FINANCIAL MANAGEMENT FOR HOSPITALITY SECTOR

CONTENTS INTRODUCTION HOTEL INDUSTRY ANALYSIS OVERVIEW DEMAND SUPPLY FINANCIAL ESTIMATE JECT COST SOURCES OF FUND FUND ALLOCATION REVENUE MODEL FINANCIAL STATEMENT ANAL YSIS RECCOMENDATION CONCLUSION

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INTRODUCTION Finance is a subject of critical importance To the successful operation and mana gement of a hospitality Firm .an operation with a elegant dinging room, conferen ce Facility, a world renowned chef, thousand of guest room is Come into realty o nly to good financial management and Better allocation of fund for smooth runnin g of whole Business. it can be fail if it cannot generate a rate of return That makes it worthwhile for people and institution to invest Their money in the oper ation .

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, Park s

INTRODUCTION TO THE HOTEL INDUSTRY According to the British laws a hotel is a place where a bonafied traveler can rec eive food and shelter provided he is in a position to for it and is in a fit con dition to receive. Hotels have a very long history, but not as we know today, wa y 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. This condition of the prevailed for a long time, until the i ndustrial revolution in England, which brought about new ideas and progress in t he business at keeping. Hotel today not only cater to the basic needs of the gue st like food and shelter provide 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 ba ck 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 Premi um end of the market (5 Star Deluxe) in which the Company operates, generates ar ound 6570% of industry revenue

Very few projects are under implementation in Bangalore, Chennai, Hyderabad & Pun e. Hence, the next few years are likely to witness a limited capacity addition w ith strong increase in annual demand of about 15%. There are strong barriers to e ntry viz., scarcity of suitable plots of land at good locations, excessive land prices in metropolitan cities. The number of tourists visiting to India is likel y 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 fuellin g hotel room rates across India.

HOTEL INDUSTRY- DEMAND Growth in business-tourist traffic to India remains strong in the double digits Th e trends for ARR growth and room demand remain encouraging. Recent rupee apprecia tion of 7-9% could have a nearterm impact on revenues Most hotel chains are looki ng to either increase dollar tariffs or subsequently move to rupee tariffs for d omestic as well as international customers

HOTEL INDUSTRY- SUPPLY The trend of room demand outpacing supply, particularly in the premium segment, c ontinues New room supply from domestic as well as international chains, both buil ding aggressively in growth markets This supply is unlikely to impact until FY09 R evPars 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 a ny firms, here we see how , How the finance fits into large hospitality firms org anization Structure. 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 system The mai ntenance of record Audit Tax work Budgeting Analysis of financial data to help in de cision making

STEP -I STEPS INVOLVED IN SETTING UP A HOTEL Hotel generally offer three individual products: accommodation, food & service Before starting anew hotel we must go through.. 1. SITE SELECTION 2. THE FEASIBILTY STUDY 3. FINANCING ARRANGED Amarkan tak

SITE SECETION Choosing the site for hotel is usually first in aseries of critica l decision Affecting the eventual success of hotel. The site must be adaptable t o the.. Type and size of proposed hotel A 400- room commercial hotel with m built zoning law prohibit a building of that size

Proximity Business and Trade Centers, Highways, Traffic Levels, Key Attractions, Shopping Centers, Population Backup Site Specific Size, Zoning Laws, height restr ictions 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 of The hotel project. Feasibility study can help Preparation of a market feasibili ty study for the project Estimation of costs for all elements of the project and D etermination of sources of financing financing and negotiate contract for franch ise, lease formulate marketing and operating plan prepare the initial capital an d 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. Hot el categories The number of rooms Style of bed room Ratio of single to twin and dou ble rooms Provision of sitting rooms ,conference rooms

Types of catering e

Provision of equipment and ancillary service

Other type of servic

HOTEL CATEGORIES It is important to understand the way in which hotels are categ orized. Hotel can be categorized by location,ownership,price and other factor. H ere we categories hotel on the basis of price and accommodation. HOTEL CATEGORIS MAXIMUM LAND AREA Budget hotels (1/2/3 star) Mid-market 4 Star Hotels 5 Star / 5 Star Deluxe Hotel s 1200 Sq. Mtr. 6000 Sq. Mtr. 18000 Sq. Mtr.

THE NUMBER OF ROOMS The number of rooms totally depend on the feasibility study of project And marke t analysis. The number of rooms depends on the estimated occupancy, the Estimate d 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* 365 NUMBERS OF ROOMS

STEP - II HOTEL FINANCE Having determined the quantum of capital cost of hotel p roject the Next step is to find out the source of fund. Example ROOM 400 1OO LAND REQUIRED PROJECT COST 2.00 TO 4.00 ACRES 2 .00 ACRES

SOURCE OF FINANCE The source of finance available to a hotel development are sim ilar 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 capi tal Preference share capital Equity share capital

Borrowed capital Debenture Mortgage Loan from commercial bank Loan from financial i nstitution 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 h ighly capital intensive. Most of the Hotel represented by land , building, furni ture furnishing and Equipment. A study of the balance sheet of the leading hotel companies show tha bulk capital is 90%.

A hotel project requires money under the following heads: Cost of land and buildi ng 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 pro viding facilities like air-conditioning, boilers, water treatment plant, filtrat ion plant, water pump, drainage system. Cost of providing swimming pool, land sca ping,land development, Shopping arcade. Cost of kitchen ware. Cost of manpower Misl linious cost

Analysis of the construction cost in hotels A construction cost of a hotel build ing varies from place to place. Table-1 indicates the analysis of the constructi on cost of luxury hotel Situated in an important tourist centre.

Table-1 ITEMS COST OF LAND & BUILDING COST OF EQUIPMENT AIR CONDITIONING PLUMBING ELECTRICITY KITCHEN LAUNDRY ELEVATORS PNEUMATIC TUE COST OF FURNTITURE & FURNISING TOTAL COS T 9.8% 8.1% 12.7% 2.9% 0.2% 3.1% 0.3% PERCENTGE OF TOTAL 52.2% 37.1% 10.7% 100.00%

Cost of Land Depends on whether land is actually purchased or owned Cost of land t ypically 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 clea ring the land factored into overall cost.

Cost of Construction Largest cost element in any hotel project If franchised, have to adhere to franchi sor specs $60,000 per-room cost of construction is considered satisfactory (Preva iling 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 contract Contractors 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 s hop supplier or spreads out across several suppliers. furniture, fixture and equ ipment divided into two parts 1. visible to guest- guest room, furniture,lobby,r estaurant,bar furniture . 2. not visible to guest-kitchen, laundry equipment. Fro nt of house and back-of-the-house equipment. $12,000 per room for furniture, fixt ures, and equipment is considered acceptable (Of course depends on brand

Operating Equipment Linen, silver, china, glass ware, and, in some instances, uni forms. Back-up inventories must be acquired $8,000 per room is acceptable. Pre-ope ning Expenses Prior to the opening of a hotel, expenses incurred for Pre-opening p ayroll, training costs, advertising, and sales expenses and travel. To be factore d into overall budget Depends 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 (unp redictable 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 rec eived,expences Taxes, licensing charge ,charge for public unities , heating, lig hting Operating cost etc.

Inventories Inventories can be broken down into the following categories: 1.Food 2.Beverages 3.Cleaning supplies 4.Paper supplies 5.Guest supplies 6.Stati onery 7.Engineering supplies Excessive inventories can tie up capital and create additional interest costs. 00 per room of for operating inventories should be considered satisfactory 6,0

Rule of Thumb Total Building Cost Total Non-building Costs Total Soft Costs Land Cost Estimate d Total Project Cost Total Cost Per Room (Total Project Cost/100 Rooms) ADR to D etermine Feasibility (Rule of Thumb=Total Cost Per Key/1000) $ 4,739,118.00 $ 1,618,859.50 $ 861,151.50 $ 164,550.82 $ 7,383,679.82 $ 73,836. 80 $ 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 sales Telephones Cigar & news paper Laundry portation Other incomes

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ROOM REVENUE Room revenue is generated by sales of guest rooms to individuals travelers or Gr oup , such as tours and business meeting or permanent guest who remain at the Ho tel for expected period of time. It includes revenue from guest accommodations R ented 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 The se are the primary variables that that interacts to the form the total Room reve nue. Percentage occupancy * average rate*number of available room/days*365= tota l room revenue

Occupancy percentage= (room occupied / room available)*100 AV.DAILY RATE(ADR)=(ROOM REVENUE/ROOM OCCUPIED)

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 AMERIC AN HOTEL AND MOTEL ASSOCIATION for developing a formula For computing rooms rate s. The formula published in 1952, is worked out follows: 1. An estimation is made of the guest rooms to be sold every year. 2. Then a tab ulation is made of the cost of operation . 3. An amount representing the expecte d 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 est imated occupied rooms.

HOTEL ROOM TRAIFF FORMULA All operating and overhead expenses under heads including interest less.. Total gros s revenue from all source other than guest room, sales such as a shop, store ren tal, food beverage sales and other income. Balance.. the balance is the amount t o be realised from guest room sales. Compute.. Number of guest room multiplied b y 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 NON A/C SINGLE A/C DOUBLE NON A/C DOUBLE BATH ROOMS 140 SQ.FT. 160 SQ.FT. 180 S Q.FT. 220 SQ.FT. 40 SQ.FT. 45 SQ.FT. FOR 2 & 3 STAR FOR 4 & 5 STAR 180 SQ.FT. 19 0 SQ.FT.

FOOD & BEVERAGE REVENU Food and beverage sales include revenue derived from the sales of food and Bever age in restaurant, bar coffee, shops snack bars, through room service or at Banq uets. FOOD SALES In most of hotel the waiter takes out the order delivers the go ods, 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 incl udes 24.5% from the sales of wine , spirits, liqueur, juices beers, minerals Wat er and soft drinks.

FOOD COST ANALYSIS A common statistic used throughout the food service industry is the FOOD COST PE RCENTAGE. This number represent the cost of food sold to guests in a given Perio d , 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 empl oyee meals and complimentary meals to guest. The COST OF FOOD sold is based on b eginning and closing inventories and food And food purchases for the period betw een two inventories, minus free meals.

The following figures gives how this works: Beginning inventory Add food purchase Total Deducted closing inventory Cost of f ood consumed $ 20,000 $ 15,000 + $ 35,000 - $ 4,000 + $ 31,000 Deduct employee meals & - $ 2,000 COMPLIMENTRY MEAL Cost of food old + $ 29,000

Assumed food sales for this period were $ 10,0000 to compute the food cost Perce ntage :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 sol d during period, divide total menu items Sales for period, multiply by 100. Stan dard 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 c ost is ideal food cost.

TELEPHONE REVENUE Telephone revenue is derived on following points: Number of call s Time connected Telephone company charged Service charge Cash collect House charge arge guest Distance call ( local or long)

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STEP-IV REVIEW OF FINANCIAL STATEMENTS In hospitality business ,management communities financial information to interna l And external user via financial statements. Internal users like management. Ex ternals users like suppliers , bank, stockholders, government agencies. Regards of the users , the purpose of financial statements is to communicate relevant fi nancial information ,it is important to taking decision for further Progress . The firm should follow uniform pattern when preparing financial statements. The fi nancial 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 Earn ings

THE BALANCE SHEET The balance sheet also called the statements of financial posi tion or statement of Condition ,reflects the financial position of the hotel bus iness at a point in time. It essentially a snapshot of business condition at a g iven 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 ba lance the sum of creditors and owners claims. THE INCOME STATEMENT The financia l statement reflecting operation of given period of time , is the income Stateme nt, also reflect the profit and loss statement, P& L, or operation statement. Th e good name of this statement would be net income statement.

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 STA TEMENT OF RETAINED EARNING This statement simply show the retention of earning a nd 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 t he relationship among four financial statement. the Balance sheet is static stat ement it reflects an enterprise s financial position at a point of time. The othe r statement ,reflecting activities over internals of time as follow STATEMENT STATEMENT OF INCOME STATEMENT OF CASH FLOW REFLECTS RESULT OF OPERATIO NS ACTUAL CASH RECEIPTS AND DISBURESEMENTS STATEMENT 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 occu pancy necessary to Pay all operating expenses .the brake even point for the avera ge hotel is obviously Lower than 70%. Example:Estimated total operating expenses : Rs. 60.00 lakhs Estate taxes etc 6.00 Insurance 10.00 Depreciation 8.50 Intere st 0.50 Total 85.00 lackhs Total daily expenses= 8500000/365=Rs. 23287.7 Thus th e hotel must take Rs. 23287.7 each days to break-even. For - rooms rates hotel R S. 232/- 100 room a day to break-even.

HOTEL LEELA VENTURE 51

DECISION MAKING After review of financial statement and financial analysis , own er is now able to Take the decision of following points. Further expansion plan Bu dget allocation Forecasting demand and prices Estimated variables expenses Estimate d fixed cost Controlling expenses Purchasing system Linen replacement Uniform replac ement Purchasing operating supplies Stationeries ,paper And pencil

RECCOMENDATION FOR SUCCESSFUL HOTEL Turn waste space into production use Maintain the distinctive character of acquire d hotels Stress efficiency, but not standardization Consolidated facilities Achieve income from store rentals Emphasis guest service Keeping personal touch with serv ice Diversify its activities Apply modern industrial methods to hotel operation

CONCLUSION Financial management means to the hospitality financial manager It ma ximizing the current firm related value or wealth of a firms Owners. it will be r elated 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