FINANCIAL MANAGEMENT

FOR HOSPITALITY SECTOR

CONTENTS

INTRODUCTION
HOTEL INDUSTRY ANALYSIS
 OVERVIEW
 DEMAND
 SUPPLY
 FINANCIAL ESTIMATE
 PROJECT COST
 SOURCES OF FUND
 FUND ALLOCATION
 REVENUE MODEL
 FINANCIAL STATEMENT ANALYSIS
 RECCOMENDATION
 CONCLUSION
INTRODUCTION

Finance is a subject of critical importance

To the successful operation and management of a hospitality
Firm .an operation with a elegant dinging room, conference
Facility, a world renowned chef, thousand of guest room is
Come into realty only to good financial management and
Better allocation of fund for smooth running 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 operation .
 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, Parks
INTRODUCTION TO THE HOTEL INDUSTRY

According to the British laws a hotel is a place where a “bonafied” traveler can
receive food and shelter provided he is in a position to for it and is in a fit condition
to receive.
Hotels have a very long history, but not as we know today, way 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 industrial revolution in
England, which brought about new ideas and progress in the business at keeping.

Hotel today not only cater to the basic needs of the guest 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 back 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 Premium end of the market (5 Star Deluxe) in which the
Company operates, generates around 65-70% of industry
revenue
Very few projects are under implementation in Bangalore,
Chennai, Hyderabad & Pune. Hence, the next few years are
likely to witness a limited capacity addition with strong increase
in annual demand of about 15%.
There are strong barriers to entry viz., scarcity of suitable
plots of land at good locations, excessive land prices in
metropolitan cities.
 The number of tourists visiting to India is
likely 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 fuelling
hotel room rates across India.
HOTEL INDUSTRY- DEMAND

Growth in business-tourist traffic

to India remains strong in the
double digits
The trends for ARR growth and
room demand remain
encouraging.
Recent rupee appreciation of 7-
9% could have a near-term
impact on revenues
Most hotel chains are looking to
either increase dollar tariffs or
subsequently move to rupee
tariffs for domestic as well as
international customers
 HOTEL INDUSTRY- SUPPLY

The trend of room demand

outpacing supply, particularly in
the premium segment, continues
New room supply from domestic
as well as international chains,
both building aggressively in
growth markets
This supply is unlikely to impact
until FY09
RevPars 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 any firms, here we see how ,
How the finance fits into large hospitality firm’s organization
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 maintenance of record
Audit
Tax work
Budgeting
Analysis of financial data to help in decision 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

Amarkantak
SITE SECETION

Choosing the site for hotel is usually first in aseries of critical

decision
Affecting the eventual success of hotel.
The site must be adaptable to the……………………………………..

 Type and size of proposed hotel

 A 400- room commercial hotel with meeting space can be built
 zoning law prohibit a building of that size
Proximity
INDIA
Business and Trade Centers,
Highways, Traffic Levels, Key
Attractions, Shopping Centers,
Population Backup
Site Specific
Size, Zoning Laws, height
restrictions and parking
requirements, Visibility,
Accessibility
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 feasibility study for the project
 Estimation of costs for all elements of the project and
 Determination of sources of financing
 financing and negotiate contract for franchise, lease
 formulate marketing and operating plan
 prepare the initial capital and 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.

Hotel categories
The number of rooms
Style of bed room
Ratio of single to twin and double rooms
Provision of sitting rooms ,conference rooms
Types of catering
Provision of equipment and ancillary service
Other type of service
HOTEL CATEGORIES

It is important to understand the way in which hotels are categorized.

Hotel can be categorized by location,ownership,price and other factor.

Here we categories hotel on the basis of price and accommodation.

HOTEL CATEGORIS MAXIMUM LAND AREA

Budget hotels (1/2/3 star) 1200 Sq. Mtr.

Mid-market 4 Star Hotels 6000 Sq. Mtr.

5 Star / 5 Star Deluxe Hotels 18000 Sq. Mtr.

THE NUMBER OF ROOMS

The number of rooms totally depend on the feasibility study of project

And market analysis.

The number of rooms depends on the estimated occupancy, the

Estimated 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 NUMBERS OF ROOMS

ESTIMATED OCCUPANCY* 365
 STEP - II

HOTEL FINANCE

Having determined the quantum of capital cost of hotel project the

Next step is to find out the source of fund.

Example –
ROOM LAND REQUIRED PROJECT COST
400 2.00 TO 4.00 ACRES
1OO 2 .00 ACRES
SOURCE OF FINANCE

The source of finance available to a hotel development are similar

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 capital
• Preference share capital
• Equity share capital
Borrowed capital
• Debenture
• Mortgage
•Loan from commercial bank
•Loan from financial institution
• 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 highly capital intensive. Most of the
Hotel represented by land , building, furniture furnishing and
Equipment.
A study of the balance sheet of the leading hotel companies show that
bulk capital is 90%.
A hotel project requires money under the following heads:

Cost of land and building

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 providing facilities like air-conditioning, boilers,
water treatment plant, filtration plant, water pump, drainage system.
Cost of providing swimming pool, land scaping,land development,
Shopping arcade.
Cost of kitchen ware.
Cost of manpower
Misllinious cost
Analysis of the construction cost in hotels

A construction cost of a hotel building varies from place to place.

Table-1 indicates the analysis of the construction cost of luxury hotel
Situated in an important tourist centre.
 Table-1
ITEMS PERCENTGE OF TOTAL

COST OF LAND & 52.2%

BUILDING
COST OF EQUIPMENT
AIR CONDITIONING 9.8%
PLUMBING 8.1%
ELECTRICITY 12.7% 37.1%
KITCHEN 2.9%
LAUNDRY 0.2%
ELEVATORS 3.1%
PNEUMATIC TUE 0.3%
COST OF FURNTITURE & 10.7%
FURNISING

TOTAL COST 100.00%

Cost of Land

Depends on whether land is actually purchased or owned

Cost of land typically 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 clearing the land
factored into overall cost.
Cost of Construction

Largest cost element in any hotel project

If franchised, have to adhere to franchisor specs
$60,000 per-room cost of construction is considered
satisfactory (Prevailing 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
Contractor’s 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 shop supplier or spreads out

across several suppliers.
 furniture, fixture and equipment divided into two parts
1. visible to guest- guest room, furniture,lobby,restaurant,bar
furniture .
2. not visible to guest-kitchen, laundry equipment.
Front of house and back-of-the-house equipment.
$12,000 per room for furniture, fixtures, and equipment is
considered acceptable (Of course depends on brand
Operating Equipment

Linen, silver, china, glass ware, and, in some instances, uniforms.

Back-up inventories must be acquired
$8,000 per room is acceptable.

Pre-opening Expenses

Prior to the opening of a hotel, expenses incurred for

Pre-opening payroll, training costs, advertising, and sales expenses and travel.
To be factored 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

(unpredictable 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 received,expences

Taxes, licensing charge ,charge for public unities', heating, lighting
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.Stationery
7.Engineering supplies
Excessive inventories can tie up capital and create
additional interest costs.
6,000 per room of for operating inventories should be
considered satisfactory
Rule of Thumb
Total Building Cost $ 4,739,118.00
Total Non-building Costs $ 1,618,859.50
Total Soft Costs $ 861,151.50
Land Cost $ 164,550.82
Estimated Total Project Cost $ 7,383,679.82
Total Cost Per Room (Total Project $ 73,836.80
Cost/100 Rooms)
ADR to Determine Feasibility
(Rule of Thumb=Total Cost Per
Key/1000) $ 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
Transportation
Other incomes
ROOM REVENUE

Room revenue is generated by sales of guest rooms to individuals travelers or

Group , such as tours and business meeting or permanent guest who remain at the
Hotel for expected period of time. It includes revenue from guest accommodations
Rented 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
These are the primary variables that that interacts to the form the total
Room revenue.

Percentage occupancy * average rate*number of available

room/days*365= total 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
AMERICAN HOTEL AND MOTEL ASSOCIATION for developing a formula
For computing rooms rates. 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 tabulation is made of the cost of operation .
3. An amount representing the expected 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 estimated occupied rooms.
HOTEL ROOM TRAIFF FORMULA

 All operating and overhead expenses under heads including

interest
 less.. Total gross revenue from all source other than guest room,
sales
such as a shop, store rental, food beverage sales and other
income.
 Balance.. the balance is the amount to be realised from guest
room sales.
 Compute.. Number of guest room multiplied by 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 140 SQ.FT.

NON A/C SINGLE 160 SQ.FT.

A/C DOUBLE 180 SQ.FT.

NON A/C DOUBLE 220 SQ.FT.

BATH ROOMS 40 SQ.FT.

45 SQ.FT.

FOR 2 & 3 STAR 180 SQ.FT.

FOR 4 & 5 STAR 190 SQ.FT.

FOOD & BEVERAGE REVENU

Food and beverage sales include revenue derived from the sales of food and
Beverage in restaurant, bar coffee, shops snack bars, through room service or at
Banquets.

FOOD SALES

In most of hotel the waiter takes out the order delivers the goods, 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 includes 24.5% from the sales of wine , spirits, liqueur, juices beers, minerals
Water and soft drinks.
FOOD COST ANALYSIS

A common statistic used throughout the food service industry is the FOOD COST
PERCENTAGE. This number represent the cost of food sold to guests in a given
Period , 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 employee meals and complimentary meals to guest.
The COST OF FOOD sold is based on beginning and closing inventories and food
And food purchases for the period between two inventories, minus free meals.
The following figures gives how this works:
Beginning inventory $ 20,000

Add food purchase $ 15,000

Total + $ 35,000
Deducted closing inventory - $ 4,000
Cost of food consumed + $ 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
Percentage :-
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 sold during period, divide total menu items
Sales for period, multiply by 100.

Standard 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 cost is ideal food cost.
TELEPHONE REVENUE

Telephone revenue is derived on following points:-

Number of calls
Time connected
Telephone company charged
Service charge
Cash collect
House charge
Charge guest
Distance call ( local or long)
STEP-IV

REVIEW OF FINANCIAL STATEMENTS

In hospitality business ,management communities financial information to internal

And external user via financial statements. Internal users like management.
Externals users like suppliers , bank, stockholders, government agencies.
Regards of the users , the purpose of financial statements is to communicate
relevant financial information ,it is important to taking decision for further
Progress .
 The firm should follow uniform pattern when preparing financial statements.
 The financial 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 Earnings
THE BALANCE SHEET

The balance sheet also called the statements of financial position or statement of
Condition ,reflects the financial position of the hotel business at a point in time.
It essentially a snapshot of business condition at a given 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 balance the sum of creditors' and owners claims.

THE INCOME STATEMENT

The financial statement reflecting operation of given period of time , is the income
Statement, also reflect the profit and loss statement, P& L, or operation statement.
The 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 STATEMENT OF RETAINED EARNING

This statement simply show the retention of earning and 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 the relationship among four financial statement. the

Balance sheet is static statement –it reflects an enterprise's financial position at a
point of time. The other statement ,reflecting activities over internals of time as follows

STATEMENT REFLECTS

STATEMENT OF INCOME RESULT OF OPERATIONS

STATEMENT OF CASH FLOW 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 occupancy necessary to
Pay all operating expenses .the brake –even point for the average 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
Interest 0.50
Total 85.00 lackhs

Total daily expenses= 8500000/365=Rs. 23287.7

Thus the hotel must take Rs. 23287.7 each days to break-even.
For - rooms rates hotel RS. 232/- 100 room a day to break-even.
FINANCIAL PERFORMANCE
HOTEL LEELA VENTURE

51
DECISION MAKING

After review of financial statement and financial analysis , owner is now able to
Take the decision of following points.
Further expansion plan
Budget allocation
•Forecasting demand and prices
•Estimated variables expenses
•Estimated fixed cost
Controlling expenses
•Purchasing system
•Linen replacement
•Uniform replacement
•Purchasing operating supplies
•Stationeries ,paper And pencil
RECCOMENDATION FOR SUCCESSFUL HOTEL

Turn waste space into production use

Maintain the distinctive character of
acquired hotels
Stress efficiency, but not standardization
Consolidated facilities
Achieve income from store rentals
Emphasis guest service
Keeping personal touch with service
Diversify its activities
Apply modern industrial methods to
hotel operation
CONCLUSION

Financial management means to the hospitality financial manager

It maximizing the current firm related value or wealth of a firm’s
Owners. it will be related 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