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Finance in Hospitality Sample

Answer :

INTRODUCTION

Finance plays an important role in the growth and development of an organization. Without it no organization can survive in this competitive world. In the present report sources of finance are discussed in detail and some of them are recommended to the reader. Apart from this components of cost are also described in detail. At middle part of the report trial balance is prepared and adjustments are done. After that ratio analysis is done and recommendations are given in respect to performance improvement. At the end of the report using break even analysis proposals are evaluated and recommended to the firm.

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TASK 1

1.1 Sources of finance

Case of Mr. Stephen

Two sources of finance for Mr. Stephen are as follows.

Bank loan- Mr. Stephen can take bank loan from a specific bank. If he does not get entire amount from single bank then he can take loans from the multiple banks. These loans are available at fixed or floating interest rate. There are some benefits and limitations of taking bank loan. If floating interest rate gets increased then finance cost of the firm will also be increased. Same risk is not available in case of fixed interest rate loan. Hence, loan with fixed interest rate is recommended to Mr. Stephen.

Venture capital- Under this source of finance, there is a firm that gives capital to an individual for operating new business. In return that firm gets a stake in a newly formed company (Ratha, 2005). It also gets an amount of share in the company’s profitability. This source of finance is an alternative of loan and in this it is not necessary to pay return to capital lender on time. While major limitation of this source of finance is that control of real owner of the company gets diluted. Hence, they cannot take entire business decisions individually. Due to availability of flexibility at the time of returning of amount, this source of finance is recommended to Mr. Stephen.

(a)Sources of finance for large sized business

Equity- Large sized corporation is eligible for bringing IPO on the basis of passing a certain parameters that can raise capital through this source of finance. If capital is raised through this source of finance then business will get lots of benefits. In case of equity it is not necessary to pay dividend every year (Zhengfei and Lansink, 2006). Hence, finance cost can be controlled. This is a major benefit that business gets from this source of finance. However, issue of equity leads to dilution of the control of existing shareholders. This is a major limitation of this source of finance. But in case of this source of finance majority of holding remains with the company owners. Thus it is not matter of concern.

Private equity-It is a variant of equity, but in this like venture capital firm there is a company that gives capital to the company. In return, they get share in the profit. Due to shareholding they have right to give guidance to the firm. With the help of guidance, firm can operate business in an effectual manner. It is also its main advantage. Main limitation of using this source of finance is that control of existing shareholders get diluted in the company (Tarca, Morris and Moy, 2013).

Short term loan- Firms can take short term loan in order to get finance according to its working capital requirements. Thus, business operations do not impede due to lack of finance. This is also its major advantage. Limitation of this sources is only that interest needs to pay on time.

1.2 Contribution of different things on business profitability

There are various things that affect business profitability.

Sales- By generating sales firm can enhance its level of profitability. Hence, firm must adopt measures that elevate its sales for upcoming year.

Sponsorship- Under this a company takes a sponsorship of any event. In return it gets a right to advertise its products or brand name at large scale. As a result, prestigious image of the company product is created among people. Ultimately this leads to increase in sale of the company product.

Grants- In many nations government gives a grant to business organizations. Firms use these grants for their business expansion. This gives boost to the company’s cash flows. Hence, profitability of the company also gets increased.

TASK 2

2.1 Elements of cost, gross profit and sales price

There are two types of costs. These costs are discussed below as:

Direct cost- It refers to the cost that is incurred in the production process. These costs may be raw material purchase cost etc.

  • Direct material cost- It refers to that material that is used in the production process. Raw material purchase is the best example of direct cost.
  • Direct labor cost- It refers to the employees that are involved in the production process. Employee cost related to these labors is counted in direct labor cost (Williamson, 2010).
  • Direct expense cost- It refers to the expenses that are related to the production of goods and services. Carriage expenses are counted in direct expense cost.

Indirect cost- Indirect cost is those costs that are not related to the production process. Administrative cost is best example of indirect expenses.

  • Indirect material cost- It refers to those materials that are used in normal operations of the business. Expenses incurred on sales and office operations come under indirect expenses.
  • Indirect labor cost- It indicates the cost related to employees that are not involved in the production process (Kothari, Li, and Short, 2009). Employee cost related to manager is the best example of indirect labor cost.
  • Indirect expense cost- It is a cost that is not related to the production process. Expenses related to purchase of clean equipment are the best example of indirect expense cost.

Fixed cost- It refers to the cost that remains fixed and does not get changed. Purchase of machinery is the best example of fixed cost.

Variable cost- It refers to the cost that very with change in production process. Raw material cost is a well-known example of indirect cost.

Semi variable cost- It is a cost whose some part remain fixed and some remain variable.

Gross profit percentage- It is calculated by using gross profit and net sales (Thompson, Jones-Evan and Kwong, 2009). By dividing gross profit from net sales and multiplying it by hundred gross profit percentages is calculated.

Sales price- There are two elements of sales price including cost and margin percentage. By adding both elements, sales price is calculated.

2.2 Methods to control stock and cash

In a hotel there are many kinds of rooms with different capacities and price. In order to control room’s prediction must be made in this regard After this way in which rooms are allocated to the guests must be reviewed. Suppose there is a room for four people and two people want that room. It is a basic logic that cost of four people cannot be charged on two people (Osterwalder and Pigneur, 2010). If firm allots room to that two people then it will face loss. Hence, at place of giving room to that people firm can wait and can allot room to other four people in the group. Conclusion is that on the basis of prediction and trends of room filling, rooms must be allocated to the prospective guests.

Cash can be controlled by using cash management strategy. By using this strategy cash can be received quickly from the debtors and late payment can be made to the creditors. If more time is taken by the debtor in making payment then by making late payment to the creditors lag time can be offset using this tactics.

TASK 3

3.1 Drafting a trial balance

Table 1: Trial balance as on 31 December 2014

Particulars

Debit

Credit

Cash

11,700

 

Debtors

12,000

 

Rates

1,880

 

Bank Loan interest

1,400

 

Other expenses

11,020

 

Vehicles

2,020

 

Trade Creditor

 

11,200

Sundry creditors

 

1,620

Purchases

12,400

 

Bank Loan

 

12,000

Capital

 

13,000

Sales

 

14,600

Balance

52,420

52420

Procedure of preparing a trial balance

  • Preparing a journal account- In this step a journal account is prepared in which separate entry is entered related to each and every transaction. These transactions are further grouped on the basis of similarities in a separate account.
  • Source of ledger/Preparing a ledger account- In this step a ledger account is prepared in which person wise and item wise account are created (Gali, Gertler, and Lopez-Salido, 2007). In theledger account balance of debit and credit side of account is matched in order to ensure that no mistake is made in the accounts entry.
  • Preparation of trial balance- On the basis of ledger account, all details related to transaction are necessary to entered into the trial balance.

3.2 Adjustments and notes

Table 2: Adjusted Trial Balance

Particulars

L/F

Debit Amount

Credit Amount

(in £)

(in £)

Opening Stock

86,000

 

Purchases

1336000

 

Salaries

110000

 

Wages

61,000

 

Carriage Inwards

26,900

 

Trading Charges

64,000

 

Carriage Outwards

52,500

 

Rent received

 

178300

Cash

62,500

 

Capital

 

344700

Bank (Overdraft)

 

37,980

Commission

42,780

 

Creditors

 

468000

Sales

 

1548700

Debtors

256000

 

Machinery

480000

 

Total

 

2,577,680

2577680

Adjustments explanation

Purchase of machinery- Purchase of machine on credit means that machine was purchased from someone without making payment and that transaction was not recorded. Machinery of 200000 is purchased on credit and its entry was not made. In order to make changes in trial balance adjustments are made. In this regard purchase value in trial balance is increased by 200000. In same way creditors are also increased by the same value. Hence, changes come in both purchase and creditors headings in trial balance.

Wages adjustment- Wage amount of 43,000 was wrongly added to salary. In order to make correction changes are made in the trial balance. In this regard, 43,000 is deducted from salary and same is added to wages. Hence, entry affects both wages and salary.

3.3 Purpose and process of budgetary control

Main purpose of preparing budget is to perform a control function. In budget figures are determined about the sales and purchase as well as other things. Manager makes an attempt to maintain expenses in a determined limit through preparing budget. Second main purpose of preparing budget is to motivate managers to make extra effort to control expenses. Budget reflects the expectation of top level management from the managers. Hence, budget acts as a motivating factor for managers (Olson, Slater and Hult,, 2005). Process of budgetary control is as follows.

  • Preparing standard- In this step standards are determined which will be followed for controlling the cost of company. These standards are determined on the basis of past data and management expectation about the future scenario. Hence, accurate estimation about future is required for preparing standards for the budget.
  • Measuring a performance- In this step manager measures the performance of company in terms of sales and expenses. After measuring results report is prepared and communicated to the top level management for further action.
  • Preparing of corrective action- After communicating results to top level management, middle level managers are focused on taking corrective actions in order to ensure that same mistakes will not be committed in future (Graf, 2005).
  • Modification- If top managers recommend some changes then that modifications are added into the corrective actions. After that, these actions are implemented in order to make sure that same mistakes will no again committed by the employees.

3.4 Analysis of variance and reasons behind change variance in values

Table 3: Direct material price variance

Actual price

9.5

Budgeted price

10

Actual produce

1000

Direct material price variance

-500

Interpretation

Material price variance of the firm is favorable and this reflects that firm purchases raw material at a lower cost than stated in a budget (Baden-Fuller and Morgan, 2010). This happens because firm purchases raw material in a bulk. While purchasing in a bulk company gets a huge amount of discount. As a result, price of raw material is less than its actual price. Strong upward in currency movement may be another reason behind purchasing of raw material at least price. Thus, due to low price firm direct material price variance is positive.

Table 4: Direct material total variance

Actual price

9.5

Budgeted price

10

Actual production

1000

Budgeted production

1200

Direct material total variance

-2500

Interpretation

This variance indicates the total variance in the direct material. Due to less raw material price and less production of goods, budgeted lots of amount are saved. Hence, lot of amount is saved from the firm side. Fewer units may be produced due to lack of demand. Substantial availability of unsold stock may be another reason behind the production of less unit than budgeted amount.

Table 5: Direct material usage variance

Actual quantity used

4850

Standard quantity

5000

Standard cost per KG

10

Direct material usage variance

1500

Interpretation

This variance indicates that firm use more raw material than budgeted cost or not (Reijers and Mansar, 2005). In the present case variance is favorable because less quantity of raw material is used for the production. Hence, on this front company gives good performance.

Table 6: Labor efficiency variance

Actual output

1000

Actual hours

4200

Standard cost of actual hours

21000

Standard hours

4000

Standard cost

20000

Labor efficiency variance

1000

Interpretation

This variance indicates that firm take more work from its workforce than budgeted hours or not. Variance is positive and within budgeted. This reflects that labor is efficiently utilized by

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