In groups (of 3-4), you will work on a major project of preparing a financial and operational analysis of a hospitality business. The company and its financial reports will be allocated to your group. The audience for this project is potential investors, franchisees, lenders and managers of the business.
The assignment comprises three tasks:
1. Company Analysis – Group Level
2. Financial Performance Analysis – Individual Hotel Level
3. Operational Variance Analysis – Department Level
While this assignment provides you with insights into different financial measures relating to a range of different levels of the business, each task is independent from the other. However, please be reminded that each group member is equally responsible for the quality standard of every task.
Please note that this is a practical assessment that must demonstrate your ability to apply financial and operational techniques. However, it is even more important that you demonstrate your ability to interpret the information in respect to its implication for the financial and operational decision making processes within the business.
Task 1: You should describe the link between the strategic business objectives and how they are measured.
Task 2: You will need to provide reasoning for the change in the profitability and other key dimensions of the business and implications arising for external stakeholder (shareholders, lenders, suppliers, employees) using ratios. It is not adequate to simply indicate the directional change of these figures across the two years.
Task 3: You are required to go beyond identifying positive/adverse variances and provide a rational with respect to what factors may have caused these variances.
Your knowledge of key concepts will be demonstrated in the successful application to the business environment.
Task 1: Company Analysis Marks: 15
The directors’ report, also referred to as the management report, takes you through the key financial results, how the business delivered against its strategy and the progress that was made in relative to the business’s strategic plans. The rest of the annual report provides you with information on the segment financial results and operational measures outcome.
This task requires you to:
1. Identify the vision, mission and strategic objectives of your allocated company and the current quantitative and qualitative metrics in place to measure its success relative to its strategic objectives.
2. Identify the revenue-generating business segments (operational/functional and/or regional) which the company reports on and determine the percentage revenue contribution that each segment makes to the total revenue for the last two years.
a. Identify which segment contributes the highest portion of the revenue
b. Comment on the change of the percentage revenue contribution over the past two years?
3. Comment on the crucial operational measures for the last two years. If available identify these measures for each business segment , otherwise for the whole business.
4. What are the current trends and strategies the company focuses on to remain competitive?
Hint: You can also use graphs to complement your response to part 2 of task 1.
Task 2: Hotel Financial Performance Analysis Marks: 20
This task requires you to analyse and interpret changes in the financial performance of an individual hotel for the last two years.
1. Firstly, this analysis requires you to calculate the financial ratios for both years*. The financial aspects that are to be investigated by your group are the following:
a) Profitability (ensure to engage the DuPont decomposition)
b) Long-term financial stability
c) Short-term financial stability
Please account for the assumption that 70% of the total sales were on credit.
2. Secondly, you must comment on the change of the ratios from one year to the other and interpret the implications resulting from your analysis undertaken for part1 of task 2. The rationale for the changes in financial results is crucial to a high-quality outcome of your assignment. This section must cover the reasoning for the change in the financial performance of the hotel, whether the hotel can meet its financial requirements over the short-run and why this may have changed over the two years under investigation. Lastly, identify the long-term financial stability and the extent of financial risk the business is exposed to due to its debt structure. To appraise this risk, you may want to assess whether a loan application for further expansions would likely be more successful in the current year relative to the prior year.
3. Further, identify and discuss other trending performance measures that are specific to the hospitality industry.
*Note: You will need to show your calculations in the table format provided at the end of these instructions. This table format will assist you in providing a clear response to the requirements in part 1 of task 2.
Task 3: Department Variance Analysis 15 marks
This task requires you to identify potential causes for variances in the operational profitability of the hotel’s banquets department. You are given an extract of the department’s financial performance report and also budget information (see blow). The report focuses on the aspects of performance that show the largest deviations from the budget:
1. Sales revenues for banquet meals
2. Costs relating to the one complimentary welcome drink served with each meal
3. Costs relating to the major ingredient of the main course: Wagyu beef
4. Kitchen labour costs*
*Note: The majority of preparation time is spent on preparing and cooking the main ingredient, the Wagyu steak.
At first glance it appears the sales revenue show a significantly positive variance relative to the budget, however, the unexpected adverse expense variances for drinks, the key ingredient to the main course and also for labour costs mitigate against the significant positive revenue gain to an overall positive net effect on the profit of $8,946 for the department.
The Best Hotel
Financial Performance Report
For the Month ended 31st May 2018
Banquets Department Actual Budgeted
Banquet meals sold 10,800 meals 9,000 meals
1. Sales Revenue $529,200 $472,500
Variable Costs of inputs:
2. Drinks (Cost of sales) $82,476
3. Meals (Cost of sales) $81,000
4. Labour (Kitchen Staff) $120,420
Departmental net operating profit impact $245,304
Drinks standards and used input
Budgeted: 1 bottle Champagne containing 750ml costing $40per bottle should provide 5 full pours (full glasses).
Actual: The end of the month report shows that 2,088 bottles of Champagne were purchased and used.
Meals standards and used input
Budgeted: 250g of Wagyu beef per person per meal while the hotel planned to purchase the beef for $30 per kilo.
Actual: The report shows that 3,240kgs of meat where consumed in the production process.
Labour standards and used hrs
Budgeted: Planned time for kitchen staff to prepare the meals was 21minutes per meal while the average wage was anticipated to be $25per hour.
Actual: Labour hours actually worked were 5,400hrs.
The banquets manager is concerned about variances and has asked you to systematically explore the variances and identify possible explanations for each to assist further investigation and the quest for high efficiency.
1. Calculate the static-budget variance for all 4 items referred to in the financial performance report (Sales revenues, costs of the drinks, the meat and the direct labour costs).
2. Compute the flexible-budget variance for all 4 4 items referred to in the financial performance report.
3. Compute the price and efficiency variances for the champagne and indicate whether each variance is favourable or unfavourable.
4. Compute the price and efficiency variances for the main ingredient and indicate whether each variance is favourable or unfavourable.
5. Compute the price and efficiency variances for labour and indicate whether each variance is favourable or unfavourable.
6. Comment on your findings for requirements 3-5 and provide a possible explanation as to why these variances have occurred.