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FINANCIAL MANAGEMENT
FOR HOSPITALITY SECTOR
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CONTENTS
INTRODUCTION
HOTEL INDUSTRY ANALYSIS
OVERVIEW
DEMAND
SUPPLY
FINANCIAL ESTIMATE PROJECT COST
SOURCES OF FUND
FUND ALLOCATION
REVENUE MODEL
FINANCIAL STATEMENT ANALYSIS
RECCOMENDATION
CONCLUSION
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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 returnThat makes it worthwhile for people and institution to invest
Their money in the operation .
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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
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INTRODUCTION TO THE HOTEL INDUSTRY
According to the British laws a hotel is a place where a bonafied traveler canreceive 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. Thiscondition 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.
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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 theCompany operates, generates around 65-70% of industry
revenue
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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 good locations, excessive land prices inmetropolitan 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.
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HOTEL INDUSTRY- DEMAND
Growth in business-tourist traffic
to India remains strong in the
double digits
The trends for ARR growth and
room demand remainencouraging.
Recent rupee appreciation of 7-
9% 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
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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 ingrowth markets
This supply is unlikely to impact
until FY09
RevPars across most tourist
destinations were up 35%-plus
for FY07
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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 firms organizationStructure.
The finance ruction involve two general areas:-
Rising of fund ( Financing decision)
All allocation of fund (investment decision)
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on other hand.
Accounting involvesThe design of business information system
The maintenance of record
Audit
Tax work
Budgeting
Analysis of financial data to help in decision making
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STEPS INVOLVED IN SETTING UP A HOTEL
Before starting anew hotel we must go through..
1. SITE SELECTION
2. THE FEASIBILTY STUDY3. FINANCING ARRANGED
Amarkantak
Hotel generally offer three individual products: accommodation, food & service
STEP -I
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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..
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
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Proximity
Business and Trade Centers,
Highways, Traffic Levels, Key
Attractions, Shopping Centers,
Population Backup
Site Specific
Size, Zoning Laws, height
restrictions and parkingrequirements, Visibility,
Accessibility
INDIA
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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
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
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Types of cateringProvision of equipment and ancillary service
Other type of service
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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 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.
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THE NUMBER OF ROOMS
The number of rooms totally depend on the feasibility study of project
And market analysis.
The number of rooms depends on the estimated occupancy, theEstimated 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* 365NUMBERS OF ROOMS
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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 PROJECT COST
400 2.00 TO 4.00 ACRES
1OO 2 .00 ACRES
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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
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Borrowed capital
Debenture
Mortgage
Loan from commercial bank
Loan from financial institution
Trade debt- credit guaranteed by supplierInter company loans
Provision for taxation
Public fixed deposit
IPO
Project cost:- $ 7.3 million for 100 rooms
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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 tha
bulk capital is 90%.
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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
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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.
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Table-1
ITEMSPERCENTGE OF TOTAL
COST OF LAND &
BUILDING
52.2%
COST OF EQUIPMENT
AIR CONDITIONING 9.8%
PLUMBING 8.1%
ELECTRICITY 12.7% 37.1%
KITCHEN 2.9%
LAUNDRY 0.2%
ELEVATORS 3.1%PNEUMATIC TUE 0.3%
COST OF FURNTITURE &
FURNISING
10.7%
TOTAL COST 100.00%
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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 landfactored into overall cost.
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Cost of Construction
Largest cost element in any hotel projectIf franchised, have to adhere to franchisor specs$60,000 per-room cost of construction is consideredsatisfactory (Prevailing market scenario withoutinterest).Fixed-price contract
Cost more controlled, difficult to get because of theinflation prevalent both in labor and in construction
materials, this is not often feasible.Cost-plus contractContractors profits are a percentage of the costs. Maximumceiling on cost can be written into contract
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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 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
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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 forPre-opening payroll, training costs, advertising, and sales expenses and travel.To be factored into overall budgetDepends on the pre-opening philosophies of the operator.$3,000 per room is considered optimum
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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.
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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
$ 164,550.82Estimated Total Project Cost $ 7,383,679.82
Total Cost Per Room (Total Project
Cost/100 Rooms)$ 73,836.80
ADR to Determine Feasibility
(Rule of Thumb=Total Cost PerKey/1000) $ 73.84
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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 divideInto :-
Room sales
Food sales
Beverage sales
Telephones
Cigar & news paperLaundry
Transportation
Other incomes
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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
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Occupancy percentage= (room occupied / room available)*100
AV.DAILY RATE(ADR)=(ROOM REVENUE/ROOM OCCUPIED)
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1. An estimation is made of the guest rooms to be sold every year.
2. Then a tabulation is made of the cost of operation .
3. An amount representing the expected fair return on investment is
added to cost of Operation .
4. The average rates must be charged is calculated by dividing thetotal amount
By the number of estimated occupied rooms.
For generated revenue from room set the price 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 formula published in 1952, is worked out follows:
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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 otherincome.
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.
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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.
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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.
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FOOD COST ANALYSIS
A common statistic used throughout the food service industry is the FOOD COSTPERCENTAGE. 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 foodAnd food purchases for the period between two inventories, minus free meals.
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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 &
COMPLIMENTRY MEAL
- $ 2,000
Cost of food old + $ 29,000
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Assumed food sales for this period were $ 10,0000 to compute the food cost
Percentage :-Food cost 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/ $ 10,000=.27*100=27%
Note actual food cost is higher than the st.food cost=2%St. food cost is ideal food cost.
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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)
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STEP-IV
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 .
y The firm should follow uniform pattern when preparing financial statements.
y The financial statements used in hospitality industry are:-
1. The Balance Sheet
2. The Income Statement
3. The Statement of Cash Flow
4. The Statement of Retained Earnings
REVIEW OF FINANCIAL STATEMENTS
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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 STATEMENT OF RETAINED EARNING
This statement simply show the retention of earning and dividends declared for the
Years ,as well as balance in the retained earning account at the beginning and end of
year.
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RELATIONSHIP AMONG THE FOUR FINANCIAL STATEMENTS
It is important to understand the relationship among four financial statement. theBalance 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 OF RETAINED EARNING CHANG IN RETAINED EARNING
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Financial Analysis:-- Horizontal Analysis
- Vertical Analysis
- Ratio Analysis
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DECISION MAKING
After review of financial statement and financial analysis , owner is now able toTake the decision of following 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 suppliesStationeries ,paper And pencil
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RECCOMENDATION FOR SUCCESSFUL HOTEL
Turn waste space into production use
Maintain the distinctive character of
acquired hotels
Stress efficiency, but not standardization
Consolidated facilitiesAchieve income from store rentals
Emphasis guest service
Keeping personal touch with service
Diversify its activities
Apply modern industrial methods tohotel operation
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CONCLUSION
Financial management means to the hospitality financial manager
It maximizing the current firm related value or wealth of a firms
Owners. it will be related to timing ,magnitude and riskiness of the
Future cash distributions.
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