Strategic Management Accounting - Boutique Hotel - Case Study Example

Strategic management accounting Task Introduction Boutique Hotel is a business organization in the Hotel industry consisting of14 hotels. The company was acquired by Ave-Co plc, which saw the Hotel’s managerial strategy change. The Hotel management took the regional direction where the 14 Hotels were divided into three regions, each headed by a regional manager. The financial performance of Boutique Hotel began declining. Based on the information contained in the case study, this executive report seeks to present the key problems faced by the Hotel. Secondly, the content of a journal article covering the use of ABC system has been drawn. Last, two mind maps presenting the Hotel’s problem and the article’s main arguments are also included. The problems facing Boutique Hotel The above mind (appendix 2) map shows the key problems facing Boutique Hotel, which could be blamed for the recent decline in the financial performance. First, lack of interaction between the organization and the financial department, situated in the parent company, is a sign of ineffective management. A company’s financial manager should maintain constant interaction with the organization’s manager in order to facilitate a deep analysis of the organization’s current financial situation (Case study, 2014). Ave-Co’s financial department has failed to conduct a deep financial analysis using various methods such as ratios. The current key performance indicators used in the organization are occupancy percentage and the return on investment. From economic and financial point of view, the two performance indicators are overly weak. The occupancy rate for the year 2011 to 2014 were 266.45, 277.4, 295.65 and 299.3 respectively, showing an increase in the occupancy rate. on the other hand, the return on investments for the same years were 6.665%, 9.483%, 13.84%, and 11.95 respectively, showing an increase followed by a decrease in the asset utility rate. Some critical aspect of the company’s performance, such as costs and liquidity is left unevaluated (Case study, 2014). Therefore, both the occupancy and asset utility rate represent a skeleton analysis of the company. The absence of the financial analysis of the company has clouded both the management’s and the financial department’s view to realize the insufficiency of the performance indicators implemented in the company. Consequently, the same old strategy has been in action leading to the decline of the company’s financial performance (Case study, 2014). Second, the preparation of budget is important for planning and controlling, coordinating, communication and motivation purposes (Barrett, 2005, p. 56-60). Planning is defined as the process of setting objectives and goals and the course of actions to be taken in order to ensure the achievement of the goals. The control aspect of the budget involves measuring the organization’s actual performance against the planned performance (target/ budget) (de Waal, 2005, p. 56-58). In addition, a budget is majorly used to detect variances and formulate the most suitable corrective measures depending on the situation. The budgeting process enhances effective communication between various levels of management and between different functional departments within Boutique Hotel (Rickards, 2008, p. 100-103). The budget spells out the courses of action to facilitate the achievement of goals within a time frame. Managers are thereafter stimulated to utilize the allocated resources to meet the organization’s objectives (Maccarrone, 1996, p. 43-47). Coordination among the functional departments within an organization is prompted by the need to cross check data between functional departments within the organization (Smith, 2005, p. 40-50). However, the financial department based at Ave-Co plc hardly interacts with Boutique Hotel’s management, thus, the impeding budgeting process in the company. The mentioned reasons have partly led to the company’s financial performance decline. Third, the regional managers have the total control over Boutique Hotel. Therefore, they have unlimited authority to implement strategies of their choosing, which to some extent, might not have ensured the achievement of long-term goals (Case study, 2014). In order to align the managers actions with the organization’s objectives, their unlimited authority should be withdrawn. The company’s net profit margin ratios of the year 2011 to 2014 are 3.479%, 4.771%, 6.753%, and 5.774% respectively. The net profit margin ratio shows the percentage of the company’s revenues that were sales. For instance, in the year 2014, 5.774% of sales were net profit, whereas the remaining 94.226% were consumed by operating expenses. The analysis proves that the company’s cost management strategies and price setting methods are ineffective. The high operating costs have led to the reduction in the company’s profitability level (Innocent, Mary & Matthew, 2013, p. 60-63). Therefore, a more sophisticated costing system such as the Activity Based Costing should be implemented. The article on strategic cost management accounting (ABC system) The mind map below (appendix 3) shows the sub-concepts that lead to strategic cost management accounting. The article indicates the rate at which ABC system is being adopted by the UK companies and whether the companies have successfully been able to control costs, set appropriate prices, incorporate budgeting, measure performance and improve decision making (Pierce & Brown, 2006, p. 111-115). The research methodology adopted was the use of Questionnaire, which were distributed to top 500 companies and 50 financial services companies listed as top Irish companies in the 2001 Business and Finance listing. The questionnaires were answered anonymously by finance officials or the CEO and 24 responses were never received. Out of the 526 responses, only 122 were usable. The major limitation was finding a complete response to the questions. Companies that have adopted the ABC respond that the success rate of cost management and other aspects, listed above, are high (Pierce & Brown, 2006, p. 111-114). 39% of the respondents admitted that the implementation of ABC system has improved their ability to control operating costs, set appropriate prices, incorporate budgeting, measure performance and improve decision making (Pierce & Brown, 2006, p. 111-114). A reflective critique The report presents the analysis of the problems facing Boutique Hotel. The problems arise due to lack of effective control measures and the ineffectiveness of the finance department. Other than collating the key performance indicators and producing monthly management account, the finance department, which is located at Ave-Co’s head office, maintains less contact with the Hotel managers (Case study, 2014). Lack of interaction between the finance department and the Hotel managers could have hindered free information flow between the finance department and the Hotel managers. Lack of free information flow reduces the chances of conducting a deep and broad financial analysis on Boutique Hotel, thereby minimizing the possibilities of discovering the financial aspects that need special control measures and adjustments such as cost items (Case study, 2014). The absence of interaction between the finance department and the hotel managers dwarfs any effort to formulate a budget that encompasses all the company’s activities. That can only be possible if the finance department establishes another branch that provides services exclusively to Boutique Hotel. Due to the ineffective budgeting process, the company lacks a platform to develop effective plans and control measures. This is proven by the brief financial analysis conducted using net profit margin ratio. The ratio has shown that the operating costs of Boutique Hotel consume excessively large portion of revenue. On that note, the article proves that the ABC system helps companies manage costs and set appropriate prices for both goods and services. Therefore, an effective strategic cost management accounting can help improve the financial performance of the Boutique Hotel. List of References Barrett, R. (2005). Predictive planning: the next step in the planning and budgeting revolution. Measuring Business Excellence, vol. 9, no. 1, pp. 56-63. Case study 2014, “Accounting for strategic management: Boutique Hotel”, Retrieved from YYYY University, School of Business. de Waal, A.A. (2005). Is your organization ready for beyond budgeting? Measuring Business Excellence, vol. 9, no. 2, pp. 56-67. Innocent, E.C., Mary, O.I. & Matthew, O.M. (2013). Financial Ratio Analysis as a Determinant of Profitability in Nigerian Pharmaceutical Industry. International Journal of Business and Management, vol. 8, no. 8, pp. 107-117. Maccarrone, P. (1996). Organizing the capital budgeting process in large firms. Management Decision, vol. 34, no. 6, pp. 43-56. Pierce, B. & Brown, R. (2006). Perceived success of costing systems: Activity-based and traditional systems compared. Journal of Applied Accounting Research, vol. 8, no. 1, pp. 108-161. Rickards, R.C. (2008). An endless debate: the sense and nonsense of budgeting. International Journal of Productivity and Performance Management, vol. 57, no. 7, pp. 569-592. Smith, J. (2005). Cost budgeting in conservation management plans for heritage buildings. Structural Survey, vol. 23, no. 2, pp. 101-110. Appendix 1: Calculations of relevant ratios Year 2011 2012 2013 2014 Occupancy rate (Occupied rooms/Available rooms) 266.45 277.4 295.65 299.3 ROCE (Net profit/Net assets) 6.67% 9.48% 13.84% 11.95% Net profit margin (Net profit/Sales)*100 3.48% 4.77% 6.75% 5.77% Operating profit margin (EBITDA/Sales)*100 13.92% 15.24% 17.45% 16.58% Net asset turnover (Sales/ Net asset) 1.916 1.988 2.049 2.07 Appendix 2: Boutique Hotel’s mind map Appendix 3: Mind map based on the selected article Read More