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AB397H | Unit 2 Finance in the Hospitality Industry BTEC Higher National Diploma

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Introduction

Finance is the most essential thing that is needed in order to start an enterprise and thenmake it operated successfully as without finances it will not be possible to do the day to day operations (Altinay, Paraskevas and Jang, 2015). As in hospitality industry, is concernfinance plays important role in managing services and operations whichare associated with accounting or financial transaction. The initial part of Project, focuses on various sources of finance and its implication that have on hospitality as a whole. In later stage, various methods of costing are derived to used it in our business operations. On the basis of calculation, company may be ableto take decision by using those method.

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The hospitality industry is wide category with relation to service industry which includes lodging event organisation, cruse line and additional segment with tourism industry. Financial management present concepts and explainvarious method that can be used by the company in their daily operationswithin hospitality sectors. By taking help of financial statement, different ratio has been done. This ratio analysis willprovide valuable information about working and controlling of company. As per the mentioned project data, evaluation and interpretation of various related aspects of company has been done and recommendation that should be followed in effective response generation toward hospitality industry.

TASK 1

1.1 Sources of funding available to business and services industries

In order to start a new venture huge amount of capital is required which will be collected from various sources. The fund required by hospitality industry is depend upon the size of business. Short term capital is required for working capital management and long term capital for increasing business operation. There are various sources of finance available to hospitality industry :

  • Equity Financing: It is a kind of process, by which funds is being raised by issuing shares in the market. It is said to be most expensive sources of finance as it involves payment of dividend to the shareholders from net gains after paying all government taxes,interest on debt and other preferences dividend.
  • Owners capital: These are those finance that are brought by owner of industry in operating its business (Bowie, Buttle and Brookes, 2016). They are less risky as it does not have any thing to give other members. As it is important source of raising finance for industry.
  • Retained earning: It is that percentage of net income which is not paid out as dividends,but retained by the company to uses it or reinvest in its core operation,or to pay debt ( (Bar-Tal, 2012)).
  • Debt Financing: It is a kind of borrowing funds from outsiders. It is associated with net amount to be paid as interest ,at during that period and also to pay principle amount at closing end.
  • Bank loan: It is another important sources of fund which is taken as loan from bank that carry certain interest amount on it.
  • Leasing: It is a kind of contract by which one party agrees to rent some of his portion that are owned by another party.
  • Government grants: It is financial award given to backward areas to encourage hospitality sectors that would help to contribute our national economy.
  • Bank overdraft: It is short-term finance which is used widely by small and newly created ventures. They are more valuable for hospitality sectors to promote them.

1.2 Evaluate contribution made by different methods of income generation

ABC Ltd, is a small business unit which is operated by sole trader. They want to purchases a building which costs £450,000. to buy that, owner of the company has two options that are available through which he can finance those are internal and external sources of finance. As a manager, of business I would opted to go with internal sources as they are owners capital (Chan and Hawkins, 2010). It is easy to get finance from internal sources and can be raise through external sources from bank and other option.

Depending upon services and product of company such as hospitality industry, majority of revenues are generated from its core business. So, if it is a product manufacturing company then it is easy to generate capital from selling of its core business or it is a service company then it will generate finance through providing necessary services. From the above mentioned situation owner of business is fully raising its finance from internal sources.

Capital investment appraisal is a process by which organisation long term investments are associated in buying machinery and replacement of machinery which are worth the funding of capital through capitalization composition. Earning and income data are mainly collected and evaluated at different levels. Earning data are concern for the business owners. To make more appropriate business decision internal sources are very much helpful. There are various advantages of choosing internal sources of finance (Chang, Gong and Shum, 2011).

  • More ownership: The most important benefit of internal sources is the less we rely on external sources of funding , the more ownership is can be retain by the company.
  • More control: It is depend on situation that might need to gave some control power over your company when we rely on external factors.

TASK 2

2.1 Elements of cost,gross profit percentages and selling price

A business can be analysed to succeed at its division of expenses that are help the activity to be active. Cost in a retail sectors would be somewhat different from hospitality business strategies, are categorised followed :

  • Material cost: These are direct cost which are include in manufacturing process. like, raw material, work in process, finished good.
  • Labour cost: There are associated with the cost incurred with producing that activity. Like Wages.
  • Direct expenses: Although these are directly impact business as they are increase or decrease the profitability of company Like, Hiring and maintenance of machinery and equipments.
  • Overhead Costs: These are Mixed cost which includes variable and fixed expenses. like,fuel expenses.
  • Selling and distribution costs: All those cost which are deducted after paying factory cost or other overhead costs (ForumFu and et. al., 2011).

All above mentioned cost can be divided into various categorise of costs like, direct, or indirect cost, fixed or variable cost.

Gross profit percentages: It is sometime said to be gross profit ratio or margin that shows a relationship of company gains as percentages of sales. It is helpful indicator of business effectiveness. The ratio compare profits of two company that are expresses in absolute terms.

GPP(Gross profit percentage) = Gross profit/ Total sales*100

(Where Gross profit : Total sales – cost of good sold)

The cost of good sold is the total value of all component, which are used during production process. To get the selling price, seller has to plus profit margin, which contribute to gross profit (Hoque, 2013).

Selling price + COGS + Mark up (GP)

Net profit is generated from Gross profit after subtracting all overheads, like rent, salaries and taxes and it comprise the actual amount received.

Initially, the trading or production account is prepares to determine GP and after that profit and loss statement is being prepared to evaluate Net profit.

2.2 Evaluate methods of controlling Stock and cash

Cash and stock are two of the main important component of working capital, as the first is associated with cash transaction and other state trade receivables and payables. But with relation to business and service, there are different levels of assets depend upon nature of industry. However, a hospitality industry associated with cash or credit and utilize credit from its suppliers. On the other hand, a distributor can be completely cash motivated. For better working capital management is desire to assure that there is no idle cash, which save excess costs, gain interest where realizable.

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Most common used methods to control cash and stock are as follows:

  • Set cash flow target: One way to control cash is by set up and keep cash flow forecast.
  • Agree clear payment term: Establishing clear cost terms from the outset is crucial as hospitality industry. It is important to know payment terms.
  • Make payment comfortable for customers: It means avoid payment through cheques as it would result in delays as the cash is received in company bank account.
  • Offer guest fixed rate payment packages: Another way to control cash is by offering periodic packages, a scheme which hospitality industry has adopted for their clients.
  • Do not focus on gain,focus on cash flow: It has being seen that many of the company do not have cash flow plan from starting day, neglect forecasts of gain amount for years leading (Jeou-Shyan and et. al., 201).
  • Provide cash discount for early payment made by buyer.

As for Controlling Stock:

  • JIT(Just in time): It aims to reduce cost by cutting down stock to minimum. Products are delivered when they are needed and used immediately (Kim, Cho and Brymer, 2013).
  • Preparation of inventory budget: Many company have an yearly stock budget that are prepared in advance before stock is produce. It includes material cost, fixed operational cost,logistics costs and other miscellaneous cost.
  • Perpetual inventory system: This method is designed to maintain a constant tract of quantity and value of every stocked item.

Thus, inventories are valued at variable cost and there is no component of fixed costs. All above mentioned cost and stock controlling methods can help industries to maintained there production processes and planned to achieved its target those are set by the company in coming future. By using, appropriate method a company can determine value and controls its extra expenses those are used during manufacturing process. As hospitality industry, it should be helpful to manage their business operations.

TASK 3

3.3 Process and purpose of budgetary control

Budgetary control: It is the process through which budgets and budgetary reports for the purpose of coordinating,evaluating and controlling daily operations as per the role mentioned under budget. The objectives are required to be achieved though budgetary control system. Major causes and investigations are identified by this methods.

Purpose of budgetary control are as follows:

  • Planning: Management is forces to aspect in front, responsible for set targets, anticipating of problems and providing direction to hospitality industries. It is an important feature of budgetary control.
  • Communication of ideas: It is more effective by budgetary control in order to make sure that each individual is aware of what job he suppose do in business.
  • Coordinating activities: Under this the activities of different department or units of organisations are categorised. It implies co ordination concept, sales demand,the production budgets should in control as base (Moutinho, 2011).
  • System of control: A plan should be made against which progressive differences can be generated of actual outcome.
  • Motivating employees: They are motivated as they are able to perform well in delivery their services to hospitality sectors.

Process of budgetary control :

The following steps are involved in budgetary control :

  • The objectives which are required to be attained by hospitality industry is defined and specified by budgetary control (Rogerson, 2013).
  • Business plans must be required for the purpose of ensuring desired goals, that are fulfilled through budgetary control.
  • It translates the aims into budget and related to particular section of budgets.
  • Budgetary control help to compare actual outcome with budgeted on regular basis.
  • For purpose of identification of causes, the major comparison are done through budgetary control.
  • Information related to variances to individual responsibilities are to presented through budgetary control.
  • It also help to avoid repetitions of over expenditures or wastages.

Budgetary control cycle :

In budgetary cycle there are four stages which includes Budgetary forecasting that is based on estimation for future time (Sahida and et. al., 2011). Implementation budgetary it includes summarising the plans into group,Budget evaluation is controlling and providing guidance to manage finance in hospitality industry, Budgetary reviews is overall reviews of budgets.

3.4 Yuri budget variances analysis

 

Budget variances

   

Particular

Standards

Actual

Variances

Unit sold

100000

70000

-30000

Material

£ 15,000

22500

7500

Direct labour

£ 22,500

24375

1875

Particular

Material (£)

Labour (£)

Price/variance

-4500

3750

Efficiency variance

-3000

-5625

Total variance

-7500

-1875

Units sold variances:

The estimated standard data of 100,000 and the actual values is 70000. It was estimated that total sales during the period is =100,000 but company has generated actual sales of 70,000. The organisation is facing a deficit of 30,000. they need to established effective budgeting techniques for their business that will help them to maximise profit and increase in sale by following all basic standards (Theodosiou and Katsikea, 2012).

Material variance :

The company have estimate standard limit of 15000 but actual material that is used by the company is only 22500. so, it required for the company to cut down expenses of material in such a way that it can't affect the growth of enterprises. They have various options by using those they can limit their expenses over it. The budgeted variances of 7500 and price variances is 4500 and usages variances is recorded as 3000.

Labor variances:

The budget limit mentioned by the company was recorded as 22,500,but it has being observed as it has just generated 24375 that results in excess of labour cost expenses. from the above calculation labours should be paid on contractual basis not on daily basis (Tsai and et. al., 2010). The company has option to have pay less to its labour as to control the extra cost and expenses. There is a variances of (1875).

On the basis of above reviews of variances material variances should be targets as to focused as they are important part of company production process, but prices per unit is paid higher for one units. Labour costs are negative as they are valuable part of company has to be planned accordingly.

TASK 4

3.1 Source and structure of trail balance

Trail Balance:It refers to a database of last balances of ledger accounts on a specific data. It is the starting phase of financial statement of company. It is mostly prepared at the end of financial year to assist in composition of financial statements. It consist of debit and credit columns. It is prepared to find out errors that are arise during entry accounting system.

Sources of trail balance:

A trail balance is a statements which check the arithmetic accuracy of the accounts prepared. Moreover, it can not able to detect some of errors. Journal and ledgers are the main sources of trail balance (Wang, Chen and Chen, 2012). It is the process of equating all debits and credits in your books of accounts(General ledger), then make sure the entire of all debits are equal to sum of credits. Under this both side of balances of debit and credit are to be equal, then it has to be correct or otherwise, it contains errors which are also of various types:

  • An error of original entries in either side of transaction which include the entry of wrong amount.
  • Error of omission is when a written record is entirely omitted from the records.
  • Error of reversal when written account are made to the right amount, but with debit instead of credit.

3.2 Evaluate Business accounts, adjustments and notes

Profit and loss statement of R. Riggs for the year ended 31st December 2017

Particulars

Amount (£)

     
         

Sales and gain

157165

     

Interest revenues

500

     

Discount receive

160

     

Total revenues

157825

     

LESS:

       

Expenses and losses

       

Cost of goods sold

94520

     

Salaries

31740

     

Rent

3170

     

Discount allowed

820

     

Van running costs

687

     

Doubtful debt provision

91

     

Bad debts

730

     

Depreciation

1630

     

Total expenses

133388

     

Net profits

24437

     

Balance Sheet as on 31stDecember 2017

Assets

Amount (£)

Non current assets

5545

current assets:

 

stock

2400

Debtors ( Less: 496)

11820

prepaid expenses

230

cash and bank (Add: interest recived)

5924

Total Assets

25919

   

Equity and Liabilities

 

owner's equity 12400

 

less: drawings 17100

 

Add: profit and loss 24437

19737

Current liabilities

 

creditors

5770

accruals

412

Total equity and liabilities

25919

From above calculation of profit and loss statements cost of furniture of 525 was purchased which was made impact on creditor,which results in increase in cost of creditor by 525. It also made rise in costing of furniture. As cost of fixed assets are jumped up to 5525.

The another impact is seen in interest received of 500, but entry was not made in the books of account. Because of this there is huge change in company net profit which has been increased to 24437. It has help company because their increased in cash and cash equivalent with 5924.

Adjustments can been done as per the given criteria that has been evaluated underneath:

Working Note:

Creditor

£ 5245

Add: Due to purchase of furniture

£ 525

Total

£ 5770

   

Fixed assets

£ 5020

Add: Due to purchase of furniture

£ 525

Total

£ 5545

Debtors

£ 12316

Less: Provision for doubtful debts

£ 496

Total

£ 11820

   

Cash and bank

£ 5424

Add: Interest received

£ 500

Total

£ 5924

4.1 Ratios calculation and its evaluations

Particulars

Formulas

Amount

Profitability Ratio

   

Gross Profit

 

62645

Net profit

 

24437

Revenue

 

157165

Gross profit margin

Gross profit/Sales

39.8593834505

Net profit margin

Net Profit / Net sales*100

15.5486272389

     

CURRENT RATIO

Current assets/current liabilities

3.5131695245

Current assets

 

19874

Current liabilities

 

5657

After Balance sheet

   

Current assets

 

25550.0617967634

Current liabilities

 

5770

Current ratios

 

4.4280869665

     

Acid Test Ratio

 

3.0889163868

inventory

 

2400

Liquid assets

Current assets- inventory

17474

     

After Balance sheet

 

4.0121424258

Liquid assets

Current assets- inventory

23150.0617967634

     

DEBTORS COLLECTION PERIOD

Debtor/sales*365

27.4507683008

DEBTORS

 

11820

     

Credit Collection period

Creditors/sales*365

12.1809881335

Creditors

 

5245

After Balance sheet

   

Credit Collection period

 

13.4002481469

     

Stock Turnover

Net sales – Gross / stock

39.3833333333

CGS

 

94520

Stock

 

2400

1 Gross profit Ratio

Formula:- Gross profit ratio = (Gross profit / sales) * 100

Solution:-

Gross profit = 62,645

Sales = 157,165

Therefore, Gross profit ratio = 62645/157165*100 = 39.86%

2 Net profit margin

Formula:- Net profit margin = Net profit / Net sales * 100

Solution:-

Net profit = 23,937

Net sales = 157,165

Therefore, Net profit ratio = 23937/157165*100 = 15.23%

After changes in balance sheet

Net profit = 24,437

Net sales = 157,165

Therefore, Net profit ratio = 24437/157165*100 = 15.54%

3 Current Ratio

Formula:- Current ratio = Current Assets / Current Liabilities

Solution:-

Current assets = Stock + Debtors + Prepaid Expenses + cash at bank&hand

= 2400+11820+230+5424 = 19874

Current Liabilities = Creditors + Accrual

= 5245+412 = 5657

Therefore, Current Ratio = 19874 / 5657 = 3.5

After changes in balance sheet

Current assets = Stock + Debtors + Prepaid Expenses + cash at bank&hand

= 2400+11820+230+5924 = 20374

Current Liabilities = Creditors + Accrual

= 5770+412 = 6182

Therefore, Current Ratio = 20374 /6182 = 3.30

4 Acid test ratio

Formula:- Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities

Solution:-

Current assets – Inventory = 19,874 – 2,400 = 17474

Current Liabilities = 5,657

Therefore, Acid test ratio = 17474/5657 = 3.08

After changes in balance sheet

Current assets – Inventory = 20,374– 2,400 = 17974

Current Liabilities = 6182

Therefore, Acid test ratio= 17974/6182 = 2.90

5 Debtors collection period

Formula:- Debtors payment period = Debtors / sales * 365

Solution:-

Debtors = 11,820

Sales = 157,165

Therefore, Debtors collection period = 11820/157165*365 = 27.45Days

6 Creditors payment period

Formula:- Creditors payment Period = (Creditors / Sales) * 365

Solution:-

Creditors = 5,245

Sales = 157,165

Therefore, creditors payment period = 5245/157165*365 = 12.20 Days

After changes in balance sheet

Creditors = 5,770

Sales = 157,165

Therefore, creditors payment period = 5770/157165*365 = 13.40 Days

7 Stock turnover

Formula:- Stock Turnover = (Net sales – Gross profit) / Stock = Cost of goods sold / stock

Solution:-

Cost of goods sold = 94,520

Stock = 2,400

Therefore, Stock Turnover ratio = 94520/2400 = 39.4

4.2 Recommendation future strategies

From the above ratio's Profit margin measurement help to identified efficiency of business organisation in manufacturing process. The ratio helps to determine the ability to covering, the expenses and mixed overheads of production by its general sale. Increase in profit margin indicates that business can company generate amount of sales from its goods and services by managing the cost expenses. Although, low profit margin says that the cost of production overheads is not under control.

According to above solution the net profit margin is 15.54% which is lower for company to cover the overhead in manufacturing to its profits. The debtors collection period says that amount of debtors that can be received in 27 days. The operations must help in discounting in cash sales and supports in reducing the number of days required collection of amount. As per creditors are concern the collection period is estimated to 12.40 days which is required to pay before preparation of balance sheet and after its preparation it jumps to 13.20 days. It means the now, it will take this much time for payment to the creditor. Business enterprises must maximise cash purchase in order to increase duration of time period to pay the amount.

TASK 5

5.1 Categorise fixed, variable and semi- variable costs

Cost: It is a processing of business operation that changes according to change in activities of production process. The subject is said to be those which require payment, before it can be acquire or completed. In other words, it can be said that an amount which can be paid or invested in order to purchase or achieved something. It is also calculate in monetary valuations. Like, Material, resources, time and utilities consumed and risk involved duration production process.

Variable cost: It refers to a cost that changes in quantity of amount, with changes in the level of each unit of activity in production process. A common examples, is a direct raw material cost. Others are sales commission and shipping cost (Variable, fixed and mixed (semi-variable) costs, 2017).

Fixed cost: It is said to be those cost which remain fixed whether there is changes in activities in production process. It does not have any kind of relation with operations activities because they are remain unchanged when increase or decrease in production process. For examples, are Factory rent, taxes paid by company (Wu and Lu, 2012).

Semi- variables: These are those cost which are mixed or combination of variables and fixed. They remain constant at certain point and above the line it got changed. For examples, Power and repairs, fuel etc.

As mentioned in budget number of units is available for the company is 10,000 among this 70,000 is variable cost and fixed overheads are 20000.

5.2 & 5.3 BEP in units and No. of units required to achieve the target

 

In units @ 10000

In Value @ 10000

Sales

100

1000000

Less: Variable cost

70

700000

Contribution

30

300000

Less: fixed cost

20

200000

Profit

10

100000

 

 

According to Units

According to Value

Break even point:

0.6666666667

0.6666666667

 

 

Calculation as per 30000 units

 
 

In units

In Value @ 30000

Sales

100

3000000

Less: Variable cost

70

2100000

Contribution

30

900000

Less: fixed cost

20

600000

Profit

10

300000

 

 

According to Units

According to Value

Break even point:

0.6666666667

0.6666666667

     

1) Decreased selling price to 10%

   

 

 

Decrease in SP

In Value @ 30000

Sales

90

2700000

Less: Variable cost

70

2100000

Contribution

20

600000

Less: fixed cost

20

600000

Profit

0

0

     
     
 

According to Units

According to Value

Break even point:

1

1

     

 

 

2) Increase in SP by 10%

   
 

Ins. In SP

In Value @ 30000

Sales

110

3300000

Less: Variable cost

70

2100000

Contribution

40

1200000

Less: fixed cost

20

600000

Profit

20

600000

     
     
 

According to Units

According to Value

Break even point:

0.5

0.5

     
     

 

 

 

 

3)

Increase in variable cost by 1.50

 
 

Inc. in VC

In Value @ 30000

Sales

100

3000000

Less: Variable cost

71.5

2145000

Contribution

28.5

855000

Less: fixed cost

20

600000

Profit

8.5

255000

     
     
 

According to Units

According to Value

Break even point:

0.7017540.702

0.701754386

 

Profit Target :

X: 20+30000/30

: 1001 units.

So, company can earn profit on 1001 units which will be helpful in hold the performance in the market as well as assist in keeping the standards and attainment of goals and objectives. Earlier, they are manufactured 10000 units but when, they started to produce 30000 units then company has to pay same variable and fixed on the manufacturing of goods (Sources of Finance. 2017). The BEP is 0.67 in units and values. If sale decreases by 10% and sales is 90 at that point BEP is 1. if sale price is increase to 10% then its BEP is 0.702. It has concluded that there is always a differences in BEP at various level.

Conclusion

From the above project report is has being concluded that finance if most valuable part in the organisation. It is the only element which is importantly used in operation of various activities of organisation. It includes various sources of finance that are available to businesses that they can acquire from short and long term sources. The break even point is studied to determine at which point company is suitable to increase or decrease productions to increases maximum profit. As, it is the stage which says that company has no loss and profit.

References

  • Altinay, L., Paraskevas, A and Jang, S.S., 2015.Planning research in hospitality and tourism. Routledge.
  • Bar-Tal, D., 2012.Group beliefs: A conception for analyzing group structure, processes, and behavior. Springer Science & Business Media.
  • Bowie, D., Buttle, F and Brookes, M., 2016.Hospitality marketing. Taylor & Francis.
  • Chan, E.S and Hawkins, R., 2010. Attitude towards EMSs in an international hotel: An exploratory case study.International Journal of Hospitality Management. 29(4). pp.641-651.
  • Chang, S., Gong, Y. and Shum, C., 2011. Promoting innovation in hospitality companies through human resource management practices.International Journal of Hospitality Management. 30(4). pp.812-818.
  • Forum(Vol. 34, No. 1, pp. 46-53). Elsevier.
  • Fu, H.P and et. al., 2011. Using fuzzy AHP and VIKOR for benchmarking analysis in the hotel industry. The Service Industries Journal. 31(14). pp.2373-2389.
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