FINANCIAL MANAGEMENT FOR HOSPITALITY SECTOR

CONTENTS
INTRODUCTION HOTEL INDUSTRY ANALYSIS  OVERVIEW  DEMAND  SUPPLY FINANCIAL ESTIMATE  PROJECT COST  SOURCES OF FUND  FUND ALLOCATION  REVENUE MODEL  FINANCIAL STATEMENT ANALYSIS  RECCOMENDATION  CONCLUSION

INTRODUCTION

Finance is a subject of critical importance To the successful operation and management of a hospitality Firm .an operation with a elegant dinging room, conference Facility, a world renowned chef, thousand of guest room is Come into realty only to good financial management and Better allocation of fund for smooth running of whole Business. it can be fail if it cannot generate a rate of return That makes it worthwhile for people and institution to invest Their money in the operation .

HOSPITALITY SECTOR 
Travel - Air - Cruise Ships - Rail - Coach - Automobile - Eco-Tourism  Lodging - Hotels - Motels - Resorts  Assembly & Event Management - Meetings - Conventions - Expositions   Restaurants & Managed Services Recreation- Attraction, Gaming, Parks

INTRODUCTION TO THE HOTEL INDUSTRY
According to the British laws a hotel is a place where a ³bonafied´ traveler can receive food and shelter provided he is in a position to for it and is in a fit condition to receive. Hotels have a very long history, but not as we know today, way back in the 6th century BC when the first inn in and around the city of London began to develop. The first catered to travelers and provided them with a mere roof to stay under. This condition of the prevailed for a long time, until the industrial revolution in England, which brought about new ideas and progress in the business at keeping. Hotel today not only cater to the basic needs of the guest like food and shelter provide much more than that, like personalized services etc.

Hotels today are a ³Home away from home´.

OVER VIEW OF HOTEL INDUSTRY Indian hospitality industry is in the midst of a strong cyclical upturn on the back of a buoyant economy.a. generates around 65-70% of industry revenue . with a growth in business and leisure tourists @ 25% p.000 guest rooms The Premium end of the market (5 Star Deluxe) in which the Company operates. and an existing shortage in room supply of about 100.

000rooms fuelling hotel room rates across India. There are strong barriers to entry viz. Hence. the next few years are likely to witness a limited capacity addition with strong increase in annual demand of about 15%. Recent estimate shows that India has a shortage of 150.  The number of tourists visiting to India is likely to soar to 10 million in the year 2010 from its current level of 5 million in 2007-08. Chennai.. Hyderabad & Pune.Very few projects are under implementation in Bangalore. . excessive land prices in metropolitan cities. scarcity of suitable plots of land at good locations.

DEMAND Growth in business-tourist traffic to India remains strong in the double digits The trends for ARR growth and room demand remain encouraging.HOTEL INDUSTRY. Recent rupee appreciation of 79% could have a near-term impact on revenues Most hotel chains are looking to either increase dollar tariffs or subsequently move to rupee tariffs for domestic as well as international customers .

continues New room supply from domestic as well as international chains.HOTEL INDUSTRY.SUPPLY The trend of room demand outpacing supply. both building aggressively in growth markets This supply is unlikely to impact until FY09 RevPars across most tourist destinations were up 35%-plus for FY07 . particularly in the premium segment.

here we see how . The finance ruction involve two general areas:Rising of fund ( Financing decision) All allocation of fund (investment decision) . How the finance fits into large hospitality firm¶s organization Structure.PROJECT CONCEPT THE ROLE OF FINANACE IN HOSPITALITY INDUSTRY Finance plays a important role for any firms.

Accounting involves The design of business information system The maintenance of record Audit Tax work Budgeting Analysis of financial data to help in decision making .on other hand«.

STEP -I STEPS INVOLVED IN SETTING UP A HOTEL Hotel generally offer three individual products: accommodation.. food & service Before starting anew hotel we must go through««««. SITE SELECTION 2. THE FEASIBILTY STUDY 3. FINANCING ARRANGED Amarkantak Pachmarhi . 1.

The site must be adaptable to the««««««««««««««..  Type and size of proposed hotel  A 400.SITE SECETION Choosing the site for hotel is usually first in aseries of critical decision Affecting the eventual success of hotel.room commercial hotel with meeting space can be built  zoning law prohibit a building of that size .

height restrictions and parking requirements. Population Backup Site Specific Size. Shopping Centers.Proximity Business and Trade Centers. Highways. Traffic Levels. Key Attractions. Zoning Laws. Accessibility INDIA . Visibility.

a market study and financial analysis .FEASIBILITY STUDY After the site section . is called Feasibility study. lease  formulate marketing and operating plan  prepare the initial capital and operating budget . Feasibility study can help««  Preparation of a market feasibility study for the project  Estimation of costs for all elements of the project and  Determination of sources of financing  financing and negotiate contract for franchise. is conducted to determine the economic viability of The hotel project.

conference rooms . we analyzing the structure of hotel. Hotel categories The number of rooms Style of bed room Ratio of single to twin and double rooms Provision of sitting rooms . that is depend on the Following point.DESIGIN & STRUCTURE OF HOTEL After the compilation of site selection and fusibility study of success of Hotel.

Types of catering Provision of equipment and ancillary service Other type of service .

price and other factor. Mtr. Here we categories hotel on the basis of price and accommodation. HOTEL CATEGORIS MAXIMUM LAND AREA Budget hotels (1/2/3 star) Mid-market 4 Star Hotels 5 Star / 5 Star Deluxe Hotels 1200 Sq. 18000 Sq. Hotel can be categorized by location. 6000 Sq.ownership. Mtr. Mtr.HOTEL CATEGORIES It is important to understand the way in which hotels are categorized. .

averarage Rate per occupied room described on overall rate structure in single Room. TOTAL NUMBER OF ROOMS NIGHTS ESTIMATED OCCUPANCY* 365 NUMBERS OF ROOMS . the Estimated occupancy is based on assumed rate structure. The number of rooms depends on the estimated occupancy.THE NUMBER OF ROOMS The number of rooms totally depend on the feasibility study of project And market analysis.

STEP .00 ACRES .00 ACRES 2 . Example ± ROOM 400 1OO LAND REQUIRED PROJECT COST 2.II HOTEL FINANCE Having determined the quantum of capital cost of hotel project the Next step is to find out the source of fund.00 TO 4.

The following are usual method of rising finance for the hotel Industries:Share capital ‡ ‡ Preference share capital Equity share capital .SOURCE OF FINANCE The source of finance available to a hotel development are similar To those available to real estate developers of others kind of project.

Borrowed capital ‡ Debenture ‡ Mortgage ‡Loan from commercial bank ‡Loan from financial institution ‡ Trade debt.3 million for 100 rooms .credit guaranteed by supplier ‡Inter company loans ‡Provision for taxation ‡Public fixed deposit ‡IPO Project cost:.$ 7.

. the industry can be classified As one among those which are highly capital intensive. A study of the balance sheet of the leading hotel companies show that bulk capital is 90%.STEP. building.III FUND ALLOCATION FOR THE PROJECT Hotel industries displays an investment characteristic with Distinguishes it for other industries. Most of the Hotel represented by land . furniture furnishing and Equipment.

boilers. Cost of providing swimming pool.land development. water treatment plant.A hotel project requires money under the following heads: Cost of land and building Cost of civil works Cost of electrics installation and fixtures Cost of sanitary work and fixtures Cost of furniture fixture and fitting Cost of carpet Cost of providing facilities like air-conditioning. filtration plant. Cost of kitchen ware. Cost of manpower Misllinious cost . land scaping. water pump. Shopping arcade. drainage system.

Analysis of the construction cost in hotels A construction cost of a hotel building varies from place to place. Table-1 indicates the analysis of the construction cost of luxury hotel Situated in an important tourist centre. .

1% PERCENTGE OF TOTAL 52.3% 10.1% 12.7% 2.8% 8.1% 0.7% 37.2% 3.9% 0.2% 100.00% .Table-1 ITEMS COST OF LAND & BUILDING COST OF EQUIPMENT AIR CONDITIONING PLUMBING ELECTRICITY KITCHEN LAUNDRY ELEVATORS PNEUMATIC TUE COST OF FURNTITURE & FURNISING TOTAL COST 9.

000 Taxes during construction and costs of clearing the land factored into overall cost.000 or $40.Cost of Land Depends on whether land is actually purchased or owned Cost of land typically weighed based on the number of rooms in hotel. Can range from $500 per room to as high as $30. .

this is not often feasible.Cost of Construction Largest cost element in any hotel project If franchised. difficult to get because of the inflation prevalent both in labor and in construction materials. Fixed-price contract Cost more controlled.000 per-room cost of construction is considered satisfactory (Prevailing market scenario without interest). Cost-plus contract Contractor¶s profits are a percentage of the costs. have to adhere to franchisor specs $60. Maximum ceiling on cost can be written into contract .

visible to guest. Front of house and back-of-the-house equipment. not visible to guest-kitchen. $12. and equipment is considered acceptable (Of course depends on brand . 2. laundry equipment.guest room.  furniture. and Equipment Either developer buys from one-stop shop supplier or spreads out across several suppliers.restaurant.Costs of Furniture. Fixtures. furniture. fixtures.lobby. fixture and equipment divided into two parts 1.bar furniture .000 per room for furniture.

glass ware. and. $3. advertising. Pre-opening Expenses Prior to the opening of a hotel.Operating Equipment Linen. To be factored into overall budget Depends on the pre-opening philosophies of the operator. and sales expenses and travel. training costs.000 per room is acceptable. uniforms. china. expenses incurred for Pre-opening payroll. in some instances. silver. Back-up inventories must be acquired $8.000 per room is considered optimum .

licensing charge .expences Taxes. Working capital is required for financing of good received. .Working Capital Funds required to meet early payrolls and operating expenses (unpredictable time period) Determines cash flow health of the firm Should amount to at least $2. lighting Operating cost etc. heating.charge for public unities'.000 per room.

Cleaning supplies 4.Food 2.Engineering supplies Excessive inventories can tie up capital and create additional interest costs.Guest supplies 6. 6.000 per room of for operating inventories should be considered satisfactory .Inventories Inventories can be broken down into the following categories: 1.Beverages 3.Paper supplies 5.Stationery 7.

859.383.118.550.00 $ 1.836.Rule of Thumb Total Building Cost Total Non-building Costs Total Soft Costs Land Cost Estimated Total Project Cost Total Cost Per Room (Total Project Cost/100 Rooms) ADR to Determine Feasibility (Rule of Thumb=Total Cost Per Key/1000) $ 4.618.84 .679.739.50 $ 164.82 $ 73.151.50 $ 861.80 $ 73.82 $ 7.

SO HE MAKE THE PROFITABLE REVENUE MODEL. The operating revenue varies directly or indirectly in relation to the volume of Business as measured in terms of occupancy. The operating revenue may be divide Into :Room sales Food sales Beverage sales Telephones Cigar & news paper Laundry Transportation Other incomes .HOTEL REVENUE PROFITABLE MODEL OWNER OF HOTEL INDUSTRY MAKE AN INVESTMENT TO GENERATE GOOD PROFIT .

Room sales in the hotel industry have two important components Occupancy Rates These are the primary variables that that interacts to the form the total Room revenue. full day or longer period basis. such as tours and business meeting or permanent guest who remain at the Hotel for expected period of time. It includes revenue from guest accommodations Rented on apart day. Percentage occupancy * average rate*number of available room/days*365= total room revenue .ROOM REVENUE Room revenue is generated by sales of guest rooms to individuals travelers or Group . It is varies hotel to hotel.

Occupancy percentage= (room occupied / room available)*100 AV.DAILY RATE(ADR)=(ROOM REVENUE/ROOM OCCUPIED) .

The formula published in 1952. The average rates must be charged is calculated by dividing the total amount By the number of estimated occupied rooms.Roy hubbart .For generated revenue from room set the price of room:HOTEL ROOM RATES. 3. . An amount representing the expected fair return on investment is added to cost of Operation . was the chairmen of the committee which was appointed by AMERICAN HOTEL AND MOTEL ASSOCIATION for developing a formula For computing rooms rates. Then a tabulation is made of the cost of operation . 2. An estimation is made of the guest rooms to be sold every year. is worked out follows:- 1. 4.HUBBART FORMULA Mr.

 Balance. store rental.. food beverage sales and other income. C/ D works out as average room rent.HOTEL ROOM TRAIFF FORMULA  All operating and overhead expenses under heads including interest  less. the balance is the amount to be realised from guest room sales. Number of guest room multiplied by 365 days and reduce by giving an allowance for average vacancies. sales such as a shop..  Compute... .  Result. Total gross revenue from all source other than guest room.

40 SQ.FT. 190 SQ.FT.FT. 45 SQ. FOR 2 & 3 STAR FOR 4 & 5 STAR 180 SQ. .The cost of room varies place to place and size and accommodation:As per Indian standards for the size of the guest room and bath room are as follows.FT.FT.FT.A/C SINGLE NON A/C SINGLE A/C DOUBLE NON A/C DOUBLE BATH ROOMS 140 SQ.FT. 160 SQ. 180 SQ.FT. 220 SQ.

5% from the sales of wine .FOOD & BEVERAGE REVENU Food and beverage sales include revenue derived from the sales of food and Beverage in restaurant. through room service or at Banquets. liqueur. bill and collect The case. FOOD SALES In most of hotel the waiter takes out the order delivers the goods.e 75% of the total Restaurant sales. juices beers. minerals Water and soft drinks. The percentage of food sales made to registered guest is highest i. spirits. shops snack bars. BEVERAGE REVENUE It includes 24. bar coffee. .

The COST OF FOOD sold is based on beginning and closing inventories and food And food purchases for the period between two inventories. This number represent the cost of food sold to guests in a given Period . divided by food sales for the same period. such As employee meals and complimentary meals to guest. one must deduct meals that are consumed but not sold to the guest . To reach the COST OF FOOD SOLD . minus free meals.FOOD COST ANALYSIS A common statistic used throughout the food service industry is the FOOD COST PERCENTAGE. .

000 .000 + $ 35.000 .000 $ 15.000 + $ 31.The following figures gives how this works: Beginning inventory Add food purchase Total Deducted closing inventory Cost of food consumed Deduct employee meals & COMPLIMENTRY MEAL Cost of food old $ 20.000 + $ 29.$ 4.$ 2.000 .

Standard food cost is for period $ 27.Assumed food sales for this period were $ 10.000/ $ 10.0000 to compute the food cost Percentage :Food cost percentage= $ 29. .000=.000 St. divide total menu items Sales for period.food cost=2% St.27*100=27% Note actual food cost is higher than the st.0000 (food sales)*100=29% Standard food cost percentage Standard food cost for all menu items sold during period. food cost is ideal food cost.000 (cost of food sold)/$ 10. multiply by 100. food cost percentage=$27.

TELEPHONE REVENUE Telephone revenue is derived on following points:Number of calls Time connected Telephone company charged Service charge Cash collect House charge Charge guest Distance call ( local or long) .

management communities financial information to internal And external user via financial statements. Externals users like suppliers . The Income Statement 3. The Balance Sheet 2. The Statement of Cash Flow 4. Internal users like management. Regards of the users . the purpose of financial statements is to communicate relevant financial information . y The firm should follow uniform pattern when preparing financial statements. The Statement of Retained Earnings .it is important to taking decision for further Progress .STEP-IV REVIEW OF FINANCIAL STATEMENTS In hospitality business . bank. government agencies. stockholders. y The financial statements used in hospitality industry are:1.

is the income Statement. .asset must equal . P& L. The claim asset include liabilities' and owners equity. or operation statement.reflects the financial position of the hotel business at a point in time. Show this statements are asset and claim of asset. In other world . or balance the sum of creditors' and owners claims. THE INCOME STATEMENT The financial statement reflecting operation of given period of time . also reflect the profit and loss statement. It essentially a snapshot of business condition at a given moment. The good name of this statement would be net income statement.THE BALANCE SHEET The balance sheet also called the statements of financial position or statement of Condition .

as well as balance in the retained earning account at the beginning and end of year. THE STATEMENT OF RETAINED EARNING This statement simply show the retention of earning and dividends declared for the Years .The statement of cash flow It reflects the sources and uses of cash for a period of time . . it show cash flow . While income statement show income flows.

The other statement .reflecting activities over internals of time as follows STATEMENT STATEMENT OF INCOME STATEMENT OF CASH FLOW REFLECTS RESULT OF OPERATIONS ACTUAL CASH RECEIPTS AND DISBURESEMENTS CHANG IN RETAINED EARNING STATEMENT OF RETAINED EARNING .RELATIONSHIP AMONG THE FOUR FINANCIAL STATEMENTS It is important to understand the relationship among four financial statement. the Balance sheet is static statement ±it reflects an enterprise's financial position at a point of time.

Ratio Analysis .Vertical Analysis .Horizontal Analysis .Financial Analysis:.

00 Depreciation 8.00 Insurance 10. For .7 Thus the hotel must take Rs. Example:Estimated total operating expenses: Rs.EVEN POINT (BEP) Every hotel have break ±even point . .00 lackhs Total daily expenses= 8500000/365=Rs. 232/. 23287.the brake ±even point for the average hotel is obviously Lower than 70%.50 Total 85.00 lakhs Estate taxes etc 6.50 Interest 0.rooms rates hotel RS. 60.the percentage of occupancy necessary to Pay all operating expenses .BREAK.7 each days to break-even.100 room a day to break-even. 23287.

FINANCIAL PERFORMANCE HOTEL LEELA VENTURE 51 .

paper And pencil . Further expansion plan Budget allocation ‡Forecasting demand and prices ‡Estimated variables expenses ‡Estimated fixed cost Controlling expenses ‡Purchasing system ‡Linen replacement ‡Uniform replacement ‡Purchasing operating supplies ‡Stationeries . owner is now able to Take the decision of following points.DECISION MAKING After review of financial statement and financial analysis .

but not standardization Consolidated facilities Achieve income from store rentals Emphasis guest service Keeping personal touch with service Diversify its activities Apply modern industrial methods to hotel operation .RECCOMENDATION FOR SUCCESSFUL HOTEL Turn waste space into production use Maintain the distinctive character of acquired hotels Stress efficiency.

CONCLUSION Financial management means to the hospitality financial manager It maximizing the current firm related value or wealth of a firm¶s Owners. . it will be related to timing .magnitude and riskiness of the Future cash distributions.

JAGMOHAN NEGI FINANACIAL MANAGEMENT FOR HOSPITALITY INDUSTRY AMERICAL HOTEL& MOTEL ASSOCIATION HOTEL HILTON GROUP HOTEL LEELA GROUP .REFERENCES HOTEL FOR TOURISM DEVEELOPMENT by DR.