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Unit 6 Finance in Hospitality Level 5 Bucks university

Introduction

In the present era, companies lay high level of emphasis on financial management aspects which in turn contributes in the attainment of organizational goals and objectives. Effective financial management enables a firm to employ funds in productive activities and thereby helps in achieving goals.

The present report is based on the case scenario of AB which in turn provides deeper an insight about sources that can be used for meeting monetary requirements. Further, report also entails how budgetary control tools assist in making control over expenses. It will also shed light on the financial position and performanceof business unit through ratio analysis.

Task 1

A) Identifying sources of funding for business and evaluating methods in generating income

There are various methods of raising funds which can be used by business in order to achieve benefits in future course of action. The sources of finance are as follows-

  1. Family and Friends-

It is a source of finance that can be taken from friends and family and as such, business may achieve daily operations quite effectually. It can be raised by organisation because trust prevails and is one of the safest forms for generating finance. The main reason behind this is that business does not have to pledge goods and thus, funds can be easily generated.

  1. Angel investors-

Angel investors provide funds to organisation which is quite helpful for accomplishing operational activities in an effective way. They provide finance and in return ownership is taken in the business by them. In simpler words, some part of shares is imparted to such investors in relation to amount of loan provided. Thus, ownership is provided with respect to funds initiated to organisation (Jones and et.al., 2016.).

  1. Loans from bank-

It is another common source of raising finance by taking loans from banks. In addressing this, company has to repay principal amount along with interest accrued on the same. Moreover, solvency position of firm should be high so that it may be able to repay loan without any difficulty and as a result, funds can be effectively utilised.

  1. Retained Earnings-

Profits are attained by organisation in a particular financial year by accomplishing stated targets in the best possible way. In relation to this, some part of profit is shared among shareholders and remaining part is retained in the business to effectively attain operational tasks. It can be used by firm as it is good source of internal finance for meeting daily activities. Moreover, no liability to repay amount is found as it is generated from internal earnings of business.

There are various sources of generating income which will be helpful for Astors Belgravia to attain income with much ease. The hotel has exotic food and spacious rooms which attracts most of the customers in effective way. One of the main methods to generate extra income is that consumers may be provided with attractive offers in relation to the food which will be mailed to their respective mail ids. This provides effective sales to business as customers are imparted with new offers and mailing method is cost-effective as well. Thus, prospective customers will be lured towards fresh offers and discounts and as a result, technology has provided new ways to do business and attain sales (Kallmuenzer and Peters, 2018).

Another method is organising contests which is useful technique to promote products in the best possible manner. By this way, customers are attracted towards business by organising contests, relationship with regular and new consumers may be broaden with much ease. Social media is also important way of promoting organisation and as such, income can be generated in effectual way. Astors Belgravia may be benefited as there are various websites where people are connected to each other and as such, discounts can be offered by hotel on such social media websites and thus, sales will be injected as customers will be lured to buy items quite effectively. Thus, these are some of the methods which could be helpful for t hotel to attain income in effectual manner.

Task 2

A) Elements of cost and profit and selling prices for organisation

There are various types of cost such as material, labour and cost of overheads. In the hotel, these costs play essential role in assessing profit and selling prices in the best possible manner. It can be bifurcated that material cost which remain as a part of food. For instance, ingredients mixed in flour for making food such as bread. Hence, direct cost is incurred in making products. Moreover, materials cost are food, beverages, tobacco and related costs which are included in overall expenditures of material (Kasemsap and et.al., 2018). On the other hand, labour costs are included as well to determine selling prices. Salaries, overtime expenditures and wages are termed as labour expenses. Depreciation, advertisement provided to people is indirect expenses. While, overheads are marketing, maintenance, administration costs incurred.

In relation to this, total cost arrived by adding material, labour and overheads and as such; it is included in the selling price of item. On the other hand, fixed and variable expenses are provided as well. As the name suggests, fixed expenditures are to be incurred whatever be it sales or production. While, variable expenses are incurred as per level of volume which means that if production will be less, costs will be adjusted in accordance to the production level. Hence, these are included in the selling price of goods. Hence, gross profit can be computed by taking purchase price and total costs. For example, if purchase price = 90, Kitchen percentage = 170, gross profit will be 170 - 90 = 80. The gross profit can be calculated in terms of percentage such as Gross profit * 100 / Kitchen percentage. Therefore, substituting the formula, = 80 * 100 / 170 = 47. Thus, gross profit is 47, cost is 90, then accordingly, selling price can be get = 47 + 90 = 137

B) Methods of controlling stock and cash and cost and benefit of any two methods in organisation

There are various important methods of controlling stock which are mentioned above:

  • Economic Order Quantity: It is analysed as standard formula which has used to arrive at a proper balance between too much or very little stock. It is can be quite complex calculation so that it may be find easier for company to utilise the software of stock. The model of EOQ is considered as important for every business and for hospitality industry as well. This method of inventory control helps in the holding and ordering costs which has been analysed as not much quality and not less quantity of inventory. This is also considered as standard formula and it considered as cost effective method as well for ordering quantities of stock. Further, through arriving at EOQ, the major and standard quantities have ordered by the enterprise and such wastage has not been found.
  • Just In Time Approach: It is considered as the management study that aligns various raw material orders from the suppliers directly with schedules of production. Organizations employs this inventory strategy in order to increase efficiency and decrease wastage through receiving products only as they are needed within process of production and thereby reducing the cost of inventory. In this context, this approach will be effectively useful for restaurant because this approach will help in decreasing the wastage and spoilage of resources within organization. Further, the closing stock is required to be analysed by management in order to make products in estimated resources and without any wastage. This aids to accomplish the continuous growing requirement of customers and tends to reduce the unnecessary wastage of important as well as valuable stock.

In addition to this, there are some important methods of controlling cash that has been found and listed below:

  • Balancing: For controlling the cash, there is major requirement of balancing every business transaction which has been occurred within business. In this context, when the cash will be received by organization, they should provide cash receipts to customers in order to maintain record of sales on daily basis. It helps in removal of issues in calculation of sales turnover and shortage of cash. There should be a perfect balancing of the transaction of cash within registers and software because it helps the restaurant in taking and maintain record of each and every cash receipts along with the cash withdrawal. This method will tend to reduce cost of business enterprise and helps in achievement of high profitability in hospitality sector as compared to competitors.
  • Securing cash: It is considered as most important method that is used for securing the cash which involves installation of cameras in the premises mainly as the cash collection counter so that all transaction would get recorded and manager should review all footage cash counter once within a week. Further, other security systems must be installed within enterprise to control the cash collected from selling of products and services to customers.
  • Routine reconciliation: It is also a method of checking the cash transaction which involves development of reconciliation statement to match actual cash with the expected cash. Effective reconciliation of bank accounts will provide support to restaurant business in effectively controlling the cash. This will tend to provide clarification to the restaurant and no discrepancies have been happened.

However, through approach management of restaurant will be able to management their stock and achieve high profitability through maximization of cost. These methods will provide support in increasing business opportunities at workplace. Further, it can be said that effective management of hotel will tend to raise the business operations of enterprise in hospitality sector. High financial capabilities will also provide support to the organization in management of business activities.

Task 3

A) Trial balance and assessing source and evaluating business accounts

Particulars

Debit

Credit

Capital

 

104

Cost of distribution

   

Administration costs

   

Bank Balance

50

 

Cash and Cash Equivalent (CCE)

4

 

Bank Borrowings

 

50

Furniture and Fixtures

150

 

Accumulated Depreciation on Furniture and Fixtures

 

45

Receivables

10

 

Payables

 

15

 

214

214

The trial balance is one of the important statements which are prepared to effectively carry out differences if any observed in books of prime entry or ledger accounts. In simpler words, arithmetical accuracy can be judged with the help of preparation of trial balance. Ledger accounts are termed as impersonal accounts. The structure of trial balance can be evaluated of Astors Belgravia listed in the above trial balance.

  • Current assets are Bank balance, CCE and receivables
  • Fixed assets are Furniture and Fixtures and accumulated depreciation on the same
  • Non-current liabilities is Bank borrowings highlighted in trial balance
  • Current liabilities are Capital and payables

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Balance sheet till 31st December 2017

Amount

Current Assets

 

Deposit In Banks

19000

Cash In Hand

20000

Receivables

34000

Total Current Assets (CA)

73000

Furniture And Fixtures

18800

Buildings

294500

Fleet Of Vehicles

35880

Tax

5000

Total Assets

427180

Liabilities And Shareholders' Equity

 

Liabilities

 

Current Liabilities (CL)

 

Payables

8300

Wages To Be Paid

35000

Interest Payables

4500

Total Liabilities

47800

Shareholders' Equity

 

Capital

331580

Total Liabilities And Shareholders' Equity

427180

The balance sheet is prepared of the hotel for the period of 31st December 2017 and it shows the assets and liabilities in the best possible manner.

B) Purpose and process of budgetary control and analysing budget variances

The main objective behind control over budget is to ensure planning of effective ways in which budgeted output will be effectively measured from actual output.

From the above extent, it has been analysed that the restaurant will be able to manage wastage up to great extent and will result in maximization of higher profits from t business with ease. In addition to this, the cost of capital has been identified as effectively and this will lead to rise in profitability of business enterprise with ease (Jones, Hillier and Comfort, 2016).

Moreover, the capital cost can be forecasted in an easiest way through budgetary control. Further, this will help an enterprise to be effective and appropriate in possible ways. The main objective of budgetary control has been that if there is presence of important deviations among the actual and the budgeted output. This will aid the management of restaurant in corrective actions in order to eradicate such as important deviations that hinders the business performance (Dopson and Hayes, 2016).

Process of budgetary control is also mentioned which is utilized by organization to control the financial resources such as:

Establishment of plan and target performance: In this stage, plan must be created by organisation to control the financial resources which specified clear expenses that needs to be incurred by organisation on activities.

Recording actual performance: At this stage, managers of analyse the actual expenses which is incurred on performing the activities.

Comparison: In this stage, Actual financial performance will be compared with the estimated or target performance of organisation.

Measurement: It is also important stage at which different between the standard and actual budget have been calculated and reason for completion of those variances have been analysed. This will provide support to organisation in identification of ways through which estimated objectives have been achieved.

Implementation: After identification effective measures, managers needs to implement them remove those difference in order to estimated objectives. All activities must be accomplished within a specified budget in order to resolve issues.

Below give is the process of budgetary control that needs to be utilised by managers to accomplished business objectives.

Budget Committee: This has been made by organization for execution and development of budget. This important budget has been prepared after referring the departmental heads. Collective decision would be made by organization for its sales (Dopson and Hayes, 2016).

Budget Centres: these are also considered as different departments which the budget for the appropriate period has been effectively prepared. This centre has been considered as vital for an organization to perform effectively. This will provide support within allocation of budget for controlling cost. It is necessary as it controls cost. The allocation of funds to each department is done with ease.

Manual of Budget: it is related with roles and responsibilities of various important personnel executive. The has been appointed by managers in order to make changes within the budget which has been prepared to specify the relationship between

Officer: This is generally done by him in accordance with the demand of situation. Deviations are analysed and corrective actions are being taken. The budget is prepared for hotel and variances analysis can be applied by using such technique in effective way.

Particulars

Budgeted Figures

Actual Figures

Customers in the hotel

20000

15000

 

£0.00

£0.00

Sales revenue

2000

1700

Cost of Goods Sold

1500

1390

Gross profit

500

310

Administrative costs

200

210

Selling and distribution expenses

150

90

The variances can be calculated from the above listed budgeted and actual figures and taking each and every element. Variances are computed below-

  1. Sales revenue variance = Budgeted value – Actual value

= 2000 – 1700

= 300

  1. Cost of Goods Sold = Actual sales value – Budgeted sales value

= 1390 - 1500

= -110

  1. Gross profit = Actual value - Budgeted value

= 310 - 500

= -190

  1. Administrative costs = Actual costs - Budgeted costs

= 210 – 200

= 10

  1. Selling and distribution costs = Actual costs - Budgeted costs

= 90 – 150

= -60

It is recommended to the management of hotel that it needs to initiate control upon expenditures in order to earn good quantum of revenue. This is evident from the fact that selling and distribution expenses have increased up to a high extent. Cost of Goods Sold also needs to control so that profits may be maximised quite effectively.

Task 4

A) Calculation of financial ratios for the firm

Particulars

Formula

2017

Gross profit ratio

Gross profit / revenue * 100

73.08%

Operating profit ratio

Operating profit / revenue * 100

50.00%

Current ratio

Current assets / Current Liabilities

7.6 : 1

Average receivables period

Ending receivables / Cost of Goods Sold / Number of days

21.06 days

Average payables period

Ending payables/ Cost of goods sold / Number of days

10.53 days

Debt Equity ratio

Firm's debt / Stockholders' Equity

0.20%

B) Recommendations to perform in future

It can be interpreted from above ratios that Astors Bulgravia needs to improve upon debt equity ratio as it should be increased up to 0.40 % which is suggested by market experts and needs to maximise as there should be perfect mix of debt and equity so that firm may be able to finance its activities by utilising debt and equity in optimum manner. On the other hand, company should improve upon current ratio as it is 7.6: 1 which more than ideal ratio of 2: 1. This shows that business is not effectively using its current assets to carry operational activities (Avilova, Ermakov and Gozalova, 2014). It is recommended to utilise current assets for carrying daily tasks. Apart from ratios, it is recommended that hotel should implement well-mannered strategies so that profitability aspect of company may be enhanced in a better way. Furthermore, it should use social media tool to establish relationship with customers by offering discounts.

Task 5

A) Categorising costs as variable, fixed and semi-variable of firm

Number Of Beds In Hotel

600

Selling price

£40 per person

Cost of wages

£400.00

Other costs

£40.00

Salaries

£80.00

Rent for the hotel

£1,000.00

Electricity bill

£500.00

Telephone expenses

£1,000.00

The various costs can be bifurcated on the basis of above statement.

Fixed costs – Rent for the hotel

Variable costs - Cost of wages, other costs, selling price of bed per person, salaries

Semi-variable costs - Electricity bill and Telephone expenses

B) Calculation of per product contributions and relationship between Cost Profit and Volume

Marginal Costing

 

Sales

24000

Less: Variable Costs

 

Cost Of Wages

400

Cost Of Printing

40

Salaries

80

 

520

Less Semi Variable Costs

 

Electricity Bill

500

Telephone Expenses

1000

Contribution

1500

Less Fixed Costs

 

Rent For The Hotel

1000

Net Profit

500


In relationship of cost profit and volume, P/V ratio can be calculated below-

P/V ratio = Contribution / Sales

= 1500 / 24000

= 0.06 %

C) Use and significance of Break-Even analysis for decision making

The break-even analysis is not used that shows the point at which neither loss nor profit is attained by company. This implies that if firm sales go below break-even point, then losses will incur and it is required those sales should not go below such point. It can be assessed from the break-even chart which shows break-even point is attained at 2500 activity level and cost is 50. Thus, at this point neither profit is garnered nor loss is incurred (Claveria, Monte and Torra, 2015).

There is immense significance of break-even analysis in taking short-term decisions (Aisha. 2018 ). One of the main reasons is that cost-volume and profit is studied in depth at levels of output. Strategies can be implemented to reduce cost and attain more production, thereby, garnering more profits quite effectually. Profits may be easily planned with the help of break-even analysis and thus, organisation is benefited by relying on such analysis to take short-term decisions.

Conclusion

By summing up this report, it has been concluded that bank loans andpersonal savings are the most effectual sources which helps in getting funds. Further, it has been articulated that budgetary control tools are highly prominent in identifyingdeviations and taking corrective actions within suitable time frame. When the cash will be received by organization, they should provide cash receipts to customers in order to maintain record of sales on daily basis. It helps in removal of issues in calculation of sales turnover and shortage of cash.

References

  • Jones, P. and et.al., 2016. Sustainability in the hospitality industry: some personal reflections on corporate challenges and research agendas.International Journal of Contemporary Hospitality Management,28(1), pp.36-67.
  • 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. InEncyclopedia of Information Science and Technology, Fourth Edition(pp. 1594-1604). IGI Global.
  • 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.
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