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Financial Analysis: Luna Hotel Add in library

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Questions:

1. Rebecca believes it is important to focus on her cash flow. Explain why a social enterprise such as Luna Hotel might face cash flow problems. Evaluate the usefulness of cash flow forecasts and budgeting in managing and controlling cash flow. What other methods might be available to Luna hotel to improve its cash flow. (45%)

2. Explain what is meant by break-even analysis and evaluate its usefulness. Using the information provided for the introductory course in ‘organic gardening in line with moon cycles’ calculate (a)the number of participants needed to break even, (b)the number of participants to achieve the target profit. (30%)(Include in your report appendix your calculations).
 
 

Answers:

Introduction

Luna Hotel is facing cash flow problem. The hotel is known for its seasonal trade services while the occupancy during the mid week remains low. The hotel has an overdraft facility with the local bank. However the overdraft limit crosses most of the time and the company faces cash flow problems. The company faces problems in forecasting the cash flow and the budget. The reasons behind the cash flow problems have been identified and the probable solutions to the problems have been entailed (Almeida, Campello and Weisbach, n.d.).

1. Cash flow problems for Luna Hotel

Luna hotel is a small business enterprise. It is a social enterprise that organizes various programs for the people with disabilities. But it does not enjoy the same cash flow benefits like the large organizations in the market place. A social enterprise runs the business for the welfare and the wellbeing of the consumers. Profit maximization is not the sole motive of such an organization. Thus it faces cash flow problems. The expenses of the company are more than the revenue earned by Luna Hotel. This results in cash flow problems (Bitz and Terstege, 2003).

 

Usefulness of cash flow forecasts and the budgeting process

Cash flow forecast is important tool for the management of the cash flow of the organization. The business would fail if it does not forecast the expenses for the suppliers and the wholesalers. It has to forecast the expenses that are necessary for the management of the inventory. The company has hire employees on the basis of the forecast of sales. The accurate flow of cash in future can be ascertained on the basis of the history of the sales and the expenses. Thus the company will not face the situation of running out of inventory during the period of sales boom. This will reduce the vulnerability of the business (Bradbury, 2011).

Budgeting process is the method for the allocation of the resources. It is an important tool for monitoring and controlling the operations of the business. The process serves as an important tool for the coordination of the various departments so that the organization is sheered towards its objectives (Müller, 2006). The forecast of budgeting provides a framework for the delegation of the business activities in the organization. The errors and the difference with the actual results can be identified so that probable changes in the allocation of resources can be done (Diamond, 2003).

Methods to improve cash flow

The cash flow in the organization can be improved by the forecasting the expenses and the income of the organization. The expenses can be managed in an efficient manner with the proper forecast of the expenses on the basis of the historical results. Luna Hotel has to manage the receivables in an efficient manner. A forecast of the budget will serve as an important tool for the proper allocation of the resources. This will reduce the misuse of the resources. The company will be able to invest in social activities with the proper management of the resources.

 

2. Break even analysis

Break even analysis is to determine the point at which the revenue is equal to the cost that is associated with receiving the revenue (Vance, 2003). The margin of safety is calculated via the break even analysis. The amount at which the revenue will exceed the breakeven point is calculated. The process of break even analysis is supply side analysis. It is used for the analysis of the cost of the sales. The demand that will be affected as a result of the change of prices is not calculated by this process. Break even analysis is an important tool to determine the minimum output that has to be exceeded so that the required profit can be reached. It is one of the simplest analytical tools that is used by the management (Cafferky and Wentworth, 2010).

Usefulness of breakeven analysis

 
Break even analysis is an important tool for the calculation of the profitability of the product. The aim of the organization is to maximize the profitability of the organization.
The company will be able to determine the number of units that has to manufacture to position itself in a profitable position by the calculation of the break even analysis.The unit prices can be set by the calculation of the break even analysis. The price per unit can be determined by leaving the cost per unit as the variable in the calculation of the break even analysis equation. The most effective unit price will bring profitability to the organization.
The financial strategy of the organization can be determined by the break even analysis. The company will be able to take better financial strategy that will fit the projected cost and the profit of the company. The company will be able to take strategic decisions on the basis of break even analysis (Kimmel, Weygandt and Kieso, 2011).
 

Sales

2470

Variable costs

670

Contribution margin

1800

Ratio of contribution margin

73%

 

 

 

 

Number of participants to break even

260.7222222

 

 

 

 

Number of participants to achieve the target profit

2730.722222


The number of participants that is required to break even for Luna Hotel has been calculated. The number of participants is 261. However the number of participants that will be required to achieve the target profit is 2731.

 

Conclusion

The paper has analyzed the problem of cash crisis for Luna Hotel. It is important for the management to forecast the cash flow and the budget so that the cash can be managed in an efficient manner. This will improve the flow of cash in future. The process of budgeting will serve as an important tool for the allocation of the resources in a proper way. This will reduce any misallocation of resources in future. There will be savings in cost. The break even analysis will serve as an important tool for the calculation of the profitability of the product. Rebecca will be able to make the financial strategy on the basis of the break even analysis on the basis of the calculation of the number of participants that is required to break even. The break even analysis for the introductory course organic gardening in line with moon cycles has been calculated.

 

References

Almeida, H., Campello, M. and Weisbach, M. (n.d.). The Cash Flow Sensitivity of Cash. SSRN Journal.

Bitz, M. and Terstege, U. (2003). Cash-Flow-Analyse und Cash-Flow-Management. WIST, 32(1), pp.2-7.

Bradbury, M. (2011). Direct or Indirect Cash Flow Statements?. Australian Accounting Review, 21(2), pp.124-130.

Cafferky, M. and Wentworth, J. (2010). Breakeven analysis. New York: Business Expert Press.

Diamond, J. (2003). Performance Budgeting: Managing the Reform Process. IMF Working Papers, 03(33), p.1.

Kimmel, P., Weygandt, J. and Kieso, D. (2011). Accounting. Hoboken, N.J.: Wiley.

Müller, G. (2006). Budgeting process for information security expenditures.WIRTSCHAFTSINFORMATIK, 48(4), pp.286-288.

Vance, D. (2003). Financial analysis & decision making. New York: McGraw-Hill.

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