AB397H | Unit 2 Finance in the Hospitality Industry BTEC Higher National Diploma
Report on AB397H | Unit 2 Finance in the Hospitality Industry BTEC Higher National Diploma
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. 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.
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.
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. 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.
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
|Direct labour||£ 22,500||24375||1875|
|Particular||Material (£)||Labour (£)|
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.
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|
|Sales and gain||157165|
|Expenses and losses|
|Cost of goods sold||94520|
|Van running costs||687|
|Doubtful debt provision||91|
Balance Sheet as on 31stDecember 2017
|Non current assets||5545|
|Debtors ( Less: 496)||11820|
|cash and bank (Add: interest recived)||5924|
|Equity and Liabilities|
|owner’s equity 12400|
|less: drawings 17100|
|Add: profit and loss 24437||19737|
|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.