BIZ201 Accounting for Business Decision Crystal Hotel Private limited Case Study Part A Assessment Answer
ACCOUNTING FOR BUSINESS DECISION
In this report, relevant accounting concepts to the business scenario has been made. Financial analysis tools are used to assess the business performance and financial forecasting of the organization. The trend analysis, vertical analysis, and horizontal income statement analysis have been used to assess the financial performance of Crystal Hotel Private limited. The ratio analysis and interpretation have been made to assess the financial performance of the company.
Income Statement comparative analysis
The financial statement and analysis made on it divulge that Crystal Hotel Company has been earning a good amount of earning from the sale of its rooms in the market. Nonetheless, as compared to different factors following analysis has been made as below (Mahoney, and Thelen, 2015).
Revenue- The Crystal Hotel Company has 60% of total revenue only from the room booking in the hotel. As compared to industry room occupation, the company has 5% less room occupation. The revenue from the food and beverage part is 7.08% which is 35% low compared with industry average data. The company needs to focus on its marketing activities to boost its room occupancies in the market (Mialon, Swinburn, Wate, and Tukana, 2015).
Personal Cost- It is accompanied by 7% of its total personal costing. It is 25% of total sales and industry standards of personal cost are accounted for 43% which is continually increased (Said, 2016).
Unallocated costing- It is accounted to 18.31% which is high as compared to its cost and other related costs. The unallocated operating costing of the industry standard is 18% which is .3% low as compared to Crystal Hotel. The hotel has kept high unallocated costing due to its high operating expenses (Finkler, Smith, and Calabrese, 2018).
Total Cost of goods sold– The COGS of the hotel is 27.59% which is way too low compared to industry standards counted to 81%. The lower COGS will increase the overall return on capital employed and earning of the company (Barr, and McClellan, 2018).
There are the following recommendations are given below.
- Total revenue- Crystal should increase its room occupancies to increase its revenue from other sources such as food and beverage and other facilities.
- Administration cost- It needs to lower down its administration costing by abandoning its unnecessary admin expenses. It needs to keep it below 6%.
- Personal Cost- This costing should be lower down to 20%. However, as compared to the industry it is way too low but to increase the return on capital employed, it should be decreased more.
- Unallocated cost- This is related to expenses on property and land. It could be reduced by outsourcing the vacant areas to other small business organizations.
- Total cost- This costing needs to be reduced to increase the profitability of the hotel. It should set up an alliance with other business organization and set automation in its operating activities.
The ratio computation has been made based on financial data given for the year 2015. It is found that the computed gross profit margin of the company is 72.41% which is 9.41% lower as compared to the industry average. It has kept a high gross margin due to its cost-cutting methods and its financial capital deployment in process. The earned return on assets has been 23.37% which is 15% higher as compared to industry data. The return on equity of the company is 32.85% which is 23% higher as compared to industry data. It reveals that the company is offering a higher return to its stakeholders as compared to other industry rivals. The gross profit margin could be more improved by the company if it purchases its materials and goods at the cheapest rate from the suppliers (Burtonshaw-Gunn, 2017).
Inventory turnover is 6.6 times which is 2 times lower as compared to industry data. The hotel has been keeping overstocking in its warehouse which increases its cash costing. The receivables period is also way too high compared to its industry average. The higher receivables turnover reveals high cash blockage. Hotel needs to improve its capital efficiency to deploy in its business (Ko, Fujita, and Li, 2017).
The current and quick ratio of company is less than the industry average. The current ratio is 1.86 times and quick ratio is 1.45 times. Both ratio is lower than industry average. The current ratio of the hotel is way too low which should be increased at least to 2 times. However, the quick assets ratio is adequate to operate the business effectively.
Crystal hotel should increase its liquidity by increasing the investment in its current assets.
The cash blockage of funds should also be reduced to strengthen business outcomes.
It needs to lower down its excess expenses to increase the overall margin.
There are several methods to assess the financial performance of the company. However, the below given alternate method is given below (Moutinho, and Vargas-Sanchez, 2018).
- Comparative horizontal financial statement analysis
The performance of the Crystal Hotel could be compared with the performance of the rival's business organization in the industry. This method assists in improving the financial performance of the company yearly. The horizontal performance analysis could be used to assess the value business element of the company. The formula for the computation of the horizontal performance analysis has been given as below (Matthew, 2017).
Value in comparison year (Element)– Value base year( Same element) x 100
Value in base year (Element)
Therefore, by using the above given formula, we could easily assess the growth and decline stage of the company in the percentage forms. This could further be used to assess the financial performance of the company in context with the data given of the industry in the market (McKinney, 2015).
- Graphical analysis
This is the graphical presentation of the financial data through which comparison is made between the two financial factors or financial performance of companies. There are several graphs such as Pie chart, Line chart, Bar chart, and Column graphs to make the comparison of the given financial data. By using the different graphs and charts, the financial performance of company could be compared with the industry data. However, SPSS and data tool software could also be used by Crystal Hotel to prepare these graphs. The below given is the example of the graphical analysis of the data (Martin, 2016).
- CVP analysis (Cost volume profit analysis)
The CVP analysis helps in computing the cost, contribution and profit volume of the company at a certain level of the sales. By using this method, company could easily determine the point of sales at which it will have particular profit. It is the best method to identify the cost, profit, and break-even point. This formula could be used by Crystal Hotel to make the comparative analysis on the given financial data. This method is useful to plan better financial position and keeping business more effective. However, the CVP analysis could be used for the following computation such as total room revenue per year, contributing margin ratio, expenses ratio, the margin of safety ratio and break event points (Banerjee, 2015).
This could be learned from example. For instance, room revenue per year would be
Total room revenue/ number of room
= $ 68.61 per room.
The financial aspects of the Crystal Hotel have been showing that it has been keeping good amount of financial returns. It has kept good liquidity, profit-earning margin, and increased its investment in its current assets throughout the time. Nonetheless, administration expenses of the company has also been increased which may impact its gross profit margin. Therefore, these expenses should be controlled by Hotel to increase its overall return on capital employed. Nonetheless, in the end, it could be inferred that Crystal Hotel should focus on reducing its cash blockage to earn more profit in its business. It will lower down the cost of capital and eventually increase the overall return on capital employed.