Finance In Hospitality
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Managing financial principle and technique will facilitate companies to take corrective measures to induce more productivity and higher profit generation at lower costs. The report will also summarize concepts of budgeting and how they can be implemented (Swart, 2004). The report also given emphasis on the creation of unit cost and way a company can allot more corrective action to improve the cost and selling prices of a product. The report will also throw light on variance analysis and provide tools to reduce it simultaneously.
A recent graduate is eager to start a new chain of fast food restaurant in his neighbourhood. But the problem is he is not sure how to start the business in such tough market conditions, where unemployment is sky high. In order to start new venture it is necessary to address financial back drop of commencing a new venture. Financial assistance is a major task which needs to handle first. Source of fund must be arranged, doing this they will be able to procure land, buy equipments, employ architect, labour to construct he building involve marketing and employing staff for the hotel.
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In hotel and service industry, arraigning financials is a tough task, because income generation will be les in the initial years, in following years the income may increase, thus is it a risky venture there might be a possibility of huge losses too (Bierman, 2003). Understanding the present scenario, it leads us to acknowledge only few sources of finance which will help to establish the hotel for the further purposes. They are:
Bank Loan: The best and most preferred channel of availing sources of financials. There are plenty of market players are available which can provide term loans to new entrepreneurs. They asses the project’s potential and further accept the loan application. Bank loan provide loan on prevailing market rates. They charge a fixed or floating interest rate, they usually provides loan on long and mid-term project installations (Powell, 2009).
Venture funds: Capital encouragement is also facilitated from the various venture capitalists too. They approve the project based on the market potential and demand of the product. Higher the demand better will be chance of getting the project selected. The venture capitalist usually provides aid for long to mid-term objectives. They also provide managerial expertise to new entrepreneur, so that they can provide the best of help to rising businessman a hand to successfully start their venture.
Personal Savings: Many entrepreneurs try to bring funds from their own funds or personal savings, these savings is also very beneficial because they do not incur any outside cost to procure it. Personal savings is provided on zero interest.
Borrowings from relatives: The next alternative after personal savings, which major number of people try to pursue is, arrange fund from relatives, friends and other neighbourhood belongings. The cost of procurement is zero, no interest is experienced (Brigham, 2001).
Private equity: private is a conventional approach, where private investors show their interest in pooling funds for a new venture, the company directly contact them to provide funds to meet the exclusive aims of the business for both long and short term needs.
Opening up of fast food chain involves various functions to fund, like buying infrastructure, getting a interior designer, designing of blueprint and availing building materials and equipments to construct the building and other auxiliary functions. But fund must be appropriate to the needs of the business. Higher cost will potentially reduce the profitability of the company. Thus it is mandatory to recognize what kind of resources will be beneficial for the businesses to culminate (Hildreth, 2004).
Personal savings and Borrowings from relatives may act as a positive source of fund in short term. But for long term it is a disadvantage to company needs, because personal savings and borrowings will only help in short term needs, but building and construction requires much more funds than that. Arranging fund for long term from this source will also reduce the working capital of company in short run. In other words, these saving can be termed as retained earnings. Main advantage of such source is that company is not liable to anyone and profits earned in past can be used for the expansion or starting up new business.
Private equity is a conventional approach where investors provide funds on the need of the business. But before approving the project, they will analyze the company’s potential on rewarding capital gains. They also evaluate the entrepreneur’s past record too. After acute analysis, they accept to fund them, but they charge high returns on the invested capital and also assume a healthy position in the company’s shareholdings. Investment of funds and money from investors is the major source of income through which any company can run its future operations. The benefit of this source of fund is that company is not liable to pay any interest or repayment of principle and if business operations are unable to generate than there is not need of paying any payment to the shareholders.
Venture funds are new alternatives to budding entrepreneurs, they tend to provide best suggestions, fund criteria, return on the capital and managerial proficiency to rise up the business from its initial stages to commercial production. Venture capitalist assumes a powerful position in the business which may interfere with original ideology of the promoter’s idea. This may reduce the capability of the product to reach its prospective customers.
Bank loans are very suitable and viable option in the new entrepreneur line, but they tend to charge high interest rates and require collateral, before accepting the loan application (Robertson, 2009). On bankruptcy conditions, bank owns the right to dissolve the assets of the company. Through bank loan firm can easily generate amount, this is appropriate for the company because with mere formalities company can acquire huge amount for their future functioning. Disadvantage of this source of generating fund is that company have to give something equal to amount loan as the collateral security to financial institution.
Marks and Spencer is a retail giant and they function into various subsidiaries to provide best products to its customers. The achievement of it’s product is widely connected to its people. To prosper in that section, they must address the element of cost in the business. A cost includes three most important element, they are material, labour and overheads. They are divided in 3:
Direct Cost: Direct cost implies those cost which influences the operations of the business, they are interrelated with production and manufacturing of any product. For Marks and Spencer, they need to people to deliver the product from one place to another, requires processing and manufacturing plants to create products according to customer needs. To achieve these criteria, cost is incurred. They are termed as direct cost (Sihler and Crawford, 2004). For instance, Marks and Spencer is producing a packaged under the brand name, to prepare one single unit they need to buy materials, establish machinery to process the raw material in to finished products. This process also requires a heavy labour time and other overheads are also incurred. This makes the cost of the product and called Prime cost.
Indirect Cost: Such cost which is not directly influences the production, but they are included in the form of selling and administrative cost. These cost actually includes, post manufacturing cost. Every product needs to be packed, distributed and marketed. Such cost is included in the product. These costs are known as the cost of production.
Gross profit: Profit making venture need to identify on an annual or semi annual basis, how much profit has been earned by the company? It is identified by subtracting total sales from Cost of Goods Sold or cost of sales. The direct cost is subtracted by total sales. It shows that, how much percentage of sales proceeds has been encountered on a point of sale. Gross profit also addresses the whether they are making profits higher and how much inventory is sold. Gross profit ratio enumerates the fact that, how good the profit has been realised on the total sales. The criteria to select whether they are engaging higher ratio or lower signifies the gross profit earnings of the company (Periasamy, 2009).
The Selling price marks the total cost and an aggregate profit margin inclusive of cost marks selling price. Selling price also includes taxes too. Selling price also decides how much competition they are offering, to sustain in the market they provide a penetration pricing and to induce monopoly they market value added pricing. Marks and Spencer, has to face a tight competition from it’s rivals, to maintain the market share, they promote price skimming or penetration pricing.
Maintaining the stock and cash in a business is very necessary, because stock will keep the production running and other will keep the liquidity in the business to churn the business operations (Obst and Graham, 2007). Any shortage in any of them will increase the cost and productivity will diminishes. So a company need to maintain both of them at an optimum level so neither of them blocks the daily operation of the business. In this case, Marks and Spencer is into various functions, they need to produce, store, distribute, assimilate bulk delivery from various subsidiaries and convey them to different stores. So cash level must be tracked and monitored at an optimum level. They can establish a unit of cash management, which will maintain a reserve of immediate cash repositioning in the production unit. This will periodically blow some cash in, so that short term liability can be handled (Brigham, 2013). They also need to check on the receivables counter, so that they can know what debit period has been provided to debtors. If debtor has been provided a higher period, so company need to keep a higher liquidity to maintain in the business or vice versa. Some organisations also maintain a cash policy, where a minimum order of cash is stabilised to meet the uncertainties in the business.
Just as the cash is maintained, stock is also kept under rain check, to avoid uncertainties. Firstly any seller will look for the product which is fast movers and which ones are slow movers. This way they will keep a high stock of fast movers and less of slow ones. This is how the total stock is maintained, it reduces the cost of handling and consumption time also reduces. They can also employ Economic order quantity, fixed time re-ordering and fixed re–order stock level. Every technique will reduce the total inventory holdings and also assumes the time to order the next batch, so that inventory cost does not depreciate (Shuim, 2008).
Budgetary control is series of activity for establishment of budgets associated with various tasks performed in a business. These budgeted figures are correlated with actual figures, which will aid in analyzing the level of achievement has been arrived by implementing the said budgets. The motive of budgetary control is to identify issues of occurring variances (Ross, 2008). Further investigation will be done to recognize gaps which lead to this. The importance of budget help to improve the operations in short run, this will improve the utilisation of resources in the mean time.
A budget process is majorly affected by various factors, like unavailability of raw resources, lack of skilled labours, restrictions by public body, inefficient sales promotion, underutilisation of plant capacity, and lack of research into consumer needs. The purpose of budgetary control is a 3 step process, they are;
The purpose of budgetary control, first function of budget is to reduce the elevating cost in the hotel. Any hotel, manufacturing plant, even small enterprise need to develop a budget, which will help to cut down on the costs of the company. They also instil co ordination between activities and departments, this way uniformity will be brought into the firm to achieve the goals. They also help to maximize the profits of concern (Fabozzi, 2009). The research and development also gets benefitted. They can also adopt the strategies of standard costing, where contribution of each unit is easily identified. They also facilitate to take corrective measures to improve the production function in a short period.
Yuri budget is actually an operating budget which manufactures cutlery set. The budget shows that, they are experiencing a very huge variation in the actual and standard budget. The budget of Yuri states that, they budgeted to sell 100000 units, but they sold only 75000, this rise due to low availability of raw material in the market. The quality of steel is also very much under standard, this may be a reason behind the high variation in sales. The next shortage we see in the units, may be the labour inefficiency, the need of skilled labour was absent (Bose, 2006). Thus this entire factor actuated the budget, which showed a variation in the total material and labour. They need to change the costing system from units sold to activity based costing or just in time method this will improve the cost incurrent in the business. Secondly, they can change the labour to automated machines, they can work much faster and more number of products can be produced in one time. Thus will reduce the total cost and accelerate the economies of scale.
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Gross profit ratio – GP ratio assist in understanding the difference between revenue generated and cost of production. Gross profit ratio of R. Riggs is around 39% which indicates that company is generating 39% income on their cost of production.
Net profit margin – This ratio assist in identifying the pricing strategy adopted by the company and how well it able to control the incurred costs. NP margin R. Riggs Company is 15%, which means firm’s profitability margin is being reduced.
Current ratio – Current ratio assist in measuring the ability of R. Riggs in order to pay their liabilities. Current ratio of R. Riggs is 3.42 which means company is able to payout their current liabilities.
Acid test ratio – This ratio indicates the ability of firm to overcome it short term obligation through most liquid assets or which can be converted easily in cash when needed. Acid test ratio of R. Riggs is 2.95 which indicate company have around 30% of liquid assets which can be used when required.
Debtor’s payment ratio – This ratio indicates the average time taken to collect trade debts from debtors. DBR of R. Riggs is 28.6, which means company is able to collect their debt from debtors in 29 days.
Creditor’s payment ratio – Through creditor’s payment ratio manager can evaluate the efficiency of firm’s business operations. In other words, average time taken by company to make payments to its creditors. CPR of R. Riggs is 12.18 which means, company take around 12 days in making payment.
Stock turnover ratio – Stack turnover ratio means, the ability of company using its inventory over a period of time and the STR of R. Riggs is 65 days.
The report has summarised various concepts associated with managing financial principles and techniques in a real time scenario, a hotel firm has been selected, where a fast food chain is to be initiated (Bhat, 2008). The motive of involving such an illustration will aid in yielding best results. The report also illustrates how cost concept can be implemented in a real time scenario to reduce the cost and improve the profits of the industry. An assumed example has been taken into action which will help in providing information about the unit costing and ho margin can be fixed by increasing the per unit cost (Lasher, 2010).
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