Financial Report and Cost Control in Hotels - Term Paper Example

Name: Professor: Course: Date: Financial report and cost control in hotels Table of contents 1.0 Introduction to financial ratios…………………………………………………….3 1.1. 0 Profitability ratios……………………………………………………….3 1.1.2 Financial ratios…………………………………………………………..4 1.1.3 Business activity ratio……………………………………………………5 1.2 findings……………………………………………………………………………..6 1.2.1 Comparison of ratios against industrial average…………………………………6 1.2.3 Comparison of ratios year by year……………………………………………….8 1.2. 4 Ratio results and profitability of the restaurant………………………………...9 1.5 Recommendation to improve financial performance……………………………..9 1.6 Forecasted sales…………………………………………………………………..9 1.7 Conclusion……………………………………………………………………….9 Work cited………………………………………………………………………….10 Appendix 1.0 Introduction to financial ratios The financial ratios help company management in planning and decisions making. The financial ratios include profitability ratios, financial stability ratios and business activity ratios. 1.10 Profitability ratios A profitability ratio uses margin analysis and shows the return on sales and capital employed. These ratios gives the company good understanding of how well company utilizes its resources in generating profit and value to shareholders. Long -term profitability of the company is vital for both company’s survival and benefit to shareholders. (Investopidia, 10) Profitability ratios includes, gross profit ratio, net profit ratio and return on owners equity(Investment)(ROI).gross profit ratio is the ratio of gross profit to net sales and is expressed as a percentage. This ratio expresses the relationship between sales and gross profit. It helps in determining if a firm is in a position to fund all her operating expenses such as employee benefits, advertising etc. (Ellis, 15) Net profit ratio is the ratio of net profit after taxes to net sales. It is expressed as a percentage.net profit ratio is used to measure the overall profitability of the firm and therefore is a very important tool. The ratio is vital because it indicates whether the investment is viable and returns will be gained. It also indicates the firm’s capacity to face challenges and adverse economic conditions such as competition, fall in demand. If the ratio is higher, the higher the profitability of the firm (Accounting for management, 1).To analyze net profit ratio it is important first to compare with other firm, having in mind that variation of net profit ration may change from year to year because of unavoidable abnormal conditions. When the net profit ratios decrease it is an indication that there is stiff competition or cost of production is rising. (Ellis, 15) Return on owners’ equity ratio (ROI) is the amount of income returned as a percentage of owners’ total equity (capital). Returns on equity ratio measure the firm’s profitability by revealing how much profit a company generates with the money invested. This ratio measures if the company is in a position to payback the invested money in a given period. This is a useful tool in comparing the profitability of the company to that of other firms in the industry. (Accounting for management, 2). 1.12 Financial ratios Financial stability ratios are tools which are used to measure ability of the firm to meet its long-term goals with enough working capital to operate. These ratios are working capital/current ratio and debt ratio. Working capital/current ratio measures the number of times the current assets of a firm cover its current liabilities. According to Bruce,L John “this is a measure of solvency: the capacity of a firm to pay its debts through normal cash cycle, selling inventory on credit, collecting debts and paying creditor.(3) According to Jones this ratio must normally exceed 1:1 and should be closer to 2:1. The assets should be enough but not excess to reduce misuse. Current ratio is the value of a company’s current assets that will be converted to cash over the next twelve months compared to the value of the liabilities that will mature over period. (Ellis, 6).The ratio of 2.1 is considered the benchmark while the ratio of less than one it is considered that the firm may not have sufficient resources to settles its short-term debts. Debt ratio compares a company’s total liability to its total assets, which is used to gain general ides as to the amount of leverage being used by the company. Debt ratio is expressed as a percentage of total liabilities to total assets. If the percentage is low then this means that the company is less dependent on leverage and therefore the stronger its equity position. When the ratio is high then the company is at risk. 1.13 Business activity ratio Business activity ratios explain the level of efficiency of a business. The main ratio includes, turnover of inventory ratio and account receivable turnover ratio. Inventory turnover ratio is used to determine whether or not the business is maintaining adequate levels of inventory. The ratio represents the number of times the inventory has ‘turned over’ over the accounting period. The ratio shows how the firm has managed its inventory levels and how frequently it replenishes inventory. The higher the turnover the better because inventories are least liquid form of asset (Ellis, 17), low inventory turnover indicates that a company maybe overstocking, or there is deficiency of the product. This is a sign of ineffective management because inventory usually has a zero rate of return and high storage cost. (Bruce L. John, 4) Accounts receivable ratio indicates how many times, on average, accounts receivable are collected during the year. This ratio is obtained by taking net sales and then dividing it with accounts receivable. The result, number of times, is the number of times in the accounting year the firm collects. If the turnover is high then it shows that the customers are paying their debts on time and vice versa. Sometimes the turnover may be too high. This means that, the company doesn’t offer credit facilities so much in that they may have restrictions in credit policies and collection too. (Ellis, 20) The sooner the customers pays their bills to the company, the liquidity of the company increases and the sooner they put the cash in the bank, pay down their debts, venture into new product or enhance their marketing strategies. As measure only credit sales are taken into the account during calculation. (Bruce,L, John, 6). To calculate this ratio total credits sale is divided with average receivable and is expressed in form of ratio. 1.2 Findings 1.2.1 Comparison of ratios against industrial average Industrial analysis involves comparison of firm performance with the industrial average performance or norms. It involves analysis of performance of a given firm over a given time. Ratios of different year of a given companies are compared in order to establish whether the performance of a given firm over time. It was found that gross profit ratio in the restaurant was higher than the industry ratio of 62% the Regency Blue Ribbon hotel gross ratio decrease each year but its average is higher (64.7%) . these results indicate that the operating costs are too high. This maybe as a result of inefficiency operation and high debt has to finance its production.net income is obtained after deduction of all expenses and therefore, put the restaurant net income low. It was found that, the net profit ratio of Regency Blue hotel is decreasing each .in 2007 was 6.2% then decreased up to 0.54%.This is worse than industry average of 9.1% lower by 2.9%.as gross profit was favorably high it indicates that the expenses which more. The restaurant pays the interest and depreciation too which maybe higher than for other firms in the industry and therefore reducing the net profit which in turn reduces the ratio. Regency Return on owner’s equity (ROI) lowers than the industry average 12.1%. It was found out that, the restaurant ratio reduces each year. In 2007 the ratio was 20% and due to decrease in net profit deficit was observed in 2010 the ratio reduced up to -2.38%. This indicates that the restaurant assets are decreasing and net profit is also decreasing. This is bad situation to the hotel as it is not able to fund its operation. This ratio is low because the restaurant is funding its operation with debt and therefore reducing the net profit. The current ratio of the restaurant is higher than industry ratio. According to the findings the current ratio was 5.2:1 in 2007 but it becomes lower we move to the following years. This is because current liabilities of the restaurant are increasing each year and therefore current ratio fall, and this is a sign of trouble to the restaurant. The increase of current liability shows that the restaurant has experienced some downfall and therefore has to finance most of its operation using accounts payable which increases liability. The industry ratio (0.95:1) is lower than restaurant current ratio, this means that the restaurant in a favorable position than its competitors Regency Blue Ribbon restaurant debt ratio is 2:1 all four years, this means that more of the of the financing of the restaurant has been done by creditors .the debt ratio of the restaurant exceeds the industry average ratio of 0.75:1.therefore this raises a major concern because this will make it more costly for them to borrow additional funds without them first raising their equity. This means that it will be hard for creditors to lend them money and therefore the firm will be subjected to a bankruptcy if it sought to borrow another amount. This shows that the financial stability of the restaurant is at risk. Restaurant inventory turnover ratio ranges from 20 times a year to 86 times with a average of 47.5 times while that of the industry is lower (26.7).this suggests that the company inventory moves very fast, are cheaper, high quality, market strategies are unique or it stores less inventory. This represents a productive investment with higher rate of return. Sales occur throughout the year and it has been increasing each year in this case. With this increase in turnover the firm is above other firms in the market. Accounts receivable ratio for Regency is lower than industrial ratio. The ratio of the restauran5t range from 5 to 2 in the four years while that of industry is 26.75.regency hotel collected accounts receivable five times in 2007 and 2 times in 2010.while the industry average shows that the collection was done in 26.75 days per year. Credit sale conditions of the restaurant which requires that the customer to pay their debt within 30 days, has majorly contributed to lower ratio because total credit sales are reduced. Another reason for the lower collection ratio is because the restaurant may not be offering credit to the customers compared to the other restaurants in the industry. The lower accounts receivable indicates that, Regency customers pay their debts in time and therefore reducing the collection level. 1.2.2 Comparison of ratios year by year Gross profit ratio his higher in 2007 and the percentage drops as it proceeds to 2010.This shows that the company at 2007 was operating more effectively than 2010.The drop in gross profit maybe due to industry competition etc.Net sales also decrease from 2007 with percent of 6.2% to 2010 with 0.54%.The restaurant expenses increases each year. Although the sales were increasing but other things affecting net income were not held constant. Stiff competition in the market caused the restaurant to increase its finances to advertising and marketing. The rate of return on equity also drops as the year proceeds. In 2007 the ratio was 20.98% but it decreased in 2010 to -2.38. The ratio indicates that there is a big problem with it’s the restaurants net income as the year proceeds with total assets too. The situation happened because the restaurant has used high debt in its operation. Financial stability ratio indicates that the firm is in at risk to pay its debts. The inventory turnover ratio increases from 2007 to 2010.in 2007 stock turnover is 20 and it increase up to 86 times in 2010.this means that the restaurant sales are high though the accounts receivable is low meaning the restaurant is credit sales is limited. Debt ratio is the same throughout the four years; this indicates that the restaurant the total liabilities and total assets of the firm don’t change much. Business activity ratios, current and accounts receivable indicate good performance. The current ratio increases from 2007 to 2010.in 2007 was 5.2:1 and in 2010 was 1:1.this decrease shows the doing good because the current liability are at the same with the current assets and therefore the restaurant performance improves each year. Accounts receivable is high in 2007 and lowers ad then increase in 2010. The credit terms of the restaurant requires customers to pay credit within 30 days. In 2007 the collection times was higher and continued to decrease. This indicates that the restaurant might have tightened the credit rules or most of the customer pay cash. This ratio indicates that the liquidity level of the restaurant is too high. 1.2.3 Ratio results and profitability of the restaurant The profitability of the restaurant is determined by the two ratios Profit and net profit ratio. Both ratios are declining overtime. The decrease in net profit is due to decrease of net profit thus decline in the net profit ratio. The profitability of the firm decreases e from 2007 to 2010.this is due to increase of liabilities and more expense and therefore the net income is reducing too. The restaurant in 2009 invested too much in marketing and advertising and therefore reducing the net income. The production cost of the restaurant has increased with debts increasing and therefore the restaurant is focused more to position itself in the market and face the stiff competition in the industry. 1.3 Recommendation to improve financial performance of the industry For the firm to prosper in the industry first it should ensure that employ marketing strategies in order to cover a wide market. This means that their demand will increase and therefore their sales too which in turn increases the gross profit ratio rate. The restaurant should lessen its restriction on credit and offer credit facilities to many customers. This will not only increase accounts receivable but also the customers and improve the liquidity of the firm. Reviewing of returns on owners’ equity to ensure that the payback period is reduced by increasing the rate. The restaurants should also employ budgetary control to control the cash outflow and company assets. This is done to reduce unnecessary expense .To increase stock turnover, the restaurant should stock goods which are easy going and inexpensive. Marketing should be done thorough and they should avoid stocking unnecessary goods. In conclusion the restaurant should measure the actual performance with the planned one, check on the issue not followed and then implement on them. 1.4 Forecasted sales The sales forecasts suggest that in 2011 the sales of both food and beverage will increase up to 15% and 23% respectively. While in 2012, the sales will fall with 10% and 18%.increase in sale in 2011 will increase the net profit as far as the expense will not increase. While their decrease decreases the net profit to. The decrease of sale may be due to ,high competition in the market, decrease in demand for the product, increase in cost of production and therefore making the product expensive, entry of new product in the market and therefore customers considering those product to those of Regency Blue hotel. 1.5 Conclusion In conclusion to improve in this, the restaurant should consider improving its marketing strategies, using cheaper but quality raw materials, being innovative and creative and finding ways of funding its operation. Work cited Ellis.“Financial Ratios”. The Australian Shareholders’ Association, 2010, retrieved on 9th Nov 2011 from Accounting for Management. “Financial Ratios and Analysis”, 2011.Retrieved on 9th Nov 2011 from Investopidia. “Financial Ratios tutorial”, 2010. Retrieved on 9th Nov 2011 from http://i.investopedia.com/inv/pdf/tutorials/financialratio.pdf Jones, B, L. “Financial Analysis”: Ratio and other Financial Measures. University of Wisconsin Extension, 1996, retrieved on 9th Nov 2011 from Appendix 1 Computation of Financial ratio table Ratio Formula 2007 2008 2009 2010 Gross profit Gross profit ×100% Sales 1,163,422× 100% 1,725,576 67.4% 1,176,903×100% 1,750,597 67.22% 973,070×100% 1,482,057 65.66% 1,268,495× 100% 2,154,659 58.87% Net profit Net profit after tax ×100% Sale 107,719x100% 1,725,576 6.24% 97,226 x 100% 1,750,576 5.63% 40,326 x100% 1,482,057 2.72% 11,526x100% 2,154659 0.54% Return on owners equity (ROI) Net profit ×100% Total assets 107,719x100% 513548 20.98% 97,226x100% 586,654 16.57% 40,326×100% 536,708 7.51% (11,526) ×100% 483,494 -2.38% Working capital/Current ratio Current assets Current liability 64,498 12,350 5.2:1 77,425 54,930 1.4:1 45,926 38,158 1.2:1 20,125 21,470 0:93:1 Debt ratio Total debt(current long term liability) Total assets 513,548 236,200 2:1 586,654 274,430 2:1 536,708 209,158 2:1 483,494 169,470 2:1 Inventory turnover Cost of sales Average stock/365 562,154 26,076 21 times 573,694 13,900 41 times 508,987 11,850/365 42 times 886,164 10,250/365 86 times Accounts receivable ratio Total credit sales Average account receivable 56,215.4 11,400.5 5 57,398.7 28,039 2 50,898.7 30,838 2 88,616.4 13,288 5 Computation formula 2007 2008 2009 2010 Average stock Opening stock+ closing stock 36,852+15,300 2 26,076 15,300+12,500 2 13,900 12,500+11,200 2 11,850 11,200+9,300 2 10,250 Average account receivable balance Opening accounts receivable+ closing accounts receivable 2 10,053+12,748 2 11,400.50 12,478+43,600 2 28,039 43,600+18,076 2 30,838 18,076+8,500 2 13,288 Credit sale 10% 10,053+12,748 2 11,400.50 12,478+43,600 2 28,039 43,600+18,076 2 30,838 18,076+8,500 2 13,288 Read More