Finance and Accounting for Hospitality Businesses - Assignment Example

Finance and accounting for hospitality businesses Institution Instructor: Name: Date: Executive Summary This study was to identify the importance of formal accounting procedures and auditing, and the reasons to implement them within the organization, by the general manager and the Chairman of the Board. This report involved the discussion and key benefits of developing proper cash handling procedures, cash control procedures, operational & cash flow budgeting and capital budgeting. 1. Introduction 1.1. Background This report has been written because of the several concerns raised by the general manager of the organization concerning, use of his personal credit to fund wage payment of employees due to insufficient funds within the organization’s bank account. The concerns also include spending large amount of money and resources on new equipment and refurbishing of public areas that goes uncounted and improper expenses management. 1.2. Objectives The objective of this report is to convince the Board of Management members of the importance of formal accounting processes and procedures within the organization, and why formal accounting procedures should be implemented. 1.3. The scope This report examines the relevance and importance of formal accounting system in the organization to bring about efficiency and effectiveness of resources allocation and use to ensure proper running of the organization and maximization of profits. 2. Main body of the report   Due to lack of the proper accounting methods and procedures in the business to account for the day to day operation of the organization, the need to implement and understand these accounting tools within the organization takes centre stage in its financial prosperity and growth. Therefore, this report examined the importance and the reasons why such methods need to be used; these techniques included, cash handling procedures, cash control methods, operational & cash flows budgeting , and capital budgeting. (Horngren 2002a). Cash handling procedures Developing a proper cash handling within the organization provides a documentation evidence of the money received and transacted; this would help to ensure easy tracking of the income and expenditure of the organization. (Horngren 2002a).The cash handling procedures requires that all the money received be banked, payments not to be made using cash, cash be held in safe places, separation of duties to be effected, preparation and reconciliation of petty cash book with independent records and at regular intervals ensured. (Horngren 2002b). All the cash received should be properly audited and listed to prevent any case of theft and misconduct. This would be important to ensuring that individuals handling cash have no direct contact to the reconciliation of tills, cash counting to be done in separate protected areas, tills that would not be properly balanced to be reported the responsible offices, and audit should be carried out on a regular mode. This will enhance and ensure that there are no errors encountered during the auditing process, since there would be a clear and effective crosschecking of financial documents. (Horngren 2002b). Cash control techniques Cash becomes a very critical component of any profit generating business. A business’s assets help to generate income; this further generates cash flows to the businesses, which are used in many ways. The cash flows would then enable the organization to pay its creditors, reward the shareholders, pay the employees’ salaries, and provide capital replacement for growth. The cash control procedures applied in the business include regular bank reconciliation, separation of duties in cash handling, liability of cash shortages, approval of cash payment, and both internal and external audit. (Hawawini et al 2001).The regular bank reconciliation would ensure that cash generated within the organization is unfailing with the bank records, and an autonomous evaluation of the reconciliation by the board will offer safeguard. In addition, it will check the cash generated to prevent fraud. The separation of roles over cash handling will ensure sufficient handling of cash disbursement and stop cases of cash embezzlement. (Hawawini et al 2001). The management of the organization should hold individuals accountable for cash embezzlement. This would therefore, enable individuals to take responsibility and manage cash properly. Approval of cash disbursement would allow cash to be released only through official signers; this would further enable easy tracking of cash usage. Moreover, the organization should have signatures on all the checks to be legitimate. Institution of quick books control would allow more users to access the organization files. (Hawawini et al 2001).Through this, there would be need to create a control atmosphere that protects the data from illegal users. In addition, errors should also be prevented by use of password and limiting the number of users to the QuickBooks. This leads to the benefit of maintaining important business data that might be used to evaluate the performance of the organization. (Hawawini et al 2001). Operations & cash flow budgeting The key purpose of budgeting o an organization is to provide the management with short term and long-term goals to make appropriate decisions in the future. It provides the framework for activities to be carried in the organization, and thus, it becomes effective when managers are able to build budgets to monitor and modify important undertakings to obtain the desired outcomes. It is important to develop budgets because, through it, communication within departments is enhanced, there would be high coordination of plans, and harmony within the departments and it spells out the expenses and revenues expected in the business. (Fight 2006). The cash flow budget is a forecast or project of what cash will be accessible to meet the operating cost of the organization in the future. It indicates the anticipated flow of cash in and out of the organization and projects the financial position of the business. This therefore, implies that the management can plan for the time when additional funds are need or to reflect on how to create the superlative use of short term cash surpluses. Importantly, the management should consider the cash flow budget as the most critical management instrument in the organization, since it highlights the possible problems. Its preparation will permit enough time to deliberate ways to minimize future problems, (Shapiro, 2005). The cash flow budgeting involves accounting for the net resources generated from daily running of the business, sales and purchases of assets, issue and salvage of equity, changes in operational assets, and long term borrowing from external sources. (Frino et al, 2009). A well prepared cash flow would then determine the performance of the business in the long run. Developing an operational budgeting in the business would allow the expected profit margins to be attained through projecting revenue levels. This further means, that when revenues are less than expected, then the expenses need to be decreased to march the discrepancy. (Frino et al, 2009). In the same way, if the actual revenues become higher than the projected levels, would mean that the expenses be increased. This requires the manager to be keen to achieve the anticipated level of revenues. It is achieved through prior implementation of the review of historical accounts, consideration of both internal and external factors influencing revenues. This again calls for the process of monitoring revenues through comparing the expenses and profits of the business. (Frino et al, 2009). Operational profitability can be determined by the manager through evaluating the differences linking the expected outcome and the actual operating fallout. Revenue analysis and expenses analysis provides the means of determining the operating profits of an organization and therefore, managers should endeavor to carry out business evaluation procedures on a regular basis, (Frino et al, 2009). Capital budgeting techniques According to Clark, et al (2002), this is a method of comparing opposing options and planning areas that the organization need to spend more money. It thus entails the long term assets outlay decisions. Te management should plan on the capital expenditure, evaluate projects under operation, and finally, control the capital expenditure of the business. When carrying out the capital budgeting, the management should consider the size of the asset investment, the economic value of the ongoing projects of the business, the certainty of capital returns, and the planned importance to the business. This will enable the management to monitor and evaluate the progress of the business capital formation and usage, (Frino et al, 2009). Through capital allocation, the management would be at the position to access the business capital expenditures through such method as accounting rate of returns, net present value of capital, payback time of capital invested, and the internal rate of return. The net present value of capital makes use of the cash flows, projects cash flows and discounts the cash flows accordingly. A zero or positive value is preferred since it indicates the well being of a business capital. When calculating the net present value, the future cash flows are estimated together with the discount rate and original costs on capital. The decision rule is necessary when the value is either positive or zero, (Collis and Andrew, 2012). The payback time of capital seeks to determine the length of time the business project would take to repay fully on the investment. Therefore, the shorter the time the attractive the venture, because, when the investments are recovered earlier, profits are maximized, and the risks attached to the investments are easily overcome. (Collis and Andrew, 2012). The accounting average rate of accounting on the other side is based on book value and does not consider the value of money. The internal rate of return is considered favorable when it is higher than the returns. 3. Conclusions There is need for the business to employ an accounting system since it will allow the business to easily its financial information in the long term. The management should strive to ensure that every transaction in the business is appropriately accounted for. The collection, recording and reporting of financial information should be properly managed. Use of capital budgeting techniques would help the business to forecast and evaluate the capital returns, profits, and losses made in the financial period. Ensuring regular checks and balance of the business by the management would allow easy assessment of the business growth and development. There is also need for constant exercise of proper accounts management skills to ensure correct entries and forecast of business capital, (Barrow, 2008). 4. Recommendations To use and apply control procedures to evaluate the performance of the business The management to consider using passwords to protect business data The management to effectively employ administrative control over the business To monitor the progress of the business through frequent checks and balance To ensure proper financial monitoring approaches by use of accounting methods References Barrow, C 2008, Practical financial management a guide to budgets, balance sheets and business finance,7th ed. London. Clark, et al 2002, Capital budgeting: planning and control of capital expenditures, Englewood Cliffs, N.J.: Prentice-Hall. Collis, J, and Andrew H, 2012, Business accounting: An introduction to financial and management accounting, 2. ed. Basingstoke. Fight, A, 2006, Cash flow forecasting, Burlington, MA: Elsevier Butterworth-Heinemann. Frino, et al 2009, Introduction to corporate finance, 4th ed. Frenchs Forest , N.S.W Pearson Education Australia. Hawawini , et al 2001, Finance for executives: managing for value creation, Cincinnati: South Western College Pub. Horngren, C, 2002a, Introduction to management accounting, 5th ed. Englewood Cliffs, N.J. Prentice Hall. Horngren, C, T 2011b, Introduction to management accounting, 15th ed. Boston: Prentice Hall. Shapiro, A, C 2005, Capital budgeting and investment analysis, Upper Saddle River, NJ Pearson/Prentice Hall. Read More