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BIZ201 Financial Analysis of Crystal Hotel Pty Ltd: Case Study Part A Assessment Answer

ASSESSMENT BRIEF
Subject Code and Title
BIZ201 Accounting for Decision Making
Assessment
Case Study Part A
Individual/Group
Individual
Length
1,500 words
Learning Outcomes
  1. Apply relevant accounting concepts to simple business scenarios.
  2. Interpret and analyse the information contained in general purpose financial statements, to
evaluate the overall financial position and performance of a business.

Weighting
30%
Total Marks
100 marks

Context:

This assessment is aimed at consolidating knowledge from Modules 1-3. By prescribing this assessment, you are able to reflect on the understanding of accounting concepts and be able to apply them to business scenarios like given in this case study.

Instructions:

  1. The case study below presents a business scenario. Answer questions in Part 1 and 2 at the end of this case study.
  2. Submit two files; Excel Workbook and the Business Report.
  3. For calculation questions show all workings through appropriate Excel formulas. Copy pasted numbers without appropriate Excel formulas will not be accepted.
  4. Submit your assessment files using the following naming convention:

First Name_Last Name_BIZ201_Case_Study A_Assessment3_Workbook.xlsx First Name_Last Name_BIZ201_Case_Study A_Assessment3_Report.doc

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.

Required:

Part 1 – to be done in Excel Workbook

This Excel Workbook is available on Blackboard under assessment section. Download it, perform calculations on it and submit it.

  1. Vertical analysis of financial statements:
  2. Conduct Vertical Analysis of Crystal Hotel’s Statement of Financial Position as at 30 June 2015 using the Vertical Analysis SOFP worksheet. Round your numerical answers to two decimal places.
  3. Conduct Vertical Analysis of Crystal Hotel’s Statement of Profit and Loss for the year ended 30 June 2015 using Vertical Analysis P&L worksheet. Round your numerical answers to two decimal places.
  4. Conduct Ratio Analysis using Ratio Analysis worksheet. Round your numerical answers to two decimal places.

Part 2 – to be included in the Business report

  1. 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 RevenueCost of sales (excluding personnel costs), Personnel costsunallocated Operating costs and Total costs proportions.

Make recommendations on areas which need improvements or further investigation, based on the results of your comparative analysis.

  1. Using the results of the Ratio Analysis in Excel workbook, comment on ProfitabilityEfficiencyLiquidity and Solvency of the business. With reference to the industry data provided, make recommendations where appropriate.
  2. 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.

Appendix – Industry Data


Table 1 Vertical Analysis of Statement of Profit and Loss based on Number of Rooms


 Vertical Analysis of Statement of Profit and Loss based on Number of Rooms

Table 2 Vertical Analysis of Statement of Profit and Loss based on Average Room Price Range

Vertical Analysis of Statement of Profit and Loss based on Average Room Price Range

Answer

Financial analysis

Part 2

Introduction 

With the ramified economic changes, each and every organization is facing various issues and financial problems in its business. In this report, financial analysis of Crystal Hotel Pty Ltd has been taken into consideration. In the starting, the income statement of Crystal Hotel Pty Ltd has been compared with the industry average. After that, ratio analysis is being done. Afterward, industry research has been done to evaluate business outcomes in the industry.  

Answer to question no-3. 

After assessing the financial details of the company and industry average, it is analysed that Crystal Hotel Pty Ltd has a high amount of income from its room sales in the market. However, the following analysis has been given for the company while comparing the different points with the comparison of the industry 

Revenue- Crystal Hotel Pty Ltd has more than 60% of the total revenue from the sale of its room to clients. However, Industry data has shown the increasing the number of rooms occupied by average 12% since last 3 years and resulted to 65% room revenue. It reflects that Crystal Hotel Pty Ltd needs to strengthen its overall marketing to increase the sales of the room in market (Mialon, Swinburn, Wate, and Tukana, 2015). The food and beverage sector of Crystal Company has been 7.08% which is way too less as compared to industry average. This is 41% which has increased by 3% as compared to last three year data. 

Personal cost- The personal cost for room sales of Crystal Hotel Pty Ltd has been 7% of its total personal cost. However, total personal cost is approximately 25% of the total sales. The personal cost of the industry standards is high and showing 43% in 2015 which has increased by 13% since last three year. In addition to this, in case of hotel, personal cost is 25%. This reflects that company has been incurring low personal cost as compared to industry average. 

(Ko, Fujita, and Li, 2017).

Income statement comparison analysis

Unallocated cost- The unallocated operating cost of Crystal Hotel Pty Ltd has been 18.31% which is way too high. However, the company has kept this cost low in its business as compared to its personal cost and another related cost. Nonetheless, the unallocated operating cost of industry standard is 18% which is .3 % lower as compared to the Crystal Hotel Pty Ltd. This shows that Crystal Hotel Pty Ltd has kept its unallocated cost higher as compared to the industry average 

The total Cost of sales excluding– The total cost of sales of the Crystal Hotel Pty Ltd has been 27.59% which is way too low as compared to the industry average 81%. As compared to the industry average, Crystal Hotel Pty Ltd has kept its total cost way too low which will help it to strengthen its business in the long run.

Recommendation
Crystal Hotel Pty Ltd needs to lower down its personal cost by installing the advanced technologies. 

  • Total revenue-The Company needs to increase its overall revenue by adding more sales from the other department other than the sales of rooms in the market.
  • Administration cost-The Company needs to lower down its administrator and general expenses as it is way too high and the company is keeping it right to more than 6%.
  • Personal Cost- Company should lower down its personal cost as it approximately 25% of the total sales. However, it is low as compared to industry average but it could be lower down more. 
  • Unallocated operating cost- The unallocated operating cost should also be reduced by company. This could be done by reducing the expenses on the property maintenance and operation. 
  • Total cost- The total cost of the company should be reduced to strengthen the profitability and sustainable business practice of the Hotel. The hotel needs to work on the reducing its operational expenses and administration expenses which have been high and burden on the profit earning capacity. 

Answer to question no-4.

The ratios for the organization have been computed for the year 2015 and have been compared with the industry average. The gross profit margin is just 72.41%, while the industry average is 81%. This shows higher direct costs in the company in comparison to the industry average. While the net profit margin for the company is 19.53% as compared to 11% for the industry. This shows the cost-cutting techniques incorporated in the organization which have severely reduced the expenses. The company's efficiency of the working methodology is evident from this because of lower expenses leading to high net profits. The return on assets for the company is 23.37% while the industry average is just 8%. This again reports the company's highly profitable operations in comparison to the assets employed in the business. The return on equity is 32.85% while for the industry it is 9%. It means the shareholder's expectations are met by the organization more than double the industry average. To improve the gross profit ratio, the organization must try to find suppliers who provide basic hotel supplies at a lower rate. The purchases should be made in bulk to get materials at reduced prices (Adrian, and Liang, 2016). However, at an overall level, the profitability of the organization is better than industry performance (Mialon, Swinburn, Wate, and Tukana, 2015).

The inventory turnover for the organization is just 6.6 times in comparison to the industry average of 8.6 times. A lower inventory ratio in comparison to industry average might imply overstocking of inventory by the company and even weaker sales. It could also depict unsatisfactory marketing by the company.  The company's receivable collection period is too high in comparison to the industry average. This high receivable turnover period indicates the slower collection of debts by the organization. The company’s operations seem inefficient as evident from these ratios. The company needs to improve its efficiency by better management of inventory and acceleration of collection speed of accounts receivable. The efficiency needs to be improved (Easton, and Sommers, 2018).

Both the current ratio and quick ratios for the organization are less than the industry average. The current ratio is 1.86 while the quick ratio is 1.46 times. However, the industry average for the current ratio is 3.2 times and for the quick ratio, it is 2.12 times. The standard ratio shows the current assets should at least be 2 times the current liabilities. It means the current ratio is bad as compared to the standards as well the industry average. The quick assets should be at least equal to the current liabilities. 

Recommendation 

The company should increase its overall current ratio, but in order to keep its business financial cost low, it should be lower than the industry average. To improve these two ratios, the company should resort to long-term debt in comparison to short term debt. The idle current liabilities must be paid immediately. The cash equivalents should be improved by raising the share of shareholder’s funds.  The liquidity ratios should also be improved by 12% average since last year data to have sound liquidity in its business (Brigham, Ehrhardt, Nason, and Gessaroli, 2016). 

Answer to question no-5.

The alternative measures that can be used by the hotel in their comparative analysis are recommended as follows:

  • COMPARATIVE HORIZONTAL FINANCIAL STATEMENT ANALYSIS: the internal performance of the organization under consideration can be compared with the internal performance of the industry. This technique helps in providing a review of the organization's performance on a year-to-year basis (Mahoney, and Thelen, 2015). By computing the internal performance over a year for the organization with the internal performance of the industry, the difference in the performance of the organization as compared to industry average can be observed in numerical terms. The horizontal analysis can be performed individually for the organization and the industry by using the formula as follows:

Value of the element in comparison year – a value of the element in base year x 100

 Value of element in the base year 

(1786095-$1626020)/162602= 9.95%

Through the use of this formula, the performance growth and decline can be observed in percentage form. These percentages as compared for the organization can be compared with the industry average performance (Kidwell, et al. 2016).

  • GRAPHICAL ANALYSIS: the graphical analysis incorporates the use of graphs while making a comparison of financial performance and position. Different types of graphs like bar graph, column graph, line chart, etc. can be used to undertake the graphical analysis. Both the financial position and performance of the industry as well as an organization can be plotted in a visual form through the use of a graph, using the graphical analysis. Some well-established organization even uses specifically customized software that performs the only job of graphical analysis.

Income statement comparison analysis graphical analysis

  • COST VOLUME PROFIT ANALYSIS: The relationship present between the entity's sales, profit and cost are disclosed by the use of this analysis technique. For using this technique for comparative analysis, the formula needs to be applied on data available for industry average and organization, and then is required to be compared. This helps the entity in planning in a better manner for profits by looking at the industry trends (Said, 2016). The several components in which this analysis can be broken is as follows:
    • Total room revenue per room available every year
    • Contribution margin ratio: contribution / sales
    • The expense ratio for variable cost: total variable costs/ sales
    • Break-even point: total fixed costs/ contribution per unit
    • The margin of safety: total sales – break-even sales

For instance

Total room revenue per room available every year= Room revenue/ number of rooms available for the year

4006920/365*160

= $   68.61 revenue per room every year. 

For instance

Break Event point= Fixed cost/ Contribution per unit

Fixed cost= $29,787+ $45,276

Contribution==1859770

BEP= 6075649

Conclusion 

After assessing the financial details of the hotel, it could be inferred that the company needs to strengthen its liquidity position by increasing the investment in its current assets. In addition to this, administration expenses of the Hotel are way too high which also be reduced. The crux of this report is that Hotel has been doing its business effectively but needs to strengthen its business financial efficiency to increase its overall return on capital employed.  

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