Key Performance Indicators for Whyatt International Hotel - Case Study Example

Report on Key Performance Indicators for Whyatt International Hotel Student’s Name: ID Number: Date: Finance 1 Revision 1.0 Introduction This report aims to establish several measures of business performance in terms of financial strength. To achieve this end, business financial records are important for scrutiny and fair judgment. This is where one determines whether the business is performing or not by just looking at figures in financial records. This is a major limitation in itself since there are multiple financial records and identifying the accurate ratio is not easy. By looking at financial statement, the main task was to identify the one that aids in computing correct profitability ratios. In this regard, determining business performance particularly by using financial records was not easy. The scope of the report was to point out five performance measures. Accommodation department was selected in this report within Whyatt International Hotel to measure the performance of this specific organisation. By looking at the major trends closely and making several calculations using the figures from financial records availed, this report gives its recommendation in respect of relevance of data on the performance of this particular hotel business. Five key performance indicators only assist in making informed recommendation on whether the performance is positive or not (Sainaghi, Phillips, & Corti, 2013). They also help in making a critical decision on what to do since accurate calculations are provided. If the business is performing poorly, it is easy to know by using these indicators and calculations. 2.0 Calculations Calculations show performance of this department in terms of revenue and expenses. They enable the management to take corrective action whether to sustain profitability or control expenses in order to realise profit (Meng, & Minogue, 2011). Note that all calculations here were performed on the basis of financial records provided. 2.1 Occupancy percentage Rooms in any hotel generate revenue when visitors book them for use. When the booking rate is high, the revenue for the hotel goes high since they are paid for. Now, occupancy percentage is the measure of booking rates for the room in relation to rooms available for sale. It seeks to compare the number of rooms already sold out to the number of rooms available over a period of time (Yeoman, & McMahon2011). In a given financial period, performance of a hotel is determined by its efficiency in selling these rooms. Whyatt International Hotel had the target of having 80% of their rooms sold during 2007 – 2008 financial year. In this calculation, total rooms sold are divided by total rooms available for sale. In reference to financial records provided, this hotel realised an improvement in occupancy percentage in the year 2008 compared to the year 2007. Although the hotel did not achieve its occupancy target, it realised 63%. By failing to realise the occupancy target, overall business is affected since the hotel missed the objective for that year. Lack of specific target market as well as having inadequate strategies to build and maintain good customer relations are some of the factors that leads to missing targets. To increase occupancy rate, the management need to engage potential customers such as corporate bodies and government institutions among others. This ensures that rooms are booked and occupied throughout the year hence increasing occupancy percentage. This is the essential measure of performance in high-end hotels such as Whyatt International Hotel. During the financial year 2006-2007, Whyatt International Hotel was able to sell 36933 rooms out of 67525 rooms that were available for sale. Therefore: 3693367525 = 54.70 In the financial year 2007 – 2008, the hotel recorded sales of 42704 out of 67525 available rooms. 4270467525 = 63.24 In respect of these figures, there was improvement of approximately 9% in occupancy percentage. 2.2 Liquidity Ratio This accounting ratio establishes business ability to pay short-term debts using its current assets. It is also known as current ratio which tends to compare business current assets in relation to its current liabilities. It basically reflects business sustainability in the market by looking at whether it is able to cater for its operations without requiring external source of funds (End, Willem, & Kruidhof, 2012). In this case, Whyatt’s ability to facilitate its operations by paying all its current debts is assessed. If the business cannot use its available working capital to facilitate its operations, then it is weak and its survival is at stake. By dividing the current assets by current liability and multiplying the result by 100, you arrive at liquidity ratio. If the figure is more than one, then the business is said to be stable. If it is less than one, the business may be bankrupt and cannot finance its short-term operations. In such case, the business definitely collapses or the management may decide to look for external funding. In most cases, such businesses are not viable to qualify for external financing since it there is no surety of paying back in the long run. Whyatt International Hotel had the financial problem between the year 2006 and 2008 as reflected in their current ratios. In 2006, the liquidity ratio was 0.58:1 while in 2008, there was a slight improvement since the ratio was 0.87:1. In this case, the management ought to scrutinise their expenses and minimise those that are not directly related to business. By controlling expenses, then liability reduces giving the business sufficient resources to cover its short-term debts. This is also important for this hotel to have competent professionals in finance department to produce accurate records for timely decision making (Cvelbar, & Dwyer, 2013). In the year 2006, Whyatt International Hotel had current assets totalling to $770,966 while current liability was $1,323,035. Liquidity ratio or current ratio that year was 0.58:1. In 2007, current assets totalled to $598,671 and liability was $807,956 hence the ratio was 0.74:1. In 2008, the hotel has total current asset of $914,191 and current liabilities of $1,054,227 thus giving the ratio of 0.87:1. This trend shows an aspect of improvement especially in increasing assets. However, expenses should be controlled to reduce the liabilities in order to strengthen the business short-tern financial position. 2.3 Return on Capital Ratio This is also referred to as return on owners’ equity. It reflects company’s ability to deploy the equity or the capital raised by business owners. It is expressed as the percentage of the net income which the shareholders’ equity is able to generate over a period of time i.e. one financial year (Brynjolfsson, Hitt, & Kim, 2011). To make accurate observation on trends particularly in relation to return on capital, income statements of the business and balance sheet are essential. By taking the net income provided in the income statement and divide by total owner’s equity in balance sheet, you get the return on capital ratio. Whyatt International hotel shows improvement in this area since there was percentage increase of 1.17% in the year 2007-2008. During this period, the business recorded 6.54% Return on Equity. This reflects the ability of the capital to generate returns for the owner or the shareholder. It is affected by several aspects such as rate of sales turnover and taxation. 2.4 Rev Par In hotel business, Rev Par refers to total revenue generated by rooms in relation to available rooms. This may help to compare the performance of the hotel with others (Meng, & Minogue, 2011). It is an essential performance indicator since it enables the management to know whether this department is relevant in the business. If the rooms revenue is low, then the department may not be key to the business thus may not need much attention from the management (Abukhalifeh, & Som, 2013). It may also imply that the hotel is charging extremely cheap especially is it is compared with other hotels of the similar level. Whyatt achieved RevPar of approximately 84% in the year 2006-2007 which increased to 93% in the year 2007-2008. This was below their target for the year but the increase is a positive aspect for the business. In 2006-2007, total revenue was $5,670,712 and rooms available were 67525. The RevPar for that year was 84%. In the following year, the revenue increased to $6,295,024 and number of rooms remained the same. The RevPar therefore was 94% 2.5 Average Daily Rate This is the measure of average revenue a hotel gets out of rooms rental per day. It indicates how the department is performing on daily basis along with other measures. By taking total revenue collected per day dividing by the number of rooms occupied, you realise Average Daily Rate (Kimes, & Anderson, 2011). It is usually abbreviated as ADR. The ADR for Whyatt in the year 2006-2007 was $153 while the ADR for 2007-2008 was $147. This implies that the marketing team was reluctant in their work for the second year. They never ventured their activities into a different market or the customers for the year 2006-2007 were not retained in the following year. In 2006-2007, total revenue for rooms was $5, 670, 712 and total rooms sold were 36933. Dividing 5,670,712 by 36933, you realise the figure of $153.54 which is the ADR for that particular year. In 2007-2008, revenue was $6, 295, 024 and total rooms sold were 42,704. Dividing 6,295,024 by 42,704, the ADR is $147.41. Conclusion It is clear that all indicators reveal performance improvement in the year 2007-2008 compared to the previous financial year. Notwithstanding, this hotel had insufficient revenue to cater for its operational cost which is reflected by its liquidity ratios for both financial year. It was therefore recommended that the management be keen on their expenses and maintain the positive improvement in revenue collection. Other departments that affect the performance of rooms division should also be checked to ensure there is efficiency. This includes marketing department which should become vibrant in reaching new areas and engaging more potential clients. This ensures that there is positive change in terms of sales and the trend is maintained for business survival. By looking at the profits of the hotel and the expenditure rate, it is clear that if the management is not keen enough, the business may not stand the test of time. The business that cannot manage its short-term debts and other operating costs cannot survive and may as well go out of market. Reference: Abukhalifeh, A. N. M., & Som, A. P. M. (2013, February). Performance Management OF A Service Unit In Hotel: Theoretical Review. In Proceeding of International Conference on Tourism Development. Brynjolfsson, E., Hitt, L., & Kim, H. (2011). Strength in numbers: how does data-driven decisionmaking affect firm performance?. 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