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FINANCE IN HOSPITALITY INDUSTRY

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TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 TASK 1: Sources of Finance for Small Business ........................................................................... 1 1.1................................................................................................................................................ 1 1.2................................................................................................................................................ 2 TASK 2: Monitoring and Controlling Performance at Mark & Spencer........................................ 3 2.1................................................................................................................................................ 3 2.2................................................................................................................................................ 4 TASK 3: Budgetary Control ........................................................................................................... 6 3.3................................................................................................................................................ 6 3.4................................................................................................................................................ 7 TASK 4: Financial Statements........................................................................................................ 8 3.1................................................................................................................................................ 8 3.2................................................................................................................................................ 9 4.1.............................................................................................................................................. 11 4.2.............................................................................................................................................. 13 TASK 5: Costing Methods............................................................................................................ 13 5.1.............................................................................................................................................. 13 5.2.............................................................................................................................................. 14 5.3.............................................................................................................................................. 16 CONCLUSION ............................................................................................................................. 16 REFERENCES ............................................................................................................................. 17

LIST OF TABLES Table 1: Profit and Loss Account ................................................................................................... 9 Table 2: Balance Sheet.................................................................................................................. 10 Table 3: Costing ............................................................................................................................ 14 Table 4: Costing ............................................................................................................................ 14 Table 5: Costing ............................................................................................................................ 15

TABLE OF FIGURES Figure 1: EOQ ................................................................................................................................. 5 Figure 2: Budgetary Control Cycle ................................................................................................. 7 Figure 3: Trail Balance ................................................................................................................... 9

INTRODUCTION Hospitality industry is customer oriented sector, according to companies have use optimum utilization of financial resources in order to fulfill needs and wants of customers (Dittenhofer, 2001). In the first part report will focus on various sources available to hospitality industry for their sustainable future whereas in second part report will discuss about monitoring and controlling of performance at Mark and Spencer Company. In third part repot will highlight the importance of budget and purpose of budget. In the fourth part report will focus on financial statements of R. Riggs Company in order to identify and evaluate their financial performance. TASK 1: Sources of Finance for Small Business 1.1 Sources of finance are basic requirement for any organization, industry or sector in order to perform their task effectively and efficiently. There are various methods of raising funds or money in any industry and every company adopts different types of sources based on nature of business operations (Shim and Siegel, 2008). In other words finance according to corporate can be termed as managing of large funds or money by company for future sustainability. Sources of funds can be categorized into two sub heads: internal sources and external sources. Internal sources: in basic term these sources of finance are those which are raised within organization. In other words, internal sources of finance are those which are acquired from the previous profits or revenue generated by firm as the source of new capital investment. There are various internal sources through which any organization operating in any industry can raise their required funds or money such as: owner’s capital, retained earnings, sale of fixed assets and debt collection (Obura and Bukenya, 2008). The major focus on raising thesess funds is to meet short term liabilities of business operations. External sources: external sources of funds are those which are raised from outside organization in order to fulfill long term liabilities of business operations. These sources of finance are used to perform long term business activities for future sustainability. There are several external sources of finance which can be acquired by company in order to increase their funds such as: issue of shares and debentures, bank loan, government grants, creditors and hire purchase.

The above discussed sources of finance can be used by hospitality industry according to their needs and wants and accomplish business operations effectively and efficiently. According to case study company can use external sources of finance in order to generate income for purchasing machinery for improving overall performance and achieve desired goals and objectives. For purchasing machinery of £50k company can adopt bank loan, leasing it is recommended because of financial position that firm holds now.

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1.2 According to the case study generating sources of finance for expanding chains of restaurant, company should use external sources of finance because on the basis of present condition company is operating at low level and for them raising funds internally will be difficult (Hill, 2013). There are several sources of finance through which company can acquire funds for expanding large chain of restaurants such as bank loan or leasing. Both these sources would be most appropriate for company in order to acquire as well as repayment of funds. Firm should

critically analyze these sources in order to evaluate pros and cons of adopting these sources of finance. Bank Loan: for raising funds quickly bank loan can be adopted by any company, this source is effective as funds can be easily available through bank loan and repayment of loan is based on monthly installments. Company in order to expand or increase their chain of restaurants can use this source of finance so that future functioning can be done effectively and efficiently (Bragg, 2010). But disadvantage of this source that even is company is not making profit than also have to incur payment of interest. Leasing: this source of finance can assist company is acquiring latest technology for upgrading the services provided in restaurant. As company wants to increase their chain of restaurants can use this source because they will require buildings at various places and equipments installation for increasing the efficiency of restaurants (Mongiello and Harris, 2006). But the main issue regarding this source of finance is that acquired assets would always belong to financial institution only. From the above discussed sources of finance company can generate income for expanding chain of restaurants. Apart from that company can use internal sources for further successful functioning. Bank loan and leasing are suggested because company wants to expand in chain of restaurants. As the present financial condition of firm is stated it is a small business enterprise. TASK 2: Monitoring and Controlling Performance at Mark & Spencer 2.1 Cost in general terms refers to an amount which has to be paid in order to have something. According to business, cost is termed as monetary valuation of effort, material, resources, time and utilities consumed etc. there are various elements of cost such as material cost, labor cost and overheads. Firstly, material cost refers to the cost which is incurred by Mark and Spencer Company in order to produce finished goods. This cost is divided into two sub category direct material and indirect material (Brigham and Ehrhardt, 2011). Secondly, labor cost refers to the human efforts consumed in producing finished goods from raw material.

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Payment made for performing those activities is called labor cost. This cost is broadly classified into direct labor and indirect labor. Thirdly, overheads refer to the cost incurred by Mark and Spencer Company apart from material cost and labor cost for producing products and services. Overheads furthermore can be divided into sub category such as indirect and direct overhead. Direct overheads refers to those cost which are specifically incurred during manufacturing of products and services, whereas indirect cost refers to all the expenses incurred apart from indirect material and indirect labor (Li, 2003). Fixed cost and variable cost are explained theoretically. Whereas GP% and selling price are as follows: Gross profit percentage assist in identifying relationship between Mark and Spencer’s revenues and COGS. Gross profit = Revenue – cost of goods sold Gross profit percentage = gross profit/COGS*100 For example, if company’s revenue is £50000 and COGS is £30000 than gross profit will be: Gross profit = £50000 – £30000 = £20000 Gross profit percentage = £20000/ £30000*100 = 66.66% Selling price refers to the price at which company sells its products and services in order to gain generate profit. Selling price = 100 + gain%/ 100* cost price.

2.2 Controlling of cash and stock is major task for Mark and Spencer Company as they deal in retail sector. Every manager is making various efforts in order to improve company’s performance day by day like sales managers are focusing of generating enough sales to meet out desired goals and objectives, on the other personnel managers are focusing of controlling and managing human resources effectively and efficiently for desired results and thirdly, financial managers are focusing on managing all incurred costs like direct and indirect costs. Mark and Spencer are one of the giant retailers in global market (Brigham and Ehrhardt, 2011). Economic order quantity: Toll Free No: +1 213-929-5632 E-mail: help@instantessaywriting.com Looking for the best Essay Writing Service? Don’t Worry just ask ‘Write my Essay’ to our experienced academic experts and get an excellent quality essay.

Figure 1: EOQ (Source: Dittenhofer, 2001)

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Kindly Mail us at: help@instantessaywriting.com Company incurs several cost which can be easily identified and evaluate with sales volume. These incurred costs can be terms as direct cost such as carrier bags offered to the customer for their convenience and comfortability in handling products, and cost regarding the recruitment of qualified and different ethnic background for serving customers effectively and efficiently. On Toll Free No: +1 213-929-5632 E-mail: help@instantessaywriting.com Looking for the best Essay Writing Service? Don’t Worry just ask ‘Write my Essay’ to our experienced academic experts and get an excellent quality essay.

the other hand controlling of stock will assist Mark and Spencer to provide quality with quantity of products and services to its targeted customers (Power, 2010). By managing inventory company can also increase their sales volume or increase customer base which would be beneficial for future contingency of company’s operations.

TASK 3: Budgetary Control 3.3 Budget process refers to the process through which company prepares and approves budget for flowing of funds in business operations. By preparing budgets company can prioritize activities and on that basis spend funds and later on review whether operations are working properly or not. In other words, budget is prepared to compare actual performance of business from desired one. Budgets assist managers to indulge in various essential operations such as setting up goals, optimum utilization of financial resources in order to improve future financial performance of company (Graham and Harvey, 2001). Budget aims at providing financial information for making future strategies in achieving desired goals and objectives. In an organization several budgets can be prepared such as sales, cash, material, labor and master budget. All these budgets assist identifying and evaluating past performances of company and according to that make decisions regarding future contingency.

Project Initiation

assess corrective actions

Establish standards

intitate corrective actions

Measure Performance against Standard

companre and evalaute

Figure 2: Budgetary Control Cycle 3.4 Budget

Actual

Variance

Unit sold

100000

75000

(25000)

Material

15000

22500

(7500)

Direct labor

22500

24375

(1875)

Material (£)

Labor (£)

Price / rate variance

(4500)

3750

Usage / efficiency variance

(3000)

(5625)

Total variance

(7500)

(1875)

The above table represents information of budget of Yuri ltd. Through this it can be evaluated that company in present condition is facing various issue due to lack of efficiency in Toll Free No: +1 213-929-5632 E-mail: help@instantessaywriting.com Looking for the best Essay Writing Service? Don’t Worry just ask ‘Write my Essay’ to our experienced academic experts and get an excellent quality essay.

performing business operations (Michayluk and Zurbruegg, 2005). Yuri Ltd did not made better budgeting related to unit sold and direct labor just because of lack of forecasting and better estimation of managers. Company targeted at selling 100000 units during financial year but the actual sale was 75000 units, it can be said that marketing and promotional strategies of company was unable to achieve their desired goals and objectives which affected overall sales of company. Variance of (25000) justifies that company needs to focus on making better strategies. On the other hand, company expected material cost to be at 15000 but actual cost incurred during producing of spoons were 22500, this directly indicates that financial mangers did not focus on pricing strategy before purchasing of raw materials from suppliers or production was not measured specifically. Whereas, direct labor cost was budgeted at 22500 which incurred during the process around 24735 with a negative variance of 1857, which means labor indulged in performing activities were increased and due to this costs increased. Pricing strategy of company was not appropriate because price/rate variance was identified during performing of past operations such as material was negative (4500) and labor cost was increased by 3750. Furthermore, usage /variance was also identified of material which was (3000) and labor was (5625) this directly indicated that Yuri ltd was unable to use resources effectively and efficiently or supplier were demanding high prices. TASK 4: Financial Statements 3.1 Trial balance is a statement prepared at the end of financial year, including ending balance of each account. The main aim of this report is to ensure that total amount of all credits equals to total amount all debit, which indicates that there is no unbalanced journal entries in the accounting system (Coleman and Anderson, 2000). It is a type of financial statement which assists in providing information regarding financial performance and changes in financial position of an organization which is useful for decision makers. There are various limitations of a trial balance such as: an error relating to original entry, error of omission, error of reversal, error of commission, error of principle, compensating error and transposition error (Wildavsky, 2006).

The main purpose of preparing a trial balance is to ensure that entries in company’s bookkeeping system are done mathematically.

Trial balance December 31st 2013 Account

Debit

Bank

xxx

Credit

Sales

xxx

Sales return

xxx

Drawings

xxx

Purchase

xxx

Purchase return

xxx xxx

Sales discount Accounts receivable

xxx

supplies

xxx

Office building

xxx

Bank loan`

xxx

Accounts payable

xxx

Mortgage payable

xxx

Total

xxxx

xxxx Figure 3: Trail Balance

3.2 Table 1: Profit and Loss Account

Particulars Sales Less COGS Gross profit Discounts received Interest received from bank* Operating income Expenses Wages and salaries

Amount (in £’s) 157165.00 (94520.00) 62645.00 160.00 50.00 62855.00 (31740.00)

(3170.00) (820.00) (687.00) (730.00) (91.00) (200.00) (1630.00) (39068.00) 23787.00

Rent Discount allowed Van running costs Bad debts Doubtful debt provision Accrued expenses paid* Depreciation Total expenses Net profit Table 2: Balance Sheet

Particulars Fixed assets Office furniture & van Less depreciation Net fixed assets Additional furniture* Total fixed assets Current Assets Stock Debtors Less provision for doubtful debts Prepaid expenses Cash at bank & hand Add Interest received* Less accrued expenses paid* Total current assets Total Assets Current Liabilities Creditors Accruals Creditors for furniture* Total liabilities Equity capital

Amount (in £’s)

6650.00 (1630.00) 5020.00 525.00 5545.00 2400.00 12316.00 (496.00) 11820.00 230.00 4424.00 50.00 (200.00) 4274.00 18724.00 24269.00 5245.00 412.00 525.00 6182.00

Capital Add Net profit less drawings Total equity Total Liabilities & Equities

11400.00 23787.00 (17100.00) 18087.00 24269.00

(Corrected entries shown in Yellow*) 4.1 Identifying and evaluating financial performance of R. Riggs Company through calculating ratios which are as follows: Ratios

2014

Gross profit ratio

39.85

Net profit margin

15.26

Current ratio

2.3

Acid test ratio

2.1

Debtors payment period

28.6

Creditors payment period

14.27

Stock turnover ratio

39.38 Days

Gross profit ratio – gross profit ratio assist in evaluating the portion of profits generated by the sale of products and services, before selling and administrative expenses. Gross profit ratio can be calculated by combining the costs of direct material, direct labor and overheads than subtract from sales. Gross profit ratio = gross profit / sales *100 Gross profit ratio = 62645 / 157165 * 100 = 39.85 Gross profit ratio = 39.85. Net profit margin – this ratio assist in measuring how much out of every dollar of sales a company actually keeps in earnings. Profit margin ratio is beneficial in comparing two companies of same industry. It can be calculated by dividing net profit from sales. Profit margin ratio = net profit / sales *100 Profit margin ratio = 23987 / 157165 *100 = 15.26

Profit margin ratio = 15.26. Current ratio – current ratio assist managers to Measure Company’s ability to pay short term liabilities. Current ratio can be calculated by dividing current assets from current liabilities. Current ratio = current assets / current liabilities. Current ratio = 14220 / 6128 = 2.3 Current ratio = 2.3. Acid test ratio – this ratio assist in determining whether company have enough short term assets to meet out its short term liabilities without selling products and services. Acid test ratio is calculated by combining cash, accounts receivables, short term investments divided by current liabilities. Quick ratio = current asset – stock / current liabilities Quick ratio = 14220 – 2400 / 5457 = 2.1 Quick ratio = 2.1. Debtors payment period – this ratio assist in evaluating the average time taken by an organization to collect the trade debts. Debtor payment period = average debtor / sales * 365 Debtor payment period = 12316 / 157165 * 365 = 28.6 Debtor payment period = 28.6. Creditors payment period – this ratio assist in identifying the efficiency of a company’s business operations. It can be termed as a performance ratio. In other words, this ratio assist in identifying insight business functioning. Creditor payment ration = average creditor / purchase * 365 Creditor payment ratio = 5245 / 134113 * 365 = 14.27 Creditor payment period = 14.27. Stock turnover ratio – this ratio assist in defining the rate at which inventory of company is used over a specific period of time. Stock turnover ratio = cost of goods sold / stock Stock turnover ratio = 94520 / 2400 = 39.38 Stock turnover ratio = 39.38 days. Toll Free No: +1 213-929-5632 E-mail: help@instantessaywriting.com Looking for the best Essay Writing Service? Don’t Worry just ask ‘Write my Essay’ to our experienced academic experts and get an excellent quality essay.

4.2 On the basis of above calculation it can be concluded that R. Riggs is having better existing position in targeted market. According to that company should follow their existing strategies only, but on the long term basis company needs to focus on its pricing strategy and along with that marketing and promotions of products and services so that they can attain maximum numbers of customers and increase their sales (Shim and Siegel, 2008).

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TASK 5: Costing Methods 5.1 Cost in general terms refers to an amount which has to be paid in order to have something. According to business, cost is termed as monetary valuation of effort, material, resources, time and utilities consumed etc (Li, 2003). Cost can be sub-divided into three categories are as follows: fixed cost, variable cost and semi variable cost. Fixed cost – fixed cost refers to the cost which does not change with an increase or decrease in the amount of goods or services produced. In other words, fixed costs are the expenses that have Toll Free No: +1 213-929-5632 E-mail: help@instantessaywriting.com Looking for the best Essay Writing Service? Don’t Worry just ask ‘Write my Essay’ to our experienced academic experts and get an excellent quality essay.

be paid by producing company. It is one of the components of total cost of goods or services, along with variable cost. Variable cost – variable cost are those costs which changes as company changes its level of production. It is also sum of marginal cost. In other words, term variable cost is also known as unit level cost as it changes with numbers of unit produced (Dittenhofer, 2001). Semi variable cost – semi variable cost refers to an expense which indulges both fixed cost and variable cost component. Fixed cost is an expense which company has to bear even if they are not generating profits. On the other hand, variable cost increases and decreases on the basis of increase and decrease in the level of production. 5.2 Problems Limited thought to reduce the selling price of each unit by 10 per cent. Table 3: Costing

£000 Sales

90000

Less: variable cost

72000

Contribution

18000

Less: fixed cost

30000

Budgeted loss

(12000)

Problems Limited thought to increase the selling price of each unit by 10 per cent. Table 4: Costing

£000 Sales

110000

Less: variable cost

88000

Contribution

22000

Less: fixed cost

30000

Breakeven point

8000

Problems Limited stimulate by improving the quality of [product, which would increase the variable cost of unit by £1.50 per unit. Table 5: Costing

£000 Sales

115000

Less: variable cost

81500

Contribution

33500

Less: fixed cost

30000

Budgeted loss

3500

From the above calculation it can be concluded that costing methods of company is not appropriate as per Problems Limited performance is concerned (Obura and Bukenya, 2008). Company is unable to generate profit for that three different strategies have been suggested in which first is by reducing selling price by 10%, secondly increase in selling price by 10% and last increase in the variable cost by 1.50.

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5.3 On the basis of situation it has be calculated above and from these financial information it can be clearly stated that company should increase selling price by 10% which will assist in increasing the sales revenue of Problems Limited and leads to sustainable future position (Mongiello and Harris, 2006). In order to meet out their profits targeted company has to produce 11500 units to gain profit of £3500 CONCLUSION From the above report it can be concluded that costing play a major role in functioning of every business. In the first part report discussed about the sources that services industry should use for future functioning, and it has been recommended that externals sources should be taken in account for expanding business of restaurants. In late part report focused on R. Riggs Company’s financial position through analyzing P&L account and balance sheet and calculating several ratios.

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REFERENCES Journal and Books Bragg, M. S., 2010. Accounting Best Practices. 6th ed. John Wiley & Sons Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed. Cengage Learning. Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed. Cengage Learning. Coleman, M. and Anderson, L., 2000. Managing Finance and Resources in Education. SAGE Dittenhofer, A. M., 2001. Behavioral aspects of government financial management. Managerial Auditing Journal. 16(8). pp.451 – 457. Graham, J.R. and Harvey, C.R. 2001. The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics. 60 (2-3), pp. 187-243. Li, S., 2003. Future trends and challenges of financial risk management in the digital economy", Managerial Finance. 29(5/6). pp.111 – 125. Michayluk, D. and Zurbruegg, R., 2005. Editorial introduction: the value and scope of the financing decision process. International Journal of Managerial Finance. 1(1). pp.5 – 7. Mongiello, M. and Harris, P., 2006. Management accounting and corporate management: insights into multinational hotel companies. International Journal of Contemporary Hospitality Management. 18(5). pp.364–379. Obura, O. C. and Bukenya, K. N. M. I. 2008. Financial management and budgeting strategies for LIS programmes: Uganda's experience. Library Review.57(7). pp.514 – 518. Power, J.,2010. Financing options for business in Ireland. [pdf]. Available through: <http://publish.ucc.ie/boolean/pdf/2010/00/33-Power-2010-00-en.pdf>. [Accessed on 3rd June 2014]. Shim, K. J. and Siegel, G. J., 2008. Financial Management. 3rd.ed. Barron's Educational Series. Wildavsky, B. A., 2006. Budgeting And Governing. Transaction Publishers. Online

Hill, B., 2013. The Importance of a Financial Plan for a Small Business. [Online]. Available through:<

http://smallbusiness.chron.com/importance-financial-plan-small-business-

4713.html>. [Accessed on 24th June 2014].

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