The paper "Financial Management For Hotel Managers" is a perfect example of a Management Case Study. The restaurant earns revenues from Food and beverage sales. 72% of the total sales revenue comes from food sales and the other 28% of the sale come from the sale of beverages. However, it is to be noted that the margins on the sale of Food are much higher than that of food. However, the volumes of food sales are quite higher than that of the beverage sales. The food cost sum up to $ 181323, the beverage cost sum up to $ 39303.
The salaries and wages account for the highest operational expense. The total operating expenses are $ 365015. The tax rates considered are 22% and the total tax expenses are computed to $ 11763.4. Depreciation is provided on both Equipment and Furniture, and the sum of depreciation ads up to $ 20124. The revenue and expenses stream is comparable to the family-oriented restaurants, and the growth in volumes can help the restaurant increase its profitability. If the management wants to take the restaurant to the next level, of fine (luxurious) dining, it will have to incur expenses in avenues like advertisements and publicity besides making expenditures on new furniture and equipment to increase the aesthetic appeal to the customers. The total guest count for the year ended was 66612 and the average check amounts to $ 9.59 per guest. For a family of four, the total bill would amount to about $38.This would keep the restaurant in the league of those restaurants which can easily attract the families to come over and dine.
The fact that the prices of the restaurant are reasonable implies that it will grow as the volumes climb, and an increase in volumes would imply a bigger climb in the profits of the company. This restaurant is going to attract budget-conscious families. The total cost of goods sold for the operations as a whole. The cost of beverages is nearly 6% of the total cost whereas the cost of food is about 28%. Thus, it makes the average cost of sales to be 35%. The total operating expenses of the operations are 57%. Salaries and Wages account for 35% of the total sales.
The operating income before taxes is 8%. An analysis of the financials shows that the expenses which account for the major part of the expenses have characteristics of the learning curve imbibed in them. In other words, an increase in the scale of operations will help the company to bring down the average cost, increase efficiency and ultimately increase the profitability of the business. It is very evident that beverage sales have much higher margins than food sales.
The gross margin of food items is 60.46% while the gross margin on beverage items is 78.23%. Thus, it would be in the best interest of the company that increases the proportion of beverage sold. However, the policymakers should ensure that there is no violation of the rules and regulations in place. This is so because there are certain regulations to be followed in for sales of hard beverages in public places. The current ratio is the most popular method to measure the liquidity of the company. The company has a current ratio of 1.04 in the current accounting year.
The company has a current ratio of just above 1. It is a warning signal for the liquidity of the company. It indicates a poor strength to meet its short term bills The quick ratio is a more stringent means of measuring a company’ s liquidity. However, the Company’ s quick ratio is only 0.908, in the current accounting year. It is a sign of extremely low liquidity position of the company. The credit card collection period for the company is 7.814 days.
However, the accounts receivable average collection period is 1.95 days. The low collection period is due to the fact that the company makes most of its sales on a cash basis and not on a credit basis. The company must make efforts to reduce the collection period to improve its liquidity position. The food inventory turnover ratio is 30.11, which is on the higher side. The company should make efforts to reduce food inventory. However, some inventory of the hotel is expected to be perishable in nature and should be dealt with accordingly. The Inventory turnover ratio is a ratio showing how many times a company's inventory is sold and replaced over a period.
A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. The Inventory Turnover ratio was computed to be 14.51 times, which is said to be a decent level. The cost of sales of food is 40%, implying a contribution of 60%, whereas, the cost of sales of beverages is 22%, implying a gross margin of 78% on sales.
Thus we know that the sales of beverages have higher margins and the company would be in a profitable position if it concentrates its efforts on increasing the sale of beverages. However, the regulations should be taken care of while making efforts to improve the sales of beverages. Net Profit Margin is a very important analytical tool. A net profit margin of the company is at 6.53%.
the company should direct its efforts on improving the net profit margins. Operating Profit Margin shows how efficient the operations of the company are and how well the efforts of the management are turned into profit. Return on Assets is the indicator of the profitability of the company with respect to its total assets. The net return on an asset is at 15%. It shows that the company is operating reasonably well, and it should concentrate on improving its leverage so that the effective net profit rates improve. Return on Equity is the return for Equity Investors.
The company’ s ROE is 45.5%. it is a very high figure as the equity base is very small. We have assumed that the hotel is open for 52 weeks, and lunch is served for 6 days a week while dinner is served for 5 days a week. Thus, the number of days per year for lunch comes to 312 days and the equivalent number of days for which dinner is served comes up to 260 days a year. Further, the revenue from lunch constitutes about 45% of the total revenue and dinner constitutes 55% of the total revenues. We have assumed that all people coming for lunch would spend 20% of their total bill amount on beverages and 80% of their total billing on food.
However, people coming to have their dinner in the restaurant will spend 30% on beverages, and 70% on food. This is in confirmation with the habits of the people who spend more on beverages during dinner and not on lunch. Thus the profitability of the company can increase if they attract more people for dinner, so that expenses on beverages increase, which is the more profitable of the options from the point of view of the restaurant.
The average checks are computed at 325 with the total revenue summing up to 639111. Going forward, the restaurant should identify the areas which have the capacity of adding value to the business, in monetary terms. Beverages are one area of business, where the margins are decently high. However, it will not be easy to increase the amount of beverages sold to a big extent as it is basically a restaurant where budget-conscious families feel comfortable.
The profitability can also be increased by increasing the volumes and keeping a count on the footfalls, however, this can be done keeping in mind the equipments and the seating capacity so that the guest can feel comfortable over dining or eating out. Another area of concern is the small margin on food items. This is an area of concern as the demand of the food is not going to diminish in any of the situation and even a small increase on the margins of the food item will be able to increase the margins of the restaurant in a big way.
However, the restaurant must try and increase the margins by reducing the cost and not increasing the price. This is so because any increase in price might reduce the demand and the ultimate footfall. Any fall in the footfall of the restaurant, will be bad for the business overall because the sales of beverage (which is dependent upon food sales, and is a high contribution item)depends upon the sales of food items of the restaurant.