Unit 2 Finance in Hospitality industry

Solution for Unit 2 Finance in hospitality industry

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Unit 2: Finance in the Hospitality Industry


Unit 2: Finance in the Hospitality Industry

Task 1 LO1 Understand sources of funding and income generation for business and services industries
1.1 review sources of funding available to business and services industries 
As an employee of Alpha Beta services my aim is to help small business owners or people think of starting a business within the hospitality industry by informing them of the funding available for these businesses and income generation for businesses and service industries. With small businesses or people thinking of starting a business is probably always the biggest problem. Below is a list of some of the most popular funding and start-ups available: * Loans: Loans are one of the most popular sources of funding. There are two types of loans secured and unsecured. The difference between the two is that with a secured loan the borrower initiates some assets and an unsecured loan is a loan that is not initiated by any assets. Assets also known as goods can be anything from business equipment, inventory or a receivable. The first is the time over which it takes to pay the loan off (the term) and the interest rate. According to Pakroo (2010) a majority of business loans are short term from between one to three years. In addition, Pakroo (2010) also stated Banks are the most popular place where business and service industries get their loans from. * Investors: There are people who contribute in financing your business, they are called investors. Investors usually take a significant amount of equity or ownership (a certain percentage) in the business, but the investment that they make in financing your business does not have to be paid back to them. There are two main types of investors; private and angel investors. According to Cobb (2012), an angel investor’s capital in a new business is considered to be a high risk investment since the new company has not yet recognised a solid track record of success. * Sponsorship: A sponsor can be an individual or a group that provides financial support. For example, O2 spends £6m a year sponsoring the former millennium dome which is now as the O2 arena. * Small Business Schemes: Small business schemes are intended to encourage new and small growing businesses, to bring wealth and ultimately create jobs * Grants: There are two types of grants, direct grant and repayable grants. A direct grant is a cash award, which is often given out for activities such as training, export development or staffing. A repayable grant is a scheme where cash funding is offered for a project with the intention that the sums are paid out of future revenues. However, if the project fails, the grant is written off. * Franchise: Buying a franchise or an existing business if often the right way for certain individuals. In addition, according to Keup (2012) individual buy franchise because there is a “lower risk of failure and/or loss of investment than if you were to start your own business from scratch”. According to Mendelsohn (2004), franchising is a method of marketing goods and services which knows no boundaries in terms of business categories. * Lease Schemes and Hire Purchase: Leasing schemes and hire purchasing are financial facilities which permit a business to use an asset over a fixed period. With leasing schemes ownership is never passed to the business customer as with the hire purchase the business customer will normally be responsible for maintenance of the equipment. They are both similar in a sense but both have different characteristics.
1.2 evaluate the contribution made by a range of methods of generating income within a given business and services operation 

In every business or service operation the main goal is growth. Therefore, having a method or strategy of generate income is vital. There are a number of methods and strategies to generate income, a few are listed below: 1. Expansion of Service: Providing catering services at a different price for special events. For example, if you own a business that supplies buffet menus to parties (£12.00 per guest) and are called to buffet a special event you can slightly increase your prices (£22.00). The fact that you have expanded you services to also catering for special events will also help generate income. 2. Website: Technology as we now know it is not the same as it was 10 years ago. The new generation of technology has meant that most of our needs can be completed through the work wide web which we now have access to on a variety of device such as tabloids, smart phones, laptops etc. Websites are a massive way to generate income, now only is it a way of marketing but it is also a huge way to increase revenue. For example, a hospitality company such as Pizza Hut have wide range of outlet stores across the UK and also has a website. As well as customer visiting the stores to buy a take-away or eat in, customers are also able to order their food online and book tables. In simple words, hospitality companies who have websites as well as outlets find that their income if highly generated as the website attracts more customers. 3. Lend out you Staff: If you find that your business had grown and you have a sufficient number of staff, you can loan them to another company for a particular even needing extra staff or for a set period of time and then getting them back when you need them.

Task 2 & 3


LO2 Understand business in terms of the elements of cost2.1 discuss elements of cost, gross profit percentages and selling prices for products and services 

2.2 evaluate methods of controlling stock and cash in a business and services environment

LO3 Be able to evaluate business accounts3.1 assess the source and structure of the trial balance 

3.2 evaluate business accounts, adjustments and notes 

3.3 discuss the process and purpose of budgetary control 

3.4 analyse variances from budgeted and actual figures, offering suggestions for appropriate future management action

Every business primarily goal is profit. If a business finds that it is making a loss rather than a property than there is a big cause for concern. Businesses that don’t make profits mind that they are not using the correct methods, strategies or don’t have the correct managerial skills. Profit is usually calculated by deducting the total costs from the revenue. The cost of services and products can be classed as either fixed or variable. With a fixed cost being a cost that does no change in the amount of service or products produced whereas a variable cost is an expense that changes in proportion to the activity of a business. The gross profit percentage is represents how much of sales revenue is spent on providing products or services The selling price is the market value that will buy an amount of product or service.

There are various methods for controlling stock in the business and service environment, two of which are listed below: 1. Fixed re-order stock level: This method of stock controlling is where the business makes a decision on the minimum level of stocks it can take and then re-orders before the stock reach this level. 2. Fixed time re-ordering: With this method of stock controlling the company will re-order stocks at a fixed time of the week or month.

Controlling cash in any business or service environment involves careful bookkeeping and security. There are also various methods for controlling cash in the business and service environment, three of which are listed below: 1. Hiring the right people: Cash controlling starts with people therefore it is vital that you hire the right people who don’t have criminal records and backgrounds of theft. 2. Records of transactions: Keeping receipts of cash transaction permits accuracy in bookkeeping. 3. Securing Cash: Placing CCTV camera and using drop safes to store cash are ways of protecting cash when a transaction takes place.

According to Pandey (2002) a trail balance is a list of general ledgers accounts contained in the ledger of the business. Trail balance is used to final accounting. The structure of the trial balance

There are two sides in the trial balance, the debit and the credit side. The debit side outlines all debit balance figures and the credit side outlines all credit balance figures in the ledgers.
TRIAL BALANCE STRUCTURE
DRCR
Assets xxx
Expensesxxx
Income (e.g. sales)xxx
Purchasesxxx
Capitalxxx
Liabilitiesxxx
xxxxxx

The whole process is straight forward and is for the accounts to be balanced off. The balancing of accounts involves the following steps: 1. Add amounts on both sides of the accounts.
2. Find the difference between the two sides by deducting the lesser amount from the greater amount of the two sides. The balance brought forward is used to tell whether the account has a credit balance or a debit balance. If it is on the credit side, it is said to have a credit balance and if the account is having its balance brought down on the debit side, it is said to have debit balance.

Business accounts should be the first task to tackle one started a business as the main purpose of running a business is to take cash from customers for the products or services in which you provide. A business account is a way to manage a company’s finances in an efficient manner. Adjustments are transactions that have not yet been journalised, appended to the trial balance. Adjustments are also transactions relating to the business. Notes examine the balance sheet and profit and loss account and provide explanations, details, definitions and associated theories. Budgetary control is controlling a company’s operations through standards and target regarding income and a continuous visual and adjustment of performance against them. There are three main process of the budgetary control involves planning, coordination and responsibility and performance evaluation. Any discrepancies that exist between the budgeted figures and the actual results are known as variances. Variances can be either positive or negative. A positive variance means that the budgeted amount was less than the actual amount spent and a negative variance means that the budget amount was greater than the actual amount spent. An appropriate future management is to first flex the budget, then analyse the variance, then identify the cause and finally take the appropriate action.

Task 4

LO4 Be able to analyse business performance by the application of ratios4.1 calculate and analyse all ratios to offer a consistent interpretation of historical business performance 

4.2 recommend appropriate future management strategies for a given business and services operation 
4.1
Profitability Ratios
Efficiency Ratios:
1. Stock Turnover (ST)
Cost of sales
Average stock
Cost of sales
Average stock

ST =

40,000
50,000
40,000
50,000
16,000
15,000
16,000
15,000
Grimes Theme Park 2010: Giant House Theme Park 2010:
ST = =1.1 timesST = =0.8times

40,000
48,000
40,000
48,000
17,600
14,000
17,600
14,000
Grimes Theme Park 2011:Giant House Theme Park 2011:
ST = =1.3 timesST = =0.8times

Analysis: From the above calculation we can see that Grimes theme park has improved its stock turnover with the ratio rising from 1.1 times to 1.3 times, from 2010 to 2011. The fact that the stock turnover in 2011 is not too high shows that the business has good stock management. The above calculation also shows that Giant house theme park has kept its stock turnover ratio constant with a ratio of 0.8 in both 2010 and 2011. This indicates that there is a constant flow of the money coming in.

2. Trade Creditors Payment Period (TCPP)
TCPP = (creditors / sales) x 365

Grimes Theme Park 2010: Giant House Theme Park 2010:
TCPP = (2,100 / 16,000) x 365TCPP = (5,200 / 40,000) x 365
= 47.91 Days= 47.45 Days

Grimes Theme Park 2011:Giant House Theme Park 2011:
TCPP = (2,016 / 17,600) x 365TCPP= (5,120 / 40,000) x 365
= 41.81 Days= 46.72 Days

Analysis: The above figures indicate it took less time for the two theme parks to pay their creditors in the 2011. This is a good sign because Pendlebury (2003) stated that “if too long a period is taken to pay creditors, the credit rating of the company may suffer”. As the time taken to pay the creditors reduced in 2011, it will be less difficult for both theme parks to obtain credit.

Liquidity Ratios:
1. Acid Test Ratio (ATR)
ATR = (Current assets – inventory) / Current liabilities
Grimes Theme Park 2010:
ATR = (38,000 – 15,000) / 44,000
= x0.5
Grimes Theme Park 2011:
ATR = (37,000 – 14,000) / 35,000
= 0.7
Giant House Theme Park 2010:
ATR = (120,000 – 48,000) / 110,000
= 0.6
Giant House Theme Park 2011:
ATR = (125,000 – 48,000) / 105,000
= 0.7
Analysis: The acid test ratio is the stringent test of liquidity. It removes inventory as inventory is the least liquid of the current assets. According to the figures above we are able to say that both businesses were in a better position in the year 2011 than of 2010. Although the acid ratio for both theme parks is not above 1.0, it is an improvement and a step closer to reaching above 1.0. An acid ration of over 1.0 is a good sign and indicates that a business is well placed to be able to pay what it owes.

2. Current Assets Ratio (CAR)
CAR = current assets / current liabilities

Grimes Theme Park 2010:
CAR = 38,000 / 44,000
= 0.7

Grimes Theme Park 2011:
CAR = 37,000 / 35,000
= 1.1

Giant House Theme Park 2010:
CAR = 120,000 / 110,000
=1.1

Giant House Theme Park 2011:
CAR = 125,000 / 105,000
= 1.2
Analysis: With both theme parks we see that there is an increase in the current asset ratio from the 2010 to 2011. This clearly shows that the liquidity position for both theme parks has improved.

Investment Ratios:
1. Dividend per Share
The dividends per share are given and are as follows:

Grimes Theme Park 2010 = 8p
Grimes Theme Park 2011 = 10p

Giants House Theme Park 2010 = 12p
Giants House Theme Park 2011 = 10p
4.2
Future Management Strategies
With regards to the results gained from the stock turnover ratio, Grimes theme park improved its stock turnover from 1.1 times to 1.3 times from 2010 to 2011 which is a good sign. On the other hand, Giant House them park kept a constant stock turnover for the two years which indicates that the theme park needs to improve on the number of times in which stock converts to sale in a period as the quicker the theme park turns over its sales the better. One way in which Giant House theme park can boosts in stock turnover are: 1. Giant house theme park can offer sales promotions for example; one child (under the age of 12) gets a free entry for every two adults. These promotions should be highly completed during holiday breaks and festive breaks in order to attract more customers. The results obtained from trade creditor’s payment period for both theme parks showed that there time taken to pay back what they owed reduced throughout 2010 to 2011 was is a very good sign as it helps their chances of getting credit in future and trust. With regards to future management strategies the two theme parks should continue in the direct of continuing to pay the creditors within a less period of time. From the results obtained from the acid test ratio, both companies will have to continue improving their liquidity. So, both theme parks will need to improve their ability to pay their bills as they come and get their acid test ratio above a 1.0. Below are three ways in which the companies can improve their liquidity: 1. Both theme parks can appraise the profitability on the company’s services and products. Find out where they can increase prices in order to help raise or maintain profitability. 2. The two theme parks can also review their overheads and find if they can be reduced as decreased overhead costs have a huge effect of the profit. Two examples of overhead are professional costs and advertising. 3. Another suggestion is that the two theme parks should monitor the amount of money deducted from the accounts for non-business and business uses.

UNIT 14: HOSPITALITY CONTRACT AND EVENT MANAGEMENT

Task 5
5.1
Cost Categories:
* Fixed - £450
* Variable -£13.50
* Semi-variable - £21.00
60 guests are required for the restaurant to reach breakeven. * Calculation: 450 / (21-13.50) = 60
Value of the revenue:
Total revenue = sales price x r of units
= 21.00 x 60
= £1,260
5.2
Every guest makes a contribution of £7.50 towards the fixed cost of the business. * Calculation: 450 / 60 =£7.50
The cost/profit/volume relationship in this scenario will help the restaurant owners understand and manage the interrelationships with the cost, volume and profit. It will strongly help them in decision making in what products they should sell, the pricing policy in which they should follow, other product facilities in which they should include or what sort of marketing strategy they should use. If 80 people were booked the profit and margin of safety will be as follows: * Profit = Revenue – Costs

= 21.00 x 80
= £1,680
=1,680 – 1,260
Profit = £420.00

* Margin of Safety (MOS)
MOS = Actual unit – breakeven unit
= 80 – 60
= 20 guests
In regard to this scenario the number of guests can fall by 20 before the restaurant reaches its breakeven point. If 100 people were booked and the price per ticket was reduced to £18.50, the profit and margin of safety will be as follows: * = 18.50 x 100

= £1,850
Profit = 1,850 – 1,260
= £590.00

* MOS = 100 – 69
= 31 guests
At this rate the restaurant is able to reduce the number of guests by 31 before the restaurant reaches its breakeven point. * Calculation:
= 31 x 18.50
= 573.50
= 1,850 – 573.50
= £1,276.50
The above figure of £1,276.50 clearly is above the original breakeven point of £1,260 and that there is still a profit of £16.50. If the restaurant were to reduce the number of guests by 32 the restaurant will be below the breakeven point and a loss of £22.00 will incur. * Calculation:

= 32 x 18.5 = 592
=1,850 – 592 =1,238
= 1,260 – 1,238 = 22
5.3
A profit is the money a business or service operation keeps after paying of all expenses and a loss is when the expenses exceed the amount of sales a business makes in a certain period. A review and assessment of the business’s present financial position is the first step to managing profit and loss. A historic review on the business or service operation (last two or three years) and compare it with the current profit and loss. An example of very strong tool used to manage and calculate the risk of loss on a specific portfolio or assets is called Value at Risk (VaR).
LO5 Be able to apply the concept of marginal costing5.1 categorise costs as fixed, variable and semi-variable for a given scenario

5.2 calculate contribution per product/customer and explain the cost/profit/volume relationship for a given scenario 

5.3 justify short-term management decisions based on profit/loss potentials and risk (break-even) calculations for a given business and services operation 
The formula used to calculate the level of activity needed in order to make profit is: = (Required Profit + Fixed costs) / contribution per unit                                M32HRM   Taking on board that the margin of safety is the difference between the budgeted level of activity and the breakeven level of activity. The level of activity recommended for the restaurant is that they should reduce the price as it a higher turnout including profits and the number of guests will still be above the number of guests at the breakeven point. In simple words, the restaurant should set its prices to £18.50 instead of £21.00 as there will be a higher turnout.

Reference List
1. Jerry J. Weyganelt, Paul D. Kimmel and Donald E. Kieso. (2009). Managerial Accounting: 2. Maurice Pendlebury and Roger Groves. (2003). Company Accounts: Analysis, interpretation and understanding. 6th Edition. n.p: Cengage Learning EMEA 3. Peri Pakroo. (2010). the small Business start-up kit. 8th edition. Berkeley, CA: Nolo 4. Erwin Keup (2012). Franchise Bible. 7th edition. University of South California: Entrepreneur Press 5. Martin Mendelsohn. (2004). the Guide to Franchising. 7th Edition. London : Cengage Learning EMEA 6. William R. Cobb, M L Johnson Ed D Ph D, M. L. Johnson, Ph.D. (2012). Business Alchemy: Turning ideas into Gold. London: Author House 7. Ganga Dhar Pandey (2002). Modern Accountancy for Xi & Xii. 2nd edition. n.p: New Age International 

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