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 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 “bonafied” 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 “Home 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, with a growth in business and leisure tourists @ 25% p.a. and an existing shortage in room supply of about 100,000 guest rooms The Premium end of the market (5 Star Deluxe) in which the Company operates, generates around 6570% of industry revenue
Very
few projects are under implementation in Bangalore, Chennai, Hyderabad & Pune. Hence, the next few years are likely to witness a limited capacity addition with strong increase in annual demand of about 15%. There are strong barriers to entry viz., scarcity of suitable plots of land at a t good locations, excessive land prices in metropolitan cities. 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. Recent estimate shows that India has a shortage of 150,000rooms fuelling hotel room rates across India.
HOTEL INDUSTRY- DEMAND Growth
in business-tourist traffic to India remains strong in the double digits The trends for ARR growth and room demand remain encouraging. Recent rupee appreciation of 7-9% could have a nearterm 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
HOTEL INDUSTRY- SUPPLY The
trend of room demand outpacing supply, particularly in the premium segment, continues New room supply from domestic as well as international chains, 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
PROJECT CONCEPT THE ROLE OF FINANACE IN HOSPITALITY INDUSTRY Finance
plays a important role for any firms, here we see how , How the finance fits into large hospitality firm’s organization Structure. The finance ruction involve two general areas:Rising of fund ( Financing decision) All allocation of fund (investment decision)
on other hand…. 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
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………….. 1. SITE SELECTION 2. THE FEASIBILTY STUDY 3. FINANCING ARRANGED
Amarkan tak
SITE SECETION Choosing the site for hotel is usually first in aseries of critical decision Affecting the eventual success of hotel. The site must be adaptable to the…………………………………….. the……………………………………..
Type and size of proposed hotel A 400- room commercial hotel with meeting space can be built zoning law prohibit a building of that size
Proximity
Business and Trade Centers, Highways, Traffic Levels, Key Attractions, Shopping Centers, Population Backup Site Specific Size, Zoning Laws, height restrictions and parking requirements, Visibility, Accessibility
INDIA
FEASIBILITY STUDY After the site section , a market study and financial analysis , is called Feasibility study, is conducted to determine the economic viability of The hotel project. Feasibility study can help…… Preparation of a market feasibility study for the project p roject Estimation of costs for all elements of the project and Determination of sources of financing financing and negotiate contract for franchise, lease formulate marketing and operating plan prepare the initial capital and operating budget
DESIGIN & STRUCTURE OF HOTEL After the compilation of site selection and fusibility study of success o Hotel. we analyzing the structure of hotel, that is depend on the Following point. Hotel
categories The number of rooms Style of bed room Ratio of single to twin and double rooms Provision of sitting rooms ,conference rooms
Types
of catering Provision of equipment and ancillary service Other type of service
HOTEL CATEGORIES It is important to understand the way in which hotels are categorized. Hotel can be categorized by location,ownership,price and other factor. Here we categories hotel on the basis of price and accommodation. HOTEL CA CATEGORIS
MAXIMUM LAND AREA
Budget hotels (1/2/3 star)
1200 Sq. Mtr.
Mid-market 4 Star Hotels
6000 Sq. Mtr.
5 Star / 5 Star Deluxe Hotels
18000 Sq. Mtr.
THE NUMBER OF ROOMS The number of rooms totally depend on the feasibility study of projec And market analysis. The number of rooms depends on the estimated occupancy, the Estimated occupancy is based on assumed rate structure.averarage Rate per occupied room described on overall rate structure in single Room. TOTAL NUMBER OF ROOMS NIGHTS ESTIMATED OCCUPANCY* 365
NUMBERS OF ROOMS
STEP - II HOTEL FINANCE Having determined the quantum of capital cost of hotel project the Next step is to find out the source of fund.
Example – ROOM
LAND REQUIRED
400
2.00 TO 4.00 ACRES
1OO
2 .00 ACRES
PROJECT COST
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. The following are usual method of rising finance for the hotel Industries:Share
• •
capital Preference share capital Equity share capital
Borrowed
capital • Debenture • Mortgage •Loan from commercial bank •Loan from financial institution • Trade debt- credit guaranteed by supplier •Inter company loans •Provision for taxation •Public fixed deposit •IPO
Project cost:- $ 7.3 million for 100 rooms
STEP- III FUND ALLOCATION FOR THE PROJECT Hotel industries displays an investment characteristic with Distinguishes it for other industries. the industry can be classified As one among those which are highly capital intensive. Most of the Hotel represented by land , building, furniture furnishing and Equipment. A study of the balance sheet of the leading hotel companies show th bulk capital is 90%.
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, boilers, water treatment plant, filtration plant, water pump, drainage system. Cost of providing swimming pool, land scaping,land development, Shopping arcade. Cost of kitchen ware. Cost of manpower Misllinious cost
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.
Table-1 ITEMS
PERCENTGE OF TOTAL
COST OF LAND & BUILDING
52.2%
COST OF EQUIPMENT AIR CONDITIONING
9.8%
PLUMBING
8.1%
ELECTRICITY
12.7%
KITCHEN
2.9%
LAUNDRY
0.2%
ELEVATORS
3.1%
PNEUMATIC TUE
0.3%
37.1%
COST OF FURNTITURE & FURNISING
10.7%
TOTAL COST
100.00%
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 $30,000 or $40,000 Taxes during construction and costs of clearing the land factored into overall cost.
Cost of Construction Largest cost element in any hotel project If franchised, have to adhere to franchisor fr anchisor specs $60,000 per-room cost of construction is considered
satisfactory (Prevailing market scenario without interest). Fixed-price contract Cost
more controlled, difficult to get because of the inflation prevalent both in labor and in construction materials, this is not often feasible.
Cost-plus
contract
Contractor’s
profits are a percentage of the costs. Maximum ceiling on cost can be written into contract
Costs of Furniture, Fixtures, and Equipment Either
developer buys from one-stop shop supplier or spreads out across several suppliers. furniture, fixture and equipment divided into two parts 1. visible to guestguest- guest guest room, furniture,lobby,restaurant,bar furniture . 2. not visible to guest-kitchen, laundry equipment. Front of house and back-of-the-house equipment. $12,000 per room for furniture, fixtures, and equipment is considered acceptable (Of course depends on brand
Operating Equipment Linen,
silver, china, glass ware, and, in some instances, uniforms. Back-up inventories must be acquired $8,000 per room is acceptable. Pre-opening Expenses
Prior to the opening of a hotel, expenses incurred for Pre-opening payroll, training costs, advertising, and sales expenses To be factored into overall budget Depends on the pre-opening philosophies of the operator. $3,000 per room is considered optimum
and travel.
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 $2,000 per room. Working capital is required for financing of good received,expences Taxes, licensing charge ,charge for public unities', heating, lighting Operating cost etc.
Inventories Inventories
can be broken down into the following
categories: 1.Food 2.Beverages 3.Cleaning supplies 4.Paper supplies 5.Guest supplies 6.Stationery 7.Engineering supplies Excessive
inventories can tie up capital and create additional interest costs. 6,000 per room of for operating inventories should be considered satisfactory
Rule of Thumb Total Building Cost
$ 4,739,118.00
Total Non-building Costs
$ 1,618,859.50
Total Soft Costs
$ 861,151.50
Land Cost
$ 164,550.82
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)
$ 7,383,679.82 $ 73,836.80 $ 73.84
HOTEL REVENUE PROFITABLE MODEL OWNER OF HOTEL INDUSTRY MAKE AN INVESTMENT TO GENERATE GOOD PROFIT , 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
ROOM REVENUE Room revenue is generated by sales of guest rooms to individuals travelers or Group , 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, full day or longer period basis. It is varies hotel to hotel.
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. Percentage occupancy * average rate*number of available room/days*365= total room revenue
Occupancy percentage= (room occupied / room available)*100
AV.DAILY RATE(ADR)=(ROOM REVENUE/ROOM OCCUPIED)
For generated revenue from room set the price pri ce of room:HOTEL ROOM RATES- HUBBART FORMULA Mr.Roy hubbart , was the chairmen of the committee which was appointed by AMERICAN HOTEL AND MOTEL ASSOCIATION for developing a formula For computing rooms rates. The The formula published in 1952, is worked out follows:
1. An esti estimat mation ion is is made made of the the gues guestt rooms rooms to be be sold sold ever every y year year.. 2. Th Then en a tab tabul ulat atio ion n is made made of of the the cost cost of of oper operat atio ion n. 3. An amount amount repres representi enting ng the expecte expected d fair return return on investm investment ent is added to cost of Operation . 4. The average average rates rates must must be charged charged is calcul calculate ated db by y dividin dividing g the total amount By the number of estimated occupied rooms.
HOTEL ROOM TRAIFF FORMULA
All operating and overhead expenses under heads including interest less.. Total gross revenue from all source other than guest room, sales such as a shop, store rental, food beverage sales and other income. Balance.. the balance is the amount to be realised from guest room sales. Compute.. Number of guest room multiplied by 365 days and reduce by giving an allowance for average vacancies. Result.. C/ D works out as average room rent.
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;A/C SINGLE
140 SQ.FT.
NON A/C SINGLE
160 SQ.FT.
A/C DOUBLE
180 SQ.FT.
NON A/C DOUBLE
220 SQ.FT.
BATH ROOMS
40 SQ.FT. 45 SQ.FT.
FOR 2 & 3 STAR
180 SQ.FT.
FOR 4 & 5 STAR
190 SQ.FT.
FOOD & BEVERAGE REVENU Food and beverage sales include revenue derived from the sales of food and Beverage in restaurant, bar coffee, shops snack bars, through room service or at Banquets. FOOD SALES In most of hotel the waiter takes out the order delivers the goods, bill and collect The case. The percentage of food sales made to registered guest is highest i.e 75% of the total Restaurant sales. BEVERAGE REVENUE It includes 24.5% from the sales of wine , spirits, liqueur, juices beers, minerals Water and soft drinks.
FOOD COST ANALYSIS A common statistic used throughout the food service industry is the FOOD COST PERCENTAGE. This number represent the cost of food sold to guests in a given Period , divided by food sales for the same period. To reach the COST OF FOOD SOLD , one must deduct meals that are consumed but not sold to the guest , such As employee meals and complimentary meals to guest. The COST OF FOOD sold is based on beginning and closing inventories and food And food purchases for the period between two inventories, minus free meals.
The following figures gives how this works: Beginning inventory
$ 20,000
Add food purchase
$ 15,000
Total
+ $ 35,000
Deducted closing inventory
- $ 4,000
Cost of food consumed
+ $ 31,000
Deduct employee meals & - $ 2,000 COMPLIMENTRY MEAL Cost of food old
+ $ 29,000
Assumed food sales for this period were $ 10,0000 to compute the food cost Percentage :Food cost percentage= percentage = $ 29,000 (cost of food sold)/$ 10,0000 (food sales)*100=29 Standard food cost percentage Standard food cost for all menu items sold during period, divide total menu items Sales for period, multiply by 100. Standard food cost is for period $ 27,000 St. food cost percentage=$27,000/ percentage =$27,000/ $ 10,000=.27*100=27% Note actual food cost is higher than the st.food cost=2% St. food cost is ideal food cost.
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)
STEP-IV REVIEW OF FINANCIAL STATEMENTS In hospitality business ,management communities financial information to internal And external user via financial statements. Internal users like management. Externals users like suppliers , bank, stockholders, government agencies. Regards of the users , the purpose of financial statements is to communicate relevant financial information ,it is important to taking decision for further Progress . The
firm should follow uniform pattern when preparing financial statements.
The
financial statements used in hospitality industry are:1. The Balance Sheet 2. The Income Statement 3. The Statement of Cash Flow Flow 4. The Statement of Retained Earnings
THE BALANCE SHEET The balance sheet also called the statements of financial position or statement of Condition ,reflects the financial position of the hotel business bu siness at a point in time. It essentially a snapshot of business condition at a given moment. Show this statements are asset and claim of asset. The claim asset include liabilities' and owners equity. In other world ,asset must equal , or balance the sum of creditors' and owners claims. THE INCOME STATEMENT The financial statement reflecting operation of given period of time , is the income Statement, also reflect the profit and loss statement, P& L, or operation statement. The good name of this statement would be net income statement.
The statement of cash flow It reflects the sources and uses uses of cash for a period period of time , it show cash flow , While income statement show income flows. THE STATEMENT OF RETAINED EARNING This statement simply show the retention of earning and dividends declared for the Years ,as well as balance b alance in the retained earning account at the beginning and end of year.
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. The other statement ,reflecting activities over internals of time as follow STATEMENT
REFLECTS
STATEMENT OF INCOME
RESULT OF OPERATIONS
STATEMENT OF CASH FLOW
ACTUAL CASH RECEIPTS AND DISBURESEMENTS
STATEMENT STATEMENT OF RETAI RETAINED NED EARNING EARNING CHANG IN RETAINED RETAINED EARNIN EARNING G
Financial Analysis:- Horizontal Analysis - Vertical Analysis - Ratio Analysis
BREAK- EVEN POINT (BEP) Every hotel have break –even point ,the percentage of occupancy necessary to Pay all operating expenses .the brake –even point for the average hotel is obviously Lower than 70%. Example:Estimated total operating expenses: Rs. 60.00 lakhs Estate taxes etc 6.00 Insurance 10.00 Depreciation 8.50 Interest 0.50 Total 85.00 lackhs Total daily expenses= 8500000/365=Rs. 23287.7 Thus the hotel must take Rs. 23287.7 each days to break-even. For - rooms rates hotel hotel RS. 232/- 100 room a day to break-even. break-even.
HOTEL LEELA VENTURE
DECISION MAKING After review of financial statement and financial analysis , owner is now able to Take the decision of following points. points. 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 ,paper And pencil
RECCOMENDATION FOR SUCCESSFUL HOTEL Turn
waste space into production use Maintain the distinctive character of acquired hotels Stress efficiency, 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
CONCLUSION Financial management means to the hospitality financial manager It maximizing the current firm related value valu e or wealth of a firm’s Owners. it will be related to timing ,magnitude and riskiness of the Future cash distributions.
REFERENCES HOTEL FOR TOURISM DEVEELOPMENT by DR.JAGMOHAN NEGI FINANACIAL MANAGEMENT FOR HOSPITALITY INDUSTRY AMERICAL HOTEL& MOTEL ASSOCIATIO HOTEL HILTON GROUP HOTEL LEELA GROUP
