Finance in the hospitality industry

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 Sl Contents Page No.
1 Introduction 3
1.1 Review sources of funding available to restaurant or an event planning business and 3
services industries
1.2 Evaluate the contribution made by a range of methods of generating income within 4
restaurant or an event planning business and services operation
2 Grants are the other option to generate the income from the government and local 5
authorities.
2.1 Elements of costs, gross profit and selling prices for products & services 5
2.2 Methods of controlling stocks and cash in a business & services environment 6
3 Financial plan 7
3.1 Prepare a trial balance for Alina Ltd as at 31st December 2017 and assess the source 7
and structure of the trial balance of Alex Ltd
3.2 You are required to calculate the following and prepare the balance sheet 7
3.3 Purposes of budgetary control: According to the Needles et al (2010, pp. 966-969) 8
budgetary control process can be identified as follows.
3.4 Analyse the variances from the budgeted and actual figures and advise Delilah (the 9
manager) on appropriate future management action she could take to improve
performance
4 Calculation of ratio 9
4.1 Calculate the following ratios for Tai restaurant and evaluate by comparison with the 9
ratios of Wasabi restaurant to choose the business that is most profitable
4.2 Recommend actions be taken to improve the performance of Wasabi restaurant 12
5 Cost classification 12
5.1 Categorise the above costs as fixed, variable and semi-variable, and explain the logic 12
behind each category
5.2 Produce a marginal costing statement for the restaurant 13
5.3 You are required to calculate the break – even point in units and justify whether 13
management should go ahead with the concert
6 Conclusion 14
7 Refferences 14

Introduction:
The employee of financial service firm helps different way to provide the service to restaurant or
an event planning business and services industries. The finance service employee helps the
business owner by providing proper guideline regarding finance, costing and its operation
activities. The small business owners always think that established a business organization is

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very difficult at present time because day by day more competitor and rules are imposed on the
business organization which make them demotivated to start the restaurant business. So it is the
main challenge for all employees of financial service organization to give proper guideline to the
business owner which help them to establish a new business.
Task 1

(AC 1.1) Review sources of funding available to restaurant or an event planning business and
services industries
According to (McKenzie, W, et al, 2003) To establish a new business proper funding is always
required for the business. In respect of restaurant business finance service firms helps the owner
to collect the proper finance for restaurants business. Some sources of finance are given below:
Retain Profits.
According to (McKenzie, W, et al, 2003) By reducing the direct cost of business any owner can
save the profit and this things will be included the retained earnings side which helps the owner
to more finance in the business.
Bank Loans.
Company owner can take loan from the banks or financial institutes by low interest rate with
installments. This is very effective way to raise the funding of restaurants business because
owner can easily show his business plan and take loan from the bank.

Small Business Schemes: small business schemes is a good source of financing policy. This
way small business organization can manage small finance for the restaurant. This small
Business schemes helps the organization to support the business activities and take interest when
the business has earn positive cash flow.
Issuing share to the public
Finance firm also give advice to the owner of the company to introduce the IPO which helps the
owner to raise the company fund. This is very effective way to manage the big finance for the
organization. This things helps every organization to manage huge finance to expand the
business and directly manage the fund from public by offering the company share.

Franchise option.

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This is one of the best option to do the long time financing of the company. Normally the
company applies their goodwill to go for Franchising. This process helps the organization to
expand their business globally.
Sponsorship
According to (Hales, J.(et al, 2006) Sponsorship is one of the best option of funding if owner get
proper sponsorship, owner can easily manage his required fund for the restaurant business.
Venture capital
Venture capital is one of the best option to manage the proper fund. This process someone will
invest the ideas that the business owner introduce. Investor invest the money to the proper
project and owner are free to invest his money, owner only generate his ideas for this types of
financing.

(AC 1.2) Evaluate the contribution made by a range of methods of generating income
within restaurant or an event planning business and services operation
There have several ways the restaurant holder can generate the income from the restaurant
business and contribute to the business.
Sales
According to (Hales, J.(et al, 2006) In this restaurant business someone can easily generate the
revenue by the process of high sales. The owner can sell different types of cultural food and
traditional food, breakfast package, lunch items, dinner package and owner can also offer
beverages to the customers.
Commission.
This process owner can also generate the income or contribute to the business. Owner can sell
third parties product such as beverage items, special food Manu and others foods items of
different parties and get the proper commission from the parties.
Sponsorship
According to (Hales, J.(et al, 2006) By managing ownership or promoted other business owner
can easily generate income from the restaurant business. This process only possible when the
business owner of the restaurant business can manage to establish his brand.

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Grants
Grants are the other option to generate the income from the government and local authorities.

(AC 2.1) Elements of costs, gross profit and selling prices for products & services.

Element of Costs
Restaurants business can generate different types of cost. Day to day business activities and
initial expenses are the main parts of expenses and the things are given below:
Materials
Material cost is the main cost of restaurant business this cost is mainly generate when the
business continuously providing services to the customers. Such as Linen, silverware and
cookeries items
Consumables: Consumables product is the main expenses in restaurant business. To provide
Day to day service consumable product such as foods beverage and others items always incur for
the restaurant business,
Eg : Foods and Beverages
Labor: According to (Harris, P., et al, 2010) Labor cost is a part of prime cost. It is a
controllable cost. So our organization will try to control this cost to reduce the final products
cost.
Eg: salary to waiters.
Overhead: Overhead is cost incurred of indirect material, indirect labor cost, depreciation of
equipment, salary of drawing office etc.
Eg: Salary of admin department, electricity, stationery
Pricing in tourism: Selling price in peak season are adding an higher margin with the
operational activities. Offering discounts and different promotional offer for the clients.
Conventional pricing: Here setting different margin of profit in different sector of product such
as food and beverage.
Absorption pricing method: Variable pricing method will be count first here then adding a
margin here.

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Contribution pricing method: This is a process where after calculating the variable cost then
adds fixed cost and add margin.
Backward pricing model: This is method where adjusting the operational cost. Industry think
about here different types of operational cost.
Product and service cost: Accurate costing is a crucial part of the business. If our restaurant
fails to do then the organization will face losses. So that we are try to make a good costing
policy.

(AC 2.2) Methods of controlling stocks and cash in a business & services environment:
According to (McKenzie, W, et al, 2003) Stock controls: Stock is the part of current assets.
Controlling stock is the managing of working capital and organization’s inventory. When a
manager thinks to manage the working capital the manager need to think about controlling the
stock. At first the manager need to compute The EOQ (Economic optimum quantity) level to
know the lowest cost of every order. EOQ is computed by adding the ordering cost, carrying cost
and inventory cost. Where the manager need to compute some more important items that are the
carrying cost, ordering cost ,re order level, maximum order point, minimum order point,
maximum level and minimum level. Re-order point indicates the level of order point at where
inventory doesn’t go down.
According to (Harris, P. et al, 2010) Restaurant business mostly maintains the stock cost.
Because of this type of organization always keep better stock raw material but the company
should follow to keep less product because of restaurant are using perishable product.
Implement the CBS (Computer based system) for maintaining the stock raw material. For that
reason the company should implement ERP system to use ERP.9 or Java or Oracle. But now-a-
days people are using mostly SAP system.
Cash control: There should be following controls over the cash. Implementation of dual cash.
Prepare of bank reconciliation statements so that organization can maintain the cash book and
bank book at a time. Try to maintain properly to remove the loses of cash for unhealthy practice
of staff. Maintain a pretty cash book. The manager can also control the other elements remove
the extra cost.
Task 2

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(AC 3.1) Prepare a trial balance for Alina Ltd as at 31st December 2017 and assess the source
and structure of the trial balance of Alex Ltd
[1]
Alina Ltd
Trial Balance
As at 31st December 2017

Particulars Dr (amounts in '000) Cr (amounts in '000)

Capital   200
Stock 20  
Sales   100
Cash and cash equivalent 110  
Bank Loan   70
Furniture and fittings 180  
Trade Receivable 30  
Trade Payable   20
Wages 50  
Total 390 390

(AC 3.2) You are required to calculate the following and prepare the balance sheet
(a)
Kieran Foods
at 31st December2017
Current Asset

Accounts receivable 60484

Cash 7054
Inventory 80042

Non-current [Fixed] Asset

Mortgrage 20708
10050
Building 0
Equipment 40950
Vehicle 30200
Liability

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 Accounts Payable 51343
Wages payable 3060

(b)
Balance Sheet
Kieran Foods
As on 31st December 2017

Asset Amount Liability Amount

Mortgage 20,708 Accountpayables 51,343
Accountreceivables 60,484 WagesPayable 3,060
Building 100,500 Equity 245535
Equipment 40,950
Cash 7,054
Vehicles 30,200
Inventory 80,042
Total 299938 Total 299938

(AC 3.3) Purposes of budgetary control: According to the Needles et al (2010, pp. 966-969)
budgetary control process can be identified as follows.
Period of budget: Period of budget means duration of budget. It varies. Some time it may be 3
months or 6 months or may be 1 year (McDonald, M. & Dunbar, I. 2004). But it will be done
during 1 year for every company. Restaurant should make a budget for the company but
restaurant should choose a budget method from different budgetary systems. There are 5 types of
budget method these are: 1. Activity based budget, 2. Zero-based budget method, 3. the cash-
only budget method, 4. Priority based budget method, 5. Balance money formula technique. But
the restaurant industry may use the cash only budget method. The restaurant goes through the
whole budget by a best plan. If the restaurant fail to make a good budget then the restaurant will
face a trouble to a make profit. Restaurant business should make budget based on two month or

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three month. Because of there are some pick season in every business. So the restaurant should
make a good business budget.

(AC 3.4) Analyse the variances from the budgeted and actual figures and advise Delilah (the
manager) on appropriate future management action she could take to improve performance

  Budget Actual Variance Variance in % Status

Number of 4 15,000.0 166.6 Negativ
participants 0,000.00 25,000.00 0 7 e
4,000.0 100.0 Negativ
Revenue
8,000.00 4,000.00 0 0 e
1,000.0 200.0 Negativ
Cost of sales
3,000.00 2,000.00 0 0 e
3,000.0 66.6 Negativ
Gross profit
5,000.00 2,000.00 0 7 e
Administrative 350.0 128.5 Negativ
expenses 800.00 450.00 0 7 e
Distribution 150.0 100.0 Negativ
expenses 300.00 150.00 0 0 e

Overall status of the budget of the company is negative because they could not fulfill one of the
criteria of their line item. Here are the item wise appropriate future management action that could
take to improve performance of the business.
Number of participants:
The participant budget was 40000 but actually it was 25000 so they need to improve quality of
the service as well as need some marketing activities to improve the participants.
Revenue:
Revenue is almost half of the budge it is indicts that business was unable to make it target sales.
So they need improve their service as well as some promotional activities should be undertaken.
Gross profit:
According to (Harris, P., et al, 2010) Budgeted gross profit was not achieved because they
cannot fulfill the sales amount or revenue amount of the business. In that Cases Company’s
expense should be reduced to enhance gross profit.

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Administrative Expenses:
This is good that administrative expense is lower than the budgeted amount. As the company’s
revenue was lower so administrative expense was also lower.
Distribution Expenses:
Actual distribution expenses of the company was half than the budgeted amount 300,000. This
was happen because the company’s budgeted revenue target was not fulfilled.
Task 4

AC 4.1 Calculate the following ratios for Tai restaurant and evaluate by comparison with the
ratios of Wasabi restaurant to choose the business that is most profitable.
Tai restaurants:
Gross Profit Margin:
= Gross profit / Sales * 100
= (359 / 837) * 100
= 42.89%
Operating profit Margin:
= Operating profit / Sales * 100
= (135 / 837 ) * 100
= 16.13%
Current ratio:
= Current asset / current liability
= 176 / 90
= 1.96 : 1
Trade receivable period:
= Trade receivable / Credit sales * 12
= 96 / 837 * 12
= 1.38 times
Trade payable period:
= Trade payable / credit purchase * 12
= 45 / 255 * 12
= 2.11 times
Gearing ratio:
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= Total interest bearing notes / total shareholders’ equity
= 300 / 409
= .73
Comparison between two companies:

Tai Wasab
Comments
restaurant i
Wasabi’s gross profit margin is better than
Gross profit margin 42.89% 43.80% tai restaurants, it indicates that the
profitability of the Wasabi is high.
Wasabi’s operating profit margin is lower
than tai restaurants, it indicates that the
Operating profit margin 16.13% 13.80%
administrative and distribution cost of
Wasabi is high.
As current ratio of Tai restaurant is high
then Wasabi which indicates that Tai can
Current ratio 1.96:1 .99: 1
repay its current liability easily through its
current asset.
Trade receivable period of Tai restaurant is
low then Wasabi it indicates that tai
Trade receivable period 41.4 56.2 Restaurants can receive its receivable in
earlier period of time which is good for Tie
restaurant.
Trade payable period of Wasabi is high then
Tai restaurant it indicates that Wasabi can
Trade payable period 63.3 83.9
pay its liability longer period of time then
tie restaurants which is good of Wasabi.
Gearing ratio of Wasabi is 2.9 which is idle
in case of Tie restaurants gearing ratio is .73
Gearing ratio 0.73 2.9
which is lower in terms of the company
status.

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AC 4.2 Recommend actions be taken to improve the performance of Wasabi restaurant

 Wasabi can increase its revenue amount so that it will increase profitability and
performance of the organization.
 Administrative and distribution cost should be minimized by the company for better
profitability ratio of Wasabi.
 Payable period of the company can be increased by payment to its supplier longer period
of time so that company have some money for working capital.
 Receivable period of the company can be decreased so collection amount from the
customer at shortest period of time so that company have some money for its working
capital.
 Gearing Ratio Company should be lower by repaying some of its debt.

Task 5

AC 5.1 Categorise the above costs as fixed, variable and semi-variable, and explain the logic
behind each category
Fixed Cost

 Rent of the use of hall

Semi variable cost

 Electricity bill
 Telephone charge

Variable Cost

 Cost of wage per ticket

 Cost of printing ticket
 Cost per popcorn per ticket

AC 5.2 Produce a marginal costing statement for the restaurant

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Marginal Costing Statement:

Description Details Amount

Revenue 5000*30 150000
Cost of wage 5000*10 -50000
Cost of printing per ticket 5000*1 -5000
Rent for the use of the hall per
annum   -35000
Electivity bill   -6000
Telephone charge   -2000
Gross Profit   52000

AC 5.3 You are required to calculate the break – even point in units and justify whether
management should go ahead with the concert
Breakeven point: Total fixed cost / contribution margin
Total Fixed cost = 35000
Contribution margin = 30 – 10 – 1 = 19
So, breakeven point = 35000 / 19 = 1842 Units
Justification:
accoding to (Harris, P., et al, 2010) Yes, management should go ahead for the concert because at
the unit 1842 they are in a break-even point. So in 5000 unit they will be in a profitable scenario.
So management should go ahead with the concert.

Conclusion: Planning of business is great things for the business people or business students.
But a person should consider each and every sector of business including accounts, marketing,
management etc. If business planner can reduce the cost of business hen it will be great for the
business.

Reference:

Harris, P., Francis (2010) Accounting and Finance for the International Hospitality Industry

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