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Finance in The Hospitality Industry

Mont Rose College of Management and Sciences

Code: R/601/1789

Task 1:

1.1 Reviewing sources of finance available for the business and service industry

1.2 Evaluation on the contribution made by various methods of income generation in the large chains of restaurant

Task 2:

2.1 Discussion on the elements of cost, gross profit percentage and selling prices of products and services

2.2 Evaluation on the methods of controlling stock as well as cash in business and service environment

Task 3:

3.3 Discussion on the purpose and process of budgetary control as well as an outline on the budgetary control cycle

3.4 Reviewing the variances analysis of Yuri’s budget along with reasons behind the variances

Task 4:

3.1 Assessment on sources and structure of trail balance

3.2 Evaluation on the business accounts, adjustments and notes

4.1 Calculation and analysis of financial ratio in order to offer consistent interpretation of historic performances

4.2 Recommendation on appropriate future management strategies

Task 5:

5.1 Categorization of cost under fixed, variable and semi-variable

5.2 Calculations for contribution per products and explanation on the cost/ profit/ volume relationship

5.3 Justification for the acceptance of the proposal based on short-term management decisions


Answer

Introduction

Finance and accounting have their own language topped with various techniques and statements that can easily bewilder non-accounting individuals (Drury, 2012). The current study covers both the financial as well as accounting aspect with the help of various case studies and tasks. The study provides a review on the sources of finance and the cost elements associated with products and services. In addition to this, an evaluation on the method of controlling cash and stock, business accounts adjustments and notes have been provided in the study. Moreover, the study also provides calculations for the financial ratios while making recommendations to the companies for appropriate future management actions.

Task 1:

1.1 Reviewing sources of finance available for the business and service industry (AC 1.1, M1, M2, M3, D2, D3)

As mentioned by McLaney and Atrill (2012), the finance play a vital role in the growth and development of an organization as it ensures that the value of money is exalted. The sources of finance are of two types internal and external. The eight sources of finance for purchasing a machinery costing GBP 50000 are as under:

Internal sources:

Retained earnings

Considering the words of Wood and Sangster (2011), retained earnings are regarded as one of the most common and most fruitful sources of finance for any business. This type of financing enables businesses to use their own retained profits for boosting its operations. In the present case, the retained earnings can be used for funding the maximum portion of the machinery cost for the sole trader. In addition to this, Epstein (2012) added that the cost implication for retained earnings are nil therefore, makes them most appropriate sources of finance.

Sale of non-performing assets:

The sole trader may also opt for selling the non-performing assets. This would lead to increase in the cash and cash equivalents that would be used for funding the new machinery. Like other internal sources of finance, the sales of non-performing assets have no implications on cost. 

Credit control

The sole trader may also opt for controlling his credit options as it would ensure lower discount allowed while on the other hand, also ensure more frequent and timely cash generation. This in turn would be used for funding the new machinery. 

External Sources:

Bank credits

As in the words of Cecchini et al. (2010), bank credits are one of the most common external sources of finance for a sole trader business. This type of sources of finance involves payment of interest at a specified rate for a definite period of time. In this context, Doumpos et al. (2012) added that the breach of control in this type of sources of finance leads to legal implication affecting the market reputation of the business.

Bank overdrafts

The sole trader may also opt for bank overdraft that would enable short term funding for the new machinery. As stated by Castro and Rebeca (2013), bank overdraft are generally taken on short-term basis while attracts higher interest rates as compared to bank loans. This high interest payment is one of the major shortcomings for this type of financing source. 

Mortgage

The sole trader may also opt for mortgage wherein, the sole trader can keep certain property as guarantee to the seller of machinery and use the machinery for income generation. The payments are made at agreed terms of contracts between the creditor and debtor, which the cost implications are similar to those in case of bank loans. 

Private investors

The sole trader may also opt for funding the new machinery by acquiring funds from friends and family members. This is one of the most common sources of finance for the sole traders. Generally these type of funding do not involve interest payments moreover, the principle repayments time are also easily adjusted. 

Hire Purchase

In the current case of sole trader, the funding of the capital assets may also be done by hire purchase method. In this type of financing, the payments for the assets are made in instalments and the ownership of the assets is transferred once the final instalments are made. However, the breach of control just like bank loans leads to legal implication affecting the market reputation of the business. On the contrary, the cost implications for this type of funding are generally lower when compared to bank loans. 

1.2 Evaluation on the contribution made by various methods of income generation in the large chains of restaurant (AC 1.2, M1, M2, M3, D2, D3)

The various methods for income generation in large chain of restaurant are as under:

Increment in sales: the most fruitful and most efficient means for increase income for a large chain of restaurant is by increasing sales. This increase in sales would enable increment in profits at all the level. However, the increment in sales also results in increased cost for the restaurant. However, effective and efficient management of the cash and cost strategies would enable high return for the large restaurant chain with increased sales. 

Sales of non-performing assets: In the words of Carraher and Van Auken (2013), the sales of non-performing assets would lead to increase in cash and cash equivalents for the large restaurant chain. This increased cash and cash equivalents can be injected into the operation of the restaurant chain for further income generation. 

Letting and sub-letting: This method of income generation involves renting out of the spare premises of a large restaurant chain to other businesses. This renting of spare properties would enable the restaurant chain to generate income while acting as a support of the core business activities. 

Commission based business activities: Under this method of income generation, the large restaurant chain may opt for commission-based businesses wherein, the restaurant chain may advertise the business and products of other companies. In the words of Zanievicz et al. (2013), the commission-based business excludes the activities of the competitors. 

Task 2:

2.1 Discussion on the elements of cost, gross profit percentage and selling prices of products and services (AC 2.1, M1, M2, M3, D2, D3)

Cost refers to a certain amount of cash that is invested for acquiring revenue both in short run as well as in long run. In the present case of Marks & Spenser, cost would mainly involve payments for the material, employees and overheads. In the words of Warren, K. (2015), cost can be under the following heads:

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