Finance In The Hospitality Industry: Sources Of Funding, Income Generation, And Trial Balance

Describe about the Finance in the Hospitality Industry?.

The term ‘funding’ can be described as offering financial support for any program, project, business or personal need. In the business sector, funding can be classified into two segments. The owners of the business can provide the required financial support from their own reserve. In case of companies, the requirement is fulfilled from the various reserves of the company. It can be referred as internal funding. On the other hand, external funding can be described as the funding provided by the outsiders, mainly banks, other financial organizations and personal investors. In most of the time, the businesses have to bear additional expenses for the external funding, such as, interest (Nyide et al. 2014).

Various sources of business funding are discussed below:-

As discussed above, business owners can fund the businesses from the personal resources. The owners can collect the fund from personal savings and other family members. They can also borrow the required amount from family members or friends. Most of the time, this kind of funding are used to be interest-free (Jones et al. 2012).

The funds are also collected through loans from various financial institutions, such as, banks, insurance, other financial companies etc. The owner has to convince the investors about the profitability of the venture for taking the loan. In many cases, the loans are granted by keeping any asset as mortgage to the loan givers. The owners have to repay the loan amount in terms of monthly, quarterly or annuals repayments along with the interest.

Fund generation by the issue of shares is possible only if the business is registered as a company. In that case, the entrepreneurs use to publish the prospective of the business and issue share in the open market. It must be noted that the purchaser of the equity shares are considered as owners of the company and the dividend, paid to them, is the share of profit, not any kind of interest.

Generally, the income of any business is used to be generated various means. For purpose of disclosure, these various methods of income generation have been classified on the nature of the financial activities. The business activities related to the generation of income, can be differentiated into two groups – Operating and Non-operating activities. The Non-operating activities are further categorized into two groups – Financing and Investing Activities.

The methods of income generation are discussed below:-

Personal Funding

According to the International Accounting Standard, the operating activities can be defined as the main income generating activities of an entity and other activities, which cannot be categorized as financing or investing activities. Incomes, generated from such activity, are described as operating income (Brätland 2012).

Operating income is mainly earned from the basic or primary activities of any business. For example, for any manufacturing business, the operating income is the revenue, generated by the sale of manufactured products, whereas, for any service related business, it is earned by rendering  service to the customers.

The various sources of operating income are as follows:-

Income from the sale of products or service, rendered

Income from other activities, such as, royalties, discounts, commissions etc. These type of incomes are not the direct income but closely related with the operating activities

Income from refunds, especially, taxes, if the tax was not paid for any financing or investing incomes.

Financing activities are related to the capital acquiring processes. It reflects the amount of capital, collected from various sources and also the amount of expenses, incurred for acquiring and maintaining the capital. The main financing activities for income generation include two methods. The business can generate financing income by either equity financing or debt financing.

Equity financing is the method to raise capital by issuing shares in exchange of the ownership of the company. The income from debt financing are generated by borrowing loans from market at certain interest rates. It should be noted that the income generated by debt financing is the liability for the business (Drury 2012).

Investment activities are linked with the various investments made by the business entity in different type of assets. Incomes, generated from such activities, are called as Investment incomes. Generally, the term ‘investment’ is meant to invest money in other business or deposit money in banks or same type of institutions. In business sector, investment activities not only include the normal investment but also the purchase of fixed assets or acquisition of other firm.

The various sources of investment incomes are-

Sale of equity or bonds of other businesses

Sale of fixed assets

Interest earned from loans given to other entities

Dividend received for the equities of other businesses

Trial Balance is the financial statement, prepared in the end of an accounting period for an accounting entity, by listing the closing balances of all the accounts in the debit and credit columns properly to check the accuracy of the accounting system of that entity.

Loan from Financial Institutions

Though the purpose of Trial Balance is to verify the accurateness of the accounting system, it has been observed that there are many accounting errors, which cannot be detected from trial balance. The trial balance provides better results for ensuring the mathematical accuracy and detecting the single-sided errors (Mroczkowski and Flanders 2015).

The main sources of the Trial Balance are the various ledger accounts of the accounting entity, which have balances. The sources of the given trial balance are

Credit balances of Capital A/c., Bank Loan A/c., Accumulated Depreciation on Fixture & Fittings A/c. & Trade Payables A/c. and,

Debit balances of Bank A/c., Cash & Cash Equivalent A/c., Furniture & Fittings A/c. & Trade Receivables A/c.

The basic structure of the trial balance is given below:-

Accounts Type	Allocated column in Trial Balance
Assets	Debit Column
Liabilities	Credit Column
Revenue	Credit Column
Expenses	Debit Column
Profit	Credit Column
Loss	Debit Column
Capital	Credit Column
Reserve	Credit Column

In the given trial balance, all the accounts are either asset type or liability type, except the Capital A/c. Hence, the balances of the assets are allocated in the debit column and the liabilities & Capital A/c. are listed in the credit column (Bragg 2013).

Evaluation of Business Accounts:-

From the accounting extracts of Faith Restaurant, it can be stated that:-

The accounts are not differentiated into debit and credit columns

The administrative and distribution expenses are marked differently, but the cost of sales, though being an expense item, not marked separately.

There is no amount given for capital or any type of liabilities

The profit and assets are different type of accounts, but in the extract these items are listed together

The furniture & fixture is shown at the cost price, but there is no accumulated depreciation account created for the asset

Adjustments:-

The adjustment entries for the transactions mentioned in the notes are as follows:-

Capital A/c…..Dr. £2250 [(25000-2500)x10%]

To, Furniture & Fixtures A/c. £2250

(Being the depreciation for the previous year charged on Furniture & Fixture and adjusted with the Capital A/c.)

Furniture & Fixture A/c……Dr. £2500

To, Cost of Sales A/c.             £2500

(Being the purchase of furniture, wrongly included in Cost of Sales, adjusted with Furniture & Fixtures A/c.)

Distribution Expenses A/c….Dr. £250

To, Administrative Expenses A/c.      £250

(Being the diesel cost for distribution, wrongly included in the administrative expenses, adjusted with the Distribution Expenses A/c.)

Note on Adjustments:-

The adjustments entries, made above, is affecting the accounts of the business in the following manner:-

According to the accounting standards & taxation acts, depreciation should be charged on the assets from the first year of purchase. As, the depreciation was not charged on furniture in previous year, the profit of the firm had become overvalued and as the profit is used to be added with the Capital A/c., the Capital A/c. would also reflect an overvalued amount. Hence, in the current year, the Capital A/c. is debited to reduce it to the actual amount and the Furniture & Fixtures A/c. is reduced also by crediting it for amount of depreciation, which should have been charges on the furniture previous year.

Issue of Shares

The wrong entry made for purchase of furniture, has increased the amount of Cost of Sales, which in result has reduced the amount of Gross Profit, whereas, the total amount of assets has also become undervalued. Therefore, the necessary adjustment entry has been made to reduce to cost of sales and increase the value of furnitures.

The last entry does not have any material effect on the business. But as per the accounting rules, the cost of diesel, used for distribution purpose, should be included in the distribution expenses rather than administrative expenses (Box 2013).

Budgetary control is the method, where the management uses to estimate certain budgetary goals, compare the goals with the actual performance and, if required, make necessary adjustments to maintain the budget (Jones 2012).

The purposes for budgetary control are described below:-

Better planning for future cost, performance and requirements of an enterprise

Cost effective and efficient operations through several departments or cost centres

Reduction of wastage and labor idle time

Estimation of future capital expenses

Amendments for the disparities in the budgeted and actual performances

Centralization of the cost control system

Increase in the total profitability by cost effective operation

Proper job allocation and distribution of responsibility amongst the staffs (Marginson 2013)

Processes of Budgetary Control:-

The processes of any type of budgetary control include the following basic steps:-

Preparation of Budget according to the requirements, policies and future planning of the enterprise,

Comparison of the estimated budgetary performance with the actual performance of the project or business in a continuous and systematic manner

Modification in the budget in accordance to the changes in the actual circumstances (Nunes and Machado 2014)

Variation from Budgeted Performance:-

The variation between the budget and actual performances are shown in table:-

	Budget	Actual	Budgeted Standard for Actual Participants	Variance	% of Variance
Number of participants	20,000	15000		-5,000	-25.00%
	£000	£000	£000	£000
Revenue	2000	1700	1500	200	13.33%
Cost of sales	-1500	-1390	-1125	265	23.56%
Gross profit	500	310	375	-65	-17.33%
Administrative expenses	-200	-210	-150	60	40.00%
Distribution expenses	-150	-90	-112.5	-23	-20.00%
Net Profit	150	10	112.5	103	-91.11%

Many of the cost items use to vary according to quantity of the output. Therefore, the differences are calculated on the basis of budgeted standard for actual participants and actual amounts. The differences in the amounts are represented in the following chart:-

The rates of variance for different items are also shown in the following chart:-

From the above graphs, it can be stated that though the revenue earned from event was higher than the budgeted standard, the gross profit and net profit were significantly lower than the standard. It is mainly caused because of the drastic increase in the administrative expenses and the cost of sales.

As the business operation is related to event management services, the output should be budgeted in conservative manner.

The administrative expense was not only higher than the budgeted amount for actual performance, but also from the budget made for 2000 participants. Hence, in future the administrative expenses should be estimated properly. Moreover, this expenses are more or less fixed type of costs. If, the output changes from the budget, these costs remain quite unchanged.

The cost of sales uses to vary according to the output. In this case, the number of participants has reduced but the cost of sales has increased significantly. In future, the management should control the cost of sales more effectively (Whitecotton et al. 2013).

Calculation of Ratios:-

a) Gross Profit Margin Ratio
Paticulars		2015	2014
Sales revenue	A	100,000	80,000
Gross Profit	B	60,000	50,000
Gross Profit Margin Ratio	B/A x 100	60.00%	62.50%

b) Operating Profit Margin Ratio
Paticulars		2015	2014
Sales revenue	A	100,000	80,000
Operating profit	C	10,000	4000
Operating Profit Margin Ratio	C/A x 100	10.00%	5.00%

c) Current Ratio:-
Paticulars		2015	2014
Trade Receivables		9500	9200
Inventories		10000	8000
Current Assets	D	19500	17200
Trade Payable		9000	9000
Current Liabilities	E	9000	9000
Current Ratio	D/E	2.17	1.91

d) Return on Capital Employed:-
Paticulars		Amount
Capital Employed in 2014	F	35000
Capital Employed in 2015	G	60000
Average Capital Employed	H = (F+G)/2	47500
Profit before Taxation	I	5000
Interest on Loan	J	5000
Profit before Interest & Tax	K= I+J	10000
Return on Capital Employed	K/H x 100	21.05%

e) Trade Receivables Period:-
Paticulars		Amount
Opening Balance of Trade Receivables	L	9200
Closing Balance of Trade Receivables	M	9500
Average Trade Receivables	N = (L+M)/2	9350
Sales Revenue	O	100000
Trade Receivable Period	N/(O/365)	34.13

f) Trade Payables Period:-
Paticulars		Amount
Opening Balance of Trade Payables	P	9000
Closing Balance of Trade Payables	Q	9000
Average Trade Payables	R = (P+Q)/2	9000
Cost of Sales	S	40000
Trade Payable Period	R/(S/365)	82.13

g) Gearing Ratio:-
Paticulars		2015	2014
Bank Loan	T	50000	30000
Closing Balance of Capital Employed	G	60000	35000
Gearing Ratio	T/G	0.83	0.86

The financial performance of the business is analyzed below on the basis of the ratios, calculated above:-

The gross profit margin ratio is above 60%, which clarifies that the business is running quite well. But the ratio has declined from the previous year, which is matter of concern.

The Operating profit margin ratio has increased to 10%. The ratio is quite low in comparison to the gross profit margin ratio.

The current ratio is 2.17. It indicates that the current asset of the company is more than two times of current liabilities, which can be regarded as an ideal ratio.

Return on Capital Employed rate is 21.05%. It explains that the owner is earning more than 20% on the invested capital. The business seems to be quite profitable for the owners (MuradoÄŸlu and Sivaprasad 2014).

The trade receivables period is 34.13 days, which can be regarded as normal average period for credit recovery. But for a restaurant business, the period is little higher than the average.

The trade payables period is 82.13 days. The period is too longer for restaurant businesses.

Though the gearing ratio in the current year has decreased to 0.83 from 0.86 of previous year, it is very high. It denotes that most of the business capital, invested is collected by debt financing.

From the above ratio analysis, the following recommendations are suggested for the businesses:-

The management should detect the reasons for decrease in the gross profit margin ratio.

The operating profit ratio is very low in comparison to gross profit margin ratio. It indicates that the operating expenses other than cost of sales, are very high. The management should reduce the other operating expenses to increase the amount of operating profit.

The trade payables period are quite longer. Though, it will not affect the profits of the business, to maintain proper business ethics, the management should repay their creditors earlier than the average period.

The owners should decrease the amount of bank loans and rely more on personal funding (Healy and Palepu 2012).

The costs, provided in the information are categorized in the following table:

Cost Details	Type of Cost	Reasoning
Cost of Wages	Variable Cost	The total amount of these cost items are totally depended on the numbers of tickets. If the number of ticket varies, then it will also change accordingly.
Cost of Printing
Cost of Popcorn per Ticket
Rent for the Hall	Fixed Cost	The rent of hall use to be paid as per agreements. The quantity of output does not create any imact on it. If the organizer cannot sell a single ticket, he still have to bear this cost.
Electricity Bill	Semi-Variable Cost	In this cost item, there are some fixed amounts, which have to bear by the business as fixed costs and balance amount depends on the consumption of electricity and number of phone calls (Weygandt et al. 2015).
Telephone Bill

Contribution per Ticket:-

Calculation of Contribution Per Ticket:-
Particulars	Amount Per Unit	Total Unit	Total Amount
	£	(no. of Tickets)	£
TOTAL SALES (A)	30	5000	150000
Variable Costs:
Cost of Wages	10	5000	50000
Cost of Printing	1	5000	5000
Cost of Popcorn	2	5000	10000
TOTAL VARIABLE COST (B)	13		65000
CONTRIBUTION (A-B)	17		85000

As per the above calculation sheet, the contribution per ticket should be £17 per ticket.

The numbers of tickets, required to be sold, for achieving the targeted profit of 20,000, are calculated in the following table:-

Calculation of the Number of Tickets:-
Particulars	Amount Per Unit	Total Unit	Total Amount
	£	(no. of Tickets)	£
TOTAL TARGETED PROFIT  (A)			20000
Fixed Cost:
Rent of Hall	£45,000 p.a.		45000
Semi Variable Cost:-
Electricity Bill	£7000		7000
Telephone Charge	£1000		1000
TOTAL FIXED & SEMI-VARIABLE COST  (B)			53000
CONTRIBUTION [ C= (A+B)]			73000
Contribution Per Ticket (D)			£ 17
Required Number of Tickets (C/D)			4294

If the selling price per ticket would cost to £ 14, then the Break-even Point in units will be,

Calculation of Break-Even Point in Units:-
Particulars	Amount
	£
SELLING PRICE PER UNIT (A)	14
Variable Costs per unit:
Cost of Wages	10
Cost of Printing	1
Cost of Popcorn	2
TOTAL VARIABLE COST PER UNIT(B)	13
Fixed Cost:
Rent of Hall	45000
Semi Variable Cost:-
Electricity Bill	7000
Telephone Charge	1000
TOTAL FIXED & SEMI-VARIABLE COST  ( C)	53000
BREAK-EVEN POINT in UNITS [C/(A-B)]	53000

The Break-Even Point in units for the selling price of £ 14 per ticket, would be 53000 tickets.

Hence, it can be advised that the management should not go ahead with the concert, as it would generate huge loss (Kaplan and Atkinson 2015).

Reference List:-

Box, N. 2013, Accounting, News Limited, Melbourne, Vic

Bragg, S.M. 2013, Accounting Best Practices, 7. Aufl.;7th;7; edn, Wiley, US

Brätland, J. 2012, “Entrepreneurial strategy v. accounting accuracy in ‘calculating’ capital and income”, The Review of Austrian Economics, vol. 25, no. 2, pp. 93-114

Drury, C. 2012, Management and cost accounting, 8th edn, Cengage Learning, Andover

Guilding, C. 2009, Accounting essentials for hospitality managers, 2nd edn, Elsevier/Butterworth-Heinemann, Amsterdam;London;Boston;

Healy, P. and Palepu, K., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Jones, T. 2012, Strategic Managerial Accounting: Hospitality, Tourism & Events Applications, 6th edn, Goodfellow Publishers Limited, GB

Jones, T., Atkinson, H. and Lorenz, A., 2012. Strategic managerial accounting: hospitality, tourism & events applications. Goodfellow

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning

Marginson, D., 2013. Budgetary control. The Routledge Companion to Cost Management, p.9

Mroczkowski, N.A. & Flanders, D. 2015, Accounting: to trial balance, 11th edn, Cengage Learning Australia, South Melbourne, Victoria

MuradoÄŸlu, Y.G. and Sivaprasad, S., 2014. The impact of leverage on stock returns in the hospitality sector: evidence from the UK. Tourism Analysis,19(2), pp.161-171

Nunes, C.R. and Machado, M.J.C.V., 2014. Performance evaluation methods in the hotel industry. Tourism & Management Studies, 10(1), pp.24-30.

Nyide, C.J., Zwane, B.K. and Nxumalo, B.H., 2014. Financial Accounting 1 Module II

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons

Whitecotton, S., Libby, R. and Phillips, F., 2013. Managerial accounting. McGraw-Hill Higher Education.