FINANCIAL MANAGEMENT FOR HOSPITALITY SECTOR

CONTENTS

INTRODUCTIONHOTEL INDUSTRY ANALYSIS OVERVIEW DEMAND SUPPLY FINANCIAL ESTIMATE PROJECT COST SOURCES OF FUND FUND ALLOCATION REVENUE MODEL FINANCIAL STATEMENT ANALYSIS RECCOMENDATION CONCLUSION

INTRODUCTION

Finance is a subject of critical importanceTo 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 .

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

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 6thcentury 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 inEngland, 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 shelterprovide much more than that, like personalized services etc.

Hotels today are a “Home away from home”.

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 roomsThe Premium end of the market (5 Star Deluxe) in which the Company operates, generates around 65-70% of industry revenue

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 in metropolitan 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.

HOTEL INDUSTRY- DEMAND

Growth in business-tourist traffic to India remains strong in the double digitsThe trends for ARR growth and room demand remain encouraging.Recent rupee appreciation of 7-9% could have a near-term impact on revenuesMost hotel chains are looking to either increase dollar tariffs or subsequently move to rupee tariffs for domestic as well as international customers

HOTEL INDUSTRY- SUPPLY

The trend of room demand outpacing supply, particularly in the premium segment, continuesNew room supply from domestic as well as international chains, both building aggressively in growth marketsThis supply is unlikely to impact until FY09RevPars across most tourist destinations were up 35%-plus for FY07

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 firm’s organizationStructure.The finance ruction involve two general areas:-Rising of fund ( Financing decision) All allocation of fund (investment decision)

on other hand….Accounting involves The design of business information systemThe maintenance of recordAuditTax workBudgetingAnalysis of financial data to help in decision making

STEPS INVOLVED IN SETTING UP A HOTEL

Before starting anew hotel we must go through…………..

1. SITE SELECTION2. THE FEASIBILTY STUDY3. FINANCING ARRANGED

Amarkantak

Pachmarhi

Hotel generally offer three individual products: accommodation, food & service

STEP -I

SITE SECETION

Choosing the site for hotel is usually first in aseries of critical decisionAffecting 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

Proximity Business and Trade Centers, Highways, Traffic Levels, Key Attractions, Shopping Centers, Population Backup

Site SpecificSize, Zoning Laws, height restrictions and parking requirements, Visibility, Accessibility

INDIA

FEASIBILITY STUDY

After the site section , a market study and financial analysis , is called Feasibility study, is conducted to determine the economic viability ofThe hotel project.Feasibility study can help……Preparation of a market feasibility study for the projectEstimation 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

DESIGIN & STRUCTURE OF HOTEL

After the compilation of site selection and fusibility study of success of Hotel. we analyzing the structure of hotel, that is depend on the Following point.

Hotel categoriesThe number of roomsStyle of bed roomRatio of single to twin and double roomsProvision of sitting rooms ,conference rooms

Types of cateringProvision of equipment and ancillary serviceOther type of service

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.

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, the Estimated occupancy is based on assumed rate structure.averarage Rate per occupied room described on overall rate structure in single Room.

TOTAL NUMBER OF ROOMS NIGHTSESTIMATED OCCUPANCY* 365

NUMBERS OF ROOMS

STEP - II

HOTEL FINANCE

Having determined the quantum of capital cost of hotel project theNext step is to find out the source of fund.

Example – ROOM LAND REQUIRED PROJECT COST

400 2.00 TO 4.00 ACRES1OO 2 .00 ACRES

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

Borrowed capital • Debenture• Mortgage•Loan from commercial bank•Loan from financial institution• Trade debt- credit guaranteed by supplier•Inter company loans•Provision for taxation•Public fixed deposit•IPO

Project cost:- $ 7.3 million for 100 rooms

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 that bulk capital is 90%.

A hotel project requires money under the following heads:

Cost of land and buildingCost of civil worksCost of electrics installation and fixturesCost of sanitary work and fixturesCost of furniture fixture and fittingCost of carpetCost 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 manpowerMisllinious cost

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 hotelSituated in an important tourist centre.

Table-1ITEMS PERCENTGE OF

TOTALCOST 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%

Cost of Land

Depends on whether land is actually purchased or ownedCost 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 $40,000Taxes during construction and costs of clearing the land factored into overall cost.

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 considered satisfactory (Prevailing market scenario without interest).Fixed-price contract

Cost more controlled, difficult to get because of the inflation prevalent both in labor and in construction materials, this is not often feasible.

Cost-plus contractContractor’s profits are a percentage of the costs. Maximum ceiling on cost can be written into contract

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 parts1. 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

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 for Pre-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

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,expencesTaxes, licensing charge ,charge for public unities', heating, lighting Operating cost etc.

Inventories

Inventories can be broken down into the following categories:

1.Food2.Beverages3.Cleaning supplies4.Paper supplies5.Guest supplies6.Stationery7.Engineering supplies

Excessive inventories can tie up capital and create additional interest costs. 6,000 per room of for operating inventories should be considered satisfactory

Rule of ThumbTotal Building Cost $ 4,739,118.00Total Non-building Costs $ 1,618,859.50Total Soft Costs $ 861,151.50Land Cost $ 164,550.82

Estimated Total Project Cost $ 7,383,679.82Total Cost Per Room (Total Project

Cost/100 Rooms)$ 73,836.80

ADR to Determine Feasibility(Rule of Thumb=Total Cost Per

Key/1000) $ 73.84

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 divide Into :-Room sales Food sales Beverage salesTelephonesCigar & news paperLaundryTransportationOther incomes

ROOM REVENUE

Room revenue is generated by sales of guest rooms to individuals travelers orGroup , such as tours and business meeting or permanent guest who remain at theHotel 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 componentsOccupancyRatesThese are the primary variables that that interacts to the form the totalRoom revenue.

Percentage occupancy * average rate*number of available room/days*365= total room revenue

Occupancy percentage= (room occupied / room available)*100

AV.DAILY RATE(ADR)=(ROOM REVENUE/ROOM OCCUPIED)

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 the

total 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 byAMERICAN HOTEL AND MOTEL ASSOCIATION for developing a formula For computing rooms rates. The formula published in 1952, is worked out follows:-

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 other income. 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.

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.

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 totalRestaurant sales.

BEVERAGE REVENUE

It includes 24.5% from the sales of wine , spirits, liqueur, juices beers, minerals Water and soft drinks.

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 givenPeriod , 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 , suchAs 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.

The following figures gives how this works:

Beginning inventory $ 20,000

Add food purchase $ 15,000Total + $ 35,000Deducted closing inventory

- $ 4,000

Cost of food consumed + $ 31,000Deduct employee meals & COMPLIMENTRY MEAL

- $ 2,000

Cost of food old + $ 29,000

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 percentageStandard food cost for all menu items sold during period, divide total menu itemsSales 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.

TELEPHONE REVENUE

Telephone revenue is derived on following points:-Number of callsTime connected Telephone company chargedService chargeCash collectHouse chargeCharge guestDistance call ( local or long)

STEP-IV

In hospitality business ,management communities financial information to internalAnd 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 .The firm should follow uniform pattern when preparing financial statements.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

THE BALANCE SHEET

The balance sheet also called the statements of financial position or statement ofCondition ,reflects the financial position of the hotel business at a point in time.It essentially a snapshot of business condition at a given moment.Show this statements are asset and claim of asset. The claim asset include liabilities' and owners equity.In other world ,asset must equal , or balance the sum of creditors' and owners claims.

THE INCOME STATEMENT

The financial statement reflecting operation of given period of time , is the income Statement, also reflect the profit and loss statement, P& L, or operation statement.The good name of this statement would be net income statement.

The statement of cash flowIt 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.

RELATIONSHIP AMONG THE FOUR FINANCIAL STATEMENTS

It is important to understand the relationship among four financial statement. the Balance sheet is static statement –it reflects an enterprise's financial position at apoint of time. The other statement ,reflecting activities over internals of time as follows

STATEMENT REFLECTSSTATEMENT OF INCOME RESULT OF OPERATIONSSTATEMENT OF CASH FLOW ACTUAL CASH RECEIPTS AND

DISBURESEMENTSSTATEMENT OF RETAINED EARNING

CHANG IN RETAINED EARNING

Financial Analysis:- - Horizontal Analysis - Vertical Analysis - Ratio Analysis

BREAK- EVEN POINT (BEP)

Every hotel have break –even point ,the percentage of occupancy necessary to Pay all operating expenses .the brake –even point for the average hotel is obviouslyLower than 70%.Example:-Estimated total operating expenses: Rs. 60.00 lakhsEstate taxes etc 6.00Insurance 10.00Depreciation 8.50Interest 0.50Total 85.00 lackhs

Total daily expenses= 8500000/365=Rs. 23287.7Thus the hotel must take Rs. 23287.7 each days to break-even.For - rooms rates hotel RS. 232/- 100 room a day to break-even.

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HOTEL LEELA VENTURE

DECISION MAKING

After review of financial statement and financial analysis , owner is now able to Take the decision of following points.Further expansion planBudget allocation •Forecasting demand and prices•Estimated variables expenses•Estimated fixed costControlling expenses•Purchasing system•Linen replacement•Uniform replacement•Purchasing operating supplies•Stationeries ,paper And pencil

RECCOMENDATION FOR SUCCESSFUL HOTEL

Turn waste space into production useMaintain the distinctive character of acquired hotelsStress efficiency, but not standardizationConsolidated facilitiesAchieve income from store rentalsEmphasis guest serviceKeeping personal touch with serviceDiversify its activitiesApply modern industrial methods to hotel operation

CONCLUSION

Financial management means to the hospitality financial managerIt maximizing the current firm related value or wealth of a firm’s Owners. it will be related to timing ,magnitude and riskiness of the Future cash distributions.

REFERENCES

HOTEL FOR TOURISM DEVEELOPMENT by DR.JAGMOHAN NEGI

FINANACIAL MANAGEMENT FOR HOSPITALITY INDUSTRY AMERICAL HOTEL& MOTEL ASSOCIATION

HOTEL HILTON GROUP

HOTEL LEELA GROUP