|Subject Code and Title||BIZ201 Accounting for Decision Making|
|Assessment||Case Study Part A|
|Total Marks||100 marks|
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.
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.
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.
Part 2 – to be included in the Business report
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.
Table 1 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
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.
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).
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.
Crystal Hotel Pty Ltd needs to lower down its personal cost by installing the advanced technologies.
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.
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).
The alternative measures that can be used by the hotel in their comparative analysis are recommended 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
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).
Total room revenue per room available every year= Room revenue/ number of rooms available for the year
= $ 68.61 revenue per room every year.
Break Event point= Fixed cost/ Contribution per unit
Fixed cost= $29,787+ $45,276
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.