College Essay: FINANCE IN THE HOSPITALITY INDUSTRY

LO 2: Business in terms of the element of cost

Task 2.1: Secrete Escapes Campers Ltd: A Camping Truck at the ‘Dragons Den’

The completed standard cost card for one unit of Secret Camp is provided as follows:

Direct Material: £ £ £
     Material X – 6kg at £30 per kg 180
     Material Y- 10 sq metres at £20 per sq metre 200 380
Direct Labour:
     Grade A – 4 hours at £30 per hour 120
     Grade B – 8 hours at £20 per hour 160 280
Standard Direct Cost 660
Variable Production Overhead:
     (5 hours at £8 per hour) 400
Standard Variable Cost of Production 1060
Fixed Production Overheads:
     Supervisor wages, Depreciation, and Machining £180 180
Standard full production cost 1240
Other Fixed Overheads £50 50
Standard Costs of Sales 1290
Standard Profit (B/F) 10710
Standard Sales Price 12000

Task 2.2: Bank Reconciliation for Secret Escape Campers (SEC) Ltd.

The bank reconciliation statement for SEC Ltd is presented in the following table with the cash balance in the bank being £5,410.

Bank Reconciliation of SEC as at 31 March 2015
Cash per Bank Statement -£15,500
Add:
       Outstanding Lodgements £83,900
Subtotal £68,400
Less:
       Un-presented checks £58,400
       Check entered twice £4,590
Adjusted Cash Balance £5,410

Task 2.2b: Economic Order Quantity (EOQ)

Economic Order Quantity is referred to as the order quantity that helps in the minimisation of the total holding costs on one hand and ordering costs on the other especially with respect to SEC Ltd. The following is a calculation of the EOQ for SEC Ltd.

Where, S = cost per order (£), D = annual demand (units), C = cost per unit, and H = holding cost also considered as the opportunity cost that the firm will forgo. On the basis of the above formula, the EOQ for SEC will be given as:

Therefore, based on the above calculations, the EOQ for the SEC Ltd = 55.42 quantities

Control systems in the hospitality industry aim at the greatest possible cost savings that can be accrued by the hospitals. Some of the most common systems that reused include reduction of all avoidable, ineffective and duplication of services that may be offered by different departments. It is a plan that aims at improving the efficiency of the hospital industry by focusing on minimizing wastage. It encourages efficient clinical care that is built on the pillars of comparative efficiency, research, and implementation of information technology.

Encouragement of innovative models for delivering healthcare such as the patient-centered homes that ensure it is more appropriate it pay for health services and reduces the overall cost that is entailed in taking care of patients.

It is also advisable to engage in the reduction of administrative costs by ensuring that the management is staffed with individuals with proper skills and expertise. To reduce the costs, the industry also ensures that it adopts an appropriate doctor workforce with a high specialty mix. The workforce is prepared to handle any patient issue without necessitating for transfers and referrals.

A system that also works on reducing malpractices in medicine and need for defensive medicine practices is also an applicable plan. The industry is investing in promoting wellness, chronic care management, encouraging changes in unhealthy behavior and encouraging patient responsibility for both cost and health consciousness.

The use of this system makes it necessary for the industry to measure and analyze its performance. Measuring of performance is an essential indicator to show the direction that an industry is taking. The performance analysis methods that can be utilized in the industry include:

Hospitality firms engage themselves in bookkeeping activities, and they prepare accounts for all the activities and assets that they have. There are different ledgers, journals, and systems that are used in this process. The finance department chooses the method that best fits an activity depending on the number of transactions, the number of operations amongst other factors. The importance of keeping these records is to ensure that there is proper accountability for the resources that are used up in the hospital and to provide evidence for consultation in future financial decisions.

The concept of marginal costing makes a differentiation between the fixed costs of operation and the variable costs. When an accounting system uses marginal costing, it means that the variable costs that are charged to cost units and fixed expenses in a period are written off against the contribution that is accrued from these services.

The hospitality industry can use this concept by increasing the volume of output. If one unit increases the output volume, then the cost of production for the same unit decreases by one unit. If the volume of output is also not fully utilized, the marginal cost of production increases by the units that have not been used. When more than one unit of production increases production, then the total marginal cost that is accrued is the overall decrease in cost divided by the units of production gained.

LO 3: Business Accounts

Task 3: Trial Balance for Lexbal Consultancy PLC

Based on the trial balance, a Profit and Loss Account and Balance Sheet are the main financial statements produced for Lexbal Consultancy PLC.

Lexbel Consultancy PLC
Income Statement for the period ending 31 Dec 2015
£(‘000) £(‘000) £(‘000)
Sales 4,500
Opening Stock 320
Add Purchases 2,020
Less Closing Stock 200
Cost of Goods Sold 2,140
Gross Profits 2,360
Other Income
    Investment Income 150
    Retained earnings 700
    Profit on disposal of discounted operations 120 970
Net Income 3,330
Expenses
    Administrative expenses 700
    Distribution costs 28
    Outstanding administrative costs 4
    Depreciation 127
Net Expenses 859
Profit before Interest and Tax 2,471
    Interest 20
Profit before Tax 2,451
    Corporate Tax 90
Profit after Tax 2,361

 

Lexbel Consultancy PLC
Balance Sheet as at 31 Dec 2015
£(‘000) £(‘000) £(‘000)
Fixed Assets
Building 1,500
    Accumulated Depreciation 500 1,000
Office Equipment 50
     Accumulated Depreciation 10 40
Intangible Assets: Goodwill 300
Total Fixed Assets 1,340
Current Assets
     Bank 350
     Inventories 2,500
     Trade Receivables 850
     Prepaid Distribution Costs 2
Total Current Assets 3,702
Total Assets 5,042
Current Liabilities
    Outstanding Administrative Costs 4
    Trade Payables 500
Total Current Liabilities 504
Long-term Liabilities 504
    Debenture 200
Total Liabilities 704
Net Total Assets 4,338
Finance by:
    Ordinary Shares 2000
    Profits 2,361
    Less Dividends 60 2,338
Capital 4,338

Task 3.4: Lexbel Consultancy PLC – Budgetary Control

In marginal costing, the solution would be as follows:

Lexbel Consultancy PLC
Marginal Costing
£(‘000) £(‘000)
Sales 14,200
Less
    Variable costs 8,300
5,900
Less other variable costs 1,500
Contribution 4,400
Less Fixed Costs 5,400
Profit/Loss -1,000

Variance analysis is as follows

Fixed Budget Actual Budget Variance Analysis
Sales and Production Units 1,000 700 -300
£ £ £ £
Sales 20,000 14200 -5,800
Variable cost of sales
Direct Materials 6,000 5,200 -800
Direct Labour 4,000 3,100 -900
Variable Overheads 2,000 1,500 -500
-14,000 -9,800 4,200
Contribution 6000 4400 -1,600
Fixed Costs -5,000 -5400 -400
Profit(Loss) 1000 -1000 -2,000

 

Income Generation for the Hospitality Industry

There is continued pressure on the hospitality industry to reduce costs of healthcare to ensure that the service is made available to all individuals. Therefore, there is a need for firms in the hospitality industry to engage in other ventures to ensure that they can afford to run and support their activities.

One of the methods they can use is the federal housing administration funds (Buerhaus, et al., 2009). The firms within the hospitality industry may acquire the capital that they require for expansion and developments from this funding. It is a cheaper method for acquisition of capital by the hospitals because the overall terms and conditions, payback period and interest rates are lower as compared to other methods of capital acquisition. The hospitality industry players can also combine these funds with the Mortgage Insurance Programs that are available for hospitals under the Departments of Housing and Urban Developments in various programs (Buerhaus, et al., 2009).

Using of private equity investment is also another way to acquire the funds (Rimmington, et al., 2010). The hospitality industry firms can encourage private investors to purchase their capital shares and then use the capital that they gain to develop their health systems and their hospitals. The firms or business entities operating within the hospitality industry will only ensure it creates a mass of buying these shares and ensure it creates efficiencies in their ways of operating to ensure that they can afford to pay the investors after the agreed payback period. After that, the hospitality firms under investigation can go back to the equity market, remarket them and sell them for an even greater profit.

The elements of cost, therefore, include: Insurance billing

A large percent of hospitality industry revenue comes from billing for the services they offer to their clients. Sometimes the billing is made to private companies or governments especially with respect to the provision of hospitality products such as accommodation and other related services.

Supplies of the firms that operate within the hospitality industry also account for a large percent of the expenses. The process of identification of the best right supplier all the way to the stocking of the product in the right conditions is an expensive process. In the phases of development and expansion, the hospital also spends a lot in capital expenditures. These two elements often account for more than 15% of the total budget a hospital prepares (Choi, 2011). However, it varies with the phase of growth in which the hospital is operating in.

In the actual accounting and financial perspective, there are to the understanding of how to source funds and generate income for business and service industries. Such perspectives become very significant in understanding businesses in terms of the various elements of cost and businesses performance through the application of financial ratios. The analysis of the hospitality industry provides an opportunity to investigate the control systems, income generation, as well as the methods that are used in measuring and analyzing the performance of the hospitality industry.

How to Analyze the Performance of the Hospitality Industry by Application of Ratios

The hospitality industry in the previous years has been one of the industries that have been having an optimal growth continuously (Kotler, et al., 2013). The growth is very sustainable and can be attributed to the developments that are taking place in medical technology and pharmaceutical researches and disease treatments. Therefore, it makes it paramount for the industry to use financial ratios to monitor its growth. Use of these rates will help them set their targets and identify any causes that may make them not achieve them.

The debt-to-capitalization ratio is one of the methods that the hospitality industry can adapt (Vogel, 2012). It is a leverage ratio that is used to evaluate the industries that have massive capital expenditures such as the hospitality industries. They use a lot of capital in the acquisition of equipment, referrals, and treatment of terminal illnesses. The ratio, therefore, is calculated by identifying the long-term debts and dividing it by the available capital. The rate is used to determine how high hospitality firm is leveraged; how much debt they are operating with as compared to their capital. When the ratio is greater than one, it is not a very comfortable financial position (Vogel, 2012). It is because the hospitality is operating at a very high financial risk. Failure to pay these debts may mean liquidation of their assets. A lower ratio often less than one indicates an overall reduced financial risk for the hospitality (Vogel, 2012).

The cash flow coverage ratio is a useful general evaluation metric that the industry can adapt (Vogel, 2012). When funds come from the government, donations, grants and insurance companies, hospitalities normally have to wait for a period before they can access them. Therefore, to ensure they always survive financially, they have to ensure they have adequate cash flow and proper management skills. To develop a good ration, the Chief Finance Officer, and his team will divide the operating cash flow that they use with the all the obligations of debt that they have. The operating cash flow is acquired from the cash flow statement.  The ratio will show the ability of the industry to meet its financial obligations. If the ratio is 1, then it is acceptable, it less than 1, it demonstrates that there is danger somewhere, and the finance department needs to arrest the situation. When it is more than 1, then it is most favorable (Vogel, 2012). If the industry wishes to acquire funds from loans, they have to show a favorable ratio to the potential lenders.

Just like any other industry, the hospitality industry is also concerned with revenues and expenses in addition to providing care and compassion to patients. A hospitality firm with an ailing revenue flow may be there today and gone the next day. A hospitality firm’s finance department works a lot behind the scenes to ensure that there is adequate financial security and welfare of the overall hospitality. The factors that affect the revenue of hospitality include the number of patients it takes in, the sources of insurance that they use, the services that the hospitality offers and the frequency of providing different services among others.

Finally, the operating margin is another ideal ratio that the industry can use. It is a profitability ratio that evaluates the equity that is available in an industry (Vogel, 2012). Profits give the operating profit margin that hospitality makes from the sale of its services to patients and other products. The operating and production expenses are then deducted. However, it is not yet subjected to interests and taxes. The margin is used to help access the growth potential of hospitality in the industry and how well the management of the hospitality is working. Proper management of operating costs should reflect higher operating margins. The higher the operating margin is, the safer the hospitality is financial. However, it is also vital to compare the figure with other hospitality for clarification purposes.