HTM 471 Test #1
Profit flexing
4. Management utilizes profit flexing when the hotel's actual revenues for the month fall behind budget. Profit flexing requires managers to try to adjust pricing for the balance of the month to maximize the remaining revenue opportunity and reduce expenses without impacting customer service.
Profitability Ratios
Effectiveness of achieving profit margins and ROI goals Profit Margin Return on Assets Return on Investment Return on Equity
Balance Sheet
Provides a snapshot of a company's financial position Categories of accounts: Assets Current Assets Fixed Assets Liabilities Current Liabilities Long Term Liabilities Equity Assets = Liabilities + Equity
Revenue Recognition Principle
Revenues should be recorded in the month they are earned
T/F "Think like an owner and act like a manger," is a recurring theme throughout the book.
TRUE
Statement of Cash Flow
Three sections: Cash Flow from Operations Cash Flow from Investing Activities Cash Flow from Financing Activities
a. Liquidity ratios measure an operation's ability to meet its short-term obligations.
(1) Current Ratio = current assets/current liabilities (2) Accounts Receivable Turnover = total revenue/average accounts receivable (3) Average Collection Period = 31 days/accounts receivable turnover (4) Operating Cash to Current Liabilities = operating cash/average current liabilities
d. Operating ratios assist management in determining how efficient the operation is.
(1) Food Cost Percentage = cost of food sold/food sales (2) Beverage Cost Percentage = cost of beverage sold/beverage sales (3) Labor Cost Percentage = labor cost/total sales
c. Activity ratios are used to gauge the effectiveness of how assets have been managed.
(1) Food Inventory Turnover = cost of food sold/average food inventory (2) Beverage Inventory Turnover = cost of beverage sold/average beverage inventory (3) Fixed Asset Turnover = total revenue/average net fixed assets (4) Total Asset Turnover = total revenue/average total assets
b. Solvency ratios measure an operation's ability to meet its long-term obligations.
(1) Operating Cash Flow to Long-term Debt = operating cash/average long-term debt (2) Long-term Debt to Total Capitalization = long-term liabilities/(total liabilities + total equity) (3) Debt-to-equity Ratio = total long-term liabilities/total equity (4) Times Interest Earned (TIE) = earnings before interest expense and income tax (EBIT)/interest expense (5) Fixed Charge Coverage = (net income + interest expense + rent expense)/(interest expense + rent expense)
e. Profitability ratios measure management's effectiveness in achieving profit margins and return-on-investment goals.
(1) Profit Margin = net income/total revenue (2) Return on Assets = net income/total assets (3) Return on Investment (ROI) or Return on Equity (ROE) = cash flow/total equity or net income/total equity
a. A credit card transaction fee is charged by all credit card companies to merchants (hotels, restaurants, etc.)
(1) This fee ranges from as low as 2% to as much as 6% of the transaction price. (2) The amount of the fee is typically based on the average transaction price and sales volume of the merchant.
Employee Scheduling
1. Employee scheduling is an important part of management decision making since the hospitality industry is very labor intensive. Employee scheduling should be based on accurate revenue forecasts, productivity goals, and customer service levels.
Be Aware Of
1. Readers of financial statements should look out for window dressing, which is artificially making a company's financial statements look more favorable. 2. Off-balance-sheet financing is used by some companies that do not want to show debt on their balance sheet associated with a real estate joint venture of which they own a percentage. GAAP allows a company to avoid showing its portion of the debt related to the investment as a liability on its balance sheet as long as it owns a "relatively" minor percentage of the joint venture. 3. Capitalizing current operating expenses is another financial trick to artificially reduce current expenses and increase profits. 4. Improper revenue recognition occurs when revenues are recorded before they are actually earned, which violates the matching principle.
F/B Pricing
2. Food and beverage pricing is another important part of management decision making. Managers must track the sales of each menu item and calculate their gross profitability over time before setting menu prices and removing unprofitable items from the menu.
Revenue Mgmt
3. Revenue management is an outgrowth of yield management of which the goal is to maximize RevPAR. The basic concept of revenue management is to tactfully close lower levels of pricing during times of high demand, open all pricing levels during times of low demand, and maximize cash flow as well as revenue for the hotel.
Zero Balance Account
All cash accounts are consolidated into a single account Separate checking account statements are provided Advantage Eliminates the need to maintain cash balances in each account
Matching Principle
All expenses incurred in generating a revenue should be recorded in the period the revenue is earned
Cost Principle
All transactions must be recorded at cost
Lockbox
Assigned a numbered P.O. box for payments Bank collects and processes payments on a daily basis Advantage Businesses can process payments quickly and securely
Cash Forecast
Assists in determining the amount of working capital Management estimates cash inflows and projects cash needs for 90 days Alerts management to probable cash shortages or surpluses in advance
Sweep Accounts
Bank invests surplus cash balances in interest earning overnight accounts Advantage Generate additional interest Disadvantage Monthly fee
Account Reconciliation
Bank reconciles all cash accounts Creates a summary reconciliation report Advantage Reduces administrative costs for the business Disadvantages Set-up fee Monthly charge
Trend Analysis
Calculations and data points Over a specified period of time Presented on line graphs and bar charts Examples RevPAR Food Cost Payroll Cost
Ways to minimize working capital
Cash discounts Inventory turnover Good credit rating Managing accounts payables Tracking transactions
Credit Card Transaction Fee
Charged by credit card companies to merchants Fees range from 2% to 6% of the transaction price Fee is based on: average transaction price sales volume of the merchant
Forms of cash:
Checks Money orders Marketable securities
Vertical Analysis
Common sized statements - example: used to analyze variable expenses in income statements All accounts are sized using either: Total revenue or Departmental revenue Variable expenses should increase or decrease with the level of sales
Horizontal Analysis
Comparative Statements; tracks and Analyzes: Income Statement Balance Sheet Focuses on both $$ and % changes Analyzes changes over time Month to Month Year to Year
Management Reports
Daily Revenue Report Daily Payroll Cost Report Rooms Revenue Forecast Food and Beverage Menu Abstract Accounts Receivable Aging Schedule
Operating Ratios
Determine how efficient the operation is Food Cost Percentage Beverage Cost Percentage Labor Cost Percentage
Working Capital Defined
Difference between current assets and current liabilities OR Amount of cash required to operate a business
Full Disclosure Principle
Events that could impact a company's financial position should be reflected on financial statements or footnotes
Types of Accounting
Financial Accounting - Focuses on financial statements Managerial Accounting - Provide timely operating results
Boards that Develop A/C Standards
Financial Accounting Standards Board (FASB) Securities and Exchange Commission (SEC) Generally Accepted Accounting Principles (GAAP)
Activity Ratios
Gauge effectiveness of how assets are managed Food Inventory Turnover Beverage Inventory Turnover Fixed Asset Turnover
Revenue Management
Goal is to maximize RevPAR Strategies Close lower levels of pricing during high demand Open all pricing levels during times of low demand
Solvency Ratios
Measure ability to meet long-term obligations Operating Cash Flow to Long-term Debt Long-term Debt to Total Capitalization Debt-to-equity Ratio Times Interest Earned (TIE) Fixed Charge Coverage
Liquidity Ratios
Measures ability to meet short-term obligations Current Ratio Accounts Receivable Turnover Average Collection Period Operating Cash to Current Liabilities
Amount of working capital is impacted by
Mix of cash and credit sales Credit card transaction processing Accounts receivables Food and beverage turnover Vendor terms Growth
B. Hospitality Industry Financial Challenges
MultiFaceted Industry Low Profitability Fluctuating Sales Volume Labor Intensive Capital intensive Reliance on discretionary incomes
Monetary Unit Principle
Only transactions that can be expressed in terms of money can be shown on a company's financial statements
Income Statement
Presents operating results over a specific period of time Sections of the income statement: Revenues or Sales Operating Expenses For hotel properties: Departmental expenses Unallocated expenses Capital Expenses or Fixed Costs Net Income or Profit and Loss
Going Concern Principle
Requires businesses to assume they will continue to operate long into the foreseeable future
Economic Entity Principle
Separates the dealings of a business from the private dealings of its owners
Materiality Principle
Significant revenues or expenses should have thier own account on the income statement
T/F Cost-volume-profit modeling, or breakeven analysis, allows management to target the amount of revenue that must be attained to reach the owner's goal.
TRUE
T/F Horizontal analysis tracks and analyzes both income statement and balance sheet line items over a specified period of time. Horizontal analysis focuses on both dollar and percentage changes over time.
TRUE
T/F Hospitality managers must learn how to minimize the amount of working capital needed to operate a business and reinvest any surplus into growing the business.
TRUE
T/F The goal of financial accounting is to produce financial statements that accurately present the financial condition of the company and its operating results over time.
TRUE
T/F The goal of managerial accounting is to provide more timely operating results related to revenues and expenses to help management maximize the operating performance of the business.
TRUE
T/F When using vertical analysis, all accounts are sized using total revenue or departmental revenue as the common base. The amount of each expense is divided by the revenue amount to derive its percentage
TRUE
T/F Cash is the most important asset a business can have, because, with cash, a business has both liquidity and buying power.
TRUE 2. Cash is convertible into any other type of asset, which makes it one of the most desirable and often stolen assets. Therefore, it is important for management to utilize cash controls to protect the different forms of cash (checks, money orders, and marketable securities) from being stolen by employees or thieves
Time Period Principle
The company must set specific time periods for measuring its financial results
IV. CP3 System
Tool that can help budget cash properly Four components: Monthly Commitment Budget Purchase Order System Daily Payroll System Report Daily Profit and Loss Statement System Advantages: No Surprises Payroll control Financial flexing: e.g. hold back expenses if running behind forecast Focus through teamwork Alignment of interests (active participation) Timeliness of financial data
Class Objectives
Understand financial challenges in the hospitality industry. Read, interpret, and analyze financial reports Manage working capital and profits Understand the importance of growth and identify growth strategies available for hospitality companies Know how to finance growth finance growth opportunities in hospitality businesses Risk, reward, and value creation in hospitality businesses Investment analysis for hospitality businesses Structure and negotiate a new hospitality venture
Ratio Analysis
Used to asses financial health Five categories: Liquidity Solvency Activity Operating Profitability
3. A cash forecast assists management in determining how much working capital is necessary to operate the business.
a. At the beginning of each month, management should estimate the cash inflows and project cash needs for ninety days. b. The objective of a cash forecast is to alert management to probable cash shortages or surpluses in advance. c. The cash forecast is similar to the statement of cash flow. It presents cash inflows and outflows from operations, financing activities, and investing activities.
The balance sheet provides a snapshot of a company's financial position as of a certain date and consists of three categories of accounts: assets, liabilities, and equity.
a. On a balance sheet, total assets equal total liabilities plus total equity b. Assets are items of value the company owns (1) On a balance sheet, assets are subdivided into current assets and fixed assets. (a) Current assets have an estimated life of one year or less. (b) Fixed assets have an estimated life of more than one year. (2) Assets are listed in the order of their liquidity, or how easily and quickly it can be converted into cash. c. Liabilities, which are subdivided into current and long term liabilities, are obligations the company owes. (1) Current liabilities are obligations due within the period being reported. (2) Long term liabilities have due dates longer than the subject period. d. Equity is the amount of capital invested in the business plus retained earnings. Equity can also be thought of as the numerical difference between assets and liabilities. (1) For corporations, the investment portion of equity is called common or preferred stock. If the business is a partnership, the investment is called partnership interests. (2) Retained earnings are prior year profits that have not been paid out to owners as dividends. (3) The amount of equity shown on the balance sheet is shown at cost and may not be the true market value of the company. 3. The statement of cash flow presents cash flow from operations, cash flow from investing activities, and cash flow from financing activities.
5. Management can also utilize published industry averages and norms to analyze their company's financial condition. The Smith Travel Research HOST and STAR Reports are presented in the text, but there are numerous other reports available to hospitality mangers.
a. The HOST Report, published annually by Smith Travel Research, is designed to allow a hotel to compare its operating results with those of other comparable hotels. b. The Smith Travel Research STAR Report is a monthly report used by hotel owners and managers to compare their hotel's occupancy, average daily rate, and RevPAR with that of a customized set of hotels that compete with the subject hotel.
The amount of working capital a business needs to operate depends on many factors
a. The mix of cash and credit sales impacts working capital, because the larger the percentage credit sales are of total sales, the more working capital you may need. b. Credit card transaction processing impacts working capital. Some banks treat credit card sales as cash sales and deposit payments at the end of each day, while others record credit card sales as accounts receivables and only pay the cash after the credit card transactions are processed. c. The longer you take to collect your accounts receivables, the more working capital you need. d. The food and beverage turnover ratio is also an important factor, because low turnover requires management to have more cash tied up in inventories. e. The faster your vendors and suppliers require your business to pay its bills, the more working capital you need to maintain. f. The faster your business grows, the more inventories you need to keep on hand to serve your customers and the more likely you are to add more staff. More sales means more accounts receivables and more staff means a higher payroll.
1. The income statement, which is often referred to as a profit and loss statement, presents the operating results of a business over a specific period of time
a. The results are usually shown for the current month and year-to-date, with budget and prior year results provided for comparison purposes b. The income statement presents revenues, operating expenses, capital expenses, and the resulting profit or loss for the period (1) The first section of an income statement presents revenues or sales generated by the business (2) The second section of an income statement presents operating expenses which include expenditures directly related to the day-to-day operation of the business such as cost of goods sold, payroll, marketing, repair and maintenance, and energy expenses. Operating expenses can also be referred to as controllable expenses because management has direct influence over how much is spent each period. (3) For hotel properties, operating expenses are subdivided into departmental expenses and unallocated expenses (a) Departmental expenses are those costs that can be charged directly to one department or profit center such as rooms, food and beverage, and telephone. (b) Unallocated expenses are those costs that apply to two or more departments of the hotel such as administrative and general, marketing, property operations and maintenance, and utilities (4) The last section of the income statement includes capital expenses which are costs related to the physical structure and include interest expense, property taxes, insurance, and depreciation expense. Capital expenses are sometimes referred to as fixed costs because they cannot be controlled on a daily or monthly basis by management (5) Net income or profit and loss is the last line on an income statement
Horizontal Analysis
analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends
Trend Analysis
hypothetical extension of a past series of events into the future
Vertical Analysis
reporting an amount on a financial statement as a percentage of another item on the same financial statement
Ratio Analysis
the calculation and interpretation of a financial ratio
The three best-known systems of accounts used in the hospitality industry are:
the systems for lodging, foodservice, and club management (1) The Uniform System of Accounts for the Lodging Industry was first published by the Hotel Association of New York in 1926 and included an expense dictionary which defined and categorized accounts. (2) The Uniform System of Accounts for Restaurants, first published in 1927, provides sample financial statements, classifications of accounts, and an expense dictionary. (3) The Uniform System of Accounts for Clubs was developed by the Club Managers Association of America and adopted by the club management industry in 1954. The club industry is unique in the fact it is self-regulating since its members are also its owners. The most recent version is known as the Uniform System of Financial Reporting for Clubs.