introduction to hospitality fifth edition john r. walker Chapter 17: Accounting, Finance, and Cost Control

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Chapter 17 Accounting, Finance, and Cost Control Accounting Finance Ratios Cash Flow Management Budgets Cost Control Trends

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Accounting An important objective for any business operation is a positive financial return on investment, otherwise known as profit –Profit is also know as income, net income, or earnings, and is the amount of money a company earns after business expenses are paid –The accounting department is responsible for tracking and reporting information about the operation’s day-to-day activity and profitability –The size of the accounting staff is usually related to the size of the business organization and the form of business ownership

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Uniform Systems of Accounts Many restaurants use the uniform system of accounts for restaurants to track and report operating data A standardized accounting system for all industries These systems also assist managers in better decision making because the details of operational data are consistently collected

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Regulatory Agencies Generally accepted accounting principles (GAAP) provide guidelines for the financial measurement of operating activity and for the preparation of financial statements Two agencies involved with establishing guidelines, rules, and standards are: –Financial Accounting Standards Board (FASB) Private organization that sets broad accounting standards and specific rules –Securities & Exchange Commission (SEC) Agency of the government that sets standards for companies that issue stock

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Areas or Types of Accounting Branches of accounting: –Financial accounting: Used by external agencies such as investors and creditors; provides information to decision makers regarding the financial position of a company –Managerial accounting: Concerned with providing economic and financial data to managers and other internal users regarding a business’s daily activities –Tax accounting: Helps the taxpayer comply with all laws regarding tax paying –Cost accounting: Assists managers in identifying and controlling costs; that is, the cost of products or services and how these costs might affect selling prices –Auditing: Physical examination of financial records to determine accuracy

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Types of Business Organizations A proprietorship, or sole proprietorship, is a business owned by one person who generally acts as the manager or operator of the business and whose accounting records of business activities are kept separate A partnership is a business–unincorporated– owned by two or more partners with an agreement to run the business together In a corporation the business is, by law, completely separate from its owners; the business is responsible for its profits and, of course, its losses

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Finance Managerial or corporate finance involves business activity and decisions to help an organization do the following: –Find money to run a business –Find money to grow a business –Make investments in real assets –Plan for companies’ financial future –Manage cash on hand

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Financial Statements End results of the accounting process for a specific period of time (i.e., daily, monthly, year to date, annual) and an important tool in communicating the results Serves as a basis for evaluating management’s performance

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Income Statement Also called an operating statement or profit & loss (P&L) statement Reports the financial details of a business operation’s profit (or loss) for a period of time Typically prepared monthly, quarterly, or annually Used to answer questions about different sources of sales revenue or income (e.g., rooms, food, or beverage), and operating expenses (e.g., salaries, wages, utilities, or marketing)

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Income Statement Net income is often referred to as the bottom line: –Net revenue – Expenses = Gross profit –(Gross profit + Other income) – Other expenses = Net income

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Figure 17-1 Simplified Income Statement

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Balance Sheet Reports a business operation’s financial position at a specific point in time (end of month, quarterly, or end of year) Has 3 main parts: –Assets = Things owned by the business –Liabilities = Debts owed by the business –Equity = Assets - Liabilities

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Figure 17–2 Balance Sheet

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Statement of Cash Flows Provides information about the operation’s cash receipts and the use of cash for a period of time Lists cash receipts and cash payments for a period and is organized by operating, investing, and financing activities Generally prepared monthly and annually

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Statement of Cash Flows Operating activities refer to activity associated with running the business on an ongoing basis Investing activities refer to the purchase and sale of operating equipment or other assets intended to produce revenue in the long run Financing activities are activities involving financial resources (cash) obtained from owners and creditors and the associated repayments of the resulting obligations

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Figure 17–3 Aline’s Cafe Cash Flow Statement

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Ratios Numerical values traditionally used to measure, compare, and communicate within the business operation and the hospitality industry Profitability ratios are financial measures of a business organization’s ability to produce profit from sales to customers and clients –Each dollar of sales is used to pay for expenses such as labor, food and beverages sold, utilities, and housekeeping and maintenance

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Ratios Profit margin is calculated as net income divided by total revenue To get the return on investment (ROI), net income is taken from the income statement, and the average total assets are determined by adding the beginning balance to the ending amounts and dividing by 2

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Ratios Liquidity ratios measure a business organization’s ability to meet its financial obligations in the short run –The most common liquidity ratio used in business is the current ratio –The current ratio is calculated as current assets divided by current liabilities –It measures the amount of current assets available to pay current liabilities owed by the business as of a specific date

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Ratios Operating ratios are key financial measures used by managers to analyze the operations of the business –The average foodservice check is calculated by dividing total food sales by the total number of food covers –The average number of covers per day is calculated by dividing the number of covers in a given period by days operated during that period –Using this information, daily seat turnover for the period is then calculated by dividing the average daily covers by the number of seats available

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Ratios Calculating the average daily rate is a good indicator of a hotel operation’s ability to effectively manage the daily sales of rooms in light of these rate variations The ADR for a specified time period is calculated by dividing the total rooms revenue for period by the number of rooms sold during period

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Profitability Ratios Revenue per available room (rev par) for the same time period is also a useful measure of the performance of the room sales operations personnel –Rev par is calculated by dividing the total rooms revenue for a period by the total rooms available during the period

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Cash Flow Management The business operation’s cash flows are monitored, analyzed, and adjusted as needed –Cash flow is defined as cash coming in (received) or cash going out (paid) –Net cash flow is defined as the difference between cash received and cash paid during a specific period of time –The primary benefits of effective cash flow management are (1) avoiding extended cash shortages and (2) controlling the cost of maintaining adequate cash flow for business operations

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets Action plans for a specified period Managers prepare budgets to outline financial and operational goals, thus providing a benchmark for the evaluation of actual business performance –They judge current business performance by making comparisons with budgets (expectations) largely based on records of past performance

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets They are typically prepared for a twelve- or thirteen-month period –However, they are subdivided into monthly budget reports so that management can use them for short- term analysis –Longer-range budgeting and planning are more strategic (forward planning) in nature and include growth plans for the business operation

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets The sales budget is a financial plan detailing expected sales volume and sales revenue for a specified period of time –Used to forecast sales revenue for a day, week, month, or longer time period –It is also used to forecast sales revenue at different levels of operating activity

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets Preparing food cost budgets and beverage cost budgets enables management to look ahead to future needs –They also provide excellent benchmarks for comparison with actual food and beverage costs for the budget period

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets Labor cost budgets can be used to assess total financial resources spent toward meeting labor needs and the efficiency of employee labor utilized in day-to-day operations –Daily or weekly comparison of budgeted and actual labor costs is essential for controlling costs –Labor costs include salaries and wages, employee benefits, employer taxes, costs of employee training, employee incentives and bonuses, and other employee-related costs

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Budgets Cash budgets plan for the availability of the necessary cash resources for uninterrupted business operations –This requires estimates of cash to be received from sales, cash from the collection of accounts receivable, and cash from other expected sources during the budget period –Expected debt and other financing-related payments during the upcoming budget period are also forecasted for purposes of the cash budget

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Figure 17–8 Todson Lodge Cash Budget for the Months of July–September

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Cost Control The development and implementation of procedures that track business activity with the objective of minimizing costs without interfering with efficient operations and long-run business profitability This provides guidelines to keep business operations on track to minimize the impact of actual business activity that does not meet expectations

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Food and Beverage Cost Control Consists of numerous documents and reports for tracking food and beverage purchases and usage, the preparation of food and beverage cost budgets, and the analysis of actual food and beverage cost activity –Includes the calculation of two key cost ratios: The food cost percentage and beverage cost percentage

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Food and Beverage Cost Control The food cost percentage is calculated as cost of food sold divided by food sales for a specified period, such as a week, month, or year –It is compared to the budgeted percentage for the period, which will vary by type of dining establishment and type of food menu The beverage cost percentage is calculated as cost of beverage sold divided by total beverage sales for a specific period of time

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Labor Cost Control One of the largest costs in hospitality organizations –Includes wages and salaries of employees, employee benefits, employee training, and other employee-related business expenses The general labor cost percentage is calculated by dividing the total labor cost by the total sales revenue

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Other Operating Costs Other operating costs represent all operating costs that are not food, beverage, or labor costs –Some of these costs, such as music or entertainment, are under management’s control –Other costs in this category, such as property taxes, are considered to be non-controllable by management This is calculated by dividing the total other operating costs by the total sale revenue

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. Trends Increasing use of technology In July 2002, the Sarbanes–Oxley Act of 2002 was signed into law; the law establishes guidelines that reaffirm management’s responsibility for reliable financial reporting to investors –This act is a result of recent accounting scandals and fraudulent activities of some publicly held companies –The act requires observance of the reform of accounting procedures and promotes the improvement and quality of financial reporting Focus on the increasing cost of business risk—with emphasis on (1) identification of an organization’s exposure to unnecessary financial loss and (2) identification of ways to minimize business risk and liability

Introduction to Hospitality Fifth Edition John Walker Copyright ©2009 by Pearson Education, Inc. Upper Saddle River, New Jersey All rights reserved. The End