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Accounting for Decision Making: Crystal Hotel Pty Ltd

BIZ201 Accounting for Decision Making

Learning Outcomes

a) Apply relevant accounting concepts to simple business scenarios. b) Interpret and analyse the information contained in general purpose financial statements, to evaluate the overall financial position and performance of a business.

Crystal Hotel Case Study

Crystal Hotel Pty Ltd is a privately owned 3.5 stars hotel located in Parramatta CBD in Sydney. The Hotel consists of 160 rooms with maximum capacity of 350 guests, a restaurant with capacity of 150 guests, a function room with maximum capacity of 250 guests and a conference room with maximum capacity of 200 guests. The average price per room per night is $150. While the hotel is located in a very popular location and close proximity to a river and the city centre, it is becoming quite out-dated. The owners rely heavily on their corporate clientele. Clients usually use the hotel for their expat employees. Due to long term contracts they pay on credit with invoices being issued at the end of each month. The hotel is often faced with outstanding invoices. The owners have so far tolerated it as it usually occurs with their long term clients. Additionally to the accommodation services, they often use hotel facilities for their functions and conferences. The hotel is constantly having difficulties retaining a good quality staff as they always get junior personnel, which once gaining experience will usually leave for better opportunities in hotels with higher ratings. The biggest issue is to retain high quality personnel in the hotel restaurant, especially a chef. The owners would like to increase the hotel star rating by renovating or refurbishing the hotel and improving their services. They are thinking about building a Wellness Centre on the rooftop of the hotel, which would include a massage treatment room, gym, spa, sauna and an outdoor pool. As new plans will require quite extensive capital investment, the owners would like to know where they stand financially before making any major decisions. You have been appointed to analyse their financial statements and to give them an insight on which areas should be improved and analysed further. You are expected to conduct the financial statement analysis in Excel workbook and then use your findings in creating a business report to be submitted to the client.

Using the Income Statement Vertical Analysis prepared in Excel workbook, conduct Income Statement comparative analysis to the industry benchmarks included in Table 1 and Table 2 of the Appendix. Comment on how the business is performing comparing to the industry. Include comments on Revenue, Cost of sales (excluding personnel costs), Personnel costs, unallocated Operating costs and Total costs proportions. Make recommendations on areas which need improvements or further investigation, based on the results of your comparative analysis. 4. Using the results of the Ratio Analysis in Excel workbook, comment on Profitability, Efficiency, Liquidity and Solvency of the business. With reference to the industry data provided, make recommendations where appropriate. 5. There are additional industry specific performance indicators and benchmarks that the hotel could use when comparing itself to the industry. Conduct a research and recommend 3 additional industry specific benchmarks the hotel could use in their comparative analysis. Include a brief explanation of each benchmark you are recommending including formula where appropriate.

Answer


Introduction 

Accounting is the record of financial activity that has been performed by the firm for a specific time (Papatheodorou, & Pappas, 2017). Accounting is highly essential for the process of decision making as this help to understand regarding the expense, profit, and loss, income statement, balance sheet of the firm. To adequately understand the accounting for the decision-making process the case study of Crystal Hotel Pty Ltd is selected. It is a privately owned company that is located in Sydney. The hotel is a 3.5-star hotel with a maximum capacity of 350 guests. The purpose of the paper is to provide a comparative analysis of the income statement, then effectively offer comment on the profitability ratio, efficiency ratio, liquidity and solvency of the firm. The paper will also discuss regarding the additional specific benchmark that could be utilised for the comparative analysis of the firm. 

Income Statement Comparative Analysis 

Revenue

Revenue is the income that the business has from their usual business activities generally from the sales of products as well as the services to the consumers (Erdem, & Jiang, 2016). For the year 2015, the data of the hotel industry in revenue show that the room's income was 57% and the room revenue of Crystal Hotel Pty Ltd for the same year was 61.88%. It clearly shows that in term of room revenue the organisation has gained the profit from the industry. Moreover, the food and beverage, function and other revenue of the hotel industry were 32, 6 and 5 percent respectively, whereas the organisation for the same has the receipt of 14.46, 14.83 and 8.83 percent respectively.

Cost of sales (excluding personnel cost)

Cost of sales is the stored complete of all cost used to create the product or service that has been sold (Agrawal, & Cooper, 2017). The cost of sales of Crystal Hotel Pty Ltd rooms for the year 2015 was 13.04%, and the food and beverage were having the percentage of 12.47% and 2.08% for the other cost of sales. For the hotel industry, the data are 7% for rooms, 10% for food and beverage and 2% for others the cost of sales. It clearly shows that the organisation is having the high cost of sales as compared to that with the industry. 

Personnel cost

Personnel cost is the total remuneration that is payable to the employee by the employer in return of work (Melián-González, & Bulchand-Gidumal, 2016). The entire personnel cost that could be gained from the hotel industry is 33% for the year 2015 whereas, the Crystal Hotel Pty Ltd have the total personnel cost of 25.38%. It shows that the remuneration factor is quite low in the organisation as compared that with the hotel industry.

Unallocated operating cost

Unallocated operating cost is the cost that is not associated with any of the particular activities (Vieira et al., 2016). The unallocated operating loss of the Crystal Hotel Pty Ltd for the year 2015 was 18.31%, whereas for the hotel industry that amount in term of rooms was 15% and the same in the time of the average price was 16%. It clearly shows that the organisation has a higher value in the name of the unallocated operating cost as compared to the industry.

Total cost 

Total cost is considered to be the total expense that has been incurred for reaching the particular level of the output. The total cost of the hotel industry can be seen as 68% whereas the total cost of the Crystal Hotel Pty Ltd the gross profit was 72.41% and the net profit was 19.53%. The comparative analysis of the income statement clearly shows that the firm has benefit within the hotel industry for the year 2015.  

Recommendations

It is recommended that to increase the net operating income within the firm, it is essential for the business to reduce the cost of sales in the market. It is also recommended to increase the personnel cost for reducing the employee turnover rate. 

Profitability, Efficiency, Liquidity, and Solvency of business

Profitability 

Profitability ratio is the class of the financial metrics that are used for accessing the business ability to generate earnings (Laitinen, 2017). The gross profit margin of the industry is higher as compared that with the firm where the net profit margin of the firm was higher than the industry. In both, the case of return on asset and equity the organisation was having 22.55% and 31.67% respectively which was much higher as compared to the industry that had 8% and 9% respectively. The overall profitability ration of the firm shows that they had achieved a high-profit level for the year 2015.

Efficiency 

Efficiency ratio is the analysis tool for gathering the information regarding the use of asset and liabilities by the firm internally (Lara, Osma, & Penalva, 2016). The inventory turnover of Crystal Hotel Pty Ltd for 2015 was 6.40 whereas, the industry had 8.60. The number of day’s inventory held within the firm was 57.01 whereas, the amount in the industry was 42.44. This eventually shows that the efficiency level of Crystal Hotel Pty Ltd is quite high as compared that with the industry and also they can perform well in the market. The firm with a comparison of the industry is playing quite well, and they also have a suitable efficiency ratio in the market. 

Liquidity 

Liquidity ratio is effectively utilised for the determination of the debtor ability to pay off the current debt obligation without disturbing the external capital (Falk, & Steiger, 2018). The current ratio of the Crystal Hotel Pty Ltd for 2015 was 1.8, and that for the industry was 3.20. The quick ration also for the Crystal Hotel Pty Ltd was 1.46 and that for the industry was 2.12. This clearly shows that both the current and the quick ratio of the industry are much higher as compared that with the firm. It conclusively demonstrates that the organisation can manage the working capital and also have the sufficient ability for meeting the short-term obligations.  

Solvency 

Solvency is the capability of the firm to meet their long-term financial obligation (Rauch, & Wende, 2015). The stability of the firm show that the debt to the equity ratio was 35.81%, then the debt ratio was 26.37% and the equity ratio was 73.63%. The interest coverage of the firm was at 60, and for that, it conclusively shows the high rate of solvency within the market. The top equity ratio percentage shows that the firm has greater financial strength which indicates the low portion of the firm in debt.

Recommendations 

It is highly recommended to the firm that they need to increase the inventory turnover in the market as this will eventually increase the demand for company product or service within the market.

Additional industry-specific benchmark

Benchmarking is the process of making a comparison of the firm with the other companies in the same industry and learns the process of growing of the firm (Luo, Yang, & Law, 2014). There are numerous ways and benchmark that could be utilised for understanding the situation of the Crystal Hotel Pty Ltd within the market. It is recommended that useful benchmark help to get the proper idea regarding the business process of the firm. The 3 recommended specific benchmark are as follows; 

HubSpot’s Demand Generation benchmark

The HubSpot demand generation benchmark help to determine the success of the marketing program by accessing the benchmark data (Adamashvili, & Fiore, 2017). With the help of this report, the marketers have suitable access regarding the industry benchmark of the firm. In this report the data about the website traffic, annual revenue, marketing qualified leads, open email rates, as well as marketing investments, are provided. With the help of this benchmark, the Crystal Hotel Pty Ltd can efficiently perform the comparative analysis with the other firm or the industry. 

Social media industry benchmark report

The social media toolset is the most effective for the marketers to enhance their Return on Investment (He, Wu, Yan, Akula, & Shen, 2015). It also helps to comparatively analyse the use of social media and the online channel for the marketing process of the firm. In term of the hotel and the hospitality industry, this benchmark is highly essential for the development of the valuable process within the field. It also helps the firm to expand their brand image and increase their product demand within the market.

Average Occupancy rate

Average occupancy rate is the percentage of the available rooms that have been occupied for the specific time (Rauch, & Wende, 2015). It is essential in the hotel industry for analysing the earning of the firm for the particular period. The high rate of occupancy shows that the firm is having a high rate of earning. It is being calculated as the total paid rooms that are occupied divided by the total number of available rooms.

Calculation: Occupancy % = Paid rooms Occupied / Rooms available

Conclusion 

The paper eventually concludes the fact that the hotel Crystal Hotel Pty Ltd has a suitable and higher profitable ration within the market. The hotel is gradually developing their position within the hotel industry. The paper also concludes that the business has been developed effectively within the market with the increasing demand for product and services and also by the increasing efficiency rate of the firm.

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