Sample Dissertation Report on Finance in Hospitality

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A Sample onFinance inHospitality

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Table of ContentsIntroductionTASK 1a) Sources of funding available for opening new restaurantb) Sources of income generation

Task 2A: Evaluation of cost and gross profitB: Evaluation of business methods

Task 3A: Source and structure of trial balanceB: Evaluation of business accountsC: Purpose of financial budgets and the process suitable for the budgetarycontrolD: Variance analysis of budgeted and actual figures

Task 4A: Computation of financial ratiosB: Recommendation for City Brasserie Ltd for making improvement in theirfinancial management strategies

Task 5A: Categorization of cost using examples from City Brasserie LtdB: Calculation of contribution and relationship between cost, profit andvolumeC: Recommendation of tickets to be sold in order to earn desired profit

ConclusionReferences

Index of Tables

Table 1: Format of trial balanceTable 2: Variance analysis of budgeted and actual figures of City BrasserieLtdTable 3: Computation of financial ratios of City Brasserie Ltd




INTRODUCTIONFinance is regarded as one of the most significant resource of the

business without which it is not possible for company to operate efficiently inthe market. Further, hospitality sector delivers large number of services toits target market due to which its financial requirement is high. Companiesoperating in this sector have to consider different sources through whichtheir financial needs can be satisfied in appropriate manner. Apart from this,different business accounts are prepared so as to know overall performanceof firm such as balance sheet, income statement etc. (Shim and Siegel,2008). The present report being prepared is based on City Brasserie Ltdwhere at present business is planning to open new restaurant in London.Therefore, it is required to identify the appropriate source of finance forbusiness. Various tasks have been covered in the study which involvessources of income generation, elements of cost, source and structure of trialbalance, usefulness of balance sheet, income statement etc.




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TASK 1

a) Sources of funding available for opening new restaurant

Different sources of finance are available with city Brasserie Ltd whichbusiness can consider for satisfying its overall need. At present business isplanning to open a new restaurant near the strand in central London.Therefore, to accomplish this overall aim it is required for business to adoptappropriate source of finance (Hussey and Ong, 2005). Opening up of newrestaurant in the market of UK requires high investment and due to this basicreason company has to select source which is cheap and in turn largeamount of funds can be easily obtained by business. Following are thesources of finance which are as follows:

Debt financing: It is regarded as the act of raising business financeby borrowing money. Business can consider this source by taking loanfrom the financial institutions present in the market. Further, it canenhance liquidity position of the business where expansion can alsotake place easily. Main advantage of using debt financing as a sourceis that it leads to effective utilization of resources of firm as businesshas to pay some amount in the form of interest due to which itbecomes necessary to fully utilize the resources. Tax advantage is alsoone of the main benefits of considering this source where business canobtain tax advantage as interest is deductible for income tax purpose.Simple loan repayment is also one of the advantages of this sourcewhere lenders are only entitled to loan repayment and interest on loan(Keller, 2013). Further, future impact forecasting is also one of the




main advantage of this source where principal repayment along withinterest are based on fixed percentage and it is possible to forecast.On the other hand this source has some disadvantage which areregular payments of installment is required and this leads to rise inexpenditure level of the company. Further, many times it is possiblethat financial institutions may impose penalty for late payment andthis may have adverse impact on city Brasserie Ltd. Apart from thisfailure to make payment on loan can have negative impact on creditrating of the organization. Therefore, in this way these are some of themain disadvantage of this source which company has to consider.

Equity: For obtaining large amount of funds it is possible for cityBrasserie Ltd to issue equity shares in the market. Further, throughthis source funds can be obtained from investors who may purchaseshares of company (Cox and Fardon, 2005). Main advantage of thissource is that business does not have to keep cost of debt financing,right business angels bring valuable skills, investors are attracted toprovide follow up funding etc. On the other hand some disadvantage ofthis source is that equity financing is demanding, costly and timeconsuming.

Retained earnings: It is also regarded as one of the most effectivesource of finance where business can utilize its savings for satisfyingits expansion needs. Further, main advantage of this source is thatlarge amount of funds can be obtained easily and it is not required tobear any cost (Keller, 2013). On the other hand it reduces overallsavings of firm which is major drawback.




Out of all these three sources most appropriate one for city BrasserieLtd is equity financing where organization can easily issue equity shares inthe market and amount for expansion can be obtained easily. Main reasonbehind not recommending debt financing is that business has already takenloan from bank of large amount and this source will not be appropriate forfirm as interest cost will rise. Further, retained earnings as a source cannotbe considered by business as large amount is required for investment.

b) Sources of income generation

Different sources of income are present which City Brasserie Ltd whichbusiness can consider for enhancing its overall profitability level. Suchsources are:

Cookery classes: Chefs working in City Brasserie Ltd can organizecookery classes and can charged fess from individual for the same.This will be appropriate source of income for company and people canlearn about preparing different dishes etc. This services can beprovided by the ideal labour of the restaurant in the morning time inwhich there are fewer customers in restaurant (Portz and Lere, 2010).In this manner, they will be able to make optimum utilization ofavailable resources.

Merchandising with cookbooks and kitchen items: For CityBrasserie Ltd it is possible to introduce cookbooks and kitchen items.Further, same can be offered to local public so that they can knowabout the ways through which different dishes can be prepared.Therefore, this will also be appropriate source of income. City




Brasserie Ltd is reputed French restaurant with good market image. Onthe basis of their goodwill they can sell their cooking recipes to thecustomers (Ojha, Gianiodis and Manuj, 2013). For this activity, they donot required to incur heavy expenses but they can earn good profitsfrom this source.

Events catering: Company can take catering order of different eventssuch as party, marriage etc and income can be earned by chargingfees from the same. For this source, they can introduce differentthemes for their customers in order to make their experience morememorable. They can also provide their services to the commercialentities by getting associated with them.







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TASK 2

A: Evaluation of cost and gross profitElements of costs including labour, consumables and overheads

Elements of cost can be defined as the expenditure occurred bybusiness entity for the manufacturing process of the cost centres (Curzonand Wingler, 2013). In the context to the City Brasserie Ltd, description ofcost components is as follows:

Materials: Materials cost are involved when finished goods are readyto sell to the consumers. Materials can be of raw materials and finishedmaterials. Example of material in City Brasserie Ltd crockery, knives,silverware etc.Consumables: Consumables can be termed as the goods which areconsumed by the consumers (Elearn, 2013). It can be used forconsumption either to spent or wasted. These includes napkins, cutlery,food and beverages items.Labor: Labor is consists of human resources who was charged for thework in the industry. For example: management and all the staffmembers.Overhead Costs: It is the type of expenses which does not includelabour, materials and other expenses. It is also known as indirect cost.It includes electricity costs, telephone bills, rent, taxes etc.

Increase in gross profit percentages by changing selling pricesFor the increase in the gross profit percentage, one should consider

their market price point which should be fair, every expenses of the businessand menu item cost. One can increase their profit by changing selling price




of their cost or product. Gross profit can be obtained from cost of goodsminus revenue (Keller, 2013). The difference between cost of goods sold andrevenues is known as gross profit. This aspect shows that increase in sellingprice will make increase in gross profits.

B: Evaluation of business methodsStock taking for control and management for City Brasserie Ltd

Stock taking can be defined as procedure for the recording amount ofstock held by business. It is an effective method for the management ofinventory in the business. This method provides accurate informationregarding recording of inventory by which management can make decisionsregarding order quantity and duration. In addition to this, company will beable to minimize their storage and carrying cost.

Stock taking also assists in reduction of abnormal cost by makingproper inventory management. Further, by making use of this method themovement of stores items can be watched more closely by the store auditor(Gitman, 2013). With this approach, chances of obsolescence buying will bereduced. In addition to this final accounts can be quickly prepared.Appropriate methods for security of cash

Cash can be managed by various techniques such as working capitalmanagement. Cash security issues are common in business entity. CityBrasserie Ltd can appoint different individuals for the purpose cash handlingand cash recording. In this manner they can evaluate physical balance withthe accounting records in order to prevent embezzlement (Shahwan, 2008).Further, audits can be conducted in timely manner for the monitoring inbusiness.







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TASK 3

A: Source and structure of trial balanceTrial balance can be defined as statement summarizing accounting

balances of the ledgers. This statement is prepared to ensure arithmeticalaccuracy of the accounting reports. Trial balance can be prepared by twomethods i.e. traditional method and modern method. This statement is basefor the preparation of financial statements. Source of information ofpreparation for trial balance is balances of ledger accounts (Financial ratioand Analysis, 2013). Structure of trial balance is comprises of followingbalances:

Fixed Assets, Current AssetsLong term and Current liabilitiesCapital of OwnersRevenue ItemsExpenses

Table 1: Format of trial balanceAccount Name Debit CreditFixed and current assetAccounts receivable £0.00Inventory £0.00Investments £0.00Organization expense £0.00Vehicles £0.00Accumulated depreciation -vehicles £0.00Land £0.00Goodwill £0.00Long term and CurrentliabilitiesAccounts payable £0.00




Notes payable £0.00Capital of owners £0.00Revenues and expensesSales £0.00Revenues £0.00Cost of goods sold -materials £0.00Depreciation £0.00Dues and subscriptions £0.00Interest expense £0.00Maintenance £0.00Miscellaneous £0.00Income taxes £0.00

Totals £0.00 £0.00

Trial balance assist business organization is identification andrectification of errors. However, it is not able to identify various errors suchas error of concept and error of omission of accounting entry.

B: Evaluation of business accountsSignificance of balance sheet and income statement of limitedcompany

Income statement and position statement are crucial financialdocuments of the limited company. Income statement shows expenditureand revenue occurred during the accounting year. By considering thesevalues, profit for the year is computed by the entity through their operationalactivities (Sources of finance, 2013). On the basis of this statement,profitability ratios can be computed in order to determine their operationalefficiency. Further, position statement shows financial position of thebusiness on the particular accounting date in form of assets, liabilities andcapital.




Use of straight line depreciation method for the purpose ofadjustment

Straight line method is the easiest way for the computation ofdepreciation in an accounting period. Formula for straight line depreciationmethod is as follows:

(Initial cost – Salvage value) / no. of years usedAdvantage of this method is that it is easy to compute and it can be

applied to all the long term assets of business. This method is widelyacceptable for accounting of fixed assets and depreciation (Weil, 2012).However, this method does not provide accurate reflection of difference inusage of asset from one period to the another. In addition to this, SLM doesnot necessarily match cost with the revenues in various types of long termassets. This method is not appropriate for the assets with rapid developingtechnology.Importance of account notes

Account notes are significant for user as it provides descriptiveinformation of the financial figures used in financial statements of the limitedcompany (Hussey and Ong, 2005). These notes provide completeunderstanding of specific terms and financial conditions of the company.

C: Purpose of financial budgets and the process suitable for the budgetarycontrolPurpose of financial budgets

Budgets are prepared by business organizations in order to forecastfuture activities. On the basis of this forecasting, resources are allocated bythe management in order to make its effective utilization. Financial budgetsalso assist in management of inflow and outflow of cash to maintain proper




liquidity and solvency in business. In addition to this, it also mitigates futurerisk by taking pro-active steps in business.Process for budgetary control

Budgetary control can be defined as technique for the comparison ofactual results with the budgeted results (Winand and et. al, 2012). On thebasis of this comparison variances are computed in order to make viablemodification by the business. Planning by the management of City BrasserieLtd cannot get successful if it is not supported by efficient and effectivesystem of control. Process of budgetary control is inclusive of preparation ofseveral budgets, comparison of actual results with the budgeted figures andrevision of budgets in order to make valuable changes in operationalactivities. System of budgetary control is not rigid because company isrequired to modify it with the changing circumstances.D: Variance analysis of budgeted and actual figures(i) Indicative for occurrence of favourable and adverse variance

Table 2: Variance analysis of budgeted and actual figures of City BrasserieLtd

ParticularsBudgetedFigures

ActualFigures Variance

Adverse orfavourable

Sales £70,000.00 £65,000.00 -£5,000.00 AdverseCost of Goods Sold £15,000.00 £13,500.00 £1,500.00 FavourableGross Profit £55,000.00 £51,500.00 £3,500.00 FavourableLabour Costs £15,000.00 £19,000.00 -£4,000.00 AdverseDirect ExpenseCosts £7,000.00 £6,500.00 £500.00 FavourableOverhead Costs £8,000.00 £8,500.00 -£500.00 AdverseNet Profit £25,000.00 £17,500.00 -£7,500.00 Adverse




(ii) Justified suggestions for appropriate future management actionIn accordance with the variance analysis, management of City

Brasserie Ltd is recommended to make appropriate forecast by consideringchanging market trend and values. In addition to this, company isrecommended to render service as per demand in the market. In this manner,company will be able to make optimum utilization of available resources inorder to enhance their profitability (Arnold, 2005). Company is also requiredto enhance their efficiency to make reduction in their expenses andabnormal wastage of the available resources. For this aspect, they can installnew plant and machinery in the business. With this approach they will beable to enhance their production capacity to attain cost advantages. Further,in order to determine demand in the market they are required to conductmarket survey.







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TASK 4

A: Computation of financial ratiosFinancial ratios are computed to analyse financial position of business

by considering profit and loss account and balance sheet. Ratio is anumerical expression which shows relationship between two variables (Vice,2013). Computation of financial ratios of City Brasserie Ltd is as follows:

Table 3: Computation of financial ratios of City Brasserie Ltd

Ratio and Formula Calculation Answer Interpretation

Current ratio(Current asset / currentliabilities)

154/146 1.05

Current ratio of City Brasserie Ltd isless than ideal ratio i.e. 2:1. This aspectshows that company had limited assetsin order to meet out their currentobligation.

Quick Assets or Acid TestRatio(current asset –inventory) / currentliabilities

154-51/146 0.71

Similar to current ratio, quick ratio isalso less to the idea i.e. 1:1. Thisaspect will reduce solvency of thebusiness and will create issues inworking capital management.

Return on CapitalEmployedEarnings Before Interestand Tax (EBIT) / CapitalEmployed

154 +16/203

0.84

Ratio of return on capital employedshows that company is earning goodprofits on the capital through theiroperational activities.

Gross Profit MarginGross profit / sales *100

500/920*100 54.35%Gross profit margin is measure oftrading profit of business in comparisonto its sales. GP margin shows that City




Brasserie Ltd is able to earn goodprofits from trading activities.

Net Profit MarginNet profit / sales *100

103/920*100 11.20%

Net profit margin shows that companyis able to earn profits after incurringtheir direct and indirect expenses.Management of the City Brasserie Ltdhas excessive revenue in comparisonto their operating and non-operatingexpenses.

Debtors CollectionPeriod(Average Debtors /Credit Sales) x 365

92/920*36536.5days

Debtor collection period shows time inwhich amount from debtor after creditsales is collected. Calculation showsthat City Brasserie Ltd recovers amountof credit sales in 37 days.

Creditors PaymentPeriod(Average creditors /Credit purchases) x 365

45/(420+51)*365

34.87days

Creditor payment period shows thetime period in which is required to paydue amount of credit purchase. Inaccordance with the calculation,management of City Brasserie Ltd isrequired to pay this amount in 35 days.

Inventory or StockTurnover Ratio(Cost of Goods Sold /Average Inventory)

420 /518.24time

Inventory or Stock Turnover Ratioshows time period in which inventory ofcompany is sold and replaced by theanother inventory.

Debt-to-Equity Ratio(Debt / equity)

425/150 2.83

Debt equity ratio of City Brasserie Ltdis near to the ideal as debt isapproximately twice of the amount ofequity.




B: Recommendation for City Brasserie Ltd for making improvement in theirfinancial management strategies

Liquidity risk : In accordance with the liquidity ratios of the company,it can be noticed that company is having less ratio in comparison tothe ideal value. Management of City Brasserie Ltd is required to focuson the enhancing quick and current ratio. For this aspect, they arerequired to enhance cash sales and credit purchases (Ojha, Gianiodis,and Manuj, 2013). For this aspect, they can provide discounting offer tothe customers in order to motivate them for the early payments.Profitability: Profitability ratios of City Brasserie Ltd depicts thatmanagement is able to earn sufficient profits from their operationalactivities. In order to enhance their profits, they should manage theiroperational expenses in an effective manner. Main expenditure of CityBrasserie Ltd is wages and salary i.e. £200000. Management of theorganization is required to do planning for making reduction in thisexpense (Pratt, 2013). For this aspect, they can recruit seasonalemployees in order to pay as per the customers.Leverage risk: Debt equity ratio of the company is higher than theideal ratio i.e. 2:1. Company should attempt to reduce their ratio forthe minimization of their financial burden. For this aspect,management of City Brasserie Ltd is recommended to generatefinancial source from the equity finance for the alteration of capitalstructure (Hussey and Ong, 2005). With this policy they will be able tomake reduction in their financial cost as dividend to equity had directcorrelation with the profitability of organization.







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TASK 5

A: Categorization of cost using examples from City Brasserie LtdCost can be defined as expenditure incurred by business organization

in order to attain the economic benefit. On the basis of nature, cost can bebifurcated into following aspects:Fixed cost

Fixed cost can be termed as expenses which does not variate with theoutcome to be produced or manufactured. Amount of fixed expense remainssame even if there is increase or decrease in number of customers. Exampleof fixed cost in City Brasserie Ltd is rent, depreciation of equipment andsalary of staff (Significance of budgeting and recommendations to enhancethe budgeting process, 2010). Restaurant will be required to incur theseexpenses irrespective of number of customers.Variable cost

Expenses are considered as variable expenses if they are directlyproportionate to the production units. These expenses increase or decreasewith the change in units to be produced or services to be rendered. Exampleof variable cost in City Brasserie Ltd is sales commission to the waiters andfood cost.Semi variable cost

Expenses covered in category of semi variable cost has characteristicsof both fixed and variable cost. Some part of this expense is fixed andremaining part is variable. Example of semi variable cost for City BrasserieLtd is water bill (Weil, 2012). Some amount in this bill fixed irrespective offact that restaurant is making use of water or not and variable part of thisexpense is actual consumption of water.




B: Calculation of contribution and relationship between cost, profit andvolume

Contribution is the amount showing difference of sales and variablecost in the business. Computation of contribution as per the given businessinformation is as follows:Calculation of contributionContribution per customer = Ticket price for the Champagne Holiday Dinner -

Variable cost per customer= £80 - £30

= £50Relationship between cost, profit and volume

Cost, volume and profits are directly connected with the one another.With the increase in one variable another two variable will also be increaseand vice versa. However, increase in volume will make high increase inprofits but low increase in cost (Shahwan, 2008). It is because; after atparticular point company will only have to variable cost and the amount ofcontribution will be profit of the business. In accordance with the given casescenario with the increase in customers of Champagne Holiday Dinner costand profit will also be increased. However, net increase in profit will behigher in comparison to the cost.

C: Recommendation of tickets to be sold in order to earn desired profitBreak-even point can be defined as situation in which business is able

to recover entire cost of the businesses. At this point, amount of sales isequivalent to the amount of fixed and variable cost incurred by the businessorganization. Break-even point plays vital role in making decision for the




business. By considering this figure, organization can set their target toattain the desired profit in an efficient manner.Break-even point

Tickets to be sold to attain BEP = Fixed cost / contribution per unit= £500 / £50= 10 tickets

Tickets to be sold to make £5000Profit

Tickets to be sold to attain desired profit = Fixed cost + desired profit /contribution per unit= £500 + £5000 / £50

= 110 ticketsBy considering the above calculation it can be said that company is

required to sell minimum ten tickets in order to recover all the costs incurredby them. Further, in order to earn profit of £5000 management of the CityBrasserie Ltd is required to sell 110 tickets. At this point they will be able toearn desired profit.







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CONCLUSIONAfter conducting the entire study it has been found that most

appropriate source of finance for City Brasserie ltd is equity financingthrough which it is possible for company to attract large number of investorsand expansion amount can be easily obtained through this. Further, theincome statement along with balance sheet of limited company is highbeneficial as it supports in knowing overall performance of the firm. Further,profitability ratios can be computed easily and it shows whether all the keyresources of business are utilized efficiently or not. Apart from this accountnotes are also important which provides information regarding the financialfigures and supports in understanding the financial condition of theenterprise. Main purpose of financial budgets is to forecast future activitieswhere with the help of forecasting business can easily allocate resource in itsmajor activities.







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REFERENCESBooks and journals

● Arnold, G., 2005. Corporate Financial Management. 3rd ed. FinancialTimes/Prentice Hall.

● Cox, D. and Fardon, M., 2005. Management of finance. Worcester:Osborne Books Limited.

● Curzon, E. And Wingler, J., 2013. SEC adopts new financial responsibilityand reporting requirements for US-registered broker-dealers. Journal ofInvestment Compliance.

● Elearn, 2013. Financial Management Revised Edition.Routledgepublication.

● Gitman, J. L., 2013. Personal Financial Planning. Cengage Learningpublication.

● Hussey, R. and Ong, A., 2005. A substantive model of the annual financialreporting exercise in a non-market corporate. Qualitative Research inAccounting & Management.

● Hussey, R. and Ong, A., 2005. A substantive model of the annual financialreporting exercise in a non-market corporate. Qualitative Research inAccounting & Management.

Online

● Financial ratio and Analysis., 2013. Available through:<http://accountingexplained.com/financial/ratios/>.

● Significance of budgeting and recommendations to enhance thebudgeting process, 2010. [Online]. Available through:<http://sheltonstella.wordpress.com/2010/04/09/221/>.

● Sources of finance. 2013. [Online]. Available through:<http://thesis4all.com/2013/05/sources-of-long-term-and-short-term-financing-of-business/>.


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Sample Dissertation Report on Finance in Hospitality