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Financial Analysis of the Hotel

Question:

Discuss About The Financial Analysis Cambridge University?

In the modern world, each and every company that operates in the economy has the main aim of earning the maximum amount of profit from the market. The maintenance and the recording of the profit is possible by taking help of the mechanism of financial analysis. The financial analysis is helpful for the construction of the budget and the financial statement that is essential for the organization in expanding their business and maintaining competitive edge (Vogel 2014).   

The meaning of financial analysis is to assess the businesses projects, budgets and other financial data given out by the entity to ascertain the performance of the entity. Basically, it is done in order to explain on the on the liquidity of the firm, profitability and stability. In order to undertake comprehensive financial analysis, the organization requires to examine the income statement, balance sheet and the cash flow statement (Jensen 2013).

In this statement, this paper would be explaining the financial analysis of the departmental income with respect to a hotel. In the next segment of the paper, an examination of the current pattern and the performance of the hotel and the data that is necessary in order to take an in-depth financial analysis and the steps that are needed by the management to enhance the overall functioning of the hotel.

In the current case study, it is seen that the performance of the hotel is very weak. There is a huge difference in the budgeted sales of the hotel and the actual sales of the hotel. The beverage section and the food section sales are very low as anticipated. It is due to this factor that the hotel has been facing losses and on the other hand the management expenditure and the maintenance cost that is incurred day to day is higher in comparison to the budget. Therefore, the management of the hotel requires to have an effective balance among the expenditure and sales. 

The overall performance of company is very weak. By considering the income statement from 9th October 2016 - 5th November 2016 there has been a huge difference between the expectation and reality. The Budgeted Net Operating Profit of the hotel requires to be 201550 but in reality the hotel incurred a loss of -8880. Hence, there are lots of things that need to be improved and it can be explained in an effective manner. By looking at the revenue section, expected revenue was 838150 and in reality the hotel earned 664910. The maximum variance occurred has been due to food. The expected was 4392520 and actual earning was 332090 and then the big difference is in the variance beverages section. By observing the cost of goods sold, the budgeted cost of goods sold was 258700 and on the other hand the actual was 198300. The hotel saved a maximum cost in food that is -44650. Then by considering the gross profit data, the budgeted gross profit was 579450 and in actual the hotel earned 466610. Therefore there exists a difference of 112840.

Ratios to Evaluate Liquidity

While discussing about the direct cost it is seen that the direct costs increases due other random direct cost. The budget for the other direct cost was 41360 which raised to 85270.

Hence, the gross operating income incurred was 209120 and the budgeted income was 366120. There has been a huge difference of 157000. The maximum difference incurred was due to the rise in other direct costs.

Thereafter, it is seen that the general expense was expected to be 111580 which raised to 166710. The hotel spends too much on administration cost and day to day maintenance costs. The overall administration cost that has been incurred by the hotel was 166710 and budgeted amount was 111580.

Due to all the factors that have been explained above, it is seen that the hotel earned an operating loss of -8800 and expected profit was 201550. Therefore, there was a huge downfall in the performance of the hotel.

By considering the cumulative budget it is seen that performance of the hotel is not only poor in the current time period but the overall performance of the company was very disappointing.  There is a huge gap between the reality and the expectation. The expected net profit is 1963430 however the hotel earned a loss of -26800. The main factor for this has been due to the sale of food and beverages. Food, beverage and rooms are the major sources of revenue and the performance of food and beverage is not effective (Kou, Peng and Wang 2014).

It is essential that the hotel should improve and develop the food quality and should concentrate on establishing an improved environment in order to attract existing and prospective customers and thereby should undertake effective marketing in order to promote and advertise the restaurant. 

In this matter, this paper would explain the various significant variances are as follows:

Particulars

2016

Cumulative

Beverage

-446200

Food

-160430

-1750430

In cost of goods sold:

Beverage 

-19500

-185740

Food

-44650 

-435790

In gross profit:

Beverage

-31650

-260460

Food 

-11570

-1314640

Direct Cost

Other direct cost                                    

-43910                                                     

-362520

General expenses

Administration 

-34380

Day to day maintenance cost               

-11640                                                     

-92220

Financial analysis refers to the evaluation of the financial statements in order to ascertain the performance of the hotel. There are these 3 main mechanism with the help of which the financial statements are assessed.  They have been explained below:

  • Ratio analysis
  • DuPont analysis
  • Common size financial statements

It is seen that ratio analysis has been found to be the most important financial analysis tool out of the three that has been named above. Financial analysis is undertaken in order to undertake a comparison and valuation of the hotel. Financial statements are utilized by different persons in various manner (Schmidt and Hunter 2014). For instance, top level management will use financial statements for the purpose of decision making thereby improving performance of the hotel and on the other hand the investor will use to undertake investment decision and the auditor will use financial statement to make sure that the statements are fair and true. Therefore, financial analysis is a very crucial exercise for any company to operate successfully.

Ratios to Evaluate Profitability

In order to draw significant insight into the financial statements, the ratio analysis is an important tool. The balance sheet and financial statement are a part of the financial statements. This assesses the financial statements by dividing certain number and figures to construct the ratios. The computation of the ratio is significant as one cannot draw conclusions by observing the financial statements (Hans et al. 2014). The ratio analysis enhances the usability of financial statement. The income statement explains the amount of net profit the hotel can earn but to evaluate whether it is sufficient or not would be judged by computing the ratio (Ott and Longnecker 2015).  For instance, the net profit margin: net profit/sales is this ratio is compared to the industry ratio and in this manner a conclusion about the performance of the hotel can be understood.

The main concern of the hotel has been to earn and to judge whether hotel has been able to make sufficient profit and one needs to calculate profitability ratio. There are two kinds of profitability ratios namely:

  1. Profit margins: It is done to compare profitability at various stages by taking help of the gross profit and net profit margins.
  2. Rate of return ratios: These ratios include return on assets, return on equity, earning power etc.

These ratios are calculated to in order to assess the liquidity position of the hotel. Liquidity explains that the hotel has been able able to meet their obligations on time (Glasserman 2013). For any firm or entity, it is very important to have sound liquidity or else the entity might face trouble. Liquidity ratios are namely:

  1. Current ratio
  2. Acid test ratio
  3. Quick ratio
  4. Cash ratio

The leverage means the firm is making use of their debt in its capital structure. For any firm it is difficult to function the business without debt. There are two kinds of liquidity ratio:

  1. Capital structure ratio: These ratios are used to calculate the risk of the company for bankruptcy. these ratios include:
  2. Debt equity ratio
  3. Debt asset ratio
  4. Coverage ratios: This ratio determines the capacity of the company to meet its future debt obligations on time. These ratios are:
  5. Interest coverage ratio
  6. Fixed coverage ratio
  7. Debt service coverage ratio

These are even known as the asset management ratio or efficiency ratio. A company is having assets in order to generate sales. Therefore, this ratio determines the amount of asset utilization to convert or generate sales. These ratios are:

  1. Inventory turnover
  2. Average collection period
  3. Receivables turnover
  4. Fixed assets turnover
  5. Total asset turnover

These ratio calculates the growth of the firm. The fixed asset investment, retention ratio and profit margins and the factors that aids the firm to grow and develop (Abrahamsson et al. 2017).  It is said that company will experience better growth if external financing is used.

The valuation ratios are used to compute the market price of the hotel. These ratios are:

  1. Earnings ratio,
  2. Dividend yield

DuPont analysis is a process of measurement of the performance that was incorporated by DuPont Corporation in the year 1920. With the help of this process, the assets are computed at their gross book value and not in their net book value in order to produce an increased return on equity. It has been known as DuPont identity (Isard et al. 2017).

Ratios to Evaluate Leverage

With respect to the DuPont analysis, it is seen that the return on equity is affected by three objects namely the operating efficiency, which is computed with the help of the profit margin, asset use efficiency that is measured by the total asset turnover and the financial leverage which is computed by the equity multiplier. This process is helpful for the determination of the return on the equity and the factors that are responsible for the transformations in the return on equity. Therefore, the financial statements of the hotel can be computed with the help of which the stakeholders can undertake their decisions accordingly. It is seen that computing the assets at the gross book value eliminates the incentives in order to restrict investing in the new assets. Making use of the book values in opposition to the financial accounting depreciation process manufacture artificially lower level of return on equity in the base years where an asset is put into service. It is seen that if the return on equity is unsatisfactory, the DuPont analysis would indicate the parts of the organization that is not performing effectively (Rigamonti et al. 2015).   

Formulae: return on assets= net profit margin *total asset turnover

With respect to the hotel that is under consideration, it is seen that DuPont analysis of the hotel can be understood as following:

Return on asset= 0.0134*1.42

=0.019028

The common size financial is a statement that explains income and expense account items as a percentage of sales and the balance sheet items as a percentage of total assets in order to make the comparison easy.

Therefore, after knowing the details of the procedure for financial analysis it can be said that in the given case study only the income statement and common size statement are provided but in order to construct a comprehensive analysis it is essential to have a balance sheet as well and with the help of the balance sheet financial position of the hotel can be attained. In order to calculate all the ratios it is mandatory to have balance sheet data. Along with income and expense account and the balance sheet there is a need for the cash flow statement (Laudon and Traver 2013). The cash flow statement depicts the actual position of the hotel. The income statement would express how much sales and expenditure has occurred and on the other hand the cash flow statement will reveal the amount the hotel has received and have paid in real.

Ratios to Evaluate Growth

Leaving apart the financial statements of the hotel, the financial statement should have the information about the competitors of the hotel. Therefore, the hotel can compare itself with the industry and must gain knowledge about the pattern of the market.

As discussed above by observing the income statement and the comparative financial statement it can be said that the performance of the hotel is very weak. The hotel is not even on breakeven point as it has being incurring losses. The following are the methods the management can use in order to increase the performance of the hotel:

Provide maximum hospitality: The hotel staff should treat every guest very special. They should be polite, responsive, and for everyone they should have a sense of urgency. The experience of the hotel should be memorable for the guest

Staff should the trained for everyday basis not just for one time affair: The hotel should employee experienced staff and should have regular supervision over their performance. Their remuneration or commission should be proportionate to the sales so they are well motivated to focus on increasing sales.

Better marketing strategies: The hotel should identify their target audience and should do marketing through various sources. It should list itself on the best website and should offer various schemes and should also do advertising on social media, newspaper and should offer various discount coupons so the number of customer increases. The hotel should also provide some schemes for the customer residing in the hotel such as providing free breakfast, spa services. They should even focus on making the hotel kid friendly such as having baby chairs in the restaurant, having kids room and having baby tubes to access the pool.

Providing delightful meals: The customer satisfaction is the best way to operate the business. The customer arrives at the restaurants to enjoy food. So the hotels should give maximum focus to the quality of food they are serving to their customers. The restaurants should have proper management and stringent controls over the quality of food they are serving. Their staff should be neatly dressed and should provide quick service.

Proper forecast by top management: In the given case study the performance of the hotel is very poor. Therefore, the top level management should study what are the strategies followed by their competitors who are running a successful business. The top level management should study the pattern regarding exactly what is going wrong in their process. The management should make practical forecasts, targets and proper incentive schemes for their employees.

Valuation Ratios

Ambiance: The customers arrive at the hotels to enjoy ambiance, environment and meals. Therefore, the hotel should have proper provision of air cooling, music and very prim and proper ambiance.

Spending too much on administration and day to day maintenance expense: In the given case study there is an imbalance between the income and expenditure. It has been observed that the sales are very low and on the other hand there is too much of expenditure on the administration and day to day expenditure. Therefore, the management should undertake maximum exploitation of the given resources and should not go overboard with their expenditure.

It is essential for the management to undertake various steps and strategies that would be influential for the improvement in the financial scenario of the hotel. It has been observed that the hotel has been facing losses and the financial statement of the hotel has not indicated any positive sign. Hence, the initiation of the various steps and actions can be helpful for the improvement in the financial statement of the hotel. It is seen that the management should look to improve the financial condition by managing and supervising the construction of the financial data so that effective results can be obtained (Cinelli, Coles and Kirwan 2015). The management should even look to construct strategies that would increase customer base of the hotel. It is essential to provide various attractive schemes and promotional activities that would be fundamental for increasing the sales margin of the hotel. The introduction of various additional facilities like free-Wi-Fi, pools and fusion restaurants can be fundamental for improving the financial activities and the operational activities of the firm. The improvement in the service quality and the food quality can increase the level of revenue of the hotel. The management should even undertake effective training program for their employees in order to make them stay updated with the market. The management should even enhance the communication level among the employees so that improvement in the operational activities can be developed (Evangelou and Ioannidis 2013). Feedback from the customers can even be taken in order to understand the faults and the grievances that are seen in the hotel so that effective measures can be taken in order to improve the financial position of the hotel.       

It has been observed that all the ratios that have been explained above cannot be explained with respect to the financial figures that have been provided with respect to the hotel. Therefore, it is seen that only a few of the ratios have been used in order to understand the financial position of the company.

DuPont Analysis

Asset Turnover Ratio= 0.0142

Net Profit Margin= -1.34%

Return on Assets= -1.90%

Conclusion

The analysis of the financial statements that have been provided by the hotel reveals that the financial condition of the hotel is very poor and the financial statement only comprises of the income statement and there is non-existence of a balance sheet and the cash flow statement. Therefore, the hotel needs to construct their balance sheet and the cash flow statement and in this manner can improve their financial scenario. It is seen that implementation of the strategies that have been suggested in this paper would be fundamental for the development and expansion of the hotel and in that manner would increase their revenue of the firm. Therefore, the implementation of these strategies would enhance the operations of the hotel and in that manner improve the financial condition of the hotel.

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