equipment lease, or financial partner of business. Financial partner of business does not interfere in to the operation of business they just receive part of the profit from the business.

D. Business GrantBased on certain criterion federal government or many private organizations provide funds to sole proprietorship businesses. Based on income standard, size of business, chance of local business stimulation local government provide funds to sole proprietors.

E. Sponsorship This is a very lucrative financing source for sole proprietorship. It is simply collecting funds from some other organization and gives them opportunity to promote their names with them.

F. Trade CreditThis is another option for sole proprietorship businesses. They can purchase their necessary raw materials and other products from suppliers on credit and pay them back after receiving the money from sales.

G. Borrowing funds from Relatives and FriendsThis can also be an option for fund for relatively small scale sole proprietorship business. They simply can borrow the fund from their relatives and friends.

LO1- 1.2: Contribution Made by a Range of Methods of Generating Income within a Given Business and Services Operations Hayes & Miller (2011) in their paper indicated that income generation and contribution towards hospitality can be done in some ways like: sales, commission, sponsorship, grants, etc. Brief explanations of these terms are as follows:

SalesIn hospitality industry sales items are providing rooms, foods to the guests, different kinds of beverages, laundry services, offering different kinds of entrainments, transport services, and some other related services. By providing these kinds of services to the guests they generate income.

CommissionIn many cases third party suppliers provides some services to the guests or tourists. From those services organizations can earn commission income.

Sponsorship This is a great opportunity for organizations to earn money by giving chance to other organizations to promote their name in to hospitality industry.

Grants Sometimes organizations in the industry receive some kind of grants from government as the organization is acting as a stimulator in local economic activities.

Premise Sub letting Sometimes resort or hotel owners can sub-let their unused premise to small gift shops, flower shops, and these types of others small shops and can earn money.

Task-1LO2- 2.1: Elements of Costs, Gross Profit and Selling Prices for Products & Services

Cost ComponentsIn the hospitality industry typical cost components are:MaterialsMaterial costs are involved in the final products or services provided to the customers. For example: glassware, silverware, Knives and forks etc.

ConsumablesThese are the main cost elements in the hospitality industry. These includes, foods and beverage items. LaborHere labor costs means salary to the waiters, all staffs of kitchen, cleaning staffs, office staffs and others who are working at the front office.

Overhead CostThese costs are indirect costs. Usually we cannot measure these costs with the final products of services. Admin personnel salary, electricity costs, stationary costs are included as overhead costs.

Selling Prices for Products & Services In the hospitality industry organizations follows combinations of pricing strategy usually based on time of the year.

Price in the Peak/Off peak SeasonIn the tourism industry we all observe that when the time is peak for tourism, organizations in this industry charges higher prices for every services. On the other hand, in the off peak season organizations offer various kinds of discount or lower prices to attract more customers. In the off peak season number of tourists become fewer that is why organizations offer various kinds of discounts on their services to attract more customers.

Conventional Pricing In this case separate profit margin has been set for each service. Separate margin for food, beverage, rooms, and others services. In this method gross profit is calculated by deducting cost of sales of each item.

Absorption MethodIn this method variable cost is used. At first organization calculate per unit cost of each item then total overhead cost on per unit basis then they add their required profit margin.

Marginal Costing BasisIn this method they classify the costs as variable costs and fixed cost. Then based on variable cost per unit they set the selling price in such a way that they get their required profit margin.

Backward Pricing In this method all organizations in the industry set a common price for every service. Price at different organizations is same. After a certain time period all the organizations met at a meeting and revise the prices if required.

Task-1LO2- 2.2: Methods of Controlling Stocks and Cash in a Business & Services Environment

Controlling Stock

For proper inventory management organizations need to compute economic order quantity point and level of re-order point. If this can be done efficiently then they can avoid unnecessary inventory purchases. Need to create JIT (Just in Time) inventory management system.As in the hospitality industry main cost items are food and beverage items and these are perishable items, JIT system will reduce wastages, and extra cost on inventory dandling.

Introduction of software to track down the inventory for most accurate information regarding inventory and proper decision. Stock monitoring to eliminate the chance of theft Physical stock counting at the end of financial year for a better preparation of financial statements

Controlling Liquid Money

Organizations need to manage their working capital very efficiently for smooth functioning of the organization.

There should be more than one person to handle the cash for elimination of risk of theft and any manipulation. Reconciliation of cash book with the bank for proper cash management Cash counting on random basis for better monitoringThese activities will eliminate chance of misconduct by the personnel of the organization.

Task-2LO3- 3.1& 3.2: Structure and Sources of the Trial Balance & Business Accounts, Adjustments and Notes

Final accounts analysis3.1.1 Structure and Sources of the Trial Balance

Under three ledgers we can categorize the trail balance: general ledger, sales ledger and the purchase ledger (Kotas and Conlan , 2007).

Suppliers are included in purchased ledger, personal accounts of customers related to sales ledger and general ledger includes impersonal accounts, like nominal accounts and real accounts.

Income and expense accounts fall under nominal accounts and assets and equity accounts fall under real accounts.

Trial balance Structure

Fixed Assets, Current Assets and Contra Assets Long term and Current liabilities Capital of Owners Contra Account Revenue Contra ExpensesAt the end all these debits and credits are summarized.

Trial balance of The Enchanted Valley B&B:

Fixed Assets and Contra Assets: Building /Equipment /Acc. Depreciation

Current Assets: Bank/Cash/Customers

Current Liability: Suppliers

Long Term Liability: Long term bank loan

Owner's Capital: Retained earnings and Share capital

Contra Revenue: Opening Stock

Revenue: Sales

Expenses: Personnel Salaries/ interest on loans/Marketing and communication expenses/Utility expenses

3.1.2 Evaluation of final accounts

Income Statement

Income Statement of The Enchanted Valley B&B for the year ended 31st December 2013

Amount in '000

Sales 2,040/-

Less: Cost of Goods SoldInventory (01/02/2012) 49/-Purchases 1,360/-Total Purchase(1,409/-)Inventory at hand (31/01/2012) 51/-_________________________________________________________________Gross Profit 682/-

Admin & Operating Expenses

Insurance 64/-Wages & salary 267/-Depreciation 62.5/-

Energy Cost 49 (478.5)

Selling & Distribution ExpensesMarketing and Communication expenses 79/- + 36/-

Finance ExpensesInterest on Debenture (200 *6%) 12/-Interest paid on Bank Loans 4 (16)_____________________________________________________________________Profit before Tax 108.5/-

Less: Income Tax 39/-

Profit after Tax 69.5/-

Less: Dividend declared (15)

Retain Earnings 54.50

Balance Sheet

Position Statement of the Enchanted Valley B&B as December 2013

Assets '000

Fixed Assets Cost Acc. Dep. NBV

Buildings 400.000. 400Equipment 250. 112.5 1375___________________________________________________________________Total650. 112.5 5375

Current Assets

Inventory 51Debtors 92Insurance (Advance) 3Bank 3Cash 1150_____________________________________________________________________Total Assets 687.5

Equity & Liability

Equity & Reserve

Stated Capital 100

Reserves - Retained Earnings (157 + 54.5) 211.5 311.5

Non Current Liabilities

6% Debentures 200Long Term Bank Loans 60. 260

Current LiabilityCreditors 45Salary payable 5Interest payable on Debenture 12Income tax payable 39Dividend payable 15. 116____________________________________________________________________Total Equity & Liabilities 687.5

LO3- 3.3: Process and Purpose of Budgetary Control and Analyze Variances from Budgeted and Actual Figures, Offering Suggestions for Appropriate Future Management Action

Process and purpose of budgetary controls.

For planning, coordination and controls budgetary control is used.

Purpose of Budgetary Controls

For business targets achievements Responsibilities delegation to the staff For efficient resource utilisation For taking corrective measures Coordination of works For future policy formulation For measuring Performance

Process of Budgetary Controls

Budget Period

Usually for one year; sometimes continuation of previous time

Budget Approach

Selection of a suitable method for budget preparation

Budget Implementation

After approval of the budget from management it should be implemented as per plan

Measurement of Performances

Compare and measure the actual and planned budget

Identify the differences between the actual and planned budget

Conduct a variance analysis.

Corrective measure if necessary

Variance analysis

Raw Material Variances Calculation

Raw Material Total Variance = Standard Cost - Actual Cost

= (10,000* $ 10) - $ 98, 200= $ 1,800 F / +

Raw Material Price Variance = Quantity Used (Standard Price - Actual Price)= (11,700 * $ 10) - $ 98,200= $ 18,800 F / +

Raw Material Usage Variance = Standard. Price (Standard Usage - Actual Usage)= $ 10 (10* 1,000) - 11,800 )= $ 16,000 (A) / -

Analysis of variances

It is observed that $ 1,800 favorable total raw material variance from the budget. It means actual material cost is less, so it is within control.

We got $18,800 favorable raw material price variance from the budgeted figures. This means actual price is less than the budgeted price. But $16,000 adverse raw material usage variance from the budget. Indicates RM usages are in out of the controls.

Suggestions

Initiate corrective actions to eliminate the over usage of Raw Materials Apply new procedures for wastage reduction Make sure to implement new controls to monitor the Raw Material usages. Observe such variance is controllable or not. If yes, then take corrective action. If not then revise the process

Task-3LO4- 4.1: Ratio Analysis and Consistent Interpretation of Historical Business Performance

Ratio analysis (See Appendix A for Calculation)

Profitability Ratio

Gross Profit Ratio decreased by 15.14% compare to 18.33 % of this year with 21.60% of last year. Net Profit Ratio decreased 30.56% compare to 3.59% of this year with 5.17 % of last year. Return on Capital declined by 31.73% compare to 8.24% of this year with 12.07% of last year. Increase in expenses and cost of sales is the reason behind this decline.

Liquidity Ratio

Current Ratio increased 0.52 times

Quick Ratio declined 0.50 times in comparison to 2.43: 1 of this year with 2.93: 1 of last year. This happened due to over fund usage on closing stock.

Efficiency Ratios

Inventory Turnover Ratio declined by 36.25 times compare to 17.37 times of this year with 53.62 times of last year.

Debtors Turnover Period declined by 7 days compared to 39 days of this year

Creditors Turnover Period also Declined by 5 days compare to 25 days

This happened because of over fund utilization on stock, increase of debtors & creditors.

Ratios for Investors

EPS decreased by 0.21 compare to 0.25of this year Because of low profit earned during the operation period and issuance of new shares this decline.

LO4- 4.2: Recommendation for Appropriate Future Management Strategies

Lowering selling price hence sale should go up and resulting higher revenue Reduction in unnecessary fund utilization on inventory. Implementation of JIT inventory system Reduce expenses Larger credit period from suppliers by negotiation Follow proper cash flow management Promotional activities to gain more customers Fixed assets should be used more efficient ways to generate more income

Task-4 LO5- 5.1: Categorize Costs as Fixed, Variable andSemi-Variable

Fixed Cost

Hotel Operation Expenses- 150000

Variable Cost

VC of Food sales per Client - 8VC of Beverage sales per Client- 2.1

Semi Variable Cost

Semi- variable cost means both fixed and variable components for a given activity. It remains as fixed up to a certain level and beyond that it will be variable based on the volume or activity.

Variable Cost per occupied room - 13VC of Minor operations departments per room - 1.1

Task-4 LO5- 5.2: Calculate Contribution per Product/Customer and Explain the cost/profit/volume Relationship for a given scenario

Computation of Contribution per product / customer (in )(Appendix-B)

Selling Price 120 20 8 2 150Variable Cost (15) (7) (2.4) (1.2) (25.6)Contribution 105 13 5.6 0.8 124.4(Per product/customer)

Net Profit Computation (in )Sales (150 * 100 * 365) = 5, 475,000Less: Variable Cost (25.6 * 100 * 365) = (943,400)Contribution (124.4 *100* 365) = 4, 540,600Less: Fixed Cost = (1,600,000)Net Profit = 2,940,600

Break Even Point ComputationBEP (in units) = Fixed CostContribution per customer= 1,600,000124.4= 12,861.74 12, 862 (Customers)BEP (in ) = BEP (in units) * Selling Price= 12,862 * 150= 1,929,300

Cost -Volume -Profit Relationship Value ( 000)Total Revenue ( 5,475)(5,475)Profit ( 2,940.6)ProfitBEP(1,929) VC ( 934.4)Loss FC ( 1,600)

(Customers)0 BEP (12,862) (36,500)

Cost-Volume -Profit analysis explains how operating decision and marketing decision affects the net income based on the relationship between costs (VC and FC), volume and selling price.

To reach at break-even point the Enchanted Valley Bed & Breakfast needs to sell 12,862 rooms to the customers. Breakeven point means at that level revenue is equal to the total cost and the profit is zero. They can achieve contribution of 124.4 from every customer and if they achieve the expected sales level of 36,500 customers, then they can enjoy 2,940,600 profit.

Task-4 LO5- 5.3: JustifyShort-termManagement Decisions Based on Profit/loss Potentials and Risk(break-even)calculations for a given business and services operation

Safety Margin (units) = Expected Customers - BEP Customers= (365 * 100) - 12,862= 36,500 - 12,862= 23,638

Safety Margin (in ) = Margin of Safety (units ) * SP= 23,638 * 150= 3,545,700

Degree of Operating Leverage = Contribution MarginNet Profit= 4,540,6002,940,600= 1. 54 (low risk)

Safety Margin means is that amount or units of sale above the sales. If they can attain it they can generate 3,545,700 turnover out of 23,638 customers. It implies this hotel investment is worthy.

Degree of operating leverage is 1.54 since it generates lower risk to the future profitability of the hotel. Therefore it is justifiable to investment.

M1 Identify and Apply appropriate Strategies,

Relevant theories and techniques of accounting and finance have been followed. The most effective approach for studying and researching the method to be used for better result needs to get into the organisation.

M2 Select/design and Apply appropriate Strategies

All the methods of accounting and finance and techniques have been followed. As per theories all the points have been discussed. The actual sources of information were the related websites, relevant books and articles and also the company websites. The information taken from the relevant secondary sources are being justified through the relevant theories and techniques of accounting and finance. For synthesizing and processing the complex information for research, all information has taken from updated sources.

M3 Present and communicate appropriate findings

All the methods of accounting and finance and techniques were appropriate. As per theories all the points have been discussed. The sources of information were related to the study. The research has been studied in lights of all the information. In this study there found some unfamiliar context to which the researcher has not focused on. The applied theories of accounting and finance were appropriate in learning overall accounting and finance methods.

Reference

Banjerjee, B. (2010), Financial policy and Management Accounting, 7 th ed. Prentice Hall Ltd.Barrows, C. W. & Powers, T. (2009), Introduction to the hospitality Industry, 7 th ed. John Wiley & Sons Inc.Hansen, D. R., Mowen, M. M. & Guan, I. (2009), Cost Management: accounting & control, 6 th ed. Cengage LearningsHayes, D. K. & Miller, A. (2011), Revenue Management for the Hospitality Industry, John Wiley & Sons Inc. Kotas, R. & Conlan, M. (2007), Hospitality Accounting, 5 th ed. Thomson Learning

Appendix A & BRatio Analysis Profitability RatiosLast Year This year VarianceGross Profit Ratio= GP *100Sales = 1,920 *1008890= 21.60 %= 2,300*10012,550= 18.33 %= 3.27%*10021.60 %= 15.14%Net Profit Ratio = NP *100Sales= 460 *1008890= 5.17 %= 450*10012,550= 3.59 %= 1.58%*1005.17 %= 30.56%Return on Capital= EBIT *100Equity S/holders fund= 460 *1003,810= 12.07 %= 450*1005,460= 8.24 %= 3.83%*10012.07 %= 31.73%Liquidity RatiosComputationLast YearThis YearVarianceCurrent Ratio= CA: CL= 1,770: 560= 3.16: 1= 3,090: 840= 3.68: 1= 0. 52Quick Ratio(Acid Ratio)= (CA- Stock): CL= (1,770-130): 560= 2.93: 1= (3,090-1,050): 840= 2.43: 1= 0.50Efficiency RatiosLast YearThis YearVarianceStock Turnover Ratio= Cost of SalesAvg. Stock= 6,970130= 53.62 times=10,250590= 17.37 times= 36.25 timesStock Turnover Period= Avg. Stock * 365Cost of Sales=130 * 3656,970= 7 days= 590 * 36510,250= 21 days= 14 days

Debtors Turnover Period= Avg. Debtors * 365Credit Sales=1,120 * 3658,890= 46 days= 1,325 * 36512,550= 39 days= 7 daysCreditors Turnover Period= Avg. Creditors *365Credit Purchases(COS)=560 * 3656,970= 30 days= 700 * 36510,250= 25 days=5 daysFinancial Ratios for investorsLast YearThis YearVarianceEarnings per Share = Profit attribute to ordinary share holdersNo: of Ordinary Shares= 4601,000= 0.46=4501,800= 0. 25= 0.21