Task 1:
You have been appointed as the financial advisor of Best City Hotel plc and you are required to advise management of the hotel on sources of finance to fund the additional rooms require.
A. Identify the appropriate sources of finance available for the business for its operations and assess the implication of different sources.
B. Evaluate the appropriate sources of finance for the expansion plan of the above hotel. you will have applied an effective approach to study and research the various source of finance for the expansion project.
Task 2:
Management of The City Hotel plc is unsure about the capital structure of the company and asks for your advice about the cost of financing the expansion.
A. Analyse the cost of funding the project using equity versus debt finance and recommend your choice.
B. Explain the importance of financial planning and assess the information needs for financial
decision making and explain the impact of finance on the financial statement. you will discuss the cost of debt and equity as funding sources and apply effective judgement to recommend your choice
Task 3:
Investment decisions are the most important decisions that a company makes. They commit a substantial amount of money to decisions which are likely to have a large impact as a company’s
apparatus over a long period of time.
A. Discuss the importance budgeting and analyse the budgets for variation and make appropriate decisions for the City Hotel.
B. Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the City Hotel.
C. Assess the viability of the hotel expansion project using investment appraisal techniques.
Task 4:
When nearing the end of a company’s financial year, there are a number of procedures that need to be performed to ensure that the business’s finances are in order. Across all industries, the financial health
of a company is measured against three major financial statements: Income Statements, Statement of Cash Flows and the Statement of Financial Position.
A. Discuss the above mentioned financial statements of The City Hotel or any other relevant company.
B. Select two different types of companies (one could be the City Hotel) and compare the formats of financial statements.
C. Interpret the financial statements using appropriate ratios of a public limited company and compare with another. you will have provided an appropriate structure of the financial statements.
Finance is, considered as the science and art of managing money. Exact concept of the business finance is the key ingredient for business development. In the world of economics, finance may be, defined as the lifeblood of business. Big as well as small business demands finance for fulfilling their requirements to improve appropriate sources of finance and their implication.
Nature or the kind of business determines which kind of strategies should be applied for raising the finance of business. Here some of the possible sources of the finance is being discussed (Drucker and Bruckenstein, 2013).
Source: Classification of sources and funds
The larger organisations have the wider ability of using variety of financial resources than the smaller one. A much reputed companies most of the time have uncountable share holders. A smaller business has to take the financial support from savings, friends and families. A business may get the needed financial support by taking loans provide by the banks or from any another financial organisation. Before applying for the loan the lender of the finance must be aware with all the risks and opportunities related with the loan. Another way of raising the finance may be provided by the over draft facility (Field, 2012). By meeting some the certain business conditions one can be eligible for getting private and government funds. Beside all the knowledge of the possible sources business management requires exact application of that knowledge. Perfect implication of the resources leads a business to its best possible improvement. For attaining a huge profit trough the capital which is available, it is important and significant to plan the finance exactly in the way it is needed. Growth, innovation and interconnections is made stronger by financial institutions (Goodman, 2002). Relations between the institution and the money leader also affects in the growth of the business. Thus, realisation and understanding of indirect and direct financial methodical linkages is important.
Launching of a new business or the expansion of a business faces the same kind of challenge. It is difficult for the entrepreneurs to find the outside resources of financing. Most of the banks reject to provide loan s to the start-ups. Nowadays private investors have also grown very much cautious about giving loans to the newly developed companies. So it has become difficult for the start –ups to have the required capital for the initial growth. Choosing the right form of capital and ownership and the right source of capital is equally important. Application of exact decision while evaluating the financial resources will affect the company for lifetime. (Sutton, 2007) That is why before committing to a specific funding source the entrepreneurs must consider their option attentively. Homework is must for the entrepreneurs before choosing the right source of finance for the company .Entrepreneurs must understand which source is the best for the different phase of the company. They have to find the way of attracting the attention of the investors, so that they can get the option of choosing the sources .Before producing the business plan before the investors, entrepreneurs must get prepared perfectly. Producing the idea of the business convincingly is also very important. Rising of funds needs a lot of skill (Sutton, 2007). With the lack of fund no company can succeed. Finance is the most important ingredient in the growth of the company, so various sources of funds must be available for the company. Undertaking the growth of expansion, purchasing permanent assets, running of the daily operations is impossible without the support of finance. As a result, the appropriate financial sources for the expansion of the hotel are too much important.
Analysis of the cost of funding for the expansion of the hotel is very crucial. The Cost of capital which the city hotel have to pay of the raising of the fund is very huge For the expansion of the hotel the business owners have to search for the financial resources which will be fruitful for the business development. The decision relates to the following points:
Capital budgeting: cost of capital is crucial for the measurement of the investment of the company. Thus, the decision of the management team should be according to the investing of the capital of city hotel.
Financial structure of the corporate: financial structure is significant for the establishing of the business of city hotel, thus the ratios involved in the financial structure should be analysed by the management team of city hotel.
Processes of financing: financial resources are very imperative and the financial resources should be, collected from the stakeholders of the company.
The owners may utilize a range of financing resources. Recourses can be divided into two sections, i.e. .dept and equity.”Dept” deals with the borrowing of finance which has to be repaid with interest. On the other hand “Equity” deals with the borrowing of money from the owner of the company itself. Cost of financing about the detailed structure of the organization is very crucial and the profitability ratios as well as the liability ratios evaluate the desired fact.
Capital expenditures of an organisation are, planned by managers. Financial planning is very important in the field of business management. Both the short and long term business plan needs a perfect business planning otherwise the organisation will collapse. Financial planning involves budgeting of the capital in a large scale. In the part of the business planning manager’s makes their strategies according to the company’s business line (Tracy and Tracy, n.d.). To have an relevant business plan collective thoughts are very essential. In the initial stage of the planning procedure each division of a corporate body must be asked for their alternative business plans. The work of the planners is not only forecasting. Work of a planner is very crucial because the planner not only have to concentrate on the likely events but also on the unlikely events. There are three significant uses of financial planning
Forecasting of the sum of amount of finance borrowed externally
Setting of appropriate aims for the compensation plans
Evaluating the impact of the changes that may occur because of the financial planning.
The model of planning
Input—It is concerned with organisations current financial state and it concentrates on forecasting the future of the organisation.
The planning model –It deals with the implications of the managers forecasting of new investments, financing and profits.
Output—this part consists of the statements relating to finance, as, balance sheets and income statements.
In the financial planning regarding the expansion of the city hotel the planners must concentrate on the upcoming changes that may happen in future. It must be kept in mind that the expansion should gain profit. Otherwise it will be considered as a huge loss. As financial planning is a vital part in the growth of the hotel it must be done efficiently.
A. Discuss the importance budgeting and analyse the budgets for variation and make appropriate decisions for the City Hotel.
Investment decisions are the most important decisions for the substantial growth of the City Hotel. These decisions are the major decisions which have great impact over the growth of the city Hotel. Budget calculation is important for the Hotel to know the outgoing expenses and the incoming revenues of the hotel. An effective budget will provide framework for making efficient decision making (Greenfield). Hotel budget making helps the managers choosing multiple projects. Budget helps the management to allocate funds to the projects. Budget are the communication tools which informs the board and the staff regarding the financial goals of the year. It helps the hotel to prevent from the financial loses and reduced the extra spending. Management can maintain the excess expenses in an appropriate manner like funds investment or maintaining capital expenditure. Budget helps the hotel to know the planned spending and actual expenses planning. A planned budget helps the Hotel to achieve the financial goal of the year with relation designated project. Efficient budget helps the hotel to achieve his mission and vision (Hallerberg, Scartascini and Stein) .
Budget variation is the difference between planned and actual figures. Budget variance is of two types: positive variance, which means the spending is over budget and the negative variance is the spending is under budget. Variance between the budgeted figure and the actual figure is considered as normal and expected sometimes (Ziesemer). This cane understood by the planned amount on rooms, total amount, expenses and the occupied rooms and the actual amount gained by the hotel. This difference of the budget of actual amount and the planned amount is called the Budget Variance. The difference is shown graphically below.
Figure:1
Source:www.Budgetvariation.com
Variance analysis of city hotel helps them to make correct strategic decisions to overcome the problems before they reduce profits amount too much. Budget variance helps the hotel whether they will charge high rates or not, to find a affordable supplier, controlling labor costs and improving the occupancy rates.
Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the City Hotel
Cost per unit is calculated when an organization produces a large number of identical products (Horngren, Datar and Rajan). It is derived from the fixed costs and the variable costs by the production process divided by the units produced. Cost per unit of the city hotel can be calculated by the following by the following formula
(Total fixed costs + Total variable costs) / Total units produced
Cost per unit decline as the number of the units produced increases. This occurs as the total fixed costs will spread over the large number of units. Cost per unit is not constant.
City hotel has total variable costs of $50,000 and the total fixed cost of $30,000 in june and producing 10,000 widgets. The cost per unit is:
($30,000 Fixed costs + $50,000 variable costs) / 10,000 units = $8 cost per unit
City hotel produces 5,000 units at a variable cost of $25,000 and the fixed cost o $25,000 for the following month. The cost per unit:
$30,000 Fixed costs + $25,000 variable costs) / 5,000 units = $11/unit.
The two factors that has been considered when the price of the city hotel has been decided are the competitive pricing and the available supply. City hotel should consider the internal factor and the external factor for the price decisions (Manos). The key internal factors that are considered for the pricing decisions of the city hotels are the marketing objectives. Product strategy will help in establishing the price of the good and the service. City hotel should cut down their room rates comparing their competitors. Dropping the rates of the rooms of the hotel, its occupancy will rise and there will be low loss. Pricing of the product of the city hotel should be based on the distribution, design and the promotion (Waier and Chiang). Management should decide the city hotel pricing on the basis of set pricing and the occupancy. The key external factors for pricing decisions are the cross selling. City hotel should sell additional products such as foods, beverages and different kind of extra services. The other technique city hotel is upselling. It includes training the employees of the hotel with the sale and reservation for more expensive product instead of selling cheaper product. Discount should be given on the seasonal basis. City hotel should set price on market skimming. Charge maximum at the Easter time or the time when accommodation is very high.
C. Assess the viability of the hotel expansion project using investment appraisal techniques.
Investment Appraisal is the technique which assesses the level of the expected return earned from the level of the expenditure made and decides the future costs and benefits over the hotel expansion project (Langdon) .The three techniques which are used for hotel valuation are the market comparison technique, cost technique and the income technique. Market approach technique is based on the comparison of the sales data and the difference of the competitors. as two sites are not comparable So it is not proper technique to be used for the city hotel valuation. Cost technique is another technique. Here the technique is used to assume the cost of the hotel to rebuild (Pettinger). The account for the loss in the property value is calculated by the straight-line or the breakdown. The total depreciation is deducted from the rebuild costs. The land value is added with the depreciated value of the hotel plus the extra charges for building the rooms. But this technique is inaccurate and subjective. So the technique used for the city hotel valuation is the income approach technique. This method considers the present value of future hotel cash flow. The technique includes the city hotel capitalization process and the discount cash flows analysis. This method focuses on the city hotel annual hotel earnings and not concludes the beneficial or bad scenarios.
A. Financial statements are the desired records of all the financial activities of the organization throughout the year. The three different types of the financial statements relating to city hotel are:
Income statement commonly known as profit and the loss statement, evaluates the financial performance of the company relating to net profit as well as loss suffered by the company (Bhatia, 2008). There are two of the main elements within the financial statements:
Income: This section includes the net profit of city hotel over the definite period.
Expense: The total cost include for the execution of the business of city hotel.
The calculation of the net profit is, done by subtracting the desired expenses from the total income of the city hotel (Bragg, 2007).
The cash movement and the balances in the bank retaining over a period are included in the cash flow statement (Choudhry, 2004). There are a few segments in the cash flow are classified:
Operating activities: The cash flow that are included in the primary or th4e main activities of the city hotel are, known as the operating activities(Gramlich, 2007).
Investing activities: It includes the purchasing or the selling of the assets that are included within the cash flow statements(McCarthy et al., 2012).
Financing activities: The amount of the cash flow spent or generated on the increase of the share capital including the respective payments of the interest.
3. Statement of Financial Position: in other words the statements of the financial position are, called the balance sheet, which represents finanacial position of city hotel within the given date. It is mainly composed of the three basic elements:
Assets: This section includes that the things that are own as well as controlled by the city hotel(Newman, 1970).
Liabilities: This section includes the owing of the business to someone else(Polakow, 2004).
Equity: This represents the value of the business to the owner. This includes the capital within the business after the use of the assets to pay the pending liabilities(Rosen, 2005).
B. The financial statement of city hotel and city motors is different from one another. There are some of the valuable parameters, which help to evaluate the perfect comparison between the two companies. They are:
Financial ratios: The ratio of numeric outcome to financial data collected from the analysis of the two companies concerned(Rowse and Garrett, 2012). The data given by the balance sheet as well as the income statement are the two crucial parameters that analyses the financial statement between the two companies.
Total debt and equity ratio: The percentage of the creditors funding for the total invest from the shareholder(Seidman, 1938).
Profitability ratio: This ratio helps to evaluate the performance of city hotel as well as the city motors.
Balance sheet classifies the desired methods related to assets and liabilities. The performance is executed with the help of:
By term
By nature
Format of income statement have two of the important parameters for comparing the different financial statements of city hotel and city motors. They are:
By nature
By function
Revenue, net income and profit margin are very important faetures for the evaluating the financial statement of the two concerned companies. There should be complete analysis of the gross profit of the company throughout the year.
These are some of the vital points, that helps to compare the format of the financial statements. Thus, the financial statements of the two of the companies will help to evaluate the profit or the loss suffered by the company. This data will help to analyse which company is better in terms of financial statement (Thornhill, 1995). The most crucial role is of the balance sheet which evaluates the fact that related to the marginal profit of the company.
C. Revenue services, gross profit, depreciation, internal expenses as well as usual expenses are some of the relevant and important features of the financial statements that evaluate the fact of the public limited company.
Source: Elements of profit with loss account
Structure for profit and loss of the organization is as follows:
Interest on loans received
Rents related to the property
Fees
The total expenses within the business of a public limited company include:
Process of the goods that are purchased for selling inn the market
Prices for the manufacturing of the goods
Costs included with the transportation and the distribution system
Advertising
Promotion
The above-mentioned diagram evaluates the fact related to the formation of the structure of the financial statements of the public limited company. Cost of the sales of the product helps to evaluate the fact that the financial structure depends on the fact that the productivity should be, increased as it increases profitability for the public limited company, which is very important to enhance the growth of the business. Limited liability is one of the crucial features that shareholder liability evaluates looses of the company which has a limited contribution to their share (Tracy and Tracy, n.d.). The minimum shareholders in a public limited company are seven and it involves the sharing of the capital between the respective shareholders. Financial privacy is one of the crucial factors that evaluate the business of the public limited company. Capital is the important factor, which is, shared between the different types of the shareholders of the public limited company (Weygandt, 2009). Financial ratios, Profitability ratio and Total debt and equity ratio these are, some of the important ratios, which help to provide proper structure for the financial statements. Thus, the financial statements are very crucial to collect the information about the performance of the company and in this particular case about the city hotel. The balance evaluates the perfect profit or loss of the organization throughout the year (Wolf, 2008).
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