Fundamentals of Business Finance

Case study of The Star hotel

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Date of Submission: 12/03/2023

Table of Contents

Introduction......................................................................................................................................1
Purposes of Financial Information...................................................................................................1
Characteristics of Good Financial Information...............................................................................3
Explanation of Financial Terminologies.........................................................................................4
Analysis and Interpretation of Financial Performance....................................................................7
Calculation and Comparison........................................................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
Introduction

Financial information is referred as any kind of data or detail related to the financial activities of
an individual or organization (Collis et al., 2002). This information includes statements of
financial such as balance sheets, income statements, statements of cash flow, budgeting as well
as forecasting reports, tax returns, audit reports etc. that provide insights into an entity's financial
performance such as financial health, profitability, liquidity, and solvency (Aaker et al., 1994).

The given case is based on financial information about a 4-star hotel in UK named The Star
Hotel. In case of hotel management, financial information is also crucial for making informed
decisions about financial planning, budgeting, forecasting and resource allocation and for overall
tracking. The primary objective of this study is to interpret the performance of financial activities
of the Star Hotel through properly analyzing the given financial information and statements for
the ended financial year, 31 December 2020. There will be broad discussion about purposes and
characteristics of financial information, financial terminologies and evaluation of financial
performance by analyzing the comparison between the targeted ratios and actual ratios, ratios of
profitability, ratio of gross profit, ratio of ROCE, ratios of asset turnover and accounts receivable
turnover and finally conclusion will be given through findings of the report explained.

Purposes of Financial Information

There is a primary purpose of financial information which is providing insights and analysis on
financial performance of a business entity (Habib et al., 2013). A variety of stakeholders such as,
employees, managers, investors, government agencies etc. use financial data and information to
make significant decisions about the financial health and future prospects of an entity. Some of
the key purposes of financial information include:

 Providing Insights into Profitability: Financial information can be used for assessing profit
margin and profitability of a business by analyzing its income, expenses and profit margins.

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 Evaluating Financial Position: Financial information can be used for assessing liquidity,
solvency, and overall financial health of a business entity by analyzing its assets, liabilities,
and equity.

 Providing Information about Resources: Financial information keeps track about

acquisition of the resources and their utilization as well such as inventory, labor hour,
production capacity etc.

 Facilitating Decision-making: Financial information can be used by stakeholders to make

informed decisions about investments, lending, pricing, and other strategic activities.

 Ensuring Compliance: Financial information can be used by government agencies to ensure

that entities are complying with regulatory requirements and tax laws.

 Predicting Bankruptcy and Failure: As financial information keeps the track of solvency
and the liabilities payable, it helps predict bankruptcy and thus business entity can avoid
failure through taking proper actions.

 Supporting Performance Evaluation: such evaluation is done by the managers for

assessing financial performance and identifying the areas where improvements can be made
for growth.

Overall, financial information plays a significant role in providing data and information so that
stakeholders can ensure the financial health and prospects of an entity with proper decision
making (Diana et al., 2020).

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Characteristics of Good Financial Information

Financial information have some certain qualities or characteristics so that they can be useful and
convenient for users and by using those, stakeholders make informed decisions and assess the
financial health and performance of an entity (Knight et al., 2000). Good financial information
should possess the following characteristics:

 Accuracy: Financial information should be accurate and free from errors, omissions and
biases.

 Simplicity: Financial information should be in simplified form and simple language without
having unnecessary data.

 Reliability: Financial information should have reliability, which means it should be

consistent and material misstatements can be avoided.

 Relevance: Financial information should possess relevancy for the users, meaning that it
should be timely, understandable, and useful.

 Completeness: Financial information should be complete and clearly defined, so that using
all necessary information, users can make informed decisions properly and accurately.

 Comparability: Financial information should be comparable, meaning that it can be

compared with other entities or over time to identify trends and patterns.

 Consistency: Consistency should be maintained in financial information, which means that

using the same and standard accounting methods over time.

 Understandable: Financial information should be presented in clear and concise language

and should avoid technical jargon.

 Future Proof: Financial information is used as future proof as it helps maintain and manage
profits and losses of a business entity.

 Timeliness: Financial information should be available in a timely manner which is at the end
of financial year, so that users can use it to make decisions when needed.

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Explanation of Financial Terminologies

 Income Statement

Income statement is a financial report that shows a business entity's revenues, expenses, and net
income (profit or loss) for a specific time period, typically a month, quarter, or year (Mbobo et
al., 2026). Stakeholders use this financial reports or statements to assess the financial
performance of an entity (Leitch et al., 2011).

The income statement typically includes the following components:

1. Revenues: This includes all income generated by the entity from the sale of goods or
services during the period.
2. Cost of Goods Sold: This includes all costs directly related to producing the goods or
services sold during the period.
3. Gross Profit: This is calculated by deducting the COGS from the revenues.
4. Operating Expenses: These expenses include all costs incurred by the entity to operate the
business during the period, such as marketing expenses, staffing etc.
5. Operating Income: When operating expenses is deducted from the gross profit, it is called
operating income.
6. Non-operating Income and Expenses: This income or expense is not directly connected to
the entity's core operations.
7. Net Income: The difference between non-operating income and expenses from the operating
income is known as net income.

 Assets

Assets indicates a value that can be owned or controlled by an individual, corporation, or

government (Ittner et al., 2003). Examples of assets include:

1. Cash and Cash Equivalents: This includes money that can be converted into cash, such as
money in bank accounts, savings accounts, and other short-term investments.

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2. Accounts Receivable: This represents the money owed that the customers owe to an entity
for consumption of goods or services sold on credit.
3. Inventory: This includes all goods held for sale or use in the entity's operations.
4. Property, Plant and Equipment: This includes all long-term assets such as land, buildings,
machinery, vehicles etc.
5. Intangible Assets: This includes non-physical assets such as patents, trademarks, copyrights,
and goodwill.
6. Investments: This includes long-term investments in other entities, such as stocks and
bonds.

 Liabilities

Liabilities are obligations that an entity owes to other parties and which require future economic
sacrifices to settle (Torres & L., 2004). By analyzing the entity's liabilities, stakeholders can
assess its financial obligations, liquidity, and ability to meet its debt obligations in the future
(Nobes et al., 2015). Examples of liabilities include:

1. Accounts Payable: This represents amounts owed by the entity to its suppliers for goods or
services received on credit.
2. Loans and Borrowings: This includes all amounts borrowed by the entity from banks or
other lenders.
3. Salaries and Wages Payable: This represents amount of money owed by the entity to its
employees for work performed but not yet paid.
4. Taxes Payable: This represents amounts owed by the entity to tax authorities for taxes due
but not yet paid.
5. Deferred Revenue: This represents amounts received by the entity for goods or services not
yet delivered.
6. Accrued Expenses: This includes all expenses incurred by the entity but not yet paid, such
as rent, utilities, and interest expenses.

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 Capital

Capital refers to the financial resources available to an entity to fund its operations, investments,
and growth. Capital is important because it provides the resources necessary for an entity to
invest in new projects, purchase assets, and finance ongoing operations (Benninga & S., 2014).
However, too much debt can lead to financial distress and bankruptcy, while too much equity
dilutes ownership and can limit the entity's ability to make decisions. By analyzing the entity's
capital structure, stakeholders can assess its financial health, risk profile, and ability to meet its
financial obligations. It is important for entities to maintain a balanced capital structure that
meets their financing needs while minimizing financial risk (Carton et al., 2010). There are two
main types of capital:

1. Debt Capital: This includes funds raised through borrowing, such as bonds, bank loans and
other forms of debt financing.

2. Equity Capital: This includes funds raised through the sale of ownership stakes in the entity,
such as common stock or preferred stock.

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Analysis and Interpretation of Financial Performance

Financial performance refers to the ability of an entity to generate profits and create value for its
stakeholders (Field & H.M., 2010). The aim of financial performance is to measure an entity's
ability to generate profits, manage its assets and liabilities effectively and meet its financial
obligations. By analyzing financial performance, business entities can identify areas for
improvement and make proper decisions about investments, financing, other strategic activities
(Dust & B., 1996). There are some metrics through which financial performance of The Star
Hotel can be measured by calculating and analyzing the given data and these are as follows:

Calculation and Comparison

 Profitability Ratio

Profitability Ratio refers to a financial metrics which is used for assessing the earnings and return
on investment of a business (Zubac & I., 2012).

1. Profitability of Food
Profitability of Food=683000/50,000=13.66 %
2. Profitability of Drinks
683000
Profitability of Drinks= =8.5 %
80000

The budgeted food profitability was 66% and budgeted drinks profitability was 55%. In both
case, the profitability ratios of foods and drinks became lower than the targeted ones. So, there
improvements are needed to increase profits through applying pricing strategies.

 Gross Profit

Gross profit is a financial metric that represents the difference between revenue and the cost of
goods sold for a business (Kor et al., 2005).

Gross profit =683000/450000∗100=65.88 %

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The budgeted gross profit was 68% which lowered to 65.88% during pandemic. Though there is
not significant decline, still there is scope for improvement or increase of gross profit.

 Return on Capital Employed

Return on Capital Employed is a financial metric through which profitability of a business is

measured by efficient utilization of capitals (Halabi et al., 2010).

Return on capital employed=1,133,000 /4584300∗100=25 %

The budgeted ROCE ratio was 27% and it came to 25% during pandemic. So, there is an
opportunity to increase the ratio by utilizing capital or resources more efficiently.

 Asset Turnover Ratio

Asset Turnover Ratio indicates the uses its resources effectively and efficiently to generate sales
and revenues by businesses (Ma & H., 2021).

Asset turnover ratio :2850000/4584000=0.621

The budgeted ratio was 0.825 and during pandemic, it became 0.621. This indicates a need for
improvement for generating more sales.

 Accounts Receivables Turnover Ratio

Accounts Receivables Turnover Ratio is a financial metric that helps measure how many times a
company can collect its average accounts receivable balance. Through this, any business can
shape and quantify its effectiveness of financial operations (Barker & R., 2004).

Aver age account receivable=200000 /2

Account receivables turnover ratio : 600000 /100000=6

The targeted ratio was 2.5 and during pandemic, it increased to 6. This is a satisfactory result for
the hotel that indicates smooth running of credit control and debt collection process.

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Here, we can clearly see that there are deviations in each ratio. And in most cases, there are
needs for improvement. The Star Hotel needs to take necessary measurements for this
improvement and management should act upon this. They should aim to create sustainable value
for stakeholders by generating profits, managing assets and liabilities effectively and meeting
financial obligations while complying with regulations and maintaining transparency. This is
how; they can ensure their financial performance become efficient and commendable.

Conclusion

Financial performance is an important aspect for regulatory compliance, as entities are required
to report their financial results and comply with accounting standards and other regulations. By
maintaining accurate and transparent financial records, entities can build trust with stakeholders
and avoid legal and reputational risks. It indicates the growth of an entity (Bogićević et al.,
2016).

In the given case, various financial metrics and ratios are calculated from the given data for the
ended financial year, 31 December 2020. By doing so, the Star Hotel will be able to compare
their financial performance during pandemic with the previous targeted budget. From the
calculation, it has been shown that actual and target ratios differed from one another. Every
industry faced downturn during pandemic. So, The Star Hotel is not exception from that. Though
in some cases, the deviation is not that much significant, but continuous improvement is
something that every organisaion must adapt with the passage of time and should come up with
newer opportunities and innovations (Zanón & N.T., 2012). Accordingly, they can take steps for
improving the process effectiveness through proper cost management and thus they can earn
greater returns on investments. In this way, the hotel can achieve long term viability and success.

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