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Unit 3 Finance In Hospitality Sector level 5 Regent college

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INTRODUCTION

Balancing the financial environment in business is the main priority of the accounting professionals. Therefore, the needs of funds in each business operation will be determined and analyzed by business professionals to analyze the revenue and the costs implicated in such activities. In the present report, there will be a discussion based on financial management in the hospitality sector of the UK on which Belgravia Hotel has been considered as having appropriate study and analysis over the facts. This report ascertains the requirements of funds in the hospitality industry to have satisfactory growth in revenue as well as management of accounts will raise their market value. Similarly, there has been discussion based on various sources of funds which in turn will be useful to make appropriate changes in the operations.

TASK 1

P1. Reviewing the Sources of Funding and Their Benefits in Generating Income for Business

To ascertain the financial needs of the business, there has been availability of various sources of funding which will be through the internal sources or with the external sources which will be assistive and helpful to the entity to have the required amount of capital funds for the operations. Moreover, there are various sources that will be helpful in meeting the capital requirement of Belgravia Hotel. Moreover, there are various internal and external sources which will be evaluated as follows:

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Internal sources of funding:

Owner's Equity: This is the most convenient and satisfactory source of funding as there will not be required to make a return on the generated capital as well as it will not need the time to have returns (Kallmuenzer and Peters, 2018). The owners or partners of the firm will bring their personal savings into the operations of the business which will be the effective and primary source of gathering the amount of funds in each activity. Therefore, there is a need to have an appropriate balance of the amount that will be used in each business activity of the hospitality industry. Belgravia Hotel will have satisfactory growth in the capital structure if the directors or owner of this firm bring their savings into operational practices.

Operating activities: By contrasting with these techniques it comprises making the operational efforts such as manufacturing goods and services and dealing with them in the market. Sales revenue and the gains after deducting all the costs or operations will be helpful to use for the next tasks or for the development of the business. In the hospitality industry, to make the most appropriate deals in the market, they have to make sales of their services among consumers. Moreover, the revenue generated through serving consumers will be very helpful and beneficial to have a satisfactory amount of profits.

Sale of assets: The unused and the unequipped assets needed to be sold out of the firm so as to have satisfactory gains through this. Moreover, if a firm seeks a shortage of funds in the operations they can sell out assets like machinery, land, building, equipment, etc. Belgravia Hotel will have an efficient amount of earnings if they will make the sale of such assets (Kasemsap and et.al, 2018).

Externals sources:

These are the roots that are other than internal sources of gathering the capital funds for the operations. It will be helpful to the firm in relation to gathering the amount of capital that they desire. Moreover, they have to make payment of interest in return for the particular amount. Similarly, there will be a time limit for the amounts obtained by the firm in order to meet the funds requirements. Thus, the external sources of funds can be analyzed as:

Shareholder's equity: These are the sources of funds that help the business in selling the equity ownership of the business in the market. These are the marketable gains that have been collected through selling shares and securities among investors. In this regard, the investors mainly seek for details relevant to the financial health of a firm. Moreover, it will be suggested to the Belgravia Hotel that they must make a periodical disclosure of the firm's financial database which will be attractive to investors to show their interest in investing in the entity. It will be a suitable technique to raise the capital funds of the business. In addition, shareholders mainly seek to have appropriate returns over their invested money in the business. Thus, the appropriate dividend policies will be attractive and satisfactory to the investors in terms of making trust in the business as well as analyzing the requirements of the firm (Claveria, Monte, and Torra, 2015).

Bank loans: These are the borrowings that a firm can have through banks and financial institutions against the property or assets of the entity. Therefore, Belgravia Hotel will have a satisfactory amount of loans from the banks on which they have to make payment of interest amount and the time period of the loan will decide the terms of the loan. The short and long term loan will be helpful as to meet the financial requirements at the right time. In addition, it will be a satisfactory source as the professionals will have the effective amount of borrowings that they desire. This, which in return helps them in improving the operational quality as well as bounds them in meeting the targets.

Governmental grants: There are various governmental agencies that approach helping the business in its survival. Moreover, there will be improvements in the revenue and the grants of the business to have risen in the income level as well as in operational activities. These are funds that will be helpful to Belgravia Hotel in terms of operating the business activities as it does not require any interest amount to be paid in return for such grants. These are the amount that is tax-free, so the professionals need not make payment of corporate tax in relation to such grants.

P1.2 Evaluate Contribution Made by Methods of Income Generation

The sources of income will be helpful for Belgravia Hotels to effectively accomplish business activities in the best possible manner (Avilova, Ermakov, and Gozalova, 2014). This is required so that extra income may be produced in a better way. The hotel provides good quality food and high-end rooms in an effective manner enhancing the level of customer satisfaction quite effectively. The main method is to provide attractive offers to the consumers in the best possible way furthermore, discounts should be provided as well by which they will be attracted to the hotel and sales will be maximized leading to enhanced income. Moreover, mailing discounts-related offers to customers in an effective way. Thus, customers will be provided with fresh offers, and thus, technology has imparted a new way of doing business.

Moreover, organizing contests is a useful technique to maximize sales by implementing such promotional tool in effective manner. Relationships with potential customers will be attracted to hotels and as a result, firms will be able to garner income by organizing contests quite effectually (Lado-Sestayo and et.al, 2016). Moreover, social media is another useful strategy helpful for organization to accomplish promotion by disclosing attractive discounts on social networking sites to grab customer attention in effective way. Hence, these methods are helpful for firms to generate income with much ease.

TASK 2

P2.1 Discuss Elements of Cost and Profit and Setting Selling Prices

The business incurs various costs such as material, labor, and overheads which are required to be incurred by Belgravia Hotel in order to set the selling price of products in effective way. These costs are required to quote prices with much ease. Material cost is the main part of food items like ingredients applied in flour for preparing bread is termed as material cost. On the other hand, labor costs such as wages, salaries overtime payments, etc. depreciation is indirect expenditure and overheads are administrative, marketing and cost of maintenance, etc. Thus, by adding all these, total costs are ascertained with much ease. It is then used in setting selling prices in effective way (Liu and Pennington-Gray, 2015).

Fixed and variable expenditures are taken into account as well. Fixed ones are required to be incurred irrespective of whether sales are achieved in the desired manner. In simpler words, it is needed that the company should incur the same irrespective of profits earned by it. While variable expenses are incurred in relation to the level of production which means that expenses can be lowered if production volume is low. For instance, purchase price = 80, Kitchen percentage = 160, then gross profit = 160 - 80 = 80. It can be converted in percentage form Gross profit * 100 / Kitchen percentage. Thus, applying formula, = 80 * 100 / 160 = 50. Hence, by adding a gross profit of 50 with a cost of 80, the selling price = 50 + 80 = 130.

P2.2 Evaluate Methods of Controlling Stock and Cash and Discuss Cost and Benefit of the Two Methods

Methods of controlling stock are as follows-

  1. Just in time (JIT) approach-

This approach is quite useful in carrying out stock in a way by which no wastage may occur in Belgravia hotels. The stock is required to be analyzed in effective manner so that no wastage or spoilage may be present and as such, products may be provided to customers.

  1. Economic Order Quantity (EOQ) -

            EOQ is a useful model which is used so that inventory can be purchased in an optimum manner. There are two types of costs such as holding and ordering costs are taken into account by which perfect balance is obtained and the quantum of desired stock is purchased. This is essentially required so that no less quantity or more than the required quantity is ordered by the hotel. Thus, it is a standard formula helping businesses to order cost-effective stock and as a result, spoilage is not found.

Methods of controlling cash are listed below-

  1. To balance-

            Balancing cash on a daily basis helps to control cash in the best possible manner. When cash is received, it should be entered into accounting books and the same treatment should be made in relation to the withdrawal of cash (Stock Control and Inventory, 2017). Hence, balancing each and every transaction will be effectively used to initiate control of cash.

  1. To secure cash-

            Securing cash through installing security-related cameras should be implemented at the cash counter. This will reduce theft and cash would be controlled in the best possible way. Furthermore, employees should be assigned such jobs to ensure security.

  1. Reconciliation

Bank passbooks and accounting records of Belgravia hotels should be reviewed constantly so that no discrepancies may be present.

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TASK 3

P3.1 3.2 Trial Balance and Assess the Source and Evaluate Business Accounts

The trial balance of Belgravia Hotels

Particulars

Debit

Credit

Capital in the business

 

104

Distribution expenses

 

 

Administration expenditures                                                                                

 

 

Bank balance

50

 

Cash in hand

4

 

Borrowings from bank

 

50

Furniture & Fixture

150

 

Accumulated depreciation provided on Furniture & Fixture

 

45

Receivables                                                                                               

10

 

Trade Payable

 

15

Total

214

214

Trial balance is extracted for Belgravia Hotels which is an effective method for carrying out any type of mathematical inaccuracy found in journals or preparation of general ledger accounts in an effectual manner (Shkurkin and et.al, 2016). Thus, with the help of trial balance, mathematical and arithmetical accuracy can be analyzed with much ease. The source and structure can be evaluated below-

  • Non-current assets are Furniture & Fixtures and Accumulated depreciation is provided.\
  • Current assets are Bank, Receivables, and Cash in hand
  • Current liabilities are Trade Payable and Capital in the business
  • Non-current liabilities are Borrowings from bank

The balance sheet is prepared for the business below-

Balance sheet as of 31 December 2017

Amount

Assets

 

Current assets

 

Bank deposit

19000

Cash and Cash equivalents

20000

 Trade

34000

Total current assets (CA)

73000

Furniture and Fixture

18800

Building

294500

Fleet of cars

35880

Tax

5000

Total assets

427180

Liabilities and stakeholders' equity

 

Liabilities

 

Current liabilities (CL)

 

Trade Payable

8300

Outstanding wages

35000

Interest payable

4500

Total liabilities

47800

Shareholders' equity

 

 Capital

331580

Total liabilities and stakeholders' equity

427180

Adjustments

  1. Trade payable of 8300 was attained on the credit purchase of an asset.
  2. Accumulated depreciation on furniture and fixtures was included in the total amount and no adjustment is required.

P3.3 3.4 Purpose and Process of Budgetary Control in Organization and Assess Budgetary Variances to Recommend for Improvement in the Future

The main purpose of budgetary control is to analyze the planned and actual output and find out deviations if any for improvement. Thus, costs are assessed in a better way. The process of budgetary control is listed below-

  • Budget Committee- Decisions are made regarding the requirement of budget for various departments of the hotel and a Budget committee is formed.
  • Budget centers- The allocation of costs to different departments is made in accordance with their needs. The budget center is a unit and controls costs in an effective manner and hence, funds are allocated to respective departments.
  • Budget manual- It clarifies the roles and responsibilities of the personnel concerned with the budget. Furthermore, it is used to establish relationships between personnel in the process of budgeting (Singal, 2014).
  • Budget Officer- He is appointed by the Chief Executive Officer (CEO) to effectively scrutinize the budget prepared by executives and thus, modifications if any made by the officer. Moreover, variances are assessed and action is taken for improvement.
  • Period- The budget is prepared for the specific time frame as per the operational needs of the firm. This period is dependent on varied elements usually different in relation to industries.
  • Key factor- The budgetary control process is taken and accomplished by the hotel and the budget is prepared in effective way. The key factors need to be identified that may impact the firm and as such, key factors need to be analyzed so that they may not hamper performance.

            This helps the firm to maintain whether deviations prevail in the budgeted results or not with reference to actual results obtained. Improvement is done by taking corrective action. The main purpose of budgetary control is to ensure that funds allocated to departments are perfectly utilized so that no wastage can be made. Hence, finance could be optimum used in business with reference to budgeted one.

Analyzing budget variances

Particulars

Budgeted

Actual

Guests in hotel

20000

15000

 

£0.00

£0.00

Sales

2000

1700

Cost of Sales

1500

1390

Gross profit (GP)

500

310

Administrative expenses

200

210

Selling and distribution expenditures

150

90

Variances can be effectively computed from the above variance table-

Sales variance = Actual sales - Budgeted sales

= 1700 - 2000

= -300

Cost of Sales = Actual sales - Budgeted sales

= 1390 - 1500

= -110

Gross profit (GP) = Actual - Budgeted

= 310 - 500

= -190

Administrative expenses = Actual expenses - Budgeted expenses

= 210 - 200

= 10

Selling and distribution expenditures = Budgeted expenditures - Actual expenditures

= 150 - 90

= 60

It can be interpreted that the sales of the firm are unfavorable as it is not as per the budgeted figure and as such, the business need to enhance sales by implementing well-mannered strategies (Zervas, Proserpio, and Byers, 2014). Furthermore, costs are also more than that of actual expenditures. Thus, it is recommended to improve sales by reducing overall unnecessary expenses or costs that are deteriorating the profit of the firm.

TASK 4

P4.1 Calculation of financial ratios

Particulars

Formula

Respective figures

2016

Gross profit margin

Gross profit / net sales * 100

 =380/520*100

73.08%

Operating profit margin

Operating profit / net sales * 100

=260/520*100

50.00%

Current ratio

Current Assets / Current Liabilities

=114/15

7.6: 1

Trade receivable period

Ending accounts receivable / Cost of sales / Number of days

=30/520*365

21.06 days

Trade payable period

Ending accounts payable/ Cost of sales / Number of days

=15/520*365

10.53 days

Gearing ratio

Company Debt / Shareholders' Equity

=155/389

0.39


P4.2 Recommendation of Appropriate Management Strategies to Improve in the Future

It can be assessed from financial ratios that the debt-equity ratio is less as it is 0.39 % which means that the firm is less reliant on debt. The ideal ratio is at least 0.40 % which implies that 40 % of capital should be financed with debt and the remaining 60 % from equity. Hence, it needs to improve upon the same. Moreover, the current ratio is 7.6: 1 which is more than the ideal ratio of 2: 1. This shows that business needs to effectively use current assets. It is recommended to use a social media strategy to attract customers and enhance profitability. Moreover, it is recommended that organization use debt financing in the future as it is a cheaper source of finance for firms. Using more equity should not be there as higher returns are to be paid by the company to investors.

TASK 5

P 5.1 Categorize costs as variable, fixed and semi-variable

Number of beds in hotel

600

Selling price

£40 per person

Wages cost

£400.00

Other expenses

£40.00

Salary

£80.00

Rent for hotel

£1,000.00

Electricity expenses

£500.00

Telephone expenditures

£1,000.00

There are various costs such as variable, semi-variable, and fixed expenditures are incurred in the hotel for accomplishing daily operational tasks in the best possible manner. The costs can be classified below-

Fixed costs - Rent for hotel

Variable costs - Wages cost, Other expenses, Salary, and selling price per person

Semi-variable costs - Electricity expenses Telephone expenditures

P 5.2 Calculation of Per Product Contributions and Relationship Between Cost, Profit and Volume

Cost statement

 

Sales

24000

Less: Variable costs

 

Wages cost

400

Other expenses

40

Salary

80

 

520

Less: Semi variable costs

 

Electricity expenses

500

Telephone expenditures

1000

Contribution

1500

Less: Fixed costs

 

Rent for hotel

1000

Net profit (NP)

500

The Cost, Profit, and Volume are collectively used to attain a break-even point in effective manner. The P/V (Profit Volume) ratio is an effective way of analysing contribution over sales on per product basis P/V ratio can be calculated below-

P/V ratio = Contribution / Sales

= 1500 / 24000

= 0.06 %

The Contribution per unit (CPU) is calculated below-

= Sales - Total variable cost / Total units

= 24000 - 520 / 2000

CPU = 11.74

Hence, it is assumed that 2000 units are sold and the contribution per product turns out to be 11.74

P 5.3 Justify the Importance of Break-Even Analysis for Short-Term Decision Making

Break-even analysis is used to find out optimum sales where neither profit nor loss is incurred. If the point exceeds it, then losses start prevailing (Tsang, Lee, and Qu, 2015). It can be interpreted from the above chart that break-even sales are accomplished at 2500 units and cost is 50. Hence, if costs exceed 50, then losses will be incurred.

The importance of break-even analysis in short-term decision making is that cost, volume, and profit can be assessed and as such, strategies can be easily implemented for the attainment of higher profits and production. Hence, profits can be achieved in effective manner and thus, businesses may make short-term decisions with much ease. It is quite useful and important in business decision-making so as to maintain adequate sales level which helps in attainment of desired sales and profits can be maximised in a better way.

CONCLUSION

Hereby it can be concluded that organization should use finance in effective way to meet operational tasks. Sources of funds can be used to enhance activities in a better manner. Furthermore, elements of cost in setting prices are required quite effectually. Financial ratios play an important role in the company's clarifying financial health. Budgetary control is used to analyze deviations if any and improvement is done by taking corrective actions. Break-even analysis is another important element for business. 

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REFERENCES

  • Avilova, N. L., Ermakov, A. S. and Gozalova, M. R., 2014. An analysis of the international customer attraction experience in the hospitality industry. World Applied Sciences Journal,30(MCTT)), pp.84-86.
  • Claveria, O., Monte, E. and Torra, S., 2015. A new forecasting approach for the hospitality industry. International Journal of Contemporary Hospitality Management, 27(7), pp.1520-1538.
  • Claveria, O., Monte, E. and Torra, S., 2015. A new forecasting approach for the hospitality industry. International Journal of Contemporary Hospitality Management, 27(7), pp.1520-1538.
  • Kallmuenzer, A. and Peters, M., 2018. Innovativeness and control mechanisms in tourism and hospitality family firms: A comparative study. International Journal of Hospitality Management, 70, pp.66-74.
  • Kasemsap, K. and et.al, 2018. Facilitating customer relationship management in modern business. In Encyclopedia of Information Science and Technology, Fourth Edition (pp. 1594-1604). IGI Global.
  • Lado-Sestayo, R. and et.al, 2016. Impact of location on profitability in the Spanish hotel sector. Tourism Management, 52, pp.405-415.
  • Liu, B. and Pennington-Gray, L., 2015. Do bed bugs bite the hospitality industry? A framing analysis of bed bug news coverage. Tourism Management, 48, pp.33-42.
  • Shkurkin, D. V. and et.al, 2016. Modernization of the Sphere of the Tourist and Hospitality Industry of the South of Russia is a Growth Factor of the Socio-economic Stability of the Region. International Journal of Economics and Financial Issues, 6(1S).
  • Singal, M., 2014. The business case for diversity management in the hospitality industry. International Journal of Hospitality Management, 40, pp.10-19.
  • Tsang, N. K., Lee, L.Y.S. and Qu, H., 2015. Service quality research on China's hospitality and tourism industry.International Journal of Contemporary Hospitality Management, 27(3), pp.473-497.
  • Zervas, G., Proserpio, D. and Byers, J. W., 2014. The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of Marketing Research.

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