Finance in the Hospitality Industry - Term Paper Example

 BTEC Higher National Diploma in Hospitality Management Unit Title: Finance in the Hospitality industry Table of Contents Introduction……………………………………………………………………………………3 Task 1.…………………………………………………………………………………………3 P1.1 Review sources of funding available to business and services industries………………………..3 P1.2 Evaluate the contribution made by a range of methods of generating income within a given business and services operation…………………………………………………………6 Task 2………………………………………………………………………………………….9 P2.1 Discuss elements of cost, gross profit percentages and selling prices for products and services…………………………………………………………………………………………9 P2.2 Evaluate methods of controlling stock and cash in a business and services environment…………………………………………………………………………………..10 Task 3………………………………………………………………………………………...10 P3.3 Discuss the process and purpose of budgetary control……………………………………..10 P3.4 Analyse variances from budgeted and actual figures, offering suggestions for appropriate future management action…………………………………………………………………………………...12 Task 4(a)……………………………………………………………………………………………...13 Task 4(b)……………………………………………………………………………………………...14 Task 5…………………………………………………………………………………………………15 P5.1 Categorise costs as fixed, variable and semi-variable for a given scenario……………………..15 P5.2 Calculate contribution per product/customer and explain the cost/profit/volume relationship for a given scenario…………………………………………………………………………………………16 P5.3 Justify short-term management decisions based on profit/loss potentials and risk (break-even) calculations for a given business and services operation……………………………………………...17 List of References………………………………………………………………………….....17 Introduction This research essay will be discussing about The Source Of Finance Available For Business And Service Industry. It will discuss about various means of finance available to business and its salient features. Further, this essay will be discussing about major revenue sources for restaurant and hotels. It will also discuss about the the meaning of fixed cost , variable cost and semi-variable cost. It will also discuss about gross profit and net profit margin , current ratio and quick ratio and debtors and creditors turnover by solving an illustrated problem. This essay will also discuss about the break-even point , number of units to be manufacture to attain a targeted revenue. For the purpose of working ratios and break-even points , a separate excel sheet is used. Task 1 P1.1 Review sources of funding available to business and services industries Finance can be regarded as blood of any business operation, growth and expansion. For the majority of the business, finance is the chief restraining factor and hence, it is vital for the business to manage their financial resources efficiently. For a business, variety of sources of both external and internal sources of finance are available. Further, it is significant for any business to select the most apt source of finance for it’svaried as different sources may have its own advantages and costs. Thus, sources of finance can be classified as external, internal, long-term, short-term, debt and equity(Brealey 2012:2). Bank Finance High street bank can be the chief source of financing for business and service industries in UK as they can provide overdrafts, loans and trade finance and also UK government schemes like Enterprise Finance Guarantee Scheme. However, start-up businesses with no track record may find it difficult to source finance from banks as they may not be having the adequate track record. Due to the recent economic downturn in UK, many small and service businesses find it difficult to get finance from banks as there have a substantial increase in conditions and charges attached with loan. Overdraft is a facility granted by banks, which is footed upon businesses trading performance and its capability to have higher liquidity rates. Banks in UK can also offer finance through other processes like re-mortgaging through charge or credit cards or through the Enterprise Finance Guarantee Scheme (Brealey 2012:388). Factoring It is an alternate way of funding for an existing business. The invoices will be presented to a factoring company which will lend money to the business and will collect the amount from the debtor. This is one of the best alternate financing available to service providers and small companies, which require extra finance for the supply of new orders (Brealey 2012:815). Hire-purchase Under this, a business allowed to use an asset without making any payment for the purchase of an asset, as the same will be paid by the lender, and the user has to pay monthly instalment of the total cost together with the interest agreed upon. A business has a choice to buy the asset after having paid all the instalments for a nominal value (Brealey 2012:388). Leasing Where the lessor (lender) owns the assets to the lessee (borrower), and the lessee has to pay monthly rental, as long as he uses the asset. Under the finance lease, if the lessor pays up to 90% of the total value of the asset, then, he may have to option to own the asset leased. Under operating lease, the lease does not prolong for whole life of the asset, and the lessee is not accountable for the full value of the asset and residual risk is assumed by the lessor (Brealey 2012:672). “Finance for Corporates” “Equity Shares” Issue of ordinary or equity shares will give the company to refrain from paying any interest to the shareholders till the company is able to earn profits or in the year where there is no profit. Only when there is profit, a company may declare dividend to shareholders. For long-term financial requirements, companies can issue ordinary shares (Brealey 2012:391). “Preference Shares” One another way of raising finance for a business is to issue preference shares. A Preference share is different from equity share as the preference shareholder will not be regarded as an owner of the business as he will not have any voting rights as in the case of an equity shareholder. However, he will receive a fixed rate of interest annually whether the company earns profit or not(Brealey 2012:382). “Debentures” It is more or less like preference shares, and a debenture holder will be regarded as creditors of the company. Debenture holder is entitled to receive a fixed rate of interest irrespective of the fact, whether the company earns profit or not (Brealey 2012:646). P1.2 Evaluate the contribution made by a range of methods of generating income within a given business and services operation Hilton, Holiday Inn, Accor, Ramada, Premier Travel Inn, Hotel du Vin, Radisson, Marriott and Swallow are some of the big hotel chains operating from UK. Even though, these hotels are individually owned, these hotels are often form a consortia for marketing purposes. It is significant to include all revenue centers for the large restaurant chains instead of concentrating only on room rentals since they can considerably contribute to the aggregate of hotel’s income and financial outcomes. However, in case of Casino hotels, guest rooms might occupy the secondary revenue source. The revenue management system (RM) of large restaurant chains is always influenced by the following added facilities provided by that chain as evidenced by earlier empirical studies on the subject. Large Restaurant Chains Revenue Centers Function Rooms Orkin (2003) , Kimes & McGuire (2001) Restaurants Heo (2013), Bertsimas & Shioda (2003), Kimes (1999b, 2005), Heo et al. (2013), Kimes & Thompson (2004), Thompson and Sohn (2009) & Thompson (2010). Casinos Kuyumca (2002), Kimes (2000), Rasekh & Li (2011), & Licata & Tiger (2010). Spa Centres Modica & Scanu 2014 & Kimes & Singh (2009) Golf Courses Kimes & Schruben (2002), Kimes (2000), Rasekh & Li (2007) & Licata & Tiger (2010). Large chain of restaurants will be realising their major revenues from the following heads: Room Rentals: This offers the lion’s share of revenue for a restaurant chain. In the majority of cases, additional revenue centres will offer additional income only if the guests are staying already in the hotel even though some guests may use only the additional services offered by the hotel like conference facilities , spa centre without room accommodation. Thus, reduction in room rates may bring more customers who may use the other services offered by the hotel thereby increasing the overall revenues of the hotel (Ivanov 2014:23). “Food and Beverages (F & B)” Sale of food is the major avenue of income for any restaurant. Normally, F&B offers the highest revenue generation other than Rooms section either by providing of breakfast, lunch, and dinner, etc., events and banqueting (seminars ,weddings ,birth-day parties and conferences) , or outside catering facilities. The elements of F&B includes restaurant , breakfast rooms , lobby bar , bar, room board kind of services like buffet or a la carte and other F&B services like in-room minibar , room service and catering (Ivanov 2014:149). Merchandise: This is another major head of revenue for a large restaurant chain. Merchandise will include gift items, T-shirts, mugs, hats, pre-packaged beverages or food, which might fascinate the holiday shoppers or tourists (Ivanov 2014:60). Catering This also acts as a major income for any restaurant business. With the help of outdoor catering in other off-site marketing opportunities. Outdoor catering for events and parties is the easy way to enhance revenues of a restaurant. Some restaurants are offering a catered lunch option for adjoining businesses. At local sporting and high school events, smoothie shops can sell smoothies(Ivanov 2014:70). “Pubs, Bars and Night Clubs” These luxuries are provided by all most all hotels from low-cost to 5-star hotels, which may be provided either on independent consortia or owner-run. This is high profit-margin industry in UK, and the large-chain restaurants are even having 200 percent mark-up on drinks and foods. Wine served in the restaurant is charged £10 whereas it is bought from a supermarket at £3. Like Cola is served in a restaurant at £ 2.50 where it is being bought from a supermarket at 50p. Bars and pubs offer convenience for the guests, and it increases the revenue generation capacity. (Ivanov 2014:70). “Casino and Betting” As per Zhuang &Li (2012), the importance of gambling in increasing the revenue generation capacity of hotels particularly in destinations like Macao and Las Vegas is being felt now by hotel chains (Ivanov 2014:23). “Health Centers / Spa / Gym” Spa, fitness and Wellness facilities are offered by hotels as a differentiation factor. As per Modica & Scanu (2014), research in spa management has been negligible. Additional revenue earning capacity is possible, mainly through use of swimming pool, Turkish bath, massage, aroma therapy, Jacuzzi ,etc.(Ivanov 2014:75). Golf courses It includes membership fees, green-fees by non-members, fees for extra services like golf lessons, rentals of golf cart, trolley, golf shoes, etc. (Ivanov 2014:156). “Party and Conference Halls” One giant banqueting suite is employed by the Barton Grange Hotel in Lancashire for weddings and parties during weekend and for conferences during the week days. There is a separate entrance to the main hotel and whereas it has sliding doors where the main room can be divided into many smaller rooms. The hotel has two restaurants where in a formal restaurant, meals and snacks will be supplied all day and a 30-seater fine-dining restaurant which is open only in the evening and it also offers a menu for children Ivanov 2014:80). Task 2 P2.1 Discuss elements of cost, gross profit percentages and selling prices for products and services Direct materaials – It refers to those materials which will become part and parel of the final product in the manufacturing process. For instance ,for stell manufacturer , the iron ore will be the direct material. For auto manufacturers , steel will be the direct material. Indirect materials: Indirect materials will refer to all other assoicated materials which the company purchase for the manufacturing the final product like hand tools , sandpaper and replacement parts for its machineries (Schneider 2014:232). Direct labour : It relates to all the expenses incurred during manufacturing process and this can be easily recognised and allocated to cost units and it correlates directly with quantum of output and thus , easily identified and controlled due to its close association with the outpur. Indirect labour- This refers to all the indirect expenses incurred not pertaining to the manufacturing and includes wages paid to assistants in office , stores , purchasing andtime-office departments, maintenance personnel and foremen. It is to be noted that direct labour cost is assigned to jobs and constitutes the part of prime cost whereas indirect labour costs will be regarded as part of the overheads. (Bhar 1976: 3-1). Direct expenses: These expenses relate to all expenses excluding direct material or direct labour cost but are particularly incurred for a specific process or job and, as such ascribed to it. Some examples of direct cost include design royalty paid per unit of a copyright design, charges for special tool or plant,and crane hiring charges for a specific job. Indirect expenses: These are the expenses incurred other than direct expenses. Some examples of indirect expenses are power, insurance of plant & machinery, factory rent and rates, heating, light, telephone and repair expenses (Narsis 2009:25). “Gross profit percentage (GPP)” is a ratio which denotes the revenue which is arrived at after subtracting all variable costs, direct labour and direct material costs from revenue of a business.GPP is used to compare the company’s profitability with its turnover. It is employed for determining operating performance of a business since it depicts the production efficiency in relation to the unit volumes and the prices at which services or products are sold. GPP is used to compare a business with that of an industry and to analyse the performance of the company with that particular industry as a whole. In the year 2012, Marks & Spencer’s GPP was 37.8% as compared to its competitor Next Plc GPP was 29.26%. It denotes the M&S is spending 62% on its cost of sales, and its mark-up is 29%. Further, it also denotes that the purchasing cost of Next Plc is higher than that of M&S. Selling price of M&S is comprised 29% mark-up and cost of sale was at 71% during 2012 year. P2.2 Evaluate methods of controlling stock and cash in a business and services environment There are many methods of controlling stock in a business. Some of them are detailed out as under: Economic Order Quantity (EOQ) - As per Hopp and Spearman (2001), the EOQ model is a leeway of employing industrial engineering, scientific management, and advanced mathematics to resolved inventory issues. The EOQ pertains to the issue of how much inventory so as to order in order to optimise manufacturing schedules. The distinctive inventory order size issue concerns with arriving at the optimum order size footed upon minimizing the aggregate of two costs namely the cost of ordering and the cost of carrying the inventory. Reorder Level: The business will identify minimum stock level and will re-order that stock level when stock attains that level. (Jones &Chung 2007: 134). One of the significant controls to safeguard cash received against sales in over-the-counter sales is through the maintenance of the cash register. An acknowledgment mail can be sent for the receipt of cash is another form control measure. Many businesses are now using transfer of funds through e-banking or mobiles to increase the control over cash payment or cash receipts (Warren 2014 :197). Task 3 P3.3 Discuss the process and purpose of budgetary control Budgetary control is footed upon earlier year’s performance fine-tuned with the future trend. Budgetary control is a system of managing the performance and costs of different business functions by preparation of budget, allocating the accountabilities, appraisal of the actual performance by contrasting the actual performance with that of budgeted one and devising any remedial initiatives in case if there is any notable deviation noticed. Budget control is a controlling system that employs the budgeted figures and supervises the actual performance (Debarshi: 468). Budgetary control cycle involves four stages: A budget is established that speaks about the business entity as a whole so as to make the managers to accept to accomplish their part of the budget. The budget is employed to examine present performance against anticipations Variations from the budget are evaluated , and remedial actions are taken when possible Response from managers is gathered, and the budget is revisited and revised if required. It demonstrates how these initiatives revolve back to the start to form a cycle. (Emblemsvag 2003:292). “Budgetary Control Cycle” (Emblemsvag 2003:292). P3.4 Analyse variances from budgeted and actual figures, offering suggestions for appropriate future management action The reasons for sale of lesser units: Yuri , operates in a high cutthroat competition oriented cutlery market.High competion in the market makes the competitors to offer products at lessor price or at competitive price and the supply side will be more thereby pushing the selling price per unit downwards . Further , Yuri is aleady facing shortage of adequate quality of steel and due to this , its ability to manufacture desired quality products is acting as an impediment to enhance the supply of the units at the budgeted level to meet the sales target. Further , Yuri is witnessing a shortage of skilled labour who are experienced in cutlery manufactruing. All this factors have resulted in the lesser unit sales than budgeted by Yuri. Material Price and Usage Variance : So as to obtain a favourable price variance , it may be decided to buy cheaper materials for a job. However , it may result in considerable amount of materials wastage and due this, an adverse material usage variance happens. Further, cheaper materials are more vulnerable to handle and hence, there might be an adverse labour efficiency variance too. If quality of the product is to be enhanced and to attain this, if more expensive materials is employed, then, it may result in adverse material price variance. High rate of rejection in materials and poor material handling may result in adverse materials usage variance (Bpp Learning Media 2009:192). Yuri had material price variance of £ 4500. This might be due to as Yuri might have engaged in the enhancement of quality of the product and to attain this, it might have used more expensive materials. Yuri had material usage variance of £ 3000. Yuri may be decided to buy cheaper materials for a job and due to that it would have encountered into considerable amount of materials wastage and due this, an adverse material usage variance might have happened. Labour Rate Variance and Efficiency Variance: There will be adverse labour rate variance if employees in a workforce are reimbursed with higher salary taking into account their skill and experience. If there is a huge number of inexperienced employees in the workforce, it could end in adverse labour efficiency (Bpp Learning Media 2009:192).Yuri had a favourable labour rate variance of £3750 as it is able to pay moderate salary for its skilled and experienced labours. Yuri had an adverse labour efficiency variance of £5625, as large number of inexperienced labours might have comprised of its workforce. Task 4 3.1-Source and Structure of a Trial Balance Source of a Trail Balance Happenng of business transaction Recording the journal entry for the each and every business transaction Making summary of this into ledger Extracting trial balance from the ledger closing entries Structure of a Trial Balance Consists of three columns It will be mirroring accounting elements Contain debit side Contain credit side Structure of a Trial Balance A Ltd Trial Balance Debit £ Credit £ Bank 19,000 Capital 20,000 Sales 3,000 Purchases 2,000 Equipments 2,000 Total 23,000 23,000 Balance Sheet of R Rigs as at 31st March 2014 Fixed Assets 6650 Add: Addition during 525 the year 2012-furniture 7175 Less : Depreciation for other assets 1630 1630 Depreciation on furniture @15% 79 1709 5466 Current Assets Stock 2400 Debtors 12316 Less: Provision for doubtful debts 496 11820 Prepaid Expenses 230 Cash at bank & hand +interest received 50 4474 18924 Total Assets 24390 Current Liabilities Creditors + credit for furniture 5770 Accruals + accrual expenses paid in June 2012 612 6382 Financed by Capital 11400 Add Net Profit minus depreciation-furniture 79 23708 interest earned 50 Less Drawings 17100 Total Liabilities 24390 Profit & Loss Account of M/s R RIGS As on 31st March 2012 Sales 157165 Less: Cost of Goods Sold 94520 Gross Profit 62645 Add - Discounts received 160 Interest received 50 Gross Profit after adding Discounts received 62855 Less: Wages & Salaries 31740 Rent 3170 Discount Received 820 Van running costs 687 Bad Debts 730 Doubtful Debts Provision 91 Depreciation + dep on furniture 79 1709 Accrued Expenses 200 Total Expenses 39147 Net Profit 23708 1 R Rigs can claim an investment allowance on the addition of furniture at 40% i.e. 525 at 40% = 210 as on 31st March 2012 2 Interest earned 50 now added to profit and added to bank balance in the balance sheet Gross Profit Margin Ratio 0.40 Gross Profit / Income Net Profit Margin 0.15 Net Profit / Income Current Ratio 2.97 Current assets / current Liabilities Acid test Ratio 2.59 Current assets-inventory / current liabilities Debtor Payment Period Trade receivables / Revenue * 365 29 days Creditor Payment Period 22 days Trade payables/ cost of sales *365 Stock Turnover Ratio 65 Times Sales / inventory 4.1 Gross Profit Margin = Gross Profit * 100/ sales = £62,645 * 100/ £ 157,165= 40% Net Profit Margin= Net Profit * 100/ sales= £23708 *100/£157,165=15% Current Ratio = Current Assets / Current Liabilities =£18924/£6382=2.97 Acid Test Ratio = Current Assets – Inventory / Current Liabilities =(£18924-£2400)/£6382=2.59 Debtor Payment = Trade Receivables / Sales * 365 =£11820/£ 157,165*365=27 days Creditor Payment = Trade Payables / Cost of Sale *365=5770/94520*365=22 days Stock Turnover Ratio = Sales / inventory= £157,165/£2400=65 times Inventory Days = Inventory / cost of sales * 365= £2400/£94520* 365=9.26 days 4.2 Analysis of R Riggs Financial Ratios Gross Profit Margin- It is a chief financial pointer employed to evaluate the profitability of a businesses’s main activity , without fixed cost. R Riggs GP is 40% which denotes its variable overhead is 60% . Thus , R Riggs net profit will be depending how it manages its fixed cost. If the fixed cost is lesser, then , Net Profir for R Riggs will be higher and vice-versa. Net Profit Margin- This ratio helps to offer indication about how efficient the busienss is and how the business is able to control its cost. R Riggs NP is 15% which denotes its total costs is 85% Thus , if R Riggs is able to control its cost , it can increase its NP. Current Ratio- with the help of current ratio , one can find out whether a business has adequate resources to cover its debts which falls due within 12 months. Normally , a current ratio of 2:1 is regarded to be acceptable. R Riggs is having a current ratio of 2.97 :1 which means , its current assets is 2.27 times more than its current liabilities and can meet the short term liabilities without hassle. Acid-test Rati Task 5 P5.1 Categorise costs as fixed, variable and semi-variable for a given scenario Fixed Cost- The differentiation between variable and fixed cost is footed upon a presumption that time has a positive role to play in decision-making. All costs will tend to vary if given more time. Costs which are fixed in nature in the short-run is known as the fixed cost. These costs have to be incurred irrespective of the fact, whether there is a production in the factor or not. Some examples for fixed costs are rent for office, factory premises, telephone, insurance, power, etc. Even when production is stopped temporarily, fixed costs have to be incurred and thus fixed costs are constant or fixed in nature. Fixed cost per unit is likely to vary in response to the capacity of the production. More one produce, the less will be the fixed cost and vice-versa. Variable Costs: Variable costs are those costs that differ with the quantum of production. Some examples of variable costs are cost of raw materials, wages to the labour, etc. Variable costs are incurred only when there is production. When there is suspension of production temporarily, no variable costs will be there. Thus, if there is an increase in production, the variable costs will be more and vice-versa. Semi-variable costs: These types of costs will increase when there is an increase in production. If no production happens, then, one has to incur the fixed costs. For instance, factory labour costs are semi-variable as workers are entitled to receive their wages for their regular working hours, and the variable segment is the payment of overtime when they work beyond their normal working hours (Aryasri 2007:6.4) P5.2 Calculate contribution per product/customer and explain the cost/profit/volume relationship for a given scenario selling price increase10% selling price decrease 10% Increase in variable cost by £1.5 per unit To attain a profit of £20000 £ £ £ £ £ Budgeted Number of Units 10000 10000 10000 10000 10000 Selling Prince 10 11 9 20 13 Sales Revenue 100000 110000 90000 200000 130000 Less- Variable Costs 80000 80000 80000 95000 80000 Contribution 20000 30000 10000 105000 50000 Less: Fixed Cost 30000 30000 30000 30000 30000 Budgeted loss/ income -10000 0 -20000 75000 20000 Break-even quantity in units Fixed cost / selling price -variable cost 2992 2719 3325 1492 2300 To recover the fixed cost of £30000, 2992 units to be sold Break-even in value 29920 29912 29928 29840 29896 No of units to be sold to attain the target Units to be sold profit of £20000 13000 11820 14445 6500 10000 Selling Prince 10 11 9 20 13 Sales Revenue 130000 130020 130005 130000 130000 Less- Variable Costs 80000 80000 80000 80000 80000 Contribution 50000 50020 50005 50000 50000 Less: Fixed Cost 30000 30000 30000 30000 30000 Budgeted loss 20000 20020 20005 20000 20000 P5.3 Justify short-term management decisions based on profit/loss potentials and risk (break-even) calculations for a given business and services operation Which Proposal is to be adopted ? The proposal of selling 6500 units at Rs 20 would be ideal as the number of units is greatly reduced which would give more advantage as there could be savings in variable cost and hence there will be more contribution . But, raising selling price to Rs 20/= should be used more cautiously as it may allow the competitors will lesser selling price to encroach the market share. List of References Aryasri. (2007).Managerial Economics and Financial Analysis. London: McGraw Hills Bhar , B K. (1976).Cost Accounting : Methods and Problems. New Delhi : Academic Publishers Brealey, R. A. (2012). Principles of corporate finance. London: Tata McGraw-Hill Education Debarshi, B. (2011). Management Accounting. New Delhi: Pearson Education India Emblemsvag, J. (2003) Life-Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods. London: John Wiley & Sons Ivanov, S. (2014). Hotel Revenue Management: From Theory to Practice. Varna: Bulgaria Jones, EC & Chung, C A. (2007). RFID in Logistics: A Practical Introduction. London: CRC Press Warren, C. (2014).Survey of Accounting. London: Cengage Learning Narsis ,I.(2009). Theory in Cost Accounting. New York : Atlantic Publishers. Schneider , G. (2014). Electronic Commerce. New York : Cengage Learning. Bpp Learning Media. (2009). Fundamentals of Management Accounting. London: Bpp Learning Media. Read More