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Financial Management and Decision Making in SMEs: A Case Study of IBIS styles
Southwark hotel Limited
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Table of Contents

Introduction................................................................................................................................3

Task One: Sources of Finance....................................................................................................3

Sources...............................................................................................................................3

Assessing the sources of finance of IBIS styles Southwark hotel Limited.......................4

Task Two: Ratio Analysis...........................................................................................................6

Liquidity Ratios:................................................................................................................6

Activity Ratios:..................................................................................................................6

Profitability Ratios:............................................................................................................7

Debt to Equity Ratio:.........................................................................................................7

Internet Coverage Ratio:....................................................................................................8

Task Three: Investment Appraisal Techniques...........................................................................8

Task Four: Approaches for Valuing a Business........................................................................10

Task Five: Concept of Ethics and Social Responsibility and its Potential Impact on Decision
Making in SME’s..............................................................................................................11

Summary..................................................................................................................................12

References................................................................................................................................14
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Introduction
Accor's design economy ibis Styles London Southwark - near Borough Market is near Borough

Market. The hotel is in London's South Bank, a tourist and local culinary and cultural hub. The 154-

room hotel contains eight suites and a bar. The hotel features free WiFi, air conditioning, continental

all-inclusive breakfast, and walk-in power showers.

On September 9, 2014, ibis Styles Southwark Hotel Limited acquired the hotel's property portfolio

from an independent third party. The company leases the hotel to a fellow group company that does

its trade on the same terms as the third party and the fellow group company1. The Accor invest

Group owns and operates hotels. The Accor invest Group renovates and builds economy and

midscale hotels to consolidate its portfolio2.

The COVID-19 epidemic hit the hospitality business, causing losses during 2020–2021. Following

UK government limitations, the hotel closed in March 2020, resulting in no rental income. Hotel

reopened May 20211. Directors do not recommend a final dividend.

Task One: Sources of Finance

Sources of Finance
When it comes to launching, operating, and expanding the businesses, SMEs
encounter numerous financial obstacles. Obtaining the essential financing is one of the most
significant challenges faced by SMEs. Access to capital is crucial for SMEs, which typically
have limited assets and cannot rely on personal funds to support their business endeavors
(Baker et al., 2020). SMEs require financing to cover a variety of costs, including start-up
expenses, operating expenses, and investments in growth opportunities. SMEs have access to
a variety of financing options, including equity financing, debt financing, and alternative
financing (Rao et al., 2021).

Dvorsky (2019) postulates equity financing entails raising capital by selling company
shares. SMEs can raise equity capital from individual investors or venture capitalists. This
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type of financing does not require debt repayment, and investors receive returns via dividends
or capital appreciation. However, SMEs that choose equity financing may have to cede
control of their business to investors, and the process of raising equity capital can be time-
consuming and costly.

Borrowing funds from a lender, typically a bank or other financial institution,

constitutes debt financing. SMEs can obtain debt financing in the form of loans, overdrafts,
and credit lines. The creditor must repay the borrowed funds plus interest over a
predetermined period. Debt financing allows SMEs to retain complete control of their
business and may be a more cost-effective option than equity financing. Nonetheless, SMEs
must ensure that they can service the debt and adhere to the repayment schedule; otherwise,
they risk harming their credit score and future access to capital (Rao et al., 2021).

Alternative financing consists of obtaining funds from non-traditional sources, such as

peer-to-peer lending, crowdfunding, and invoice financing. These forms of financing are
gaining popularity among SMEs because they offer flexible repayment terms and fewer
regulatory restrictions (Baker et al., 2020). However, alternative financing options may be
costlier and more time-consuming to secure than conventional financing options.

Assessing the sources of finance of IBIS styles Southwark hotel Limited

The IBIS styles Southwark hotel Limited manages multiple accommodations in the
United Kingdom. The financial position of the company for the years 2020 and 2021 reveals
that it has utilized a variety of financing sources to fund its operations. In terms of equity
financing, the company has issued £8,000 worth of share capital, which represents the entire
value of its issued shares. The company did not issue any new shares between 2020 and 2021.
This indicates that the company did not seek to raise additional equity capital during this time
frame (IBIS styles Southwark hotel Limited, 2021).

Regarding debt financing, the organization has relied on bank loans to fund its
operations. The company has obtained a £5,000,000 long-term loan, which represents a
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significant portion of its total liabilities. The company has also taken out short-term loans and
borrowings totaling £2,422,000, including overdrafts and credit lines. These loans and
borrowings have aided the company's cash flow and enabled it to meet its daily expenditures
(IBIS styles Southwark hotel Limited, 2021).

To fund its operations, the company has also utilised alternative financing options,
such as finance leases. The company has engaged into a number of properties, plant, and
equipment finance leases totaling £4,528,000. These leases give the company access to the
equipment it requires to operate without requiring it to purchase the assets outright. However,
the company must make periodic lease payments throughout the lease term, which can
increase its financial obligations (Rao et al., 2021).

IBIS styles Southwark hotel Limited has utilised a variety of financing options,
including equity financing, debt financing, and alternative financing, to sustain its operations.
The company's use of debt financing, such as bank loans and borrowings, has allowed it to
gain access to the capital it needs to fund its operations, while its use of finance leases has
allowed it to acquire the necessary equipment without making substantial up-front
investments. However, the company's reliance on debt financing may increase its financial
risk and expose it to fluctuations in interest rates and credit availability (IBIS styles
Southwark hotel Limited, 2021)

Task Two: Ratio Analysis

Ratio analysis is a crucial tool for assessing a company's financial performance. To
gain useful insights into the company's financial health, it entails studying the relationships
between various financial data, including income statement and balance sheet elements' ratio
analysis will be used in this report to assess IBIS styles Southwark hotel Limited's financial
performance from 2020 to 2021 (Wijaya & Sedana, 2021).

Liquidity Ratio:
Liquidity Ratio (Ibis Styles Southwark Hotel Limited, 2021):
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Current Ratio = Current Assets / Current Liabilities

2020: 1,449,000 / 1,071,000 = 1.35

2021: 1,512,000 / 1,154,000 = 1.31

Between 2020 and 2021, the company's current ratio fell, signaling a slight decline in
its ability to meet short-term obligations with its most liquid assets (Husna & Satria, 2019).

Quick Ratio (Ibis Styles Southwark Hotel Limited, 2021):

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

2020: (1,449,000 - 460,000) / 1,071,000 = 0.92

2021: (1,512,000 - 484,000) / 1,154,000 = 0.89

The company's capacity to satisfy its short-term commitments with its most liquid
assets somewhat declined from 2020 to 2021, as measured by the current ratio and the quick
ratio.

Activity Ratio (Ibis Styles Southwark Hotel Limited, 2021):

Inventory Turnover = Cost of Goods Sold / Average Inventory

2020: 2,982,000 / [(460,000 + 359,000) / 2] = 7.28

2021: 3,234,000 / [(484,000 + 404,000) / 2] = 7.28

The inventory turnover ratio is 7.28 for both years, which indicates that the
corporation has maintained a consistent level of inventory management efficiency in 2020
and 2021.

Accounts Receivable Turnover (Ibis Styles Southwark Hotel Limited, 2021):

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Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

2020: 5,203,000 / [(326,000 + 356,000) / 2] = 15.29

2021: 5,633,000 / [(398,000 + 371,000) / 2] = 6.86

The company's accounts receivable turnover ratio increased from 6.54 in 2020 to 6.86
in 2021. This shows that in 2021 compared to 2020, the corporation is managing its credit
policies more effectively.

The activity ratios, comprising inventory turnover and accounts receivable turnover,
reflect the company's efficiency in managing inventory and credit rules. The inventory
turnover ratio grew from 2020 to 2021, showing that the corporation was managing its
inventories more successfully in 2021 than in 2020. The accounts receivable turnover ratio
likewise increased from 2020 to 2021, showing that the firm was managing its credit policies
more successfully in 2021 compared to 2020 (Kurniani, 2021).

Profitability Ratio (Ibis Styles Southwark Hotel Limited, 2021):

Gross Profit Margin:

Gross Profit Margin = Gross Profit / Net Sales

2020: 2,430,000 / 4,621,000 = 52.56%

2021: 2,494,000 / 4,854,000 = 51.40%

In 2020, the company's gross profit margin was 52.56%, and in 2021, it fell to 51.4%.
This suggests a minor decline in the company's profitability.

Net Profit Margin (Ibis Styles Southwark Hotel Limited, 2021):

Net Profit Margin = Net Profit / Net Sales

2020: 144,000 / 4,621,000 = 3.12%

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2021: 136,000 / 4,854,000 = 2.80%

The company's net profit margin decreased from 3.12% in 2020 to 2.80% in 2021.
This suggests a minor decline in the company's profitability.

Return on Assets (ROA):

Return on Assets (ROA) = Net Income / Average Total Assets

2020: 144,000 / [(11,710,000 + 12,123,000) / 2] = 1.23%

2021: 136,000 / [(12,123,000 + 12,746,000) / 2] = 1.00%

The return on assets ratio assesses the profitability of a company's use of its assets
(Gibran & Armansyah, 2023). In 2020, the company's ROA was 1.23%, and in 2021, it fell to
1%. This indicates a minor decline in the company's ability to generate profits from its assets.

Return on Equity (ROE):

Return on Equity (ROE) = Net Income / Average Shareholders' Equity

2020: 144,000 / [(3,433,000 + 3,662,000) / 2] = 4.19%

2021: 136,000 / [(3,662,000 + 3,870,000) / 2] = 3.51%

Return on equity measures a company's profitability relative to shareholders' equity

(Gibran & Armansyah, 2023). In 2021, the company's ROE dropped from 4.19% to 3.51%,
meaning it earned less per unit of shareholders' equity. In 2021, the company's profitability
and efficiency fell due to reduced sales, more expenses, or lower asset turnover.

Debt to Equity Ratio:

Debt to Equity Ratio = Total Liabilities / Shareholders' Equity

2020: 6,905,000 / 5,710,000 = 1.21

2021: 7,769,000 / 6,087,000 = 1.28

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The debt-to-equity ratio shows how a corporation finances its assets (Gibran &
Armansyah, 2023). The company's debt-to-equity ratio increased from 1.21 in 2020 to 1.28 in
2021, making it more leveraged and riskier. The company's debt-to-equity ratio is greater
than the industry average of 0.8, suggesting it may have trouble meeting its debt obligations.
To increase solvency and credibility, the corporation should lower its debt-to-equity ratio to
0.5.

Internet Coverage Ratio (Ibis Styles Southwark Hotel Limited, 2021):

Interest Coverage Ratio = Operating Income / Interest Expense

2020: 300,000 / 74,000 = 4.05

2021: 279,000 / 76,000 = 3.66

A greater percentage shows that operating income covers interest payments. The
company's interest coverage ratio dropped from 4.05 in 2020 to 3.66 in 2021. This means that
in 2021, the company's running income won't be able to cover its interest costs as well as it
did in 2020. Lenders may worry about this because it shows that the company's finances have
gotten worse and it may be more likely to stop paying its debts. (Gibran & Armansyah,
2023).

Task Three: Investment Appraisal Techniques

Investment appraisal methods assess investment opportunity profitability (Alkaraan,
2020). Payback period, NPV, IRR, and PI are investment evaluation methods. These methods
will be applied to the project with -£220,000 cash flows in year 0 and positive cash flows in
subsequent years.

The payback period—the time it takes to repay the initial investment from cash flows
—can be calculated first. Payback period (Baum, 2021):

2 years plus (£40,000/£50,000) = 2.8 years payback.

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The initial investment will be returned in 2 years and 8 months. This method
simplifies calculating the time it takes to repay an investment, but it ignores time value of
money.

The payback period is a second approach for evaluating an investment. This method
determines how long it will take for the project to generate sufficient financial flows to
recoup its initial investment. In this situation, the payback period can be determined by
aggregating the cash flows for each period until the initial investment is recovered (Baum,
2021).

Using the provided capital flows, the following is the payback period:

Year 0: -£220,000, Year 1: £100,000, Year 2: £80,000, Year 3: £60,000, Year 4: £50,000, Year
5: £40,000.

To determine the repayment period, it must add the cash flows until it reaches a total
of £0. The total revenue inflows in the first three years amount to £240,000 (£100,000 +
£80,000 + £60,000), meaning that the initial investment is recovered in the third year.
Therefore, the repayment period is three years (Ibis Styles Southwark Hotel Limited, 2021).

The advantage of the repayment period method is that it is simple to calculate and
comprehend. However, it does not account for the time value of money, which is the fact that
money received in the future is worth less than money received in the present (Bazaluk et al.,
2022). Consequently, it is not always the most appropriate method for evaluating investment
opportunities.

The net present value (NPV) method is another investment evaluation technique that
takes the time value of money into consideration. Using a discount rate that reflects the cost
of capital, this method determines the present value of all cash inflows and outflows
associated with the undertaking investment (Bogataj et al., 2019). If the NPV is positive, it is
expected that the project will generate a return that is greater than the cost of capital;
therefore, it is a sound investment.
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To determine the project's NPV, it must discount each cash flow to its present value
using a 10% cost of capital. Calculating the present value of each financial flow is as follows:

Year 0: -£220,000 / (1+10%) ^0 = -£220,000

Year 1: £100,000 / (1+10%) ^1 = £90,909

Year 2: £80,000 / (1+10%) ^2 = £66,116

Year 3: £60,000 / (1+10%) ^3 = £45,079

Year 4: £50,000 / (1+10%) ^4 = £34,151

Year 5: £40,000 / (1+10%) ^5 = £24,836

NPV is determined by adding the present values of all income flows:

NPV = -£220,000 + £90,909 + £66,116 + £45,079 + £34,152 + £24,836 = £41,092 (Ibis

Styles Southwark Hotel Limited, 2021).

Since the NPV is positive, it is expected that the project will generate a return that
exceeds the cost of capital; therefore, it is a favorable investment.

Several investment appraisal techniques, including the repayment period, the

accounting rate of return, the internal rate of return, and the net present value, can be used to
evaluate investment opportunities (Abdelhady, 2021). In this instance, the NPV method is the
most applicable technique, as it accounts for the time value of money and the cost of capital.
Based on the NPV calculation, the project is anticipated to yield a positive return and should
therefore be accepted.

Task Four: Approaches for Valuing a Business.

Valuing a business is important if you want to make smart choices about investment, merger, and

acquisition possibilities. The value of a business relies on many things, such as its financial

performance, industry trends, and the state of the market. The asset-based and income-based
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approaches are two ways to figure out how much a business is worth. The ibis Styles Southwark

Hotel Limited is part of the Accorinvest Group, which owns and runs a collection of hotels.

The asset-based method says that a business's value is equal to the sum of its assets minus its

debts. This method works for businesses that have real assets like land, buildings, and machinery.

The asset-based method figures out a business's net asset value (NAV) by figuring out the fair market

value of its assets and liabilities and taking that number away (Krulick, 2020). This method is easy

and fair, but it might not consider the value of intangible assets that aren't listed in the financial

statements, like a company's brand name, customer loyalty, and image.

The income-based method believes that a business's value is based on how much money it can

make in the future. This way works for businesses that have things like goodwill, patents, and

intellectual property that can't be seen or touched. The income-based method figures out the

present value of the cash amounts a business can expect to get in the future. The discount rate used

to figure out the present value shows the cost of capital, or the minimum return that buyers expect

from putting money into the business. The discounted cash flow (DCF), capitalization of earnings, and

multiplier methods are often used in the income-based model (Xu, 2021).

The DCF method uses the cost of capital to determine the current value of a business's expected

future cash flows. The capitalization of earnings method divides a business's projected future

earnings by the reciprocal of the cost of capital, which is called the capitalization rate. The multiplier

method takes a financial metric, like earnings or revenue, and times it by an average factor for the

business. Using the expected future rental income that ibis Styles Southwark Hotel Limited can get

from leasing its hotel to a group company and discounting it to its present value is an example of

how the DCF method is used to figure out how much a company is worth.

In the end, valuing a business is a difficult and subjective process that needs a number of

methods and assumptions. Both the asset-based method and the income-based method can be used

to figure out the value of ibis Styles Southwark Hotel Limited, which owns and runs a hotel.
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Task Five: Concept of Ethics and Social Responsibility and its Potential Impact on
Decision Making in SME’s
Ethics and social responsibility can alter SMEs' cost structure, revenue streams, risk

exposure, and stakeholder connections, affecting their financial decisions. To cut costs and

carbon emissions, ibis Styles Southwark Hotel Limited may invest in renewable energy or

energy-efficient appliances. To improve its image and consumer loyalty, it may donate part of

its income to local charities or social causes. These decisions may involve trade-offs between

short-term profitability and long-term sustainability and between stakeholder interests. Thus,

SMEs must balance ethical and social obligations with financial goals and constraints.

Ethical and socially responsible practices could help ibis Styles Southwark Hotel Limited

in several ways. Huang et al. (2022) show that ethical and socially responsible hotel

management can attract and keep like-minded consumers. This can provide the hotel a market

advantage. Ethical and socially responsible practices can also attract investors who want to

invest more in organizations that do business responsibly (Huang et al., 2022). If it focuses

ethics and social responsibility, the ibis Styles Southwark Hotel may attract more investors

and better finance.

Ethical and socially responsible business practices can also maintain the hotel. The hotel

can cut costs and gain favor with environmentally conscious consumers by reducing its

environmental effect (Thanh et al., 2021). Ethical and socially responsible practices boost

employee satisfaction and productivity. When people think their boss shares their values,

employees work harder. This improves performance and reduces turnover (Thanh et al.,

2021).
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Ethical and socially responsible practices assist the hotel avoid legal and reputational

concerns. Unethical behavior might cost the hotel money and tarnish its reputation. The hotel

can avoid these issues by doing business ethically and socially (Thanh et al., 2021).

The hotel may have a consequentialist or deontological approach to ethics and social

responsibility, depending on its objectives. Deontological approaches focus on obligations or

principles, while consequentialist approaches focus on outcomes or consequences (Gibran &

Armansyah, 2023). The hotel and its stakeholders would examine an ethical or social issue

using a consequentialist or deontological approach. For instance, a consequentialist approach

would justify investing in renewable energy sources if it boosts hotel profits or customer

satisfaction, while a deontological approach would justify it if it protects future generations or

the environment.

Summary
This study analyses the financial performance of IBIS Styles Southwark Hotel
Limited from 2020 to 2021 and provides findings and recommendations. In order to pay for
its operational costs, the company relied on a number of different financing strategies,
including equity financing, bank financing, and debt financing. The report used ratio analysis
to evaluate the company's financial success. The analysis revealed that while certain ratios
improved, others worsened, resulting in a mixed outcome for the evaluation of the company's
financial success. In particular, decreases were seen in the liquidity and efficiency ratios,
whereas increases were seen in the income ratios.

In addition, the paper reviewed various approaches to investment evaluation and

demonstrated that the net present value (NPV) approach is the most efficient method by
applying these various approaches to a project that already had documented cash flows.

In its final section, the paper investigated the impact of ethics and social responsibility
on the decision-making processes of SMEs using Ibis as an example, as well as the ways in
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which these factors can have an effect on a business's reputation, the loyalty of its customers,
and the support it receives from the community. When it comes to making choices about their
companies, owners of SMEs should give significant weight to these criteria.

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