Finance in the Hospitality Industry - Assignment Example

Finance in the Hospitality Industry Task 1 P1.1 Sources of Funding Available To Business and Service Industry Financing has always been a crucial aspect in terms of appropriate establishment of the hospitality industry. Being large, this industry requires abundant supply of funds. Contextually, due to the recent impact of the economic turmoil, the concept of financing has attained much attention in the present day phenomenon (Hsyndicate, 2014). Multiple sources of finance can be identified as existing for this particular service industry, with some of the majors identifiable as fund generation through selling services, borrowing of funds from the banks, stakeholders’ monetary contribution, funds collected from angel investors and other business processes or companies. It is worth mentioning in this regards that the borrowing percentage depends on the size of the industry. For instance, small-scale hospitality players, such as Queens Hotel London often borrow funds from whereas medium sized hospitality organisations are observed to source funds from the small investment bodies, as to continue with their business processes (Hsyndicate, 2014). P1.2. Evaluate The Contribution Made By A Range Of Methods For Generating Income Within A Given Business And Services Operation As already discussed above, there can be various methods through which, income can be generated within a business or service operation. However, the levels of contribution made by these income generation sources might vary to a substantial extent. For instance, in case a hotel plans to purchase laundry equipments from an electronics equipment manufacturer, on behalf of the contract made, the laundry equipment manufacturer can charge the hotel either in terms of full payment or in terms of credit purchase. The contribution of both these methods in this context can be justified with reference to the fact that if the purchase can be completed through credit, the financial burden on the hotel is also quite likely to curve down or to get reduced to a substantial extent, in the short-run. However, this will increase the liability of the organisation and likewise, may not prove to be a good source of funding in the long run. Nevertheless, through the credit sales opportunity, the hotel and the equipment manufacturer will also get the opportunity of establishing long run business relationship with each other. Given the goodwill of the hotel on the basis of its regularity to pay back the credited amount this relationship may yield significant advantages to aid the financial needs of the organisation further adding to its financial health. Thus, the purchase technique can also be recognised as a major contributor of generating income for both the business bodies. From a generalised point of view, it can therefore be stated that large government as well as private investment organizations may also be used to collect funds from within the hospitality industries in such a manner that in terms of contribution, both the hospitality organizations and the investment bodies get benefitted (University of Nebraska, 2007). For a large chain of restaurant, outsourcing of the supply chain and logistics processes may also be regarded as a major funding source for the local or global logistics organizations, which may be useful to facilitate savings in the organisation. These savings can in turn be used as a vital source of finance by the company. Correspondingly, inter-organizational investment has now become a common trend within majority of the organizations. It is principally owing to the fact that the contribution benefits for all the participating bodies persists as vast in terms of lower risks, lesser liabilities, adequate cash inflows, improvised liquidity aspects and financial stability rates among others (Hsyndicate, 2014). Task 2 P2.1 Discuss Elements of Cost, Gross Profit Percentages and Selling Prices for Products and Services In accordance with the case example, the elements associated with costs can be differentiated into two main categories; viz., direct cost and indirect cost. Direct costs generally refer to the expenditure factors for an organization that are rigid to be controlled and managed easily. In the given case scenario, labour expenses, electric bills, machinery and maintenance can be identified as the elements of direct costs. Correspondingly, indirect costs can be referred as the expenditure resulting from those variables that can be controlled with minimum or no changes in the production process (Slide Share Inc., 2014). For instance, preventing the unnecessary use of electricity and setting up of alarm systems for preventing thievery attempts can bring about reduction in the levels of indirect cost within the organization. Correspondingly, the concept of gross profit percentage can be referred as percentile calculated on profit made by a business organization or process after deducting payables and expenses from the aggregate amount earned by undertaking a business deal (Accounting for Management, 2014). Gross Profit Percentage = [{Gross Profit (Total Revenue- Total Expenditure)]/ Total Revenue}* 100] Apart from all the above-discussed facts, it can also be stated that the selling price of the products and services mainly depend on the amount of Gross Profit Percentage, which the hospitality organizations expect to earn from their business processes (Accounting for Management, 2014). Illustratively, if the overall production cost of the goods and services increases, as a collaborative effect of the direct and indirect costs, the hospitality organization will have to set the selling prices of the goods and the services higher to retrieve its desired profit percentage. P2.2 Evaluate Methods of Controlling Stock and Cash in a Business and Services Environment With reference to the provided case, the methods of controlling stock and cash within the business and the service environment can be identified in terms of multiple cost cutting techniques, which the personnel manager and the financial manager in Marks & Spencer can implement, so as to keep the expense levels in line with the determined organizational budget. One of such stock and cost controlling techniques is the effective management of the employees (i.e. human resources) and management of indirect costs, also known as variable costs that can be controlled easily. This is fundamentally owing to the fact that employees form the base of the organization and thus, its effective management would gradually bring down the resource wastage levels, which in turn will be effective to reduce the expenses of the organization largely. Moreover, the wastage levels can also be effectively controlled by keeping a check on the levels of indirect expenses (Forbes.com LLC, 2014). As stated in the provided case, managers in Marks & Spencer retail store can also make efforts of equipping the retail store with an effective security system to reduce the chances of theft and robbery occurrences. It will be like an addition to the opportunity cost. However, this in turn can also be considered as a stock and cash controlling technique. Apart from these, the managers can also keep a check on the level of product sales and the stock level of the inventory. Applying this particular strategy, the store can only bring in and store a specific quantity of goods that they can profitably sell within a specific period (Forbes.com LLC, 2014). Task 3 P3.3 Discuss the Process and Purpose of Budgetary Control The concept of budget can be explained as an assumption of the probable expenses a company may incur and likewise, an assumed explanation of the implications, which the plan may have on profit and sales figures within a specific period. The assumed budgeted figures are not rigid and thus, can vary from the actually attained figures, wherein the intention of the management is concentrated on reducing the proportion of variances in the budgeted and the actual costs incurred. Correspondingly, the purpose of the budgetary control process can be segregated into three crucial stages namely the planning stage where the annual operations for an organization gets planned accordingly. The second stage is regarding maintenance of coordination and harmony among the assumed processes. The third stage is regarding establishment of appropriate communication plan between the organizational managers for carrying out the operations in an appropriate manner. Budgetary control process may also be used to identify and deal with anticipated financial challenges, which in turn contributes to the overall strategic potentials and financial leverage conditions of the organisation. Theoretically, the budget control process comprises three stages, which can be related on the basis of a cyclic chain as demonstrated in the diagram below (CEES, 2014). The first stage of budget control is denoted as the budget-planning phase wherein Yuri and his managers can establish a plan regarding the sales factors and the profitability aspects they wish to acquire. The stage should also require the necessity of motivating managers towards achieving the organizational goals. The second stage is identifiable as budget controlling activities which mainly comprises of manually preparing the stages of budget wherein all the raw materials and the other production aspects required by Yuri and his managers will have to be recorded accordingly, based on certain specific guidelines. The third step in this cycle is the budget responsibility stage where the budget controller and the budget committee within Yuri’s business process will have to keep a tight check on all the processes to ensure that the estimated budget figures and the actual figures coincide in accordance with mentioned guidelines, exhibiting the least possible gap. This stage will also comprise of the performance evaluation of the managers regarding how successful they have been towards accomplishing the assigned responsibilities (CEES, 2014). P3.4 Analyse Variances from Budgeted and Actual Figures, Offering Suggestions for Appropriate Future Management Action In accordance to the above presented variance analysis based on Yuri’s case, it is evident that the budget plan, as estimated by Yuri does not match with the actual outcomes. Subsequently, lack of foresightedness of the managers can be considered as a major factor that might have resulted to this misalignment. Since it has been already mentioned in the provided case that the raw material required for carrying out Yuri’s business process is limited and effective steps in this context should have been taken that might have brought down the actual expense of the raw material. In addition, multiple issues were identified regarding the availability of effective and experienced workforces, which may have also been a prominent reason for the deficiencies observed in the budgeted and the actual costs. It is in this context that with irregular flow of labour, anticipating variable costs in terms of labour overheads become challenging, which in turn may increase gaps between budgeted and actual costs. Moreover, if the variance figures are taken into consideration it can be understood that the total variance for both material and labour are negative. Thus, the entire material and labour management structure within Yuri’s organization can be considered as inefficient. It is also suggestive in this regards that for the future management action, Yuri needs to bring about efficiency within his employee hiring procedure along with raw material import rates. He can bring about subsequent decrease in the indirect costs incurred due to which, the profitability factor of the business might increase gradually. Yuri also needs to bring about improvisation in the raw material processing methods through which, he can bring about a balance within the material variation rate (Sebastian & Maessen, 2010). Task 4 P3.1 Assess the Source and Structure of the Trial Balance P4.1. Calculates and Analyse All Ratios to Offer A Consistent Interpretation of Historical Business Performance Gross profit margin = Gross Profit / Net Sales (Revenue) * 100 Net profit margin = Net Profit / Net Sales Current ratio = Current Asset / Current Liability Acid Test ratio = (Cash + Amount receivable + Short term investments) / Current Liabilities Stock Turnover Ratio = Cost of goods sold / Average inventory at cost Creditors day ratio = (Trades payable/ cost of sales)* 365 Debtors day ratio = (Year End trade Debtors/ sales)* 365 By taking into consideration the above-conducted ratio analysis and the trail balance sheet, certain noteworthy recommendations can be made for improvising the overall sales figure and bringing about reduction in the cost of goods sold. Moreover, a balance will have to be maintained on the level of credit purchase and debt provision, so that the chances of bad debts and current liabilities can be minimized to the maximum possible rates (Accounting-Simplified.com, 2010). Task 5 P5.1 Categorisation of Costs as Fixed, Variable and Semi-Variable Variable costs, in conceptual terms, can be described as a type of expense incurred by corporate organizations, which often gets subjected to change, depending on the utilization of raw materials and the production of finished goods. It forms a part of the cost factor. In simple explanations, if the production volume within an organization increases, the variable costs associated with it will also increase. Similarly, if the production volume decreases, the associated variable costs also decrease accordingly. Therefore, it can be asserted that variable costs change proportionately with the changes in the produced units and accordingly, the change required in the entire production process to build the capacity. It is in this context that the concept of variable costs is quite different to that of the fixed costs. Theoretically, fixed costs of an organization can be described as those expenses, which are rigid and fixed irrespective of the volume of output produced. To be precise, fixed costs have the nature of remaining unchanged even if the produced unit quantity increases. For instance, rent on factory space can be considered as an example of fixed cost, which remains unchanged even if the produced number of units increase or decrease (Voluntary Action Cumbria, 2006). This indicates that wherein variable costs are correlated with produced units, fixed costs are not correlated with produced units. Apart from these two cost concepts, the third segregation of cost is known as the semi-variable cost, which can be considered as a central state between the fixed and the variable costs, possessing the characteristics of both. Illustratively, variable costs generally comprises rent expenditures, advertisement costs, marketing costs, machinery purchase costs and other controllable expenses, whereas the fixed costs generally comprises employee salaries, electric bills and machine maintenance costs among others. To be noted in this regards, changes intended in fixed costs incurred are subjected to the subsequent changes in the product process. Contextually, the concept of semi-variable cost allows a degree of freedom to the managers in their strategic decision-making, behaving either as a fixed or as a variable cost, depending on the nature of the operations conducted. As a result, with subsequent change in the total number of labour forces and machinery count within the organization, the semi-variable cost will gradually change (Mansueto Ventures, 2014). To be noted in this regards, while calculating fixed costs or variable costs is considered to be much easier in comparison to the computing techniques required for identifying and budgeting for the semi-variable costs. Notably, electricity used in the factories can be regarded as a semi-variable cost, which possesses the properties of both fixed costs and variable costs. To an extent, until a limit, the electricity cost will be required for the production process, irrespective of the units produced in the factory. This signifies that electricity costs possesses the qualities of fixed costs, which remains unchanged even if the aggregate amount of produced units is changed, but to a limit. On the other hand, with the number of produced units increasing, the amount of electricity consumed also increases, which after a limit, behaves similar to a variable cost, wherein with each proportionate increase in produced units demands a degree of increase in electricity costs. Therefore, it can be stated that electricity costs borne by a factory is an illustration of semi-variable cost. Variable + fixed costs = total costs P5.2 Calculate Contribution per Product / Customer and Explain the Cost/Profit/Volume Relationship for A Given Scenario Budgeted number of units: 10,000 The above presented data of the budgeted expenses apparently reveals that it is quite likely that Problem Limited will have to incur loss in its future endeavours, which might tantamount to £1.00 per unit. A principle reason to such a scenario can be identified as associated with fixed costs and the variable costs incurred by the organization, which appears to be quite high in comparison to that of the revenue earned through the sale of the expected manufactured unit. Correspondingly, three proposals have been offered to Problem Limited in order to enhance its chances of gaining profit and mitigate the risks of loss. Scenario 1 Reduce the Selling Price of Each Unit By 10 Per Cent By simulating the condition proposed in the first scenario, a loss of £20,000 appears to be the most likely outcome, given other variables to be stagnant. Correspondingly, to reach the break-even point, the company has to produce and sell 30,000 units at a selling price of £9 per unit, i.e. at a total sales value of £270,000. Accordingly, based on the calculation depicted above, an addition of 20,000 units, at a selling price of £9 per unit, will have to be added to attain the break-even point, i.e. the total number of units that Problem Limited will have to sell, so as to attain the break-even point is 30,000. Scenario 2 Increase the Selling Price of Each Unit By 10 Per Cent The second proposal given to Problem Limited emphasised the option of increasing per unit selling price of the product by 10%. As per the calculations, this would result in increased sales revenue, implying £11 per unit selling price. Correspondingly, the company will be able to attain its break-even point at the sales value of £110,000, selling 10,000 units of the product. To be noted in this regards, comparing the scenario with the current budgeted profit and expenditure, no additional unit will have to be sold by the company to earn higher revenue and mitigate chances of incurring losses. In other words, selling the same 10,000 units of products at an increased selling price of £11 per unit (i.e. 10% additional on the current selling price per unit), the company will be able to attain its break-even point. Scenario 3 Stimulate Sales by Improving the Quality of the Product, Which Would Increase the Variable Cost of the Unit by £1.50 per Unit The data simulation provided above describes the amount of loss, which Problem Limited will have to incur, if it raises the variable costs per unit by £1.50. It is in this context that the increased variable cost will lead to a proportionate decrease to the contribution per unit obtained by the company and therefore, result in a loss of approximately £10,000. As per the proposed scenario, Problem Limited will have to sell an additional 50,000 units at a selling price of £10 per unit, to attain a break event point. P5.3 Justify Short-Term Management Decisions Based On Profit/Loss Potentials And Risk (Break-Even) Calculations For A Given Business And Services Operation All the three above-mentioned scenarios can be evaluated with the implementation of Cost Volume Profit Relationship (CVP) analysis model, depending on the contribution margin ratios for the proposals. Correspondingly, the calculations reveal that the contributions margin ratio for scenario 2, is much potential as compared to other scenarios. To be precise, the contribution margin ratio for scenarios 1, 2 and 3 was calculated as 0.11, 0.27 and 0.20 respectively. These calculations can be observed below. Considering the principle assumptions of CVP analysis, it is apparent that the cost/volume/ profit relationship is the strongest in scenario 2. Theoretically, contribution margin indicates the percentage to which, the net sales value suffices the costs incurred through fixed variables. Based on this particular assumption, it becomes apparent that in scenario 2, maximum proportion of fixed cost is covered, which indicates the proposal as the most productive one. In addition, to attain the break-even point as per scenario 2, Problem Limited will not have to increase its sales units from that produced and marketed currently. In the current budgeted planning, the company produces and sales 10,000 units at a cost of £10 per unit, which if increased to £11 will yield the break-even point for the company. Therefore, this particular proposal will also require limited amount of investment as compared to other scenarios. Based on these comparative advantages that the company shall be able to obtain by inculcating the proposal made in scenario 2, it is suggestible that Problem Limited should increase its selling cost to £11 per unit, rather than reducing the selling price as per scenario 1 or making changes in the variable costs as per scenario 3. 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