Hospitality industry has grown in the recent past. The increase has necessitated investors to tap the market gap by setting up or upgrading the existing businesses. In return, this requires funding that again calls upon investors to determine the available avenues to get funding. The acquired finances will require to be properly managed by maintaining records of account and analysing the financial strength. Planning would be necessary to ensure the resources are utilised efficiently. This can be done by maintaining a budgetary process.
The business funding is becoming increasingly important in the global economy. With the new wave of globalization and use of technology, markets of goods and services have enlarged and so does the businesses. Business trade is also growing across several of sectors and notably diversifying from the previously traditionally trading partners with a significant shift in the growth of overseas markets (Frederic, 2006). This has necessitated entrepreneurs to seek funding to expand their production capacity or open new ventures. In this light, businesses need to develop a funding and income plan which will outline how the business is going to acquire the resources and utilise in generation f product and services.
A funding and income generation strategy can be described as a plan that sets out funding needs for the project, event or organisation over a given period which typically range between three to five years. It also entails financial actions; possible funding and timescales that will enable the organisation or the project sail successfully. A funding and income generation strategy provide the organisation attain the set goals and provide a platform to account what has yielded in the past as well as giving recommendations for the future (Kaplan, 2002). The project research outlines the major sources of funding to the business, costs involved, business accounts and the financial analysis. Sources of business funding
They are a range of sources of funds that are available to the business and service industries. The first source of funding to a business is the self-funding from saving. The saving can be used as part of the startup capital or the capital need to increase the production capacity. It saves the cost of looking for funding in the financial institution and maintains total control of the business as there is no need to relinquish company control to the shareholders. To add on the personal saving, many business taps on the inner circles of families and friend before expanding to the larger horizons. Most of the funding institutions require contribution of the investors in the business before they can chip in on their part.
Like any individual, business can borrow money. Borrowing money can be done privately through loan banks or it can be carried out through a debt issue. Borrowing from the bank is the common source of funding to many businesses. Many funding institutions such as bank and small micro-finance institutions have laid down policies that encourage investors to look for the start and boost financial capital by limiting the security leverage. Bank loans are easy to access, and large amount of money can be obtained (Sullivan & Sheffrin, 2003). Nevertheless, the capital obtained will add an expense to the business through the interest charged.
Businesses especially the registered businesses can sell the shares to the general public as a way of raising the required capital. The share represents the worth value to the company in that those who buy the share have ownership in that company and becomes eligible to share the company benefits in terms of dividends. Such funding is known as equity funding. Unlike in the loans, this kind of financing does not attract interests. The shortcoming is that the profits will be shared to the shareholders.
After business make profits, this can be ploughed back the profits to the operations. Though rarely enough for big projects, ploughed back profits presents the best source of funding in that the money does not attract any interest nor reduce the owners’ value in the company. Business Accounts
The name originates from the role of the trial balance which is to verify that the listed value of all the debit values side equates to a total of all the credit values. Trialing, by recording each of the nominal ledger balance, make certain accurate reporting of the nominal ledgers for use in financial reporting. If the sum of the debit column fails to equal the total value of the credit column then, this become evidence for an error in the nominal ledger accounts. The error should be rectified before a profit and loss statement, and consequent balance sheet can be generated. If there are discrepancies in the trail balance, a careful analysis of the accounts is audited, and this ensures that the errors are detected and rectified (Carcello, 2008). Budgetary Process
Business managers make decision that affects the productivity of the business every day. For the business to make valuable business and coordinate the activities of various departments, a business will need to have plans for its operations. Planning the financial operations of an enterprise is known as budgeting. Precisely, a budget is a financial plan of an enterprise within a given period.
A budget is necessary for any enterprise as it helps the business communicate, coordinate, plan, evaluate and control business activities. Various units in an organisation must coordinate the many different tasks towards attainment of the organisation goals. A budget ensures all these activities are coordinated. The budget also ensures that the activities the business intends to carry out to achieve its goals are planned in terms of timescale and the fiancés required. Ultimately, this helps the business achieve the goals which would have been difficult without a budget. The results can be controlled to avoid deviations and evaluated to ensure they meet the set goals (Krishbhavara, 2012).
In most of the case, it is normal to have a variance on the actual and expected results in a budget. Variance in the budgetary process means either cost was lower than expected or the profits were higher than projected and vice versa. The variance helps the management make a decision on future financial plans and adjust the current plans to fit in the system. Costs Classification
The cost of the business can be categorized in different approaches: Some of the costs include fixed costs, variable costs and semi-variable costs. All these costs relate to the costs in an organisation changes depending on the activities levels (Cost Classification, 2014).Variable cost: these costs vary depending on the level of production. The bigger the production level, the higher the variable costs and vice versa. An example of a variable cost is meals.Fixed cost: these are costs that are constant over a wide range of activity. An example of fixed costs is business rent which does not change no matter the level of production.Semi-variable costs: a semi-variable cost contains both the fixed and variable cost. An example of semi-variable cost is telephone bill expense.
Financial analysisA hospitality industry can categorize the financial ratio in terms of profitability, liquidity, efficiency and debt ratios. All these ratio are included in the analysis below.Gross profits margin: Gross profit is given by gross profit/ expenses. Gross profits will depend on the industry the business is in and it is always advised to measure the business against the industry benchmark. This is an excellent way of profitability of each product and services.Gross profit margin = gross profit/ saleAn example: ABC Hotel, Total revenue $ 250, 000Cost of goods sold (food and beverages) $ 75, 000Gross profit margin $ (250, 000 -75, 000) = $ 175, 000, giving 70% gross profit marginNet profit margin: The percentage profit the business makes after all the expenses has been deducted. An estimate of the net profit helps the business determine whether the profits are covering all the expenses. It also determines whether the business will run a high-volume or low-volume margins. An example ABC Hotel, Gross profit = $175, 000 Expenses (wages, utilities, fuel) = $ 34, 000 Net profit margin = $ (175, 000- 34, 000) = $ 141, 000Current ratio: The current ratio helps determine the solvency of the business by comparing current assets like unpaid invoices to current liabilities such as unpaid bills. In a profitable business, the current ratio should be more than two which means the cost of the assets should double that of the liabilities. If the sales are growing and the business has been having a low frequency of current ratio, it means that the business is healthy. On the other case, if the business is operating on longer operating circles, it is advisable to maintain a current ratio which is a stable to the main control of the current assets and liabilities.An example ABC Hotel = Current Assets/ Current liabilitiesCurrent Assets (cash in bank and hand, debtors, stock) = $ 500, 000Current Liabilities (creditors, short loans) = $ 250, 000Therefore, the current ratio is = 2Inventory turnover: The ratio is important when a company is trading stock. It indicates how often the business inventory is sold and replenished within a given period. It is advisable to have a higher inventory turnover than a lower inventory turnover. A low inventory turnover means that business stock is tied up in the stock for a long period which hampers cash flow. Again, too high figure indicates that the business do not have enough stock on hand.Return on owner equity: This ratio compares the net business income to the equity invested in the business. It reveals how much a business is making from the money invested. Return on owner equity increases as the business grows, particularly if the money investment remains the same.The ratios identify the major growth in the last decade in the four sector of the hospitality industry namely; restaurant, lodgings, airlines and entertainment sector (Krishbhavara, 2012).
With particular interest in the hospitality industry, financial ratios have been widely used by the general manager, bankers, owners of lodging companies and corporate executive. Baggaley (2013) finds out that these groups view various financial ratios differently. For instance, most managers consider activity and operating ratio; the owners give a priority to profitability ratios, corporate executive considers liquidity ratios and banks cares about insolvency ratios. Profitability and operating ratios, however, are more valued (bank, 2009).
Break-even analysis helps the business to determine if the profit gained corresponds to the equity invested. At break-even point, the cost of investment equals the returns obtained. According to the figure given by these ratios, it is possible to determine the break-even analysis. The result will in turn help the business to determine the investment is worth or the period it is going to take for it to achieve the break-even point. Therefore, the business ratio will guide short-term decision regarding the break-even, and other important financial analysis will be easy to achieve.
Additionally, these business ratios can be used to control cash and resources within the business. For instance, an inventory turnover helps the business determine the value of cash tied up in the stock. From this, the management can make a decision regarding the cash and resources (bank, 2009).
Conclusion and Recommendations
Success of an enterprise is ingrained in the financial management which entails cost accounting and budgeting. In this regard, a proper financial analysis is important to establish the strength of the business and areas of improvement. Business accounts that would ensure the funding go to each section of the hospitality industry. Besides, a budgetary process to ensure coordination, planning, control and evaluation of the company resources. The integration of all these aspects of finance in the hospitality industry operations will help streamline the activities and correct deviations. As a result of my investigation, the following recommendations should be implemented in hospitality industries.
- Utilise the cost-effective sources of funding which will helps the company reduce the financial burden in terms of expenses.
- Maintain proper records of account to ensure deviations are easily noted, and rectification made.
- Engage the employees while budgeting processes. The workers are a primary part of the business and can help shape the budget to practical figures. It also helps them feel as part of the organisation, projects or event.
- Integrate the financial analysis by use of ratio to determine the strength and the possible measures to improve on the financial growth.
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