FINANCE AND FUNDING IN THE TRAVEL AND TOURISM INDUSTRY
- Financial Analysis:
This section of the report would compare the financial performance amongst the two hotels of Australia. The two hotels chosen for the comparison are Shangri-La Hotel, Sydney & Hotel Plaza Limited (Sharman & Paul, 2003).
The Financial analysis also known as Accounting analysis refers to the process of calculating the stability, viability & profitability of an enterprise or a particular project.
Various ratios would be calculated in order to perform a financial analysis amongst the two hotels mentioned above. These ratios would help us to know as to which hotel is better in the travel & tourism industry (Sharman & Paul, 2003).
The Income Statement & the Balance Sheet of the two hotels mentioned above is as under. Financial, Activity & Liquidity Ratios would be calculated in order to get a brief idea about the financial stability of both the hotels located in Australia.
These ratios would help to assess their performance as compared to one another.
Income Statement & Balance sheet for Hotel Plaza are as under:
The Income Statement & Balance Sheet of Shangri-La Hotel are as under:
The Income Statement & Balance Sheet for Shangri-La Hotel is as under:
1.1 Financial Ratios:
Financial ratios would help to provide a signal regarding the long-term solvency of the hotel. Financial Ratios measure the limit to which the hotel or any organization uses long term debt (Peavler).
1.1.1 Debt to Equity Ratio:
The debt equity ratio is calculated by the following formula:
= Total liabilities/ shareholder’s fund
In case of Shangri-La Hotel, Sydney the debt to equity ratio would be as under i.e.
Total liabilities = 164937 Aus. $ Shareholders’ Fund = 1239587 Aus. $
Therefore, the debt to equity ratio for Shangri-La Hotel would be
= 164937/1239587
= 0.1331
Whereas, in case of Hotel Plaza, Australia the figures are as under:
Total liabilities = 188252 Aus. $ Shareholders’ Fund = 676901 Aus. $
Thus, the debt to equity ratio would be:
= 188252/676901
= 0.2781
The debt to equity ratio shows that Shangri-La has high debt/equity ratio as compared to Hotel Plaza. This means that Shangri-La has been assertive in financing its growth with the help of debt. This means that Shangri- La has volatile earnings which results in additional interest expense.
A high debt to equity ratio also depicts that since Shangri-La has invested lot of debt in its operations, therefore, the hotel would generate more earnings in near future.
1.2 Activity Ratios:
1.2.1 Assets Turnover Ratio:
The asset turnover ratio would help the hotels to indicate how effectively & efficiently the hotels use its assets. It is also known as Efficiency Ratios.
Asset Turnover Ratio is calculated by the following formula i.e.
= Net Sales/ Average Total Sales
The asset turnover ratio for Shangri-La Hotel, would be calculated as
Net Sales = 52696 Aus. $ Average Total Assets = 4308047 Aus. $
Thus, the ratio would be = 52696/ 4308047
= 0.0122
The asset turnover ratio for Hotel Plaza, would be calculated as
Net Sales = 56293 Aus. $ Average Total Assets = 881565 Aus. $
Thus, the ratio would be = 56293/ 881565
= 0.0639
By calculating the asset turnover ratios for the two hotels above, we can conclude that Hotel Plaza has high asset turnover which means that it utilizes its assets in the best possible manner in order to enhance its sales. This also indicates that the pricing strategy followed by the hotel. A low pricing margin is adopted by the same & hence it earns high asset turnover ratio (Sharman & Paul, 2003).
1.2.2 Inventory Turnover Ratio:
The inventory turnover ratio can be calculated as under i.e.
= Annual Sales/ Inventory Cost
The inventory turnover for Shangri-La Hotel would be calculated as under
Annual Sales = 52696 Aus. $ Total Inventory = 8948 Aus. $
Thus, the ratio would be = 52696/8948
= 5.8891
The inventory turnover for Hotel Plaza would be calculated as under
Annual Sales = 56293 Aus. $ Total Inventory = 362 Aus. $
Thus, the ratio would be = 56293/362
= 155.5055
The low inventory turnover rate in case of Shangri-La points to deficiencies in the product line, obsolescence. But, in some cases the low inventory turnover ratio turns out to be use full. A higher inventory ratio generally occurs when there is a rapid rise in the prices. A high turnover ratio may also depict low stock levels further leading to a loss in hotel (Sharman & Paul, 2003).
1.3 Liquidity ratio:
1.3.1 Current Ratio:
The current ratio for both the firms would be as under:
= Current Assets/ Current Liabilities
The current ratio of Shangri-La Hotel would be calculated as under
Current Assets = 4237774Aus. $ Current Liabilities = 3068460Aus. $
Thus, the ratio would be = 4237774/3068460
= 1.3811
The current ratio of Hotel Plaza would be calculated as under
Current Assets = 194698Aus. $ Current Liabilities = 16412Aus. $
Thus, the ratio would be = 194698/16412
= 11.8631
Therefore, the current ratio signifies that the hotel has enough resources to pay off its debts for the next one year. Since, the current ratio of Shangri-La Hotel is under the range of 2:1, it depicts that the hotel would be able to pay off its short term depicts on time. Whereas, in case of Hotel Plaza the current ratio is too high & indicates the hotel might have problem in paying off its liabilities (Sharman & Paul, 2003).
1.3.2 Quick Ratio:
Quick ratio can be calculated as under:
= Current Assets – Inventory/ Current Liabilities
The quick ratio of Shangri-La Hotel would be calculated as under
Current Assets – Inventory = 4228826Aus. $ Current Liabilities = 3068460Aus. $
Thus, the ratio would be = 4228826/3068460
= 1.3782
The quick ratio of Hotel Plaza would be calculated as under
Current Assets – Inventory = 194336Aus. $ Current Liabilities = 16412Aus. $
Thus, the ratio would be = 194336/16412
= 11.8411
- Cost Volume Profit Analysis:
Cost Volume Profit Analysis (CVP) refers to a mechanism which helps in making short term decision making process. The Cost Volume Profit analysis includes certain components such as Unit Selling Price, Variable Costs, Fixed Costs, Sales price, Level of activity, etc.
The Hotel Industry possesses a very excessive level of fixed costs; this indicates that high losses would be the output if the sales are comparatively low & goes below the break-even analysis. Thus, it can be concluded that cost-volume-profit (CVP) model, which is majorly applied within the hotel industry to calculate the break-even analysis, is a very essential managerial tool which helps in future forecast as well as meeting with the requirements. There are various pricing methods & techniques which would help any kind of hotels to increase their sales as well as profits.
The CVP model for hotels would start with a profit equation & the contribution margin. Profit would be calculated by the following equation such as Profit = Total Revenue – Total Costs. The cost in the hotel industry could be divided into two parts, Fixed & Variable costs. The contribution margin would help to have clear understanding between the revenue earned by selling a single item or a product (Peavler).
The Hotel industry is a sector which provides its users multiple products & services. In such type of an industry a constant sales mix helps in the computations of Cost Volume Profit analysis. The Cost Volume Profit analysis can also be used by the hotel industry to calculate the breakeven point, or a point at which the revenues covers all fixed & variable costs, which results in zero or null profit (Hotel plaza limited).
In order to have a better understanding of the cost volume profit analysis, we can also use a graphical representation of the same i.e. CVP Graph. It shows a relationship between the revenues earned by selling a unit of product or service. It also represents the amount of profit earned by the hotel thereby increasing the volume of sales (Weygandt, Kieso & Kell, 1996).
Under the CVP model, it also consists of Margin of Safety. The margin of safety would help the hotel to increase the volume of the sales. The margin of safety would also indicate the value by which the sales could drop before profits would reach the breakeven point (Weygandt, Kieso & Kell, 1996).
The practical applicability of Cost Volume Profit Analysis could be explained with the help of an example of Hotel Plaza, Australia (Weygandt, Kieso & Kell, 1996).
Suppose the total cost of hotel is 500000 Aus. $ (per 1000 units). The total cost is divided in the ratio of 2:3. The total revenues for this particular hotel are 2000000 Aus. $.
Thus, the profit earned by the hotel would be 2000000 – 500000 = 1500000 Aus. $.
The total cost would be divided as under:
Variable Cost = 500000 * 2/5 = 200000 Aus. $
Fixed Cost = 500000 * 3/5 = 300000 Aus. $
The contribution margin would be calculated by the following formula i.e. Total Revenue – Variable Cost, 2000000 – 200000 = 1800000 Aus. $.
The contribution margin per unit would help the hotel to have an idea regarding the revenue earned from each unit sold which can be applied towards the fixed costs.
In order to calculate the breakeven point, the values of variable & fixed costs is to be known. Such information would be helpful to calculate the hotel’s breakeven point.
The breakeven analysis is a very popular tool used by the business owners in order to evaluate the volume of the product they should sell in order to make huge profits. It is a vital part of the cost-volume-profit (CVP) analysis & ascertains a point to the management of the hotel at which they will neither earn a profit nor a loss (Weygandt, Kieso & Kell, 1996).
In the above example, the hotel would attain the break even at 166.66 units (approx.) i.e. Breakeven point = fixed cost/profit – variable cost, fixed cost 300000 Aus $, total profit 2000000 Aus. $ & variable cost 200000 Aus. $. This suggests that at sales of 166.6 units (approx.) the hotel would neither earn a profit nor a loss. Breakeven point depends upon the total revenue as well as the variable cost. If any of the changes the breakeven point would also change.
- Accounting Information & its importance:
Accounting information plays an essential role in the decision making process of hotels as well as other organizations. Accounting information helps in the formulation of the budgets & would also help to forecast the revenues (Downie, 1997).
There are various accounting information techniques which help the hotels to manage their budgets. The first & the most important accounting information tool which should be used by every hotel in order to have a fair idea regarding each & every cost involved in the functioning of the hotel is Cost Accounting (Downie, 1997).
The study of Cost accounting would help the hotel to manage all the various costs & would help in short term as well as the long term decision making process.
In order to forecast the revenue to be generated in the future, hotels can also use another method known as the Delphi Forecasting Method. In this type of method experts from the similar background would sit together with the officials of the hotel & try to formulate new strategies in order to increase the sales volume.
Various quantitative forecasting methods would also be used by hotels in order to prepare the budgets.
If you want Accounting management Assignment Help study samples to help you write professional custom essay’s and essay writing help.
Receive assured help from our talented and expert writers! Did you buy assignment and assignment writing services from our experts in a very affordable price.
To get more information, please contact us or visit www.myassignmenthelp.Com
