Finance in the Hospitality Industry - Assignment Example

Finance in the Hospitality Industry Introduction Fund is the essential requirement of emerging any business. The company owner does not organize every fund for emerging business, other than gather funds from some other funds. This report focuses over the “sources of funds” (Nikbakht and Groppelli, 2006:200) which used in the industry of the Enchanted Valley Bed & Breakfast. In this essay we take a number of financial issues which help the management to get strategic decision for making investment. LO1. Understand sources of funding and income generation for business and services industries. 1.1 Review sources of funding available to business and services industries Funds are classified into any two forms in every business. They are equity and debt. Equity is a capital which makes by issuing Shares. “Sources of equity financing” (Leach and Melicher, 2012:449) include Personal savings, friends and family member partners, corporations, venture capital companies and public stock sale. Debt is the other sources of funding; need repayment of the money with interest. And source of debt capital includes trade credit, commercial banks, equipment supplier’s commercial finance business and saving and loan associations. In this report, we are concentrating over the Enchanted Valley Bed & Breakfast which consider under hospitality sector. There are mainly three kinds of capital that need in any business for controlling its operation. They are Fixed capital, Working CapitaLand Growth capital. Fixed capital is utilized to buy asset and equipment which use in business for a longer time like machinery, building and Vehicles. Working capital needs for controlling every day business process and temporary business expenses like buy paying wages, inventory salary and pay bills etc. Growth capital is used to develop the business or expand the business process like funds needs for expanding a new project. These various types of capital could be developed from a variety of sources which will be the major focus of this task. The initial capital of B&B contain Mortgage, Equipments, Bed & kitchen linen, carpets and curtains, Luxurious beverages etc. There are mainly three types of capitals are fixed capital, working capital and growth capital. These various types of capital could be developed from different sources which will be the major concentration of this task. 1.2 Evaluate the contribution made by a range of methods of generating income within a given business and services operations There are types of the methods used for the invention of income as in a services operation and specified business. These conations the fee for facility as this is charging the elements or even the consumers for the social facilities in order to get better the cost for the provision of facility. A business could also make income by making the product throughout sale and manufacturing of the product. Offering the various services which can commercialize the abilities and therefore paying the service. Constant by leasing and renting the tangible asset a lot of the persons could make the income in this section, for example office space, the building, vehicles etc. Intangible asset is making income for example methodology, proprietary, goodwill, brand etc. Making from the passive revenue is imitative out from the investment “dividends” (Kapil, 2011:341). And the hospitality business is the service division that acts as the region of making the income by inviting the consumers to benefit their services. Entertaining the customers by diversity of services such as accommodation, restaurant, personnel service, bar, spa, acts as travel agent etc LO2. Understand business in terms of the elements of cost 2.1 Discuss elements of cost, gross profit percentages and selling prices for products and services Element of cost varies with kind of business. We are emerging this report particularly for the hospitality industry. Cost of B&B incur in various kinds of expenditure. The particular business is hotels that need both type of investment Fixed and working capital investment for controlling everyday operations. Following the calculation showing the Gross Profit; Buildings = £300,000 Equipments = £5,000 Other technical for controlling security issue = £20,000 Working capital cost = £12,000 Total cost = £3, 37,000 “Gross profit” (Pizam, 2010:30) is the profit which make in business with no paying tax and interest or we could say it is “EBIT” (618). Sales of trade will be simply planned by examining the revenue of total sales from the facilities in a year. Gross profit= (Sales – direct material /total sales)*100 If we imagine total sales of the business in a year is $4, 00,000 and direct material cost is $2, 00,000 containing every expenses which come in direct material cost. Then Gross profit percent = Sales- direct material cost/sales*100 = (4, 00,000-2, 00,000/4, 00,000)*100 = (2, 00,000/4, 00,000)* 100 GPP = 50% Selling price of services will be decided by organizing some of the strategies of pricing. We take one of the approaches for determining the cost of services like food and facility, room service or bear and dancing bar. Room price will differ with a service that will be given to the consumer. Food price will be determined by utilising cost plus method with the intention that we can create additional competitiveness in the business. 2.2. Evaluate methods of controlling stock and cash in a business and services environment There are a lot of methods to “control the stock” and we will get some of them that are helpful in case of B&B business and services environment. Main function of managing stock is to decrease the material investment cost and avoid the load of arranging asset to guard the material. The important methods of controlling costs are “Just in time (JIT)” (DuBrin, 2011:212) method, First in first out method (FIFO) and Economic order quantity (EOQ). JIT method is useful for diminishing the stock for the reason that we purchase goods when it is necessary and avoid the maintenance cost. EOQ is to discover the quantity that used to stability between the holdings too little or too much stock. FIFO is a system that ensures which consumable goods will be used powerfully and this system is used in a case when resources are extremely consumable in cost and nature of holding is big. LO3. Be able to evaluate business accounts 3.1 Assess the source and structure of the trial balance Trail balance is the record of “book keeping” (Bookkeeping the Easy Way, 1999:5) that has two columns credit and debit. Trail balance source is the composed form of ledger account that has every record of the business account in comprehensive form. In dealing there are two major contributors in term of financial statement, one is creditor and other is debtor. We take every credit and debtor account entry of “business transaction” (9) Main function of expanding trail balances is to test the numerical accuracy of business accounting. It is also utilized for expanding final account. Trail balances structure: Trail balances of M/R or M/S--------------------------- as on----------------------------------- Particulars L/F Debit (in Rs.) Credit (in Rs.) Account Heading 1 -- --------------------------- ---------------------- Account Heading 2 -- --------------------------- ---------------------- Total xxxx xxxx 3.2 Evaluate business accounts, adjustments and notes Business account is a “bank account” (Sharma & Batra, 2001:12) which has a same operation similar to as a personal account. It is an open account with the persons name of the account and business owner has all right to make the transactions of business. Bank offer a number of advantage on the business account like instant transfer of cash. Alteration is the business excellent “financial transaction” (12) which has been altered at the moment of emerging note and trail balances is also an additional type of business dealings that influenced at the period of emerging balance sheet. There are two entries of notes in balance sheet. It has been altered into P&L account and balance-sheet. 3.3 Discuss the process and purpose of budgetary control Budgetary control is the methods that have been used to manage the budget of the business. A method to manage the budget depends more than the types of materials and business which are used for producing. “Budget Control” (Hofstede, 1968:8) is the cost reduction method of business. To manage the budget, we need to concentrate on the whole small operation of the business activity. The important purposes of “budgetary control” (Patankar, 2008:5.9) are as follows: The major purpose of the planning or establishing the budget is to cover every activities of the organization of a convinced specified time period. The period of time can range to any duration other than generally it is of one year. Fundamental aim of budgetary control (5.9) is towards organization of the organization, assessing the performance and responsibility by later reducing and controlling the cost, valuing the stock and lastly putting in the selling price. The purpose fixed by the trade in monetary conditions, is increased in preferred time period and therefore later ensuring the sufficient working capital that can play an important role in attaining organization’s objectives. To assess, the effectiveness of the organization along with its processes and examining the efficiency, with the assist of increasing a comparison among the budgeted and actual results, in a department. Following the steps is the process of budgetary control: Initially the budget is recognized for all department or section of the organization. Next step contains the quantity of the “actual performance” (Needles, Powers & Crosson, 2011:1092). In another step the actual performance (1092) is evaluated with the performance of budget, therefore controlling the variances or deviations. Final step is towards controlling the cause for the variances and after those taking suitable actions to eliminate the defects which have happened while attaining the purposes in accordance with the unique strategy. 3.4 Analyse variances from budgeted and actual figures, offering suggestions for appropriate future management action. Calculating the variation among the “actual and budgeted data” (992) for a specific group of account is recognized as the variance of budget. The budget variance is justified with two various terms as the favourable and unfavourable budget. Variance is also known as an unexpected change from the figure of budgeted. When the expense is below the expected revenue or value is greater than the expected value, it is specified as the variances of favourable. And when the expenses are above expected revenue or value is less than the expected price, it is specified as the “adverse variances” (Horngren, 2009:255). In this way the examination of the financial plan is carried down. Analysis could also be completed by three various methods as cost of goods sold variance analysis, revenue variance analysis and variable labour “variance analysis” (Gupta, Sharma & Ahuja, 2007:741). When the industry of hospitality is facing the difference in the budget, the control of the organization has to understand in numerous regions. As the important variance in the budget could be the assessment and assessment can fail either due to the alterations in the political conditions or market conditions. Even the alteration in the quality and prices of the competitor can rather influence the budget of the firm. Inappropriate management of the employees can also influence the value factor of the hospitality industry and therefore influence the budget. LO4. Be able to analyze business performance by the application of ratios 4.1 Calculate and analyze all ratios to offer a consistent interpretation of historical business performance A business could simply analyse various ratios by offering the reliable understanding of the performance in the business. Various ratios for example Profitability, liquidity, activity and leverage ratios could be used for computation. As all ratios create different meaning, current ratio signifies the capacity of the business to assemble the short term liabilities. Profitability ratios decide the company’s cost control and pricing policy. Activity ratio of the business decides the effectiveness which decides the connection between the various assets and sales of the business. 4.2 Recommend appropriate future management strategies for a given business and services operations As per the strategies of management the management of business have to be such that the accessibility of the liquid fund at the varied condition has to rather be obtainable to control the hard circumstances. And short term liabilities of the business have to be controlled in a suitable manner to expand the business in the positive way. LO5. Be able to apply the concept of marginal costing 5.1 Categories costs as fixed, variable and semi-variable for a given scenario There are three kinds of cost sustain in business which asked to classify in this task. We will take a number of reviews of these three types of price and create clear differentiation among them. Fixed Cost: It is costs which incurs in dealing at the first level and need more savings for developing communications and buying business equipments. “Fixed cost” (Platt, 2006:ii) does not differ with manufacture or it is sovereign of the output. Fixed cost normally incurred in rent buildings, machinery and vehicle for transporting objects in business. Hotel business need more fixed cost for the improved establishment of the transportation and creating it sole from competitors. Variable Cost: It is connected to the manufacture and changes with the output. Variable cost could be managed by arranging control methods. It is a price of direct material use in production and the wage of labour and energy charges. In the case of hotel business, variable cost is the expenses over the food commodities and other drinks. Semi-Variable Cost-: It is simply a price that is part of variable and fixed cost. Such as cost incur because of the electrical charges differ with the production, other than if we will not create manufacture we have also pay smallest charge to keep the power supply in trade unit. 5.2 Calculate contribution per product/customer and explain the cost/profit/volume relationship for a given scenario The contribution unit is helpful for deciding the minimum probable cost at which to sell a product. It is calculated by sales minus all variable costs. The tool developed the connection among the “cost, volume and profit” (Finkler, Ward & Baker, 2007:98) in an organization by creating a concentration on the value of product, level or volume of the activity, total fixed cost, per unit variable cost and mix of every products sold. This idea plays an important function in taking the decisions of business. This could help in the planning of profit and performs as the vital factor in the decisions of management. Main purpose of this model is towards putting the selling cost, deciding the product mix, increasing utilize of the production services, and also assessing the influence of the transformation in the cost. 5.3 Justify short-term management decisions based on profit/loss potentials and risk (break-even) calculations for a given business and services operation The decisions of short-term management based on the profit or loss potentials and risk. It provides services and operations of a hospitality industry. Management decisions making procedure in different conditions and show working information of classic short-term decisions managers must create and how economic data can support these decisions. The analysis of breakeven is the financial document which will decide how much revenue will require meeting the expenses of business. Conclusion: Budgeting is the outline of management implement which is rather necessary for attaining the diverse set of objectives. This work out is rather necessary as it is forceful the management to put the plan and its purposes into action and lastly happening in the future. This approximate of budget is arranged on the sensible basis in deliberation to the purposes of the company. Various ratios under calculation could help the B&B to make a platform for improvement by utilizing this tool. As the analysis ratio could assist them to decide the important conditions of various factors. The relationship of cost volume profit is utilized for the preparation in profit and vitally deciding the factors that influences the management decisions. Reference List Bookkeeping the Easy Way. 3rd ed. (1999). Barron’s Educational Series, Inc. DuBrin, A. (2011). Essentials of Management. USA: SOUTH-WESTERN CENGAGE Learning. Finkler, S. A., Ward, D. M. & Baker, J. J. (2007). Essentials of Cost Accounting for Health Care Organizations. 3rd ed. Jones & Bartlett Learning. Groppelli, A. A. and Nikbakht, E. (2006). Finance. 5th ed. Barron’s Educational Series, Inc. Gupta, S. P., Sharma, A. & Ahuja, S. (2006). Cost Accounting. New Delhi: V. K. (India) Enterprises. Hofstede, G. H. (1968). The Game of Budget Control. New York: Routledge. Horngren, C. T. (2009). Cost Accounting: A Managerial Emphasis. 13th ed. India: Pearson Education India. Kapil, S. (2011). Financial Management. India: Dorling Kindersley (India) Pvt. Ltd. Leacher, J. and Melicher, R. (2012). Entrepreneurial Finance. 4th ed. USA: SOUTH-WESTERN CENGAGE Learning. Needles, B., Powers, M. & Crosson, S. (2011). Financial and Managerial Accounting. USA: SOUTH-WESTERN CENGAGE Learning. Patankar, S. (2008). Management Accounting. India: Nirali Prakashan. Pizam, A. (ed) (2010). International Encyclopedia of Hospitality Management. USA: Elsevier, Ltd. Platt, B. C. (2006). Fixed Cost Queues and Price Controls. USA: ProQuest Information and Learning Company. Sharma, A. K. & Batra, G. S. (2008). 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