Performance and Financial Analysis - Case Study Example

Hots Report Name Institution Executive summary The financial and operational performance of the hotel in year 1 was hampered by a host of uncertainties and low sales. Despite the high expenditures that the hotels management spent on generating revenue, the sales were low. As such, the hotel spent more costs than it was able to generate revenues. It made loss as the costs outweighed the revenues generated by the hotel. This was a very significant turning point for the hotel as it laid a foundation for learning and implementing strategies for increasing revenue generation. The rooms department and the food and beverage department were the main revenue generators to the hotel in year 1. Also, they had the lowest costs while the other departments incurred high costs and thereby contributing to net loss. Year 2 marked a record increase in the hotels fortunes in both operational and revenue generation. The total revenues in year 2 doubled year one’s performance. The net income also recorded more than one hundred percent increase. The operational performance also increased as the hotel was able to reduce the operational costs. This was because of implementing operational strategies aimed at making the operations efficient. The rooms, food and beverage departments generated more revenue than year 1 and this contributed significantly to the increased net income of the hotel. Year three was unique than year1 and year 2, this is because the management effectiveness came in to play. This is also the year that the hotel made remarkable expansion both in customer base and infrastructure development. The management increased services by building more infrastructures such as conference facilities, parking facilities, casino facilities and expansion of rooms. These services and infrastructure increased revenue base as the hotel was able to attract new type of customers that it could not have served in year 1 and year 2. There was increase in total revenues and the net income as compared to year 2. This increased the financial stability as well as sound investments. In essence, the hotel achieved much growth beyond the management’s expectations. The business plan provides SWOT analysis; this examines the strengths, weaknesses, opportunities and threats that the hotel is facing. These are internal and external to the hotel. The hospitality industry is volatile as it provides services and products that are highly perishable. As such, it is important to have strategies for ensuring that there is sustainable business. The business plan is provided based on year 3’s performance. It includes objectives for year 4 that the hotel will seek to achieve. This will be achieved through implementation of the strategies provided in the business plan. These strategies relates to each of the departments of the hotel. This will enable the hotel to achieve and surpass the expectations. Table of Contents Table of Contents iv 1.0 Introduction 1 2.0 Performance and Financial analysis 2 2.1 Total hotel Revenue and total hotel net income 3 2.2 Rooms department revenue and rooms net income 5 2.3 Food & beverage department revenue and food and beverage net income 6 6 2.4 Return based on capital employed (ROCE) 7 2.5 ADR and REVPAR 8 2.6 Refurbishment costs 9 2.7 Short term and Long term analytical stability ratios 10 2.8 Staff turnover 11 2.9 Marketing spending 12 2.10 EMS spent and activities 13 3.0 Business Plan 14 3.1 SWOT analysis 14 3.1.1 Strengths 15 3.1.2 Weaknesses 15 3.1.3 Opportunities 15 3.1. 4 Threats 16 3.2 Objectives 17 3.3 Strategies 17 3.3.1 Corporate Market 17 3.3.2 Leisure 18 3.3.3 Other market segments 19 3.3.4 Food and beverage 19 3.3.5 Staffing 20 3.3.6 Physical Property 20 3.3. 7 EMS 20 4.0 Conclusion 21 5.0 References 22 6.0 Appendix 23 6.1 Current Balance Sheet 23 6.2 Statement of Income for Year 3 24 6.3 Monthly indicator report for Year 3 25 1.0 Introduction Financial performance of a hotel is a significant tool that marks the internal strength of the company and is considered a good tool on which decision making should be based and directed (Clarke & Chen 2007). Use of rations and ROCE serves as an excellent tool that creates a sustainable room for decision makers to understand the challenges they are about to face. Hotel management is a critical entity that requires strategic position of the hotel, and increasing the presence of the business in the market through application of sustainable marketing approaches and techniques such as use of internet, promotions, and advertisements. The report significantly reveals the inputs that have been implemented during the last three years and a business plan that will help shape the business in the fourth year of operations and the details are uniquely documented for a five star hotel with a series of operations in the market. All set ups of the hospitality at the hotel are twisted to reflect the objectives of the hotel but the content outlined have clearly been drafted and edited from the hotel’s management and practical operations. Clients are considered to be an asset to the company, and the hospitality market is competing to win more customers with reference to other competitors and therefore the report has clearly outlined and strategically analysed the strengths, opportunities, weaknesses, and threats that the company is currently operating in. 2.0 Performance and Financial analysis Financial analysis is conducted by a company’s management to determine their position in the market, and whether their operational practices are meeting their targeted objectives or not. For some reasons, objectives are to be considered first and all efforts are to be applied to ensure that mission’s statement of the hotel is real, and that all operations are revealing the internal definitions and expectations of the hotel (Clarke & Chen 2007). Revenue generation is subject to market volatilities, resource outsourcing, scheduling, quality improvement, and increase in offer of excellent services to the clients (Weygandt, 2009). The trends in performance of a hospitality based and any other business varies with stability of the market and the status of the global inflation levels (Verret, 2008). For example, the recession that occurred in 2008, is still affecting operations and practices of several business and the currently stable business had applied strategic management systems to orient the business in new forms and to cope with the situation (Bardi, 2006). However, organizations which had poor strategy after recession are still facing problems, all of which have lowered their revenues or have brought in several fluctuations and inconsistency (Clarke & Chen 2007). Effective financial analysis of a company is conducted by calculating revenue collected from capital employed, and the analysis is done in phases in order to determine the gaps (Weygandt, 2009). Production and matching the capital employed with objectives of the hotel is also a factor that gives insights into matters that need to be addressed in order to position the business in the market (Verret, 2008). ROCE, and other rations such as EBIDTA, Beta, liquidity rations, in combination with allocation of resources has shown a possibility of improving financial status of an institution (Clarke & Chen 2007). 2.1 Total hotel Revenue and total hotel net income At the end of the first year, the hotel realised a total revenue $4,323,590 and net loss of ($30,424). However, the expenditures were much higher than the realised total revenues and therefore the hotel made a net loss, this was significantly below the targeted amount. The answer to this was that, the business had just started and it took lot of time for clients to get to know the services and products that were being offered at the hotel (Weygandt, 2009). As such, the revenue collected was little and the expenditures were high. Nevertheless, marketing strategies were laid down, and the best of them were chosen to ensure that the presence of the hotel was evident (Verret, 2008). These approaches were conducted through promotions, and through televisions advertisements (Burkard, 2011). The results from these approaches steered the operations of the hotel, and during the second year, the revenue shifted to $7,653,060 while the associated net income increased to $2,179,801. Comparing the first year revenue and net income reveals that the inputs and marketing strategies that were employed were sustainable and they helped in shaping the business in the right direction, to achieve better services. The net profit outlined existed slightly above the targeted line, and at the end of the second year, the business had been positioned strategically to compete with other market participants. However through the whole of second year, monthly revenue was fluctuating rapidly such that there was no consistency though the revenue collected were sustainable (Weygandt, 2009). These figures reveal that hospitality industry is volatile in nature, and it exists with no equilibrium levels. For the third year, revenues increased to $8,845,417 with a corresponding net income of $3,126,124. The team initiated a reinvestment plan in year 2, and the results from them saw the generation of a significant rise in revenues and it was then hoped that risks will be reduced by increasing the services offered by the hotel (Weygandt, 2009). Accommodation, foods, and restaurant and quality addition on the services were improved. The team was also able to relate and exercise a holistic approach towards elaborating the market strength of the hotel, with a forecast on how the market volatilities fluctuated. At the end of three years, the hotel had achieved great results, and it was deemed that the trend could even rocket in the fourth year, and fifth year, but only if the market remained stable. 2.2 Rooms department revenue and rooms net income Analysis of the rooms department shows a positive trend and the trend has been rocketing to higher levels. The first year realised total revenue of $1,838,239 with a corresponding net income of $1,127,281 in the twelfth month. The in depth analysis suggested the commitment among members of the simulation team and the motivation among individual members. The rooms were excellently vanished and prepared to match different categories of demand among clients who had different cultural backgrounds. For example, the rooms were installed with digital televisions, linen towels that could be exchanged quite often as requested by the client. The rooms had also telephones through which a client could communicate with their family members or other friends. During the second year, the revenues reached $3,569,623 with a corresponding net income of about $2,266,888. The total revenue and net income increased to $4,363,616 and $2,956,785 respectively in year 3. Transition and recording of revenues between months was also significant and consistent as evidenced on the graph, but there were slight adjustments and slow down at the end of the first year and the introduction of the second year. In total, the hotel made total revenue of $9,771,478 and net income of $6,350,954 during the tree year period. This is good performance both operational and financial. 2.3 Food & beverage department revenue and food and beverage net income Revenue collection from the food and beverage department for the first year was $2,347,899 while the net income was $1,009,901. The food and beverage department made more revenue than the rooms department; however, the rooms department recorded more net income than the food and beverage department. This indicates that food and beverage department had more expenditure than the rooms department. It was also evaluated that for the second year, the number of clients or customers increased due to the effective marketing strategies that the team adopted to steer implementation of the documented strategies. The second year total revenue was $3,569,623 with a corresponding net income of $2,266,888. The revenue and net income doubled the results of the first year. This is an indication of massive marketing activities and effectiveness in operations. For the third year, the revenues were $4,363,616 and net income of $2,956,785. The third year was also sustainable and effective in strategy implementation but the implications were such that, the frequent customers had increased and one time visitors converted to loyal and frequent customers, the increase noted was due to randomised visits that were recorded from new customers. Positively, the tree year performance was successful and that the increase in both revenues and net income were due to the increased marketing and additional value that was fostered by the team at different levels of business operation. 2.4 Return based on capital employed (ROCE) From the total revenue collected and net income, the ROCE for the three years was related and correlated with income and revenue. ROCE for the first year was significantly estimated at -12.5 and for year two it was estimated at 10.7, and during the third year, it was 18.5. This indicates that there was a tremendous increase in number of returns from the capital employed, and that, the hotel had started to make achievements, and probably gaining an increasing market share. 2.5 ADR and REVPAR The ADR has been existing slightly above the normal line and slightly above the REVPAR values. This means that the business is working towards increasing generation of income from its invested resources, the trend has been postive. For year 1, ADR was high at 83.78 while the REVPAR stood at 21.29. However, towards the end of the year, the ADR had reduced to 59.84 while the REVPAR had increased to 29.97. The changes means that the business was performing better from the start, and the future was promising as more resources were being pumped in the business. For the second year, the ADR value stood at 55.75 while the NEVPAR was 38.12. For the third year, the ADR increased to 74.95 at the end of the year with corresponding value for REVPAR to 53.25. This indicates that the ADR has been changing randomly with REVPAR such that there were flcutuations with regard to market changes in prices, and challenges from the marketing strategies. 2.6 Refurbishment costs There were few and random refurbishment spending for year 1 because the services were new and the assets were in good operational conditions. The total refurbishment costs for year 1 were $867,177. Year 2 had less refurbishment costs compared to year 1 as the total costs were $220,871, however, this increased slightly to $257,128 in year 3. The hotel spent a total expenditure of $1,345,176 on refurbishment. The strategies applied enabled the hotel to manage the costs effectively such that some of the months recorded no expenditure; this enabled the hotel to save dearly. 2.7 Short term and Long term analytical stability ratios For the first year, the short term stability and long term stability ratios were stable because the hotel had not borrowed much funds. The reason for this is that, assets were still new and the liabilities were few. By time, the amount of long term debt reduced from $973,858 in the first year to $834,775 in the second year. In addition, the short term ratio increased from 1.3 to3.3 in year 2, this also increased for year 3 to 3.8. The long term ratio for year 1 was 17.7%, this reduced to 15.7% in year 2 and increased again to 17.1% in year 3. This indicates good performance of the hotel in trms of financial stability. The long term debt recuded from $973,858 in year 1 to $834,775 in year 2, thgee debt reduced further to $695,650 in year three. This is good financial management by the hotel. However, the total liabilities indicates increase in year 3 from year 1, $1,749,636 and $2,217,369 respectively. the hotel needs to reduce borrowings in order to reduce the gearing position of the business. 2.8 Staff turnover The staff turnover is used to determine the staff retention capacity of the hotel, it is the rate and numbre of staff leaving the organisation. There was relatively low staff turnover in year 1, there was no staff turnover in months 4, 5, 6, 9 and 12. This indicates that the hotel was able to retain their staff. The turnover increased in year 2 and year 3. Its only one month in year 2 that did not record staff turnover and two months in year 3. The hotel has very low staff retention capacitry as the staff turnover indicates. It should motivate the staff so as to reduce the turover. Staff turnover should be kep at minimum and consistency to ensure that the hotel does not incur additional costs in hiring, training and inducting new employees. 2.9 Marketing spending For year 1, the available funds were not enough and therefore $320,608 was invested to marketing activities. This is considerable amount and it indicates the managements commitment and purpose of marketing the hotel, this is one of the strategies of making awareness and reaching the market. For the second year, the marketing expenditure increased substantially to $560,672, this corresponds with the increase in revenue and net income in year 2. The expenditure further increased to $646,592 in year 3, the increase in marketing expenditure had a direct relationship with increase in total revenue and net income. The increase in marketing spending increased revenue and the net income as well. 2.10 EMS spent and activities It was accounted that for the three years, little was spent on meeting the environmental protection because the hotel management and operations is considered to be a business sector that demand less legalization with regard to environmental protection and management. The only demanding aspect for the sector is that, it requires a licence from the public health sector in order to ensure that the sanitation and hygiene practices meet the international and local public health demands. A zero expenditure on EMS signifies that there were insinificant expenditure on installations, conformance, and maintainance or acquistion of any effective resources for environmental management. Matching resources and EMS strategies ensures that the business is socially responsible. It ensures that the business takes care of the environment by ensuring that it does not polute or contribute to activities that polute the environment. The hotel is keen in ensuring that it conducts business in a sustainable manner, it also ensures that it gives back to the society aroundwhich it is operating and carrying out its operations. 3.0 Business Plan 3.1 SWOT analysis SWOT analysis is done to help the current management systems and operation, and it paves way to understand the future position of the business in the current markets and addressing the challenges that may render a business unable to meet its objectives (Dyson, 2004). It helps businesses, managers and stakeholders to develop a sustainable strategy, by looking forward to minimising effects of business weaknesses and building on strenghts and opportunities. Threats should also be defined and minimised considerably in order to enable achieve sustainable business cash flows (Reid & Bojanic, 2009). Different markets pose different threats and weaknesses on businesses and therefore, there are various strategies that can be used to eliminate them by applying the right methodologies (Dyson, 2004). This business plan includes different analysis of threats and weakness that can sabotage efforts of the hotel towards increasing revenues and gaining a sustainable market share in a competitive market environment. The report has considered that strenghts and weaknesses are internal to the hotel. They include patents, location and reputations. These weaknesses and strenghts can be mitigated but some work is required to ensure that they don’t affect the normal operation of the business or undertaking of business practices within the hospitality industry. On the other side, opportunities and threats are external to the hotel. It also include threats of subsititute products and competitors, the hotel should put in place the appropriate strategies to address the threats while taking advantage of the opportunities (Dyson, 2004). 3.1.1 Strengths Provision of quality services and products is one of the sreanghs of this hotel. Although it has been in operation for just tree years, it has been able to provide unique and distinguished services from the competitors. Another streangth is financial capoability, the hotel has stable financial cash flow and this would help it to expand and offer more quality servies and products (Dyson, 2004). The hotel has experienced and and fully qualified workingforce, employees are veery important resources of this hotel. The hotel has established a strong relationship with suppliers, customers and effective marketing activities. It has a wider covergae in the market, this is an important streangth. 3.1.2 Weaknesses The hotel is affected by the high rate of staff turnover. This is affecting how the hotel provides quality services to their customers. In addition, the hotel is vulnerable to worker’s strikes especially when the minimum wage regulation changes as well as when fluctuations change because it operates under different state government which have different legalisations and control rules with regard to minimum wages (Dyson, 2004). 3.1.3 Opportunities The number of high end and tourist customers has been increasing, and there have been an increased array of specialised, and distinctive services and quality management of high roller customers. This is as a results of effective marketing activities. The number of increased customers looking for wedding, hosting, and planning is also rocketing and therefore the hotel can expand its services to cover a wider range of activities towards meeting the rising demand among internationa and local customers. The hotel consists of a network of personal trainers who offer refresher courses to the employees, and there is space to expand the business to cover a wider field, a move which can help the hotel to gain a bigger market share (Dyson, 2004). Gaming services are also sustainable, because they require a limited regulation, and rules when implementing its activities, and operations. In addition, emerging markets are expanding to cover all sorts of mid-priced products and services (Reid & Bojanic, 2009). The hotel offers wide range of services and products and this gives customers a range of choice to choose from. These services meets the customers expectations. This is a very important opportunity to the hotel to expand and attract more customers. 3.1. 4 Threats The hotel offers some services that are very volatile such as the entertainment and gaming. Moreover, there are many other hoteliers providing substitutes, this takes cutomers that should have been served by this hotel. The competition is very stiff, there are many hotels in the area and around the world peroviding very stiff competition. Extension of credit based frameworks and offers or agreements can affect sustainable gain of profits. There are threats of terrorism attacks at various hotel locations, this instills fear to customers and thereby affects operations and positioning of the hotel. Sales can drastically slow down when such threat of attack occurs (Reid & Bojanic, 2009). 3.2 Objectives From the year three performances, it is clear that objhectives are required in year 4, the hotel will operate and seek to achiev the folowing objectives; 1. Increase year 3 revenue by 32% and be able to obtain a significant rise in net income. 2. Reduce the staff turnover by 90% in year 4, this will correspond with reducing year 3 operational expenditure by 15% in year 4. 3. Increase the number of services and products to customers, this will correspond with increasing year 3 net income by 18%. 4. Increase the market share to 49%. 5. Increase customers by 34% by exproling the unreached and emerging markets. 6. Increase year 3’s return on capital employed by 12% in year 4. 3.3 Strategies 3.3.1 Corporate Market Is a description of a scenario whereby role of markets play a critical aspect of promoting activity of corporate activities of the hotel. Stock performance is significantly achieved when there is efficient management. To achieve this, pricing, promotion, distribution, and sales should be more relevant and steered towards management of corporate frameworks (O'Fallon & Rutherford, 2011). Quality of products at the hotel will be improved to fit preferences of different cultures among customers. Product and quality improvements should be obtained by training the management, stakeholders, suppliers, and middle men on what quality of products entails. For take aways, the packaging will be water proof, and enclosed in recyclable packagings. For gaming, proper procedures and facilities will be availed to customers, in combination with refreshments (O'Fallon & Rutherford, 2011). Promotion will be done in away that the employees will be trained to understand the need of handling customers with high levels of courtesy and etiquatte. Promotion will also be achieved by providing various products by the management such as thank and welcome again cards. Different employees will also take some photos with clients or customers afterwhich their photos will be made available on the website portal of the hotel. Generation of sales will target bi-annual assessments such that the best of the sales will be linked to different team works and employees will be initiated to targeted certain results within specific time frames. The management will also provide strategic information on viable and sustainable distribution networks, and will direct efforts of the employees to maintain specific number of distributions including food distribution points, and temporary food, room equipments or gaming facility stores (O'Fallon & Rutherford, 2011). 3.3.2 Leisure For this category, prices will be made available on the websites and at the various departments so that customers can have easily evaluate and determine future plans to visit the places. Services such as an extra time, and provision of soft drinks and private changing rooms will be provided to serve as a promotional tool (O'Fallon & Rutherford, 2011). Products such as rackets, chess manuals, and excellent playing procedures or manuals for starters will also be provided to enable them to have a soft but excellent orientation to the hotel leisure services. Distribution of leisure services will target all ages, and all genders, and the associated tools and facilitities will be found at strategic places where privacy will be a priority. Each leisure departmets will record its own sales and forward the information to the representing financial officer in charge of recreational services 3.3.3 Other market segments New centres or points will be establsihed and named after the hotel name. The products available at the hotel will also be made available at the segmented points so that customers can effectively have an access to the game facilities (O'Fallon & Rutherford, 2011). Promotion will be offered inform of giving transport means to customers at reduced rates, and the prices at the segmented centres will be two dollars less compared to the prices at the main hotel place. Distribution of services will be availed on nornal places and the segmented areas or locations and branches will consist of all products available at the main hotel. The sales recording systems at the segmnents will be connected to the main systems so that revenue generation at each segmented is monitored and evaluated by the management at the headquarters. 3.3.4 Food and beverage New beverage brands and new types of food from different cultural backgrounds will be applied to ensure that preferences among different customers is fulfilled at the hotel without having to look for substitutes everywhere. The rationale for this choice is that, globalizations has brought more people from different nations, and they have varied experiences to food types. However, the introduction of the foods will depend on the number of requests and previously noted demands. 3.3.5 Staffing In order to have a work force, different seminars and conferences will be conducted to equip employees with excellent hospitaly skills including improving quality during preparation and offer of services (O'Fallon & Rutherford, 2011). The minimum wage will also be adjusted to reflect the government requirements, but overtime compensation plan will consider a significant increase by about 2 dollars per hour. 3.3.6 Physical Property The current condition of the building and infrastructure is good and the renovations will be done on need basis, but lack of need will mean that the renovations will be done after six months but the procedure will be implemented by considering follow up of departments, and under a close supervision of maintenance and renovation engineer (O'Fallon & Rutherford, 2011). 3.3. 7 EMS The hotel should sponsor society and c ommunity events and activities as a way of giving back to the society. The hotel will also apply ISO 14001 certification to management environmental concerns, the hotel will also use this strategy to increase the efficiency of operations and therefore reduce environmental concern. This sis a good environmental management system as it includes a host of features for managing the various activities of the organisation. 4.0 Conclusion Hots hotel indicates a healthy and stable performance for the past three years that it has been operating. Although it is very new to the hospitality industry, it has been able to harness its operations and record impressive growth in both financila performance and operational efficiency. the hotel is in a good financial position, it has greate potential for growth. It has been recording increasing growth from year 1 to year 3. This is good news especially to the investors of the hotel. Looking forward to year 4, the business plan outlines the streagnths, weaknesses, oppontunities and threats that it is facing. This will help the hotel to position itself in the market in year 4. The business plan also offers objectives that it will seek to achieve, this wioll be achieved by impelmenting the strategies outlined. 5.0 References Bardi, J. A. 2006. Hotel Front Office Management. Hoboken: John Wiley & Sons. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=258852userid=^u . Burkard, N. (2011). Market Segmentation and Branding in the hotel industry with special references to Hilton Cooperation. München: GRIN Verlag GmbH. Clarke, A., & Chen, W. (2007). International hospitality management: Concepts and cases. Amsterdam: Elsevier/Butterworth-Heineman Dyson, R.G. (2004). Strategic development and SWOT analysis at the University of Warwick. European Journal of Operational Research, 152: 631-640. O'Fallon, M. J., & Rutherford, D. G. (2011). Hotel management and operations. Hoboken, N.J: Wiley. Reid, R. D., & Bojanic, D. C. (2009). Hospitality marketing management. Hoboken, N.J: John Wiley & Sons. Verret, C. (2008). Hotel sales and revenue management book 2.0. New York: iUniverse. Weygandt, J. J. (2009). Hospitality financial accounting. Hoboken, N.J: John Wiley & Sons. 6.0 Appendix 6.1 Current Balance Sheet 6.2 Statement of Income for Year 3 6.3 Monthly indicator report for Year 3 Read More