Financial Management: for the Hospitality, Tourism and Leisure Industries
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Contents:
In addition, as many large hotels have to coordinate provision of a range of hospitality services, they confront a degree of management complexity not encountered in many other hospitality organizations that offer a narrower range of services. The disparity of these functions is apparent when we recognize that the sale of rooms can be likened to the sale of seats in the airline or entertainment industries, a parallel exists between food preparation in restaurant kitchens and production activities in the manufacturing industry, and bar operations can be likened to retailing.
In addition to managing this disparate range of services, a hotel needs to coordinate a set of distinct support operations such as laundry, building and grounds maintenance, information systems, training, marketing, transportation, etc. This disparate range of hospitality activities are housed within a single site i. This creates a degree of site complexity which is exacerbated when we recognize that the location of the service provider is also the place where the customer purchases and consumes the services offered. While this is patently obvious to anyone who has been to a hotel, we should not forget that it is not the case in many other service industries e.
This factor highlights a further dynamic of the hotel industry. Not only is a hotel site the place where a broad range of activities is undertaken, it is the focal point of extensive and continual vigilance with respect to cleaning, maintenance and security. We can thus see that a hotel represents a complex site where distinct activities are conducted in close proximity to one another. Where the performance of one functional activity e. Such high interdependency can create problems when attempting to hold one functional area e.
Sales volatility The hotel industry experiences significant sales volatility. These dimensions of sales volatility and the implications they carry for hotel financial management are elaborated upon in Box 1. High product perishability Relative to many other industries, in foodservice operations there can be limited opportunities to produce for inventory.
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A significant proportion of food inventory is purchased less than 24 hours prior to sale, and much food preparation is conducted within minutes of a sale. There is thus a very short time span between purchase, production and sale. Many menu items cannot be produced in advance of sales due to their high perishability.
Box 1. Those with a high proportion of business clients suffer during economic downturns due to significantly reduced corporate expenditure on business travel. Hotels offering tourist accommodation also suffer during economic downturns due to families reducing discretionary expenditure on activities such as holidays and travel. This high susceptibility to the general economic climate highlights the importance of hotels developing operational plans following careful consideration of predicted economic conditions.
This volatility can be so severe to cause off-season closure for some resort properties. The decision whether to close can be informed by an appropriately conducted financial analysis such as that described in Chapter 6. Seasonal sales volatility can also pose particular cash management issues. During the middle and tail-end of busy seasons, surplus cash balances are likely to result, while in the off-season and the build-up to the busy season, deficit cash balances are likely to result. The need for careful cash planning and management is discussed in Chapter By contrast, many resort hotels have relatively busy weekends.
Forecasting is discussed in the context of budgeting in Chapter 8. Hotel pricing issues are discussed in Chapter In addition to these dimensions of intra-day activity volatility, staffing needs have to be considered in light of issues such as the front desk experiencing a frenetic early-morning period processing check-outs and a second, more protracted, busy period in the late afternoon processing check-ins.
Financial Management for Hospitality, Leisure and Tourism: Teachers' Book
If a room is not occupied on a particular night, the opportunity to sell is lost forever. This situation also applies to conference and banqueting activities. The high perishability associated with rooms, conferencing, banqueting and food underlines the importance of accurate demand forecasting. With respect to food, an accurate forecast of the mix and level of demand can result in the maintenance of all options on a menu during high-demand periods, and minimal cost of food scrapped during lowdemand periods.
With respect to rooms, an accurate forecast of room demand can enable appropriate pricing decisions to be made as part of an attempt to maximize revenue.
The high fixed cost structure of hotels results from rent a significant investment is required to buy land and build a hotel , as well as fixed salary costs associated with administrative and operational staff needed to manage, operate and maintain a hotel. The high proportion of fixed costs signifies that an important issue in hotels concerns the determination of the level of sales necessary to achieve breakeven i. If you visit the typical modern factory, you are likely to be struck by the highly automated and capital-intensive nature of the production process.
Procedures are scheduled by computers and robotic engineering is used extensively in physical processing. This capital intensity in the conduct of work lies in stark contrast to what you see when entering a hotel. Major hotel activities include room housekeeping, restaurant food preparation and service as well as bar service. Despite the advent of the machine and computer age, the physical conduct of all these activities has changed little over the last fifty years. They continue to have a high labour component.
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Relative to many other industries, we can conclude that activities conducted in the hotel industry are still highly labour intensive. The high labour intensity of the hospitality industry signifies the importance of performance measures that monitor labour productivity. Indices such as restaurant sales per employee-hour worked are described in Chapter 5.
In addition, the need to analyse the difference between the actual cost of labour and the budgeted cost of labour can represent a significant dimension of labour cost management. Due to their influence on sales and expenses, some managers can be held profit accountable e.
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Due to no direct influence on sales, others can only be held cost accountable e. Factors affecting departmental performance can be complex in hotels, however. As noted in Box 1. Generally, the most important aspect of forecasting is room occupancy, as room sales drive sales levels of other hotel activities. Accurate restaurant forecasting provides the basis for maintaining a full menu of options and minimizing the cost of food wastage.
With respect to rooms, forecasting accuracy can enable appropriate room rate discounting decisions. This investment generates high rent and depreciation cost discussed in Chapter 4 , which, together with significant salary costs, result in hotels having a high fixed cost structure. High investment highlights the importance of using appropriate financial analysis when appraising the relative merits of proposed investments.
The distinctiveness of these hotel characteristics that have just been described underlines the degree to which hotel financial management systems must be tailored to the particular needs of hotel management. In combination, these characteristics signify that a hotel represents a fascinating arena in which to consider the application of financial management.
Finance is generally viewed as a body of principles and theories concerned with the generation and allocation of scarce resources generally money. The most relevant aspect of finance to most managers within a company concerns the effective and efficient use of resources that fall within their particular sphere of activity. Accordingly, in this book we are concerned with describing the financial tools and techniques that can aid hospitality managers in their efforts to ensure efficient and effective management of resources.
Financial management draws extensively on accounting information.
The closely related nature of financial management and accounting signifies that gaining a basic understanding of accounting procedures is a prerequisite to becoming a financially astute manager. For most organizations, the accounting system represents the most extensive and all-encompassing information system. This is because accounting information is based primarily on the most fundamental common denominator in business, i.
A front-office manager might talk of the number of check-ins processed, a restaurant manager may talk of the number of covers served, a laundry manager may talk of the weight of linen laundered and a housekeeping manager may talk of the number of rooms cleaned. It is also the only information system that measures the economic performance of all departments within an organization.
We sometimes need to remind ourselves that accounting system design is too important to be left solely to accountants. Specific financial management information needs that fall outside the scope of a conventional accounting system design will have to be flagged by managers with decision-making and control responsibilities. There is boundless scope for tailoring an accounting information system, but the onus is on managers to inform the accounting service providers how the information provided should be tailored to meet their decision-making needs.
Despite this, some question the appropriateness of using financial measures to direct and control businesses. Profit may decline because of declining customer service. It might therefore be more helpful for management to focus on monitoring factors such as customer service rather than profit. Financial measures tend to be oriented to the short-term performance of the past.
This can hinder forward-looking, longer-term initiatives such as the development of a strong hotel chain image among customers. Despite such developments, given the importance attached to published financial statements by the investing community, continued management emphasis on financial controls is to be expected. Chapters 2, 3 and 4 provide a progressive introduction to the workings of financial accounting systems.
In Chapter 2 we will see how, like a coin, a financial transaction has two sides. These two sides signify that all financial transactions have a double impact on the business. It is important that you gain an understanding of the double entry bookkeeping system as it is a fairly fundamental aspect of accounting.
An analogy can be drawn between the manner in which knowing the alphabet serves reading and writing and the way in which an appreciation of the double entry bookkeeping system will aid your capacity to exercise appropriate financial management. Once you have mastered the basics of double entry accounting, you will have a grounding that will allow you to begin considering how accounting information can be tailored to the specific financial decision-making needs that arise in a hotel.
Recent research in hospitality financial management
It is from the information stored in the double entry record-keeping system that a profit and loss statement and balance sheet are periodically prepared. Financial management and hospitality decision makers A theme of this book concerns viewing financial management from the perspective of a range of different hospitality management functions. To provide you with an early sense of the importance of financial management to a range of hospitality decision makers, an overview of these cases is provided in Box 1.
Profit can be viewed as synonymous with income. Application of this uniform system has grown in the USA and it is now increasingly recognized across the world. The following significant benefits derive from this uniform system: Financial Management for Hospitality Decision Makers Box 1.
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Senior managers are increasingly benchmarking the performance of hotels within chains. Real estate inflation rates need to be considered if conducting an analysis using asset values of hotels bought in different time periods.