22889268 financial management in hospitality hotel industries like taj leela

8/6/2019 22889268 Financial Management in Hospitality Hotel Industries Like TAJ Leela

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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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22889268 financial management in hospitality hotel industries like taj leela

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