Professional Documents
Culture Documents
CONTENTS
INTRODUCTION HOTEL INDUSTRY ANALYSIS OVERVIEW DEMAND SUPPLY FINANCIAL ESTIMATE PROJECT COST SOURCES OF FUND FUND ALLOCATION REVENUE MODEL FINANCIAL STATEMENT ANALYSIS RECCOMENDATION CONCLUSION
INTRODUCTION
Finance is a subject of critical importance To the successful operation and management of a hospitality Firm .an operation with a elegant dinging room, conference Facility, a world renowned chef, thousand of guest room is Come into realty only to good financial management and Better allocation of fund for smooth running of whole Business. it can be fail if it cannot generate a rate of return That makes it worthwhile for people and institution to invest Their money in the operation .
HOSPITALITY SECTOR
Travel - Air - Cruise Ships - Rail - Coach - Automobile - Eco-Tourism Lodging - Hotels - Motels - Resorts Assembly & Event Management - Meetings - Conventions - Expositions Restaurants & Managed Services Recreation- Attraction, Gaming, Parks
Very few projects are under implementation in Bangalore, Chennai, Hyderabad & Pune. Hence, the next few years are likely to witness a limited capacity addition with strong increase in annual demand of about 15%. There are strong barriers to entry viz., scarcity of suitable plots of land at good locations, excessive land prices in metropolitan cities. The number of tourists visiting to India is likely to soar to 10 million in the year 2010 from its current level of 5 million in 2007-08. Recent estimate shows that India has a shortage of 150,000rooms fuelling hotel room rates across India.
PROJECT CONCEPT
THE ROLE OF FINANACE IN HOSPITALITY INDUSTRY Finance plays a important role for any firms, here we see how , How the finance fits into large hospitality firms organization Structure. The finance ruction involve two general areas:Rising of fund ( Financing decision) All allocation of fund (investment decision)
on other hand. Accounting involves The design of business information system The maintenance of record Audit Tax work Budgeting Analysis of financial data to help in decision making
STEP -I
Before starting anew hotel we must go through.. 1. SITE SELECTION 2. THE FEASIBILTY STUDY 3. FINANCING ARRANGED
Amarkantak
Pachmarhi
SITE SECETION Choosing the site for hotel is usually first in aseries of critical decision Affecting the eventual success of hotel. The site must be adaptable to the..
Type and size of proposed hotel A 400- room commercial hotel with meeting space can be built zoning law prohibit a building of that size
Proximity Business and Trade Centers, Highways, Traffic Levels, Key Attractions, Shopping Centers, Population Backup Site Specific Size, Zoning Laws, height restrictions and parking requirements, Visibility, Accessibility
INDIA
FEASIBILITY STUDY After the site section , a market study and financial analysis , is called Feasibility study, is conducted to determine the economic viability of The hotel project. Feasibility study can help Preparation of a market feasibility study for the project Estimation of costs for all elements of the project and Determination of sources of financing financing and negotiate contract for franchise, lease formulate marketing and operating plan prepare the initial capital and operating budget
DESIGIN & STRUCTURE OF HOTEL After the compilation of site selection and fusibility study of success of Hotel. we analyzing the structure of hotel, that is depend on the Following point.
Hotel categories The number of rooms Style of bed room Ratio of single to twin and double rooms Provision of sitting rooms ,conference rooms
Types of catering Provision of equipment and ancillary service Other type of service
HOTEL CATEGORIES It is important to understand the way in which hotels are categorized. Hotel can be categorized by location,ownership,price and other factor. Here we categories hotel on the basis of price and accommodation.
HOTEL CATEGORIS MAXIMUM LAND AREA
Budget hotels (1/2/3 star) Mid-market 4 Star Hotels 5 Star / 5 Star Deluxe Hotels
THE NUMBER OF ROOMS The number of rooms totally depend on the feasibility study of project And market analysis. The number of rooms depends on the estimated occupancy, the Estimated occupancy is based on assumed rate structure.averarage Rate per occupied room described on overall rate structure in single Room.
TOTAL NUMBER OF ROOMS NIGHTS ESTIMATED OCCUPANCY* 365
NUMBERS OF ROOMS
STEP - II HOTEL FINANCE Having determined the quantum of capital cost of hotel project the Next step is to find out the source of fund.
Example
ROOM 400 1OO
LAND REQUIRED PROJECT COST
SOURCE OF FINANCE The source of finance available to a hotel development are similar To those available to real estate developers of others kind of project. The following are usual method of rising finance for the hotel Industries:Share capital
Borrowed capital Debenture Mortgage Loan from commercial bank Loan from financial institution Trade debt- credit guaranteed by supplier Inter company loans Provision for taxation Public fixed deposit IPO
STEP- III FUND ALLOCATION FOR THE PROJECT Hotel industries displays an investment characteristic with Distinguishes it for other industries. the industry can be classified As one among those which are highly capital intensive. Most of the Hotel represented by land , building, furniture furnishing and Equipment. A study of the balance sheet of the leading hotel companies show that bulk capital is 90%.
Analysis of the construction cost in hotels A construction cost of a hotel building varies from place to place. Table-1 indicates the analysis of the construction cost of luxury hotel Situated in an important tourist centre.
Table-1 ITEMS
COST OF LAND & BUILDING COST OF EQUIPMENT AIR CONDITIONING PLUMBING ELECTRICITY KITCHEN LAUNDRY ELEVATORS PNEUMATIC TUE COST OF FURNTITURE & FURNISING TOTAL COST 9.8% 8.1% 12.7% 2.9% 0.2% 3.1% 0.3% 10.7% 37.1% PERCENTGE OF TOTAL 52.2%
100.00%
Cost of Land
Depends on whether land is actually purchased or owned Cost of land typically weighed based on the number of rooms in hotel. Can range from $500 per room to as high as $30,000 or $40,000 Taxes during construction and costs of clearing the land factored into overall cost.
Cost of Construction
Largest cost element in any hotel project If franchised, have to adhere to franchisor specs $60,000 per-room cost of construction is considered satisfactory (Prevailing market scenario without interest). Fixed-price contract
Cost more controlled, difficult to get because of the inflation prevalent both in labor and in construction materials, this is not often feasible.
Cost-plus contract
Contractors profits are a percentage of the costs. Maximum ceiling on cost can be written into contract
Operating Equipment Linen, silver, china, glass ware, and, in some instances, uniforms. Back-up inventories must be acquired $8,000 per room is acceptable. Pre-opening Expenses
Prior to the opening of a hotel, expenses incurred for Pre-opening payroll, training costs, advertising, and sales expenses and travel. To be factored into overall budget Depends on the pre-opening philosophies of the operator. $3,000 per room is considered optimum
Working Capital
Funds required to meet early payrolls and operating expenses (unpredictable time period) Determines cash flow health of the firm Should amount to at least $2,000 per room.
Working capital is required for financing of good received,expences Taxes, licensing charge ,charge for public unities', heating, lighting Operating cost etc.
Inventories
Excessive inventories can tie up capital and create additional interest costs. 6,000 per room of for operating inventories should be considered satisfactory
Rule of Thumb
Total Building Cost Total Non-building Costs Total Soft Costs Land Cost Estimated Total Project Cost Total Cost Per Room (Total Project Cost/100 Rooms) ADR to Determine Feasibility (Rule of Thumb=Total Cost Per Key/1000)
$ 73.84
The operating revenue varies directly or indirectly in relation to the volume of Business as measured in terms of occupancy. The operating revenue may be divide Into :Room sales Food sales Beverage sales Telephones Cigar & news paper Laundry Transportation Other incomes
ROOM REVENUE
Room revenue is generated by sales of guest rooms to individuals travelers or Group , such as tours and business meeting or permanent guest who remain at the Hotel for expected period of time. It includes revenue from guest accommodations Rented on apart day, full day or longer period basis. It is varies hotel to hotel.
Room sales in the hotel industry have two important components Occupancy Rates These are the primary variables that that interacts to the form the total Room revenue. Percentage occupancy * average rate*number of available room/days*365= total room revenue
For generated revenue from room set the price of room:HOTEL ROOM RATES- HUBBART FORMULA Mr.Roy hubbart , was the chairmen of the committee which was appointed by AMERICAN HOTEL AND MOTEL ASSOCIATION for developing a formula For computing rooms rates. The formula published in 1952, is worked out follows:-
1. An estimation is made of the guest rooms to be sold every year. 2. Then a tabulation is made of the cost of operation . 3. An amount representing the expected fair return on investment is added to cost of Operation . 4. The average rates must be charged is calculated by dividing the total amount By the number of estimated occupied rooms.
interest less.. Total gross revenue from all source other than guest room, sales such as a shop, store rental, food beverage sales and other income. Balance.. the balance is the amount to be realised from guest room sales. Compute.. Number of guest room multiplied by 365 days and reduce by giving an allowance for average vacancies. Result.. C/ D works out as average room rent.
The cost of room varies place to place and size and accommodation:As per Indian standards for the size of the guest room and bath room are as follows;A/C SINGLE NON A/C SINGLE A/C DOUBLE NON A/C DOUBLE BATH ROOMS 140 SQ.FT. 160 SQ.FT. 180 SQ.FT. 220 SQ.FT. 40 SQ.FT. 45 SQ.FT. FOR 2 & 3 STAR FOR 4 & 5 STAR 180 SQ.FT. 190 SQ.FT.
Assumed food sales for this period were $ 10,0000 to compute the food cost Percentage :Food cost percentage= $ 29,000 (cost of food sold)/$ 10,0000 (food sales)*100=29% Standard food cost percentage Standard food cost for all menu items sold during period, divide total menu items Sales for period, multiply by 100. Standard food cost is for period $ 27,000 St. food cost percentage=$27,000/ $ 10,000=.27*100=27% Note actual food cost is higher than the st.food cost=2% St. food cost is ideal food cost.
TELEPHONE REVENUE Telephone revenue is derived on following points:Number of calls Time connected Telephone company charged Service charge Cash collect House charge Charge guest Distance call ( local or long)
THE BALANCE SHEET The balance sheet also called the statements of financial position or statement of Condition ,reflects the financial position of the hotel business at a point in time. It essentially a snapshot of business condition at a given moment. Show this statements are asset and claim of asset. The claim asset include liabilities' and owners equity. In other world ,asset must equal , or balance the sum of creditors' and owners claims. THE INCOME STATEMENT The financial statement reflecting operation of given period of time , is the income Statement, also reflect the profit and loss statement, P& L, or operation statement. The good name of this statement would be net income statement.
The statement of cash flow It reflects the sources and uses of cash for a period of time , it show cash flow , While income statement show income flows. THE STATEMENT OF RETAINED EARNING This statement simply show the retention of earning and dividends declared for the Years ,as well as balance in the retained earning account at the beginning and end of year.
RELATIONSHIP AMONG THE FOUR FINANCIAL STATEMENTS It is important to understand the relationship among four financial statement. the Balance sheet is static statement it reflects an enterprise's financial position at a point of time. The other statement ,reflecting activities over internals of time as follows
STATEMENT STATEMENT OF INCOME STATEMENT OF CASH FLOW REFLECTS RESULT OF OPERATIONS ACTUAL CASH RECEIPTS AND DISBURESEMENTS CHANG IN RETAINED EARNING
BREAK- EVEN POINT (BEP) Every hotel have break even point ,the percentage of occupancy necessary to Pay all operating expenses .the brake even point for the average hotel is obviously Lower than 70%. Example:Estimated total operating expenses: Rs. 60.00 lakhs Estate taxes etc 6.00 Insurance 10.00 Depreciation 8.50 Interest 0.50 Total 85.00 lackhs Total daily expenses= 8500000/365=Rs. 23287.7 Thus the hotel must take Rs. 23287.7 each days to break-even. For - rooms rates hotel RS. 232/- 100 room a day to break-even.
FINANCIAL PERFORMANCE
HOTEL LEELA VENTURE
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DECISION MAKING After review of financial statement and financial analysis , owner is now able to Take the decision of following points. Further expansion plan Budget allocation Forecasting demand and prices Estimated variables expenses Estimated fixed cost Controlling expenses Purchasing system Linen replacement Uniform replacement Purchasing operating supplies Stationeries ,paper And pencil
Turn waste space into production use Maintain the distinctive character of acquired hotels Stress efficiency, but not standardization Consolidated facilities Achieve income from store rentals Emphasis guest service Keeping personal touch with service Diversify its activities Apply modern industrial methods to hotel operation
CONCLUSION Financial management means to the hospitality financial manager It maximizing the current firm related value or wealth of a firms Owners. it will be related to timing ,magnitude and riskiness of the Future cash distributions.
REFERENCES
HOTEL FOR TOURISM DEVEELOPMENT by DR.JAGMOHAN NEGI FINANACIAL MANAGEMENT FOR HOSPITALITY INDUSTRY AMERICAL HOTEL& MOTEL ASSOCIATION HOTEL HILTON GROUP HOTEL LEELA GROUP