Introduction To Hospitality Fifth Edition John R. Walker: Chapter 17: Accounting, Finance, and Cost Control

introduction to hospitality
fifth edition
john r. walker
Chapter 17: Accounting, Finance, and Cost Control

Chapter 17
Accounting, Finance, and Cost Control
• Accounting
• Finance
• Ratios
• Cash Flow Management
• Budgets
• Cost Control
• Trends
Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.
Fifth Edition Upper Saddle River, New Jersey 07458
John Walker All rights reserved.
Accounting
• An important objective for any business
operation is a positive financial return on
investment, otherwise known as profit
– Profit is also know as income, net income, or
earnings, and is the amount of money a company
earns after business expenses are paid
– The accounting department is responsible for
tracking and reporting information about the
operation’s day-to-day activity and profitability
– The size of the accounting staff is usually related to
the size of the business organization and the form of
business ownership

Uniform Systems of Accounts
• Many restaurants use the uniform
system of accounts for restaurants to
track and report operating data
• A standardized accounting system for
all industries
• These systems also assist managers in
better decision making because the
details of operational data are
consistently collected
Regulatory Agencies
• Generally accepted accounting principles
(GAAP) provide guidelines for the financial
measurement of operating activity and for the
preparation of financial statements
• Two agencies involved with establishing
guidelines, rules, and standards are:
– Financial Accounting Standards Board (FASB)
• Private organization that sets broad accounting standards
and specific rules
– Securities & Exchange Commission (SEC)
• Agency of the government that sets standards for
companies that issue stock
Areas or Types of Accounting
• Branches of accounting:
– Financial accounting: Used by external agencies such as
investors and creditors; provides information to decision
makers regarding the financial position of a company
– Managerial accounting: Concerned with providing
economic and financial data to managers and other internal
users regarding a business’s daily activities
– Tax accounting: Helps the taxpayer comply with all laws
regarding tax paying
– Cost accounting: Assists managers in identifying and
controlling costs; that is, the cost of products or services and
how these costs might affect selling prices
– Auditing: Physical examination of financial records to
determine accuracy
Types of Business Organizations
• A proprietorship, or sole proprietorship, is a
business owned by one person who generally acts as
the manager or operator of the business and whose
accounting records of business activities are kept
separate
• A partnership is a business–unincorporated–owned by
two or more partners with an agreement to run the
business together
• In a corporation the business is, by law, completely
separate from its owners; the business is responsible
for its profits and, of course, its losses

Finance
• Managerial or corporate finance involves
business activity and decisions to help an
organization do the following:
– Find money to run a business
– Find money to grow a business
– Make investments in real assets
– Plan for companies’ financial future
– Manage cash on hand

Financial Statements
• End results of the accounting process for
a specific period of time (i.e., daily,
monthly, year to date, annual) and an
important tool in communicating the
results
• Serves as a basis for evaluating
management’s performance

Income Statement
• Also called an operating statement or profit &
loss (P&L) statement
• Reports the financial details of a business
operation’s profit (or loss) for a period of time
• Typically prepared monthly, quarterly, or
annually
• Used to answer questions about different
sources of sales revenue or income (e.g.,
rooms, food, or beverage), and operating
expenses (e.g., salaries, wages, utilities, or
marketing)

Income Statement
• Net income is often referred to as the

bottom line:
– Net revenue – Expenses = Gross profit
– (Gross profit + Other income) – Other expenses =
Net income

Figure 17-1
Simplified
Income
Statement

Balance Sheet
• Reports a business operation’s financial
position at a specific point in time (end
of month, quarterly, or end of year)
• Has 3 main parts:
– Assets = Things owned by the business
– Liabilities = Debts owed by the business
– Equity = Assets - Liabilities

Figure 17–2
Balance Sheet

Statement of Cash Flows
• Provides information about the
operation’s cash receipts and the use of
cash for a period of time
• Lists cash receipts and cash payments for
a period and is organized by operating,
investing, and financing activities
• Generally prepared monthly and
annually

Statement of Cash Flows
• Operating activities refer to activity associated
with running the business on an ongoing basis
• Investing activities refer to the purchase and
sale of operating equipment or other assets
intended to produce revenue in the long run
• Financing activities are activities involving
financial resources (cash) obtained from
owners and creditors and the associated
repayments of the resulting obligations

Figure 17–3 Aline’s Cafe Cash Flow Statement

Ratios
• Numerical values traditionally used to measure,
compare, and communicate within the business
operation and the hospitality industry
• Profitability ratios are financial measures of a
business organization’s ability to produce
profit from sales to customers and clients
– Each dollar of sales is used to pay for expenses
such as labor, food and beverages sold, utilities, and
housekeeping and maintenance

Ratios
• Profit margin is calculated as net
income divided by total revenue
• To get the return on investment (ROI),
net income is taken from the income
statement, and the average total assets
are determined by adding the beginning
balance to the ending amounts and
dividing by 2

Ratios
• Liquidity ratios measure a business
organization’s ability to meet its
financial obligations in the short run
– The most common liquidity ratio used in
business is the current ratio
– The current ratio is calculated as current
assets divided by current liabilities
– It measures the amount of current assets
available to pay current liabilities owed by
the business as of a specific date

Ratios
• Operating ratios are key financial measures
used by managers to analyze the operations of
the business
– The average foodservice check is calculated by
dividing total food sales by the total number of food
covers
– The average number of covers per day is calculated
by dividing the number of covers in a given period
by days operated during that period
– Using this information, daily seat turnover for the
period is then calculated by dividing the average
daily covers by the number of seats available

Ratios
• Calculating the average daily rate is a
good indicator of a hotel operation’s
ability to effectively manage the daily
sales of rooms in light of these rate
variations
• The ADR for a specified time period is
calculated by dividing the total rooms
revenue for period by the number of
rooms sold during period
Profitability Ratios
• Revenue per available room (rev par) for
the same time period is also a useful
measure of the performance of the room
sales operations personnel
– Rev par is calculated by dividing the total
rooms revenue for a period by the total
rooms available during the period

Cash Flow Management
• The business operation’s cash flows are
monitored, analyzed, and adjusted as needed
– Cash flow is defined as cash coming in (received)
or cash going out (paid)
– Net cash flow is defined as the difference between
cash received and cash paid during a specific period
of time
– The primary benefits of effective cash flow
management are (1) avoiding extended cash
shortages and (2) controlling the cost of
maintaining adequate cash flow for business
operations

Budgets
• Action plans for a specified period
• Managers prepare budgets to outline
financial and operational goals, thus
providing a benchmark for the evaluation
of actual business performance
– They judge current business performance by
making comparisons with budgets
(expectations) largely based on records of
past performance

Budgets
• They are typically prepared for a twelve-
or thirteen-month period
– However, they are subdivided into monthly
budget reports so that management can use
them for short-term analysis
– Longer-range budgeting and planning are
more strategic (forward planning) in nature
and include growth plans for the business
operation

Budgets
• The sales budget is a financial plan
detailing expected sales volume and sales
revenue for a specified period of time
– Used to forecast sales revenue for a day,
week, month, or longer time period
– It is also used to forecast sales revenue at
different levels of operating activity

Budgets
• Preparing food cost budgets and
beverage cost budgets enables
management to look ahead to future
needs
– They also provide excellent benchmarks for
comparison with actual food and beverage
costs for the budget period

Budgets
• Labor cost budgets can be used to assess total
financial resources spent toward meeting labor
needs and the efficiency of employee labor
utilized in day-to-day operations
– Daily or weekly comparison of budgeted and actual
labor costs is essential for controlling costs
– Labor costs include salaries and wages, employee
benefits, employer taxes, costs of employee
training, employee incentives and bonuses, and
other employee-related costs

Budgets
• Cash budgets plan for the availability of the
necessary cash resources for uninterrupted
business operations
– This requires estimates of cash to be received from
sales, cash from the collection of accounts
receivable, and cash from other expected sources
during the budget period
– Expected debt and other financing-related payments
during the upcoming budget period are also
forecasted for purposes of the cash budget

Figure 17–8 Todson Lodge Cash Budget for the
Months of July–September

Cost Control
• The development and implementation of

procedures that track business activity
with the objective of minimizing costs
without interfering with efficient
operations and long-run business
profitability
• This provides guidelines to keep business
operations on track to minimize the
impact of actual business activity that
does not meet expectations
Food and Beverage Cost Control
• Consists of numerous documents and
reports for tracking food and beverage
purchases and usage, the preparation of
food and beverage cost budgets, and the
analysis of actual food and beverage cost
activity
– Includes the calculation of two key cost
ratios: The food cost percentage and
beverage cost percentage
Food and Beverage Cost Control
• The food cost percentage is calculated as cost
of food sold divided by food sales for a
specified period, such as a week, month, or
year
– It is compared to the budgeted percentage for the
period, which will vary by type of dining
establishment and type of food menu
• The beverage cost percentage is calculated as
cost of beverage sold divided by total beverage
sales for a specific period of time

Labor Cost Control
• One of the largest costs in hospitality
organizations
– Includes wages and salaries of employees,
employee benefits, employee training, and other
employee-related business expenses
• The general labor cost percentage is
calculated by dividing the total labor cost by
the total sales revenue

Other Operating Costs
• Other operating costs represent all operating
costs that are not food, beverage, or labor costs
– Some of these costs, such as music or
entertainment, are under management’s control
– Other costs in this category, such as property taxes,
are considered to be non-controllable by
management
• This is calculated by dividing the total other
operating costs by the total sale revenue

Trends
• Increasing use of technology
• In July 2002, the Sarbanes–Oxley Act of 2002 was signed into
law; the law establishes guidelines that reaffirm management’s
responsibility for reliable financial reporting to investors
– This act is a result of recent accounting scandals and
fraudulent activities of some publicly held companies
– The act requires observance of the reform of accounting
procedures and promotes the improvement and quality of
financial reporting
• Focus on the increasing cost of business risk—with emphasis on
(1) identification of an organization’s exposure to unnecessary
financial loss and (2) identification of ways to minimize business
risk and liability

The End


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introduction to hospitality

Chapter 17: Accounting, Finance, and Cost Control

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

• Net income is often referred to as the

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

• The development and implementation of

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

Introduction to Hospitality Copyright ©2009 by Pearson Education, Inc.

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