Unit 2 Finance in the Hospitality Industry Assignment
The first part of this assignment focuses on the importance of various sources of finance and the impact they have on the organization as a whole. In the later parts importance has been laid on various methods of costing and how decisions are taken based on such methods.
1.1 Review the sources of findings available to business and service industries
Capital is not only required to set up a business but a business may require additional funds or capital to carry on their day to day activities. The funds required by an organization will depend upon the type and size of the organization. Short term capital is required where the organization is in a need of working capital and long term capital is required for the expansion of the business.
Equity Financing is the process of raising funds through by issuing shares. It is the most costly source of finance as it involves payment of dividend to the shareholders from the net profit after the payment of all government taxes, interest on debt and preference dividend. Hence there is always of risk of non-payment of dividend. It works as a base for creating the debt and loan capacity of the organization. (Carpenter and Petersen, 2002)
Debt Financing is the process of borrowing funds from the outsiders. It carries a promise by the organization to pay a fixed amount of interest, at a specified time and also repay the principle amount at the end of the specified period. As the debt holders are the creditors of the company, in normal situation they do not have any voting rights in the company’s affairs. (Campello, 2006)
1.2 Evaluate the different sources of income that could possibly be generated from this theme park.
Theme Park Industry Overview:-
Theme Parks are generally engaged in operations such as mechanical rides, water rides, refreshments, picnic grounds, game shows etc. These are the areas of operations from where Theme Parks generate their revenues.
Sources of Revenue:-
Theme parks generally have both Direct and Indirect Method of generating revenue. Admission to the Rides & Attractions is basically the direct method of generating revenue while restaurants, picnic garden etc. are the indirect way of generating their revenue.
The biggest source of revenue comes from the direct method i.e. admission to the rides & attractions. Almost 80% of revenue comes from these sources. The theme parks divide their whole space intro rides and attractions, restaurants, picnic gardens etc. People get access to these areas after paying the requisite fees. Theme parks use the space to generate revenue from different sources such as admission to the areas of attractions and rides, shops, recreations, fishing. Theme parks sell their tickets which has a particular time span. (Adams and Perkins, 1991)
The main sources of revenue of theme parks are illustrated with the help of the figure shown below:-
2.1 Identify examples of direct costs, indirect costs, fixed costs and variable costs incurred by Hotel Icon and Upper House
The various types of cost incurred by the hotel are as follows:
Direct Cost: Salaries, linens, crockery, food and drinks, retail expenses, occupancy cost.
Indirect Cost: Room cleaning supplies, fire insurance, supplies used in spa and gym.
Fixed Costs: Salaries paid to employees, Salaries to bus drivers and attendants, Maintenance cost, Salaries to restaurant staff, cost of operating spas. (Hundal, 1997)
Variable Costs: Food, Drinks, Cost of Operating Busses (Fuel)
2.2d. Evaluate the limitations of cost-volume-profit analysis
The cost volume profit (CPV) analysis is made under certain assumptions and undergoes certain limitations such as:
- It is assumed that for the purpose of CVP Analysis the production facilities do not undergo any changes. If reduction or expansion of capacity takes place it would give a misleading result.
- If the input price and output price will remain constant then only CVP Analysis will be correct. This is really difficult to find. If the selling price is changed or the cost reduction programme is undertaken then it would not depict a perfect correlation between the cost and profit. (Jaedicke, Robichek and A, 1964)
- It will be really difficult to forecast the volume of sales mix in case where a variety of products with different profit margins are produced.
- In CVP Analysis it is assumed that the variable cost varies at all level of activity whereas the fixed cost remains fixed irrespective of the change in the activity level. This assumption may not work in practical situation.
- Inventories are valued at variable cost and there is no element of fixed cost. Therefore, when the closing stock is carried over to the next year it does not contain any element of fixed cost which is a wrong assumption of CVP Analysis. Inventories should always be valued at full cost.
2.3 Firms in the travel and tourism industry can follow different pricing strategies to achieve profit. Analyse the different pricing strategies that can be followed by Icon and Upper House, taking into account the conditions they are currently operating in.
One of the key factors for the success of Travel and Tourism industry is formulating a proper pricing strategy. In order to ensure that the customers purchase your product it is important to set a price which is consistent, accurate and competitive.
The following are the Pricing Strategies that can be followed by Icon and Upper House:
All travel and tourism industry must have a Rack rate. It is the full rate without any discount printed on the brochures for the season ahead
The standard way of pricing is to mix the price throughout the year to cover low and high for different level of demands due to the time in a year. These will be the same day in a year which may also apply for school holidays and local events.
Last Minute Pricing:
The last minute pricing is basically discounting daily prices according to the bookings made for accommodation of suppliers to fill those last minute gaps in inventory available.
To be in a better position in the competitive market discounting will be key strategy for the Icon and Upper House. By continually discounting the price to stimulate demands profitability has to be foregone or even missing the vital breakeven point. (Davies and Downward, 2001)
2.4 Evaluate how the management of the souvenir shop would control their stock and cash flow.
An organization has to keep a record of the stock as that can affect the profitability of the business. The carrying cost and the ordering cost has to be taken into account. In order to keep a tab on the cash flow and inventory the organization will have to assess the following:
- Economic Order Quantity: The organization has to keep a tab of the EOQ. EOQ is the quantity where the cost is the lowest. This comprises of the ordering and the carrying cost. For this the organization has to estimate the annual demand of the product and order accordingly. (Grubbstrom and Erdem, 1999)
- ABC Analysis: There are a lot of products which have to be purchased by the document. Generally 20% of the inventory makes up 80% of the cost and vice-versa. The company has to first understand the trend. It needs to focus more on the 20% and balance its purchases accordingly. Such 20% should be purchased at the last moment.
- Ratios: The business needs to have a clear understanding of the ratios. For example how many times has the stock been cleared and restocked. The business needs to have a clear understanding of this. The other important ratios are sales to stock ratio, sales per square feet etc.
Apart from the suggestion made above the organization can also have a Just in Time purchasing system and can have good retail software. This would allow the organization to save on the carrying and other related costs and keep the cash flow intact.