Finance Assignment of Hospitality Industry

Table of Contents
Introduction........................................................................................................... 3
1. Task 1: Understand sources of funding and income generation for business
and services industries.......................................................................................... 3
1.1

Review sources of funding available to business and services industries. 3

1.2 Evaluate the contribution made by a range of methods of generating

income within a given business and services operation.....................................4
2.

Task 2 Understand business in terms of the elements of cost.........................5

2.1 Discuss elements of cost, gross profit percentages and selling prices for
products and services......................................................................................... 5
2.2 Evaluate methods of controlling stock and cash in a business and
services environment......................................................................................... 6

3.

Task3: Be able to evaluate business accounts.................................................6

3.1

Assess the source and structure of the trial balance.................................6

3.2

Evaluate business accounts, adjustments and notes................................7

3.3

Discuss the process and purpose of budgetary control.............................7

3.4 Analyse variances from budgeted and actual figures, offering suggestions
for appropriate future management action........................................................8
4.

Task 4 - Is able to analyse business performance by the application of ratios 9

4.1 Calculate and analyse all ratios to offer a consistent interpretation of
historical business performance.........................................................................9
4.2 Recommend appropriate future management strategies for a given
business and services operation.........................................................................9

5.

Task 5 is able to apply the concept of marginal costing..................................9

5.1

Categorise costs as fixed, variable and semi-variable for a given scenario.

9

5.2 Calculate contribution per product/customer and explain the

cost/profit/volume relationship for a given scenario.........................................10
Conclusion and recommendation........................................................................10
Reference............................................................................................................ 11

Introduction
Fund is the basic requirement of developing any business. Owner of the company does not
arrange all the funds for developing business, but collect funds from some other resources. In
this report, we focus over the sources of funds that used in the service industry. We are
undertaking hotel industry for developing this report. In this report we take some financial
issue that assist the management to take strategic decision for making investment.

1. Task 1: Understand sources of funding and income

generation for business and services industries
1.1 Review sources of funding available to business and
services industries.
Fund generates with the help of financial sources that categorized into two forms in any
business, one is Equity and the other one is debt. In this assignment, we are focusing over the
hotel industry that consider under service sector. There are three types of capital that require
in any business for managing its operation (Wood F and Sangster A., 2002).
Fixed capital- It is used to purchase asset and equipment that use in business for a longer
period like building, machinery, and Vehicles.
Working capital- It requires for managing daily business operation and short term business
expenditures like buy inventory, paying wages and salary, pay bills.
Growth capital It used to expand the business or diversify the business operations like
funds requirements for developing a new project.
These different kinds of capital can be developed from various sources that will be the main
focus of this task. Funding sources have been categorized into two parts, one is equity and the
other one is debt.
Equity- Equity is a capital that generates by issuing Shares. It is a result of the personal
interest of investors because the risk of losing their money is the main issue in case of equity
capital. Each equity holder has a right of the ownership of the business.
Sources of Equity Financing
1. Personal savings
2. Friends and family members
3. Partners

4. Corporations
5. Venture capital companies
6. Public stock sale
Debt- It is other sources of funding; require repayment of the funds with interest. It is
considered as business liability in the company balance sheet. It is more expensive than
equity funding in case of small business companies.
Source of debt capital
1.
2.
3.
4.
5.

Commercial banks
Trade credit
Equipment suppliers
Commercial finance companies
Saving and loan associations

These are the sources of funding, and we can generate fund from any of the sources by
looking our business capital requirements (Williams, J, R. et al, 2008).

1.2 Evaluate the contribution made by a range of

methods of generating income within a given
business and services operation
There are varieties of the methods used for the generation of income as within a given
business and services operation. This includes the fee for service as this is charging the
constituents or even the clients for the social services in order to recover the cost for the
provision of service. A business can also generate income by producing the product through
manufacturing and sale of the product or even the resale of product. Offering the variety of
service that can commercialize the skills and thus paying the service. Even by renting and
leasing the tangible asset many of the persons can generate the income within this section,
such as the building, office space, vehicles etc. Intangible asset is generating income such as
proprietary, methodology, brand, goodwill, etc. Earning from the passive income is derived
out from the investment dividends. And the hospitality industry is the service sector which
acts as the area of generating the income by inviting the customers to avail their services.
Amusing the customers by variety of facilities such as restaurant, accommodation, personnel
service, spa, bar, acts as travel agent etc (Drury C., 2004).

2. Task 2 Understand business in terms of the

elements of cost

2.1 Discuss elements of cost, gross profit percentages

and selling prices for products and services
Element of cost differs with types of business. We are developing this report especially for
the hospitality industry. Cost of this business incur in various kinds of expenditure. Our
selected business is hotels which require both kind of investment Fixed capital investment
and working capital for managing day to day operations. Here we will take some assumption
for developing calculation of all financial terms which is the basic requirement of the report.
Fixed costBuildings

= $20, 00,000,

Machine and equipments-

= $10, 00,000

Other technological for managing security issue = $50,000

Working capital cost

= $40,000/ month

Total cost (FC+ WC)

= $30, 90,000

Gross Profit
Gross profit is the profit that generate in business without paying interest and tax or we can
say it is EBIT. Sales of business will be easily calculated by analysing the total sales revenue
from the services in a year.
Gross profit= (Sales direct material /total sales)*100
If we assume total sales of the services in a year is $5, 00,000 and direct material cost is $3,
00,000 including all expenses that come in direct material cost.
Then Gross profit percent = Sales- direct material cost/sales*100
= (5, 00,000-3, 00,000/5, 00,000)*100
= (2, 00,000/5, 00,000)* 100
GPP = 40%
Selling price- Selling price of services will be determine by deploying some of the pricing
strategies like cost plus pricing penetration and skimming pricing strategy. We take one of the
methods for deciding the price of services like room service, food and facility or dancing and

bear bar. Price of the room will vary with a facility that will be provided to the customer.
Price of Food will be decided by using cost plus method so that we can make more
competitiveness in business (Houston, J. F. and Brigham E. F., 2009).

2.2 Evaluate methods of controlling stock and cash in a

business and services environment.
There are many methods to control the stock and we will take some of them which are useful
in case of service industry. Main purpose of controlling stock is to reduce the material
holding cost and avoid the burden of deploying asset to protect the material.
Methods of controlling stock are:
JIT (Just in time) - This method is beneficial for reducing the stock because we purchase
material when it is required and avoid the maintenance cost. There is a problem with this
method that if material not delivered on time because of any reason then business operation
can be delayed (Liker, J., 2003).
(EOQ- Economic order quantity)- It is an appropriate method to find out the economic
quantity for material that is required in a specific period of time. There is a formula to find
out the quantity which used to balance between the holdings too much or too little stock.
(FIFO- First in first out)- It is a system which ensures that perishable material will be used
efficiently and this method is used in a case when materials are highly perishable in nature
and cost of holding is large.

3. Task3: Be able to evaluate business accounts.

3.1 Assess the source and structure of the trial balance
Trail balance is the book keeping record which has two columns debit and credit. Source of
trail balance is the compiled form of ledger account, which has all the record of the business
account in detailed form. In business there are two main parties in term of financial record,
one is debtor and other is creditor. We take all the debtor and credit account entry of business
transaction. Main Purpose of developing trail balances is to check the mathematical accuracy
of business accounting. It is also used for developing final account (Mukherjee, 2003).
Structure of Trail balances

Trail balances of M/S--------------------------- as on----------------------------------Particulars

Account Head 1
Account Head 2
Total

L/F
---

Debit Amount (in Rs.)

Credit

Amount

----------------------------------------------------xxxx

Rs.)
------------------------------------------xxxx

(in

3.2 Evaluate business accounts, adjustments and notes.

Business account is a bank account that has a similar operation like as a personal account. It
is open in account with the name of the business and account holder (business owner) has all
right to perform the business transactions. Bank offer some benefit on the business account
like immediate transfer of money. Adjustment is the business outstanding financial
transaction that has been adjusted at the time of developing trail balances and note is also
another kind of business transaction that manipulated at the time of developing balance-sheet.
There are two entries of notes in balance-sheet. It has been adjusted into balance-sheet and
P&L account (Arthur S. and Sheffrin S. M., 2003).

3.3 Discuss the process and purpose of budgetary

control.
Budgetary control is the techniques that have been used to control the budget of the business.
We control the budget. A technique to control the budget depends over the types of business
and materials that are used for manufacturing. Budget Control is the cost reduction approach
of business. To control the budget, we have to focus over all small operation of the business
activity (Bodie, Z., 2004).
Main purposes of budgetary control are as follows:

The main objective of the establishing or planning the budget is to cover all the
activities of the firm or organization of a certain given period of time. The time period

may range to any length but usually it is of one year.

Basic purpose of budgetary control is towards coordination of the firm, evaluating the
responsibility and performance by later controlling and reducing the cost, valuing the
inventory and finally fixing the selling price.

The objective fixed by the business in monetary terms, is gained in desired time
period and thus later ensuring the adequate working capital which may play a

necessary role in achieving firms objectives.

To evaluate, the efficiency of the firm along with its operations and observing the
effectiveness, with the help of developing a comparison between the actual and
budgeted results, within a department.

Process of budgetary control is exercised in following steps:

Firstly the budget is established for every section or department of the organization.
Next step involves the measurement of the actual performance.
In the third step the actual performance is compared with the budgeted performance,

thus determining the deviations or variances.

8Last concluding step is towards determining the reasons for the variances and
thereafter taking suitable actions to remove the defects that have occurred while
achieving the objectives in accordance with the original policy.

3.4 Analyse variances from budgeted and actual figures,

offering suggestions for appropriate future
management action
Calculating the difference between the budgeted and actual figures for a particular category
of account is known as the budget variance. The variance in the budget is explained with two
different terms as the favourable budget and unfavourable budget. Variance is also stated as
an unplanned change from the budgeted figure. When the expenditure is less than the
expected value or revenue is higher than the expected value, it is referred as the favourable
variances. And when the expenditure is more than expected value or revenue is less than the
expected value, it is referred as the adverse variances. In this manner the analysis of the
budget is carried down. Analysis can also be done by three different methods as revenue
variance analysis, cost of goods sold variance analysis and variable labour variance analysis
(Wood F and Sangster A., 2002).
When the hospitality industry is facing the variation in the budget, the management of the
organization has to be aware in several areas. As the main variance in the budget can be the
estimation and estimation may fail either due to the changes in the market conditions or
political conditions. Even the changes in the prices and quality of the competitor may rather
affect the budget of the organization. Improper management of the staff can also affect the
quality factor of the hospitality industry and thus affect the budget.

4. Task 4 - Is able to analyse business performance by

the application of ratios
4.1 Calculate and analyse all ratios to offer a consistent
interpretation of historical business performance
An organization can easily analyse different ratios by offering the consistent interpretation of
the performance within the business. Different ratios such as Profitability, liquidity, activity
and leverage ratios can be used for calculation. As all ratios poses different significance,
current ratio indicates the ability of the business to meet the short term liabilities. Profitability
ratios determine the companys pricing policy and cost control. Activity ratio of the firm
determines the efficiency that determines the relationship between the sales and various
assets of the firm (Guilding C., 2002).

4.2 Recommend appropriate future management

strategies for a given business and services
operation.
As per the management strategies the management of industry must be such that the
availability of the liquid fund at the diverse situation must rather be available to handle the
hard situations. And short term liabilities of the firm must be managed in an appropriate
manner to improve the business in the positive manner (Glautier M W and Underdown B.,
2000).

5. Task 5 is able to apply the concept of marginal

costing
5.1 Categorise costs as fixed, variable and semi-variable
for a given scenario.
There are three types of cost incur in business that asked to categorize in this task. We will
take some review of these three kinds of cost and make clear demarcation among them.
Fixed cost- it is cost that incur in business at the initial level and require more investment for
developing infrastructure and purchasing business equipments. Fixed cost does not vary with
production or it is independent of the output. Fixed cost generally incurred in machinery, rent
buildings and vehicle for transporting material in business. Hotel business requires more
fixed cost for the better establishment of the infrastructure and making it unique from
competitors (Ryan J., 2011).

Variable cost- It is related to the production and changes with the output. It is a cost of direct
material use in production and the wage of labour and energy charges. Variable cost can be
controlled by deploying control techniques. In case of hotel business, variable cost is the
expenditure over the food products and other drinks.
Semi-variable cost- It is simply a cost that is part of fixed and variable cost. For example
cost incur due to the electricity charges vary with the production, but if we will not make
production we have also pay minimum charge to maintain the power supply in business unit
(Davis P and McLaney E., 2003).

5.2 Calculate contribution per product/customer and

explain the cost/profit/volume relationship for a given
scenario.
This tool developed the relationship between the cost, volume and profit within an
organization by making a focus on the price of product, volume or level of the activity, per
unit variable cost, total fixed cost and mix of all the products sold. This concept plays a vital
role in taking the business decisions. This can help in the profit planning and acts as the
critical factor in management decisions. Main objective of this concept is towards setting the
selling price, determining the product mix, maximizing the usage of the production facilities,
and also evaluating the impact of the changes in the cost (Ryan J., 2011).

Conclusion and recommendation

Budgeting is the form of management exercise that is rather essential for achieving the varied
set of objectives. This exercise is rather essential as it is compelling the management to put
the policy and its objectives into action and finally taking place in the future. This estimate of
budget is prepared on the realistic basis in consideration to the objectives of the company.
Different ratios under calculation can help the hospitality industry to create a platform for
correction by using this tool. As the ratio analysis can help them to determine the significant
conditions of different factors. Cost volume profit relationship is used for the planning in
profit and critically determining the factors that affects the management decisions.

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