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Unit 5: Finance In Hospitality London School of Science and Technology

2448Downloads1 I Published: 04 Apr ,2020

Introduction

Hospitality sector is enclosed with hotel management, restaurants, travel and tourism firms and so on. In order to deliver quality services to consumers it is must for these organisations to have enough funds and finance. These two elements can be generated through various sources. Satisfaction level can be enhanced of customers through delivering products and service according to their needs. With the help of this, profit margins can be enhanced in an appropriate manner. Both finance and accounting and its application has helped companies under hospitality section gained in an appropriate manner (Walker and Walker, 2016). Belgravia Hotels is an international hospitality firm which is dealing in three different sector which are: Lodging, contract services and many restaurants. At the moment, they are looking forward to enhance their profitability and productivity at the same time. Report is going to include various things like, sources of funding and along with evaluation of different methods that aid in generating heavy income. Away from this, elements of cost and profit that can help organisation in understanding business environment. Assessment is also enclosed with trail balance, process of budgetary control and so on. Many interpretations like ratios which will help in measuring performance of firm.

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Task 1

1.1. Sources of funding available to business and service industries

It has been examined that there are ample number of sources through which both funds and finance can be generated by organisation in an appropriate manner so that they do not face any issues related to this while going through a task. It is required for every single firm to look into different aspects in order to resolve issues right on time which are being faced by organisation that are related to funds. Belgravia Hotels already have a good name in all over United Kingdom, in some other countries as well and it is famous for its services they deliver products and services to consumers with minimal cost which is directly helping them in maintaining long term relations with them. As per given by Legrand, Chen and Sloan, (2013), there are various funding elements that are available in business environment which provide funds whenever it is needed and these are given below:

Retain Profits: One of the most relevant and easy process through which funds can be raised by organisation. Enhancing revenue and lowering expenditure can help Belgravia Hotels to generate funds.

Bank Loans: This is another source which is being utilised by most of firms when they require funding. It is much needed for Belgravia Hotels to choose Bank which is ready to give monitory in lower rates of interest. Heavy rate of interest will directly affect the profitability of this firm. Along with this, it has been analysed that Belgravia Hotels can face issues that are related to liquidity in near future.

Bank Overdraft facility: This kind of source is for a short term of instance through which organisations can borrow money. But, this consist of higher rate of interest. Therefore, most of firms do not prefer this sort of resource and go for others.

Credit purchases: Under this, there are many business firms who are lending funds in terms of credit. It has been examined that firms like Belgravia Hotels needs to examine and manage their working capital in which agreements that are related to suppliers so that it do not get into trouble while paying the cost in order to purchase products.

As per given by Brotherton, (2012), there are some other elements as well that comes under as an option in order to raise funds and these are: Debenture issue to capitalist, shareholders, amalgamation of two firms, mortgages and so on. Henceforth, Belgravia Hotels have different sort of sources through which they can raise both funds and finance whenever it is needed. It is must for company to have a good reputation so that they do not face any sort of barrier or issues where banks do not lend money.

1.2. Methods of generating income and contribution to business & service operations

Every single business firm whether it is of hospitality and or any other sector, it is must for them to generate both revenue and profit in enough amount so that to sustain at marketplace for a longer period of time. As Belgravia Hotels comes under hospitality section therefore, they generates income through delivering various sort of services like providing rooms to travellers, offering them food and beverages and many more. Along side this, as given by Boella and Goss-Turner, (2013) creating benefits or earning money away with contributing in hospitality commercial can be evaluated through many ways and these are:

Sales: Belgravia Hotels is offering various sort of services to its clients and guests like rooms, beverages, foods and other services through which they generates revenue and income. Through these only a firm can give good rivalry to its competitors. In order to enhance sales, Belgravia Hotel's management makes strategies like they give special discounts like first 10 clients that have entered in their hotel, free room services and so on.

Commission: Income can also be generated through this element. Suppliers that comes in third party vendor commission can be generated and directed by them (Jang and Park, 2011).

Opening new outlets of restaurant: Another major source through which income is being generated. Opening a whole new branch of a restaurant at a whole new area gives an opportunity to a firm through which it can generate revenue and income as well. But, it needs heavy investments and examination should be done in an appropriate way through which they can earn benefit at maximum level. Belgravia Hotels can go through new places where they are not doing business and open a new hotel through which they can earn heavy money.

Sale of unused asset: Another way of developing income or gaining finance is through selling assets which are not coming in use. Through this, it may be not possible to generate high income through merchandising assets. Therefore, it is must for Belgravia Hotels to use or utilise them in order to make it more productive.

New product development: Belgravia Hotels should keep on introducing ample number of products and services so that to gain competitive advantages at marketplace and to generate high revenue (Suh, West and Shin, 2012).

M1. Various sources of finance and their advantages and disadvantages

Retain Profits:

Advantages

Disadvantages

Belgravia Hotels would not need to borrow money from any lenders.

Reduction in profit margins as money which was earned was directly applied into the business so that it can get run in successful manner.

Bank Loans:

Advantages

Disadvantages

Heavy loans may aid firms in attaining goals and objectives right on time.

Interest rates stays high that needs to be paid by Belgravia Hotels.

Bank Overdraft facility:

Advantages

Disadvantages

Money is being lended in short period of time (Jones, Hillier and Comfort, 2016).

Short period of time and interest rates stays high.

Credit purchases:

Advantages

Disadvantages

If credit amount is being used wisely it may create favourable conditions for Belgravia Hotels.

Time taking process where Belgravia Hotels needs to look into its books in every single month.

D1. Methods of generating income and best option from it to generate income

There are ample number of methods which are being used by Belgravia Hotels in order to generate income. The best sort of method is sales through which this hotel of hospitality sector keeps on making or generating finance for it in terms of income. Delivering products and services to consumers according to their needs may aid firm in grabbing good and competitive advantages at marketplace of United Kingdom and in other countries as well.

It is must for Belgravia Hotels to keep on making marketing strategies through which promotion is being done of services which that are being offered by this organisation (Hertog, Gallouj and Segers, 2011).

Task 2

2.1. Elements of costs, gross profit percentage and selling price for products and services

Basically, there are two kinds of costs, one is known as direct and another is indirect. Cost which is directly associated with products are termed as direct cost, whereas, if it is not connected with goods then it is considered as indirect cost. This is generally include into selling value of items and services. Henceforth, there are some cost which are going to describe here and this is connected with Belgravia Hotel:

Material cost: It means when some amount is utilized by superior; therefore, they will be able to produce items or services for company in an effective manner.

Labour cost: there are two elements which will comprise into this, such as salaries as well as wages which need to be paid by superior to their subordinates.

Expenses: This will consist cost which is associated with depreciation and many others.

There are some components which will include into gross profit percentage and this is mentioned as beneath:

Cost of goods sold: It will occurred at time of producing any type of items as well as services for customers.

Revenue: This is basically connected with organisation which will be either in term of cash or credit as well. Any kind of allowances, tax or discount will never include into this.

Several factors which are linked with selling price are mentioned as beneath:

Cost: It will include indirect and in addition direct cost. This is termed as that value on which an individual will buy product and services from organisation. It is considered as foremost component of selling price (Bharwani and Jauhari, 2013).

Profit: This is not related with cost actually but this is must as it helps to enhance efficiency of an association. With support of this, enterprise will be able to maintain their reputation at marketplace in an effective as well as efficient manner.

2.2. Methods of controlling cost and cash in business and service environment

It is not easy for a company to maintain as well as control liquidity in a significant way. Therefore, if they want to control over cash properly then, there are many methods which will be used by Belgravia hotel. These are stated as below:

Develop cash handling policy: It is required for an enterprise to develop some strategies and policies; thus, they will handle cash proficiently. This is essential for an affiliation to adopt it in an effective manner within the company.

Reconciliation system: Manager of an organisation needs to record cash activities on regular basis as this helps to maintain liquidity of firm effectually.

Instead of this, it is needed for an enterprise to keep up cash. For above stated aim, there are some techniques which will be utilized by them. This is defined as beneath:

Economic order quantity: With assistance of this, manager of Hotel will easily decide that which kind of goods need to be ordered, this aids them to maintain cost of handling in a proper manner. This is must to calculate it properly and for this, there are some cost which is essential. For instance: carrying cost, annual quantity and in addition ordering cost (Uyar and Bilgin, 2011).

Just in time: It is must appropriate tools because this helps to control merchandise properly. When product is get developed then this will be ordered.

Bank reconciliation: This is considered as a statement which will be utilized by company; therefore, they will easily get assured that both balances related to bank is correct. Like, bank balance of general ledger need to be match with bank balance. This aids to prepare journal entries in a proper manner.

M2 Identified and applied relevant theories and techniques of setting prices

It is required for an organisation to utilize proper techniques as well as theories; thus, they will be able to set value of goods and services in an effective manner. They will use pricing strategy because if cost of their products are affordable then, this will be easy for them to take benefits from rivals at competitive place. This enables them to maintain customer base as well as revenues in an effective manner. In addition to this, organisation will keep up their sustainability at marketplace for maximum time span (Martínez, Pérez and Rodríguez del Bosque, 2013). This has been analysed that, if value of items and services of an enterprise is reasonable then they will easily influence buyers to purchase it.

D2 Take responsibility for managing and organising activities

Manager of an enterprise needs to manage overall activities in a systematic manner. For this, they will formulate plan as this enables them to organise each thing in a proficient way. Hence, a project management plan will be developed by them as this will assist to guide staff members so they will complete their work systematically. Along with, coveted targets as well as goals will be attained by firm within set period of time. They will analyse demands and desires of clients because this will aid them to maintain sustainability at marketplace for maximum time duration as well.

Task 3

3.1 Assess the source and structure of the trial balance

Trial balance is being stated as a argument of various and all debits/credits scores that are being covered under double entry books of accounting. This also includes with agreements and disagreements which may aid in showing or pulling out all the errors. This includes various things and categorised under three ledgers , namely general ledger, sales ledger and the purchase ledger. It has been evaluated that purchased ledger in enclosed with personal accounts of creditors. Along with this, sales ledger includes various things like account of debtors. On the other hand, general ledger dwell impersonal accounts. Real and nominal account two types that comes under this (Wang, 2013).

The structure of the trial balance is enclosed with various sort of assets and liabilities:

Current Assets Fixed Assets & Contra Assets

Current Liability Long Term Liability

Owner's Capital Contra Capital

Contra Revenue Revenue

Expenses

Trial balance of Belgravia Hotel is being mentioned beneath:

Current Assets - Bank / Cash / Debtors

Fixed Assets & Contra Assets - Building / Equipment / Acc. Depreciation

Current Liability - Creditors

Long Term Liability - Long term bank loan / Debentures

Owner's Capital - Ordinary share capital / Retained Profit

Contra Revenue - Opening Stock

Revenue - Sales

Expenses - Salaries / Loan interest / Marketing / Energy / Communication / Rates & Insurance / Purchases

3.2 Evaluation of business accounts

Income statement Belgravia Hotel for the year ended 31st August 2017

Revenue

Amount (£)

Total Revenue

18535000

Cost of Revenue

16535500

Gross Profit

1999500

Operating Expenses

 

Selling General and Administrative

1178900

Total Operating Expenses

17807000

Operating Income or Loss

728000

Income from Continuing Operations

 

Total Other Income/Expenses Net

351700

Earnings Before Interest and Taxes

728000

Interest Expense

-125200

Income Before Tax

1079700

Income Tax Expense

168800

Minority Interest

594000

Net Income From Continuing Ops

910900

Non-recurring Events

 

Discontinued Operations

-149500

Extraordinary Items

-

Effect Of Accounting Changes

-

Other Items

-

Net Income

 

Net Income

644800

Preferred Stock And Other Adjustments

-

Net Income Applicable To Common Shares

644800

Balance sheet of Belgravia Hotel for the year ended 31st August 2017

Period Ending

30/09/17

Current Assets

Amount (£)

Cash And Cash Equivalents

2516100

Short Term Investments

-

Net Receivables

848400

Inventory

110200

Other Current Assets

843200

Total Current Assets

4317900

Long Term Investments

1375700

Property Plant and Equipment

3828500

Goodwill

2889500

Intangible Assets

548100

Accumulated Amortization

-

Other Assets

1225800

Deferred Long Term Asset Charges

323700

Total Assets

14185500

Current Liabilities

 

Accounts Payable

2653300

Short/Current Long Term Debt

1933100

Other Current Liabilities

3242000

Total Current Liabilities

6534700

Long Term Debt

630900

Other Liabilities

2355900

Deferred Long Term Liability Charges

-

Minority Interest

594000

Negative Goodwill

-

Total Liabilities

10651800

Stockholders' Equity

 

Misc. Stocks Options Warrants

-

Redeemable Preferred Stock

-

Preferred Stock

-

Common Stock

1501600

Retained Earnings

-1562500

Treasury Stock

3000600

Capital Surplus

-

Other Stockholder Equity

3000600

Total Stockholder Equity

2939700

Net Tangible Assets

-497900

3.3 Purpose and process of budgetary control in a business and service environment

Organisation

Budgetary control various sort of planning and coordination of different elements through which Belgravia Hotel can measure its capital.

Its purpose is to do controlling of budget. This includes various things like:

  • Attaining all the targets which are being set by business. Authorising duties to workers so that tasks can be resolved in short period of time.
  • With the help of this, firm can use resources that they have in an optimised manner.
  • Future based policies are being formulated in order to create favourable conditions.
  • Analysation of performances which is being given by company (Radojevic, Stanisic and Stanic, 2015).

Process of Budgetary Control and its steps:

Period of Budget: Mostly, firms uses this after completion of one year of doing business.

Approach of Budget: Zero based budgeting can be stated as an approach which is being chosen by Belgravia Hotel in order to pull out its expenses.

Implementation of Budget: This takes place when organisation plans and hit their targets by considering time in an effective way.

Performance Measurement: Evaluation of existent performance with expected or previous production which was given by Belgravia Hotel.

Identification of differences in actual with budgeted performance: By conducting a variance analysis.

Take corrective action: Corrective procedures required to produce the performances which are closer to the budgeted performance.

3.4 Analysation of budgetary variances

There are various formulas through which management of Belgravia Hotel can pull up different sort of variances.

Raw Material Total Variance = Standard Cost - Actual Cost

Staple Material Price Variance = Quantity Used ( Standard Price - Actual Price )

Raw Substantial Usage Variance = Standard Price ( Standard Usage - Actual Usage )

Suggestions:

  • It is must for Belgravia Hotel to utilise raw materials in an appropriate manner so that it can be saved for future aspects.
  • New tools and techniques are being used in order to reduce wastage.

M3 Structure and approach to assess the trial balance

Trial Balance:

Belgravia Hotel can make proper statements and it includes all the debits and credits ledger account book, with any disagreement indicating an error.

The structure of the trial balance is enclosed with various sort of assets and liabilities:

Current Assets Fixed Assets & Contra Assets

Current Liability Long Term Liability

Owner's Capital Contra Capital

Contra Revenue Revenue

Expenses

Task 4

4.1 Ratio analysis of Belgravia Hotel

Profitability ratio

Ratio

Formula

Results

Gross profit ratio

(Gross profit / cost of goods sold)*100

1999500 / 1653500 = 12.09%

Profit margin

(Net profit / total revenue)*100

644800 / 18535000 = 3.47%

 

This can be considered through above calculation that management of Belgravia Hotel have less profit ratio and it is must for them to take initiative so that to enhance their profitability which will directly put impact on their goodwill (Ransley and Ingram, 2012).

Liquidity ratio

Ratio

Formula

Results

Current ratio

Current assets / Current liabilities

4317900 / 6534700 = 0.66

Quick ratio

Liquid assets / current liabilities – bank overdraft

2516100 / 6534700 = 0.39

Current and liquidity ratio .66 times that can be considered as less than 1. Therefore, it is must for Belgravia Hotel to enhance its liquidity so that it can make effective decisions at workplace.

Solvency ratio

Ratio

Formula

Results

Debt equity ratio

Debt / equity

630900 / 2939700 = .22 times

Debt ratio

Total liabilities / total assets

10651800 / 14185500 = 0.75 times

It has been calculated and interpreted that .22 times that is calculated accordingly with computing of debts and equity. Along with this, in the year of 2017 equity stock holders fund was 2939700.

4.2. Appropriate future management strategies for business and service operation

In order to improve revenue of firm it is must for Belgravia Hotel to reducing the cost of products and services that they are selling and along with they do need to remove or reduce the stock and calculate it so that benefits can be gained in an appropriate manner. Just in time is one sort of approach that may aid in maintaining stock system to be implemented to minimise the stock handling cost (Walker and Walker, 2016).

Task 5

5.1 Categorisation of costs of Belgravia Hotel

Fixed cost: This concept defines expenses which are computed by administration to purchase appropriate assets such as land & building, plant and machinery to conduct business operations adequately. Thus, these are cost which are incurred by Belgravia Hotel to have approaches infrastructure for clients which don't varies with sales volume or production activities.

Variable cost: This include tactic which specifies that there are various expenditures which are executed by management to provide appropriate things to people. This cost depend about customers visiting Belgravia Hotel and their demands in respect to beverages and so on.

Semi-variable cost: This included expenses which remain fixed to a certain point, but after some sales volume; management of Belgravia Hotel will incur additional expenses which are due to customer number or due to changes in their taste and preferences (Legrand, Chen and Sloan, 2013).

5.2 Relation in Cost / Profit / Volume analysis of Belgravia Hotel

Computation of Contribution per product / customer ( in £ )

Description Room Foods Beverages Minor Dept. Total

Selling Price 120 20 8 2 150

Variable Cost (Appendix - B) (15) (7) (2.4) (1.2) (25.6)

Contribution 105 13 5.6 0.8 124.4

(Per product/customer)

Net Profit Computation ( in £ )

Sales ( 150 * 100 * 365) = 5, 475,000

Less : Variable Cost (25.6 * 100 * 365) = ( 943,400 )

Contribution (124.4 *100* 365 ) = 4, 540,600

Less : Fixed Cost = ( 1,600,000 )

Net Profit = 2,940,600

Break Even Point calculation

BEP ( in units ) = Fixed Cost

Contribution per customer

= 1,600,000

124.4

= 12,861.74

BEP ( in £ ) = BEP ( in units ) * Selling Price

= 12,862 * 150

= 1,929,300

Cost -Volume -Profit Relationship

Value

( £ '000 )

TR Total Revenue (£ 5,475 )

(£5,475)

Profit (£ 2,940.6)

Profit

BEP BEP

(£1,929) VC (£ 934.4)

Loss FC (£ 1,600 ) (Customers ) ( 12,862 ) (36,500)

Cost-Volume-Profit are sort of analysis and is method through which analysation is being done of both marketing and operating decision which may put impact on net income.

Belgravia Hotel needs to sell 12,862 rooms to clients in order to attain break even point of selling their services.

5.3 Justification of short term management decisions based on CPV analysis.

Margin of Safety ( in units ) = Expected Customers - BEP Customers

= ( 365 * 100) - 12,862

= 36,500 - 12,862

= 23,638

Margin of Safety ( in £ ) = Margin of Safety ( in units ) * SP

= 23,638 * 150

= 3,545,700

Degree of Operating Leverage = Contribution Margin

Net Profit

= 4,540,600

2,940,600

= 1. 54 ( low risk )

D3 Problem or issue related to performance using break-even analysis and recommended solution

From computation which is being done it has been analysed that Belgravia Hotel have to sell 12,862 rooms on a regular basis so that to attain a good reputation at workplace. Along with this, it is being analysed that through giving training to individuals on a regular basis it may aid in hitting their targets right on time which will help in gaining competitive advantages.

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Conclusion

From the above assignment report, it can be comprehended that executive require to have adequate funds for conducting business operations adequately. Every organisation have finance department whose responsibility is to construct financial statement which specifies information about income and expenditures. Along this, management require to make appropriate budget and execute money in different units so that customers get adequate items and services. Various theories and concepts are used by hospitality management to make effective judgements and decisions which are beneficial for business. Thus, financial record benefits organisation to have appropriate knowledge about profitability of firm.

References

  • Walker, J. R. and Walker, J. T., 2016.Introduction to hospitality management. Prentice Hall.
  • Legrand, W., Chen, J. S. and Sloan, P., 2013.Sustainability in the Hospitality Industry 2nd Ed: Principles of Sustainable Operations. Routledge.
  • Brotherton, B. ed., 2012.International Hospitality Industry. Routledge.
  • Boella, M. and Goss-Turner, S., 2013.Human resource management in the hospitality industry: A guide to best practice. Routledge.
  • Jang, S. and Park, K., 2011. Hospitality finance research during recent two decades: subjects, methodologies, and citations.International Journal of Contemporary Hospitality Management. 23(4). pp.479-497.
  • Suh, E., West, J. J. and Shin, J., 2012. Important competency requirements for managers in the hospitality industry.Journal of hospitality, leisure, sport & tourism education. 11(2). pp.101-112.
  • Jones, P., Hillier, D. and Comfort, D., 2016. Sustainability in the hospitality industry: Some personal reflections on corporate challenges and research agendas.International Journal of Contemporary Hospitality Management. 28(1). pp.36-67.
  • Hertog, P. D., Gallouj, F. and Segers, J., 2011. Measuring innovation in a ‘low-tech’service industry: the case of the Dutch hospitality industry.The Service Industries Journal,31(9), pp.1429-1449.
  • Bharwani, S. and Jauhari, V., 2013. An exploratory study of competencies required to co-create memorable customer experiences in the hospitality industry.International Journal of Contemporary Hospitality Management. 25(6). pp.823-843.
  • Uyar, A. and Bilgin, N., 2011. Budgeting practices in the Turkish hospitality industry: An exploratory survey in the Antalya region.International Journal of Hospitality Management. 30(2). pp.398-408.
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