Economics for students at the AP programme, 3. udgave, 1. oplag 2016 by Praxis

K A PI T EL 4 – PRI SFASTSÆ T T E LS E O G D I ST R I BU T I O N I N T R O D U KT I O N

Financial Management in Practice Economics for Students in the Service, Hospitality and Tourism AP Programme is the book for everyone studying at the Economics for Students in the Service, Hospitality and Tourism AP Programme and at Financial Management in Practice and Applied economics AP. The book can also be read by people with financial responsibilities in hotel, restaurant and adventure companies looking for inspiration for action points and possible measures for improvement. Economics for Students in the Service, Hospitality and Tourism AP Programme provides a practical introduction to financial management of hotel, restaurant and adventure activities and contains general financial and economic theory. You can, amongst other things, read about: • Presentation of financial statements • Market conditions and company costs • Pricing and distribution • Financial analysis • Planning and resource management • Investment, funding and valuation Economics for Students in the Service, Hospitality and Tourism AP Programme contains practical cases and examples where the book is particularly relevant to the experience industry and can constitute basis for the studied own cases. The book has an appendix with key figures and theories, often particularly relevant to a certain particular profession.

ISBN 978-87-571-2864-2

9 788757 128642

praxis.dk

varenr. 111015-1

Economics for Students in the Service, Hospitality and Tourism AP Programme written by Annette Vangstrup, partner in the consulting and training company Asnæs&Vangstrup. Annette teaches leaders in the hotel, restaurant and tourist business the academic subjects “Financial management in practice” and “Economy dividends”. Annette has developed specific tools for management and employee involvement and has a wide knowledge of the earnings patterns of the various sub-industries.

Economics for Students in the Service, Hospitality and Tourism AP Programme

ANNETTE VANGSTRUP

Economics for Students in the Service, Hospitality and Tourism AP Programme Financial Management in Practice

PRAXIS – Nyt Teknisk Forlag

111015-1 Economics for students at the AP programme_omslag.indd 2-4

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ANNETTE VANGSTRUP

Economics for Students in the Service, Hospitality and Tourism AP Programme Financial Management in Practice

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ECONOMICS FOR STUDENTS IN THE SERVICE, HOSPITALITY AND TOURISM AP PROGRAMME - FINANCIAL MANAGEMENT IN PRACTICE

Economics for Students in the Service, Hospitality and Tourism AP Programme - Financial Management in Practice 3rd edition, 1st printing 2016 © PRAXIS – Nyt Teknisk Forlag 2016 Publisher’s editor: Heidi Kølle Andersen, hka@praxis.dk Cover: Nina Grut MDD Graphic design and DTP: Nina Grut MDD Print: PNB Print ISBN: 978-87-571-2864-2 ISBN, e-book: 978-87-571-3371-4 Item no.: 111015-1 The book is set in Garamond and Open Sans. The book is printed on 115 g Arctic Silk All rights under the copyright law reserved. Copying from this book may take place only at institutions that have a copying agreement with Copydan Tekst & Node, and only within the framework of the agreement. Find out more at www.copydan.dk

PRAXIS – Nyt Teknisk Forlag Munkehatten 28 5220 Odense SØ info@praxis.dk praxis.dk Tel. +45 63 15 17 00

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CHAPTER 1

Foreword Welcome to Economics for Students in the Service, Hospitality and Tourism AP Programme - Financial Management in Practice, which has been written especially for the service and experience industry but which contains general accounting and economic theory. The book is aimed at students in the service, hospitality and tourism AP programme “Financial Management in Practice” and “Applied Economics”. In addition, the book is a practical introduction to the financial management of a hotel and restaurant business as well as other experience companies. Managers and owners with financial responsibility can also benefit from reading the book in its entirety or take inspiration from selected sections and chapters. This book is a revised 3rd edition of an earlier book of the same name. The book is expanded in several areas that are of current interest for the service and experience industry, such as peer-to-peer economy, distribution channels, employee involvement in financial management, and value assessment. In addition, the revised edition contains several concrete instructions for financial management methods. The book is organised with examples, fact and reflection boxes and cases, which help the reader understand the theory and transform it into practice. There is particular focus on presenting concrete examples for all theories and concepts in the book. The issues are excerpts from many years of teaching at Asnæs&Vangstrup, Restaurant and Hotel Management Academy, where participants work with current issues and challenges in their own business. Issues taking into account the learning objectives of the programme in the official master plan are linked to each AP subject. Hence, the examples are inspired by the hundreds of chief executives and owners who have attended the AP programmes at the Academy. The practice-oriented perspective in education makes it possible for students, based on the specially developed tool Udviklingscirklen®, to identify, analyse and implement solutions to the complex issues in the course while developing their own strengths. With this approach it has been possible to find examples of the theoretical problems of the subjects in the real world. We would like to extend a special thank you to all students because they always bring reality to a head in relation to theory. This book makes it possible to understand the basic concepts and economic contexts, which by including cases and specific methods of implementation can bring the reader up to a higher taxonomic learning level, where theories can be put into practice. Economics exercises associated with each of the book's main themes have been compiled: Economics Exercises for Economics for Students in the Service, Hospitality and Tourism AP Programme. The book is also translated into English and is available as e-book. Go to www.praxis.dk for more information. Thanks to the teachers at CphBusiness, Business Academy Southwest and Dania Business Academy for their comments on the new version, as well as to the certified public accountant Jesper Strunge and the teachers Christian Ingemann and Nille Presskorn for their expert contributions to parts of the book's content. June 2016 Annette Vangstrup www.asnaes-vangstrup.dk www.relationmanager.dk

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CHAPTER 1

Table of Contents 3 Foreword

8 9 10

Introduction to Understanding Economics

1.1. Introduction to Understanding Economics 1.2. Your role as financial manager 1.3. The services sector, its companies and organisations

Presentation of Financial Statements

14 2.1. Brief introduction 19 2.2. Internal accounts 19 2.3. External accounts 31 2.4. Alternative financial statements 33 2.5. Case: Preparation of accounts for analysis 34 2.6. Summary

Market Conditions and Company Costs

36 3.1. Introduction to conditions and company costs 42 3.2. Different types of economic activity 46 3.3. Price elasticity 49 3.4. Cost components 53 3.5. Calculations 55 3.6. Case: Cost structure in a fitness company 56 3.7. Summary

Price Determination and Distribution

58 4.1. Introduction to price determination and distribution 58 4.2. Theoretical price determination 61 4.3. Correlation between price and sales volume 65 4.4. Minimum prices 66 4.5. Price differentiation 70 4.6. Case: Pricing in an event company 72 4.7. Revenue management 76 4.8. Case: A hotel company's work with revenue management 77 4.9. Distribution channels 79 4.10. Case: Restaurant uses loyalty cards as a sales channel 84 4.11 Summary

Financial analysis

86 5.1. Introduction to financial analysis 88 5.2. Presentation for use in analysis 89 5.3. Analysis of earning capacity 95 5.4. Analysis of profitability 102 5.5. Analysis of capital adjustment 107 5.6. Analysis of financing 108 5.7. Analysis of liquidity and solvency 110 5.8. Analysis of the entire business perspective 112 5.9. Strategic analysis 119 5.10. Case: Financial analysis as basis for decision 122 5.11 Summary

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ECONOMICS FOR STUDENTS IN THE SERVICE, HOSPITALITY AND TOURISM AP PROGRAMME - FINANCIAL MANAGEMENT IN PRACTICE

124 125 129 134 141 142 148 149 155 156

158 158 166 168 174 177 179

182 183 185 189 192 196 199 200

202 203 206 208 210

212 216 230 231

Planning and resource management

6.1. Introduction to planning and resource management 6.2. Budgeting 6.3. Operating budget 6.4. Cash ﬂ ow budget 6.5. Balance sheet budget 6.6. Targets and budgetary control 6.7. Utilities 6.8. Examples for budgeting training 6.9. Case: Preparation of budgetary control and target-oriented management at a café 6.10. Summary

Investment

7.1. Introduction to investments 7.2. Methods for investment decision 7.3. Sensitivity analysis 7.4. Interest estimate – a general overview 7.5. Examples for understanding investment calculations 7.6. Case: Expansion with new hotel apartments 7.7. Summary

Financing

8.1. Introduction to fi nancing 8.2. Loan types 8.3. Financial institutions 8.4. The company’s fi nancial transactions 8.5. The company’s balance sheet structure 8.6. Examples for the understanding of fi nancial concepts 8.7 Case: Rødvig Seaside Hotel – the Danish Fund for Industrial Growth 8.8. Summary

Valuation

9.1. Introduction to valuation 9.2. Valuation methods 9.3. Preparing for sale 9.4. Case: Valuation 9.5. Summary

Appendix

Overview of the Most Used Key Ratios Examples of annual accounts Case overview Bibliography

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CHAPTER 1

Introduction to Understanding Economics • Introduction to understanding economics • Your role as ﬁnancial manager • The services sector, its companies and organisations

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ECONOMICS FOR STUDENTS IN THE SERVICE, HOSPITALITY AND TOURISM AP PROGRAMME - FINANCIAL MANAGEMENT IN PRACTICE

1.1. Introduction to Understanding Economics Have you tried eating at a restaurant, enjoying yourself in a bowling centre and wondered whether the company possibly makes a profit? Whether the fine gourmet makes more than the fast food restaurant? Or if the small local coffee shop with a few employees can possibly make ends meet? Perhaps you have wondered whether you should buy a restaurant one day, or set up an event company or a travel agency, and in this context have you considered how the financing of such companies is put together, and how to get a general idea of the financial situation that would make such a dream possible? Already here on one of the first pages, we want to make it clear that there is no direct correlation between how great a company presents itself, and how much money it earns. The small plain cafĂŠ can easily generate higher profits than the big 5-star hotel. This book is about a company's financial management with a special focus on service and experience companies, including restaurants, conference centres and accommodation establishments, travel agencies and event companies in the broad sense. In addition, the book deals with experiences creation in the retail business, which similarly to the rest of the service industry requires a large number of employees and common performance-based management in order to achieve not only customer satisfaction but customer loyalty too. The service industry also consists of sub-industries, where the complexity of the operation is growing, and where competence requirements for managers and owners become stricter. In addition to professionalism, leadership and knowledge of the law, which have always been necessary competences, digital understanding and financial insight into the increasingly necessary competencies are also required in order to be able to make money. The business model

Economy cannot stand alone in a company. It must be supplemented with other perspectives such as the company's physical framework, organisation and customers. You can see below how to look at the different perspectives in a business model whose purpose is to generate the best possible earnings for the company: The business model Focus Makes a DifferenceÂŽ:

RESOURCES DEVELOPMENT Concept Segments Visibility

EXPERIENCE

Processes Visual target-oriented management Highly efficient staff

Relation Manager

Sales Sales channels

Professional and personal competences

STRATEGY

LEADERSHIP

Loyalty

Measurable success

Innovation

FINANCES

PREMISES

LAW

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CHAPTER 1

The model aims to create maximum customer value and profit through a focus on experience creation and efficient staff. An important prerequisite for realising this goal is for the company to have a solid foundation. By solid foundation we mean a well thought-out strategy, competent leadership, economy-governing organisation, correct legal contexts and optimal physical setting. On this foundation value is created through a well-defined concept with good accessibility and visibility serviced by an efficient staff (the blue column). Employees who give their best at work do not just come out of the blue. They must possess the right skills, professionally and personally, and the working environment must be safe. The prerequisites for high customer loyalty (the green column) are to continuously work with customer feedback and adjust the experience to meet the customers’ core wishes and requirements. The model expresses a process that is in perpetual motion. Development is contingent upon the employees’ professional and personal skills as well as on feedback from customers, managers and employees (Fokus gør forskellen, Asnæs&Vangstrup, 2015). When we measure the economic performance of the company, this is done, for example, by establishing a number of key figures (read more in Chapter 5: Accounting analysis), which are supplemented with customer and employee loyalty figures. 1.2. Your role as financial manager Financial management is about finding, calculating and analysing products and services to make the best possible use of the company's economic potential. Understanding economics allows for: • • • •

Management and planning in order to make the best possible choices; Understanding of the past and how the company makes money; Safety and everyday life outlook; Documents on and about value creation in the company;

When we work with the financial management of a company, particular attention is given to the core service. That is to say, the products and services that are strategically decided to be most important to the company, and which are therefore of greatest economic significance. This means, for example, that we must be familiar with the calculations for each product and service and with profit centre earnings. The core service can be selected on the basis of thorough market research, a strategy process in the company or in relation to the framework, given to the company. For example, conference hotels are often built by the original owners with identical arrangement, e.g. single rooms. This makes it difficult to use the hotel for other purposes, which can be a challenge when the market for conferences changes. A calculation is an estimate of the turnover and costs associated with the delivery of a service or product. By calculating, for example, a restaurant menu, a package tour at a travel agency or an Eat & Play Bowling package at a bowling centre, we find out how much we profit by each product, and where we need to make price and resource adjustments. We further assess the content of a calculation and the type of costs to be included in such a calculation in Chapter 5.

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ECONOMICS FOR STUDENTS IN THE SERVICE, HOSPITALITY AND TOURISM AP PROGRAMME - FINANCIAL MANAGEMENT IN PRACTICE

Profit centres allow us to analyse the different parts of our business. A travel agency working with cycling holiday, for example, can split their operation into bicycle rental, guided tours, sale of hotel rooms and meals. Knowing the profit of the different profit centres can give the management important knowledge about resource consumption, including e.g. allocation of fixed costs. Many industries also work with cross-company benchmarking, where profit centres are shown as a percentage of the turnover generated at each profit centre. By knowing the composition of the operations in other similar businesses, financial management considerations are achieved, which can facilitate progress and improve profit. Value creation

Financial management is also about creating the highest possible value for the owners. When this value is to be determined, what matters is what the owners have invested in the company as related to what they can gain on a continuous basis, and after selling the company one day. In the restaurant industry there is often some talk that you must make money while you are there. This may be the case, for example, if a restaurant is run in leased premises where the tenant cannot charge a price for the restaurant once the contract expires or is terminated. It is the other way round if the restaurant is run in own, hired or rented premises and you have a right to put a price on the takeover of the restaurant by a new owner. Consequently, value creation is closely related with several conditions, for example: â&#x20AC;˘ Ability to generate profits on the turnover; â&#x20AC;˘ Ability to generate profits in relation to the money that has been invested; â&#x20AC;˘ Possibility of selling the company. When we in subsequent chapters look at financial analysis, to a great extent we deal with this important value creation, whereas value creation by sale is presented separately in chapter 9. 1.3. The services sector, its companies and organisations

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The service industry lives largely on tourists - both domestic and foreign - who visit Denmark for one or several days in a row and purchase different services and products. In addition, the service industry also consists of a wide range of companies which provide, for example, coherence and entertainment at corporate events etc., such as event companies, bowling centres etc. Tourists spend a total of more than 90 billion Danish kroner when they are on holiday and business trips in Denmark. The high sales volumes contribute to making tourism one of Denmark's main industries, generating growth, revenue and jobs all over the country. Over the past ten years major changes have occurred in the composition of tourists. From 2008 onwards, it is the Danish tourists who overall account for the greatest number of overnight stays. The Danes have thus outperformed foreign tourists in the number of overnight stays. In 2014 the increase in foreign overnight stays is greater, whereby the difference between national and international overnight stays is smaller. Danish tourists accounted for slightly more than 400,000 overnight stays more than foreign guests.

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CHAPTER 1

Foreign and Danish tourists have collectively made 5% or well over 2.2 million more overnight stays in Denmark in 2014 compared to 2013. This trend is fuelled by the growing number of foreign guests who spent their holiday in Denmark in 2014. The number of foreign overnight stays has increased by 6.6%, while the number of Danish overnight stays has increased by 3.4%. Germany remains the largest market for Danish tourism with German tourists accounting for about 56% of the foreign overnight stays in Denmark. This is equivalent to 13 million. overnight stays. Tourism plays an important role in the Danish society. The tourists' consumption generates turnover and employment in a wide range of businesses, including those outside the ones normally associated with tourism. Holiday and business travellers spend not only money on accommodation and restaurants, but also on shopping, events etc. VisitDenmarkâ&#x20AC;&#x2122;s calculations show that tourism helps create jobs for just under 111,500 full-time employees around the country, making tourism one of the major industries in Denmark. 11

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ECONOMICS FOR STUDENTS IN THE SERVICE, HOSPITALITY AND TOURISM AP PROGRAMME - FINANCIAL MANAGEMENT IN PRACTICE

Most people probably do not think about it, but tourism in Denmark is very much an export industry. When a foreign tourist spends money in Denmark, this corresponds to exporting a Danish-made product, service or experience abroad. Foreign tourists spend a total of 36.7 billion Danish kroner annually during their stay in Denmark, which constitutes 40% of the total tourism consumption. As an export industry, tourism is therefore of great importance for the Danish economy, since 3.6% of the total exports in Denmark comes from tourism (VisitDenmark). Where can you get more knowledge and inspiration

Professional associations hold a lot of knowledge and information about the sub-industries each of them represents. There are also industries that have several different professional associations. As far as restaurants, accommodation businesses, retail, event companies and travel agencies are concerned, knowledge about market conditions, structure and earnings patterns can be found on the following websites: www.danskerhverv.dk www.horesta.dk www.d-r-c.dk www.campingraadet.dk www.fbnet.dk www.travelassoc.dk www.statistikbanken.dk www.visitdenmark.dk www.dsk.dk/alt-om-dagligvarehandel www.dmogt.dk/raadgivning/branchen-i-tal www.gallup.dk/services/gallup-kompas www.campingraadet.dk/analyserogstatistik/generelforskning www.asnaes-vangstrup.dk www.di.dk www.kundepanelet.dk

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K A PI T EL 4 – PRI SFASTSÆ T T E LS E O G D I ST R I BU T I O N I N T R O D U KT I O N

ISBN 978-87-571-2864-2

9 788757 128642

praxis.dk

varenr. 111015-1

Economics for Students in the Service, Hospitality and Tourism AP Programme

ANNETTE VANGSTRUP

Economics for Students in the Service, Hospitality and Tourism AP Programme Financial Management in Practice

PRAXIS – Nyt Teknisk Forlag

111015-1 Economics for students at the AP programme_omslag.indd 2-4

08-06-2016 13:25:17