Managerial Accounting in the Hotel Industry

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The hotel industry is a major economic player especially in boosting tourism in any country. This industry is, however, affected by different economic challenges which can threaten its existence. The hotel has experienced a decline in its major performance indicators such as occupancy, Gross operating profits and the average daily rates which have all the recorded negative results in the last three years. For instance, the occupancy currently stands at 54% compared to 62% last year while the gross operating profits have declined to 17% from 24% recorded last year. Despite the unprecedented decline in the performance of the hotel, there are positive signs that the situation could be reversed as indicators relating to the economy, the markets and the hotels show an upward trend. These revelations are quite encouraging, and hence the management of the company has embarked on key strategic decisions that are aimed at enhancing the performance of the company. The key to the decisions is financial management that leads to cost reduction and enhancement of profitability. This paper will seeks to analyze the current situation at the hotel and use that information to develop a SWOT which will be used in setting up objectives and key deliverables that could revive the hotel performance. The objectives will be accompanied by specific plans that will be implemented to achieve the desired goals. The final part of this paper will be a budgetary analysis that includes costs and revenues as well as financial projections for the future (Adams, 2006 p.3).

Present situation

Price, Product, Promotion and Quality

The third year was characterized by a conservative approach to pricing, hence the prices remained fairly stable, but a few changes were witnessed. The prices of drinks and meals were fairly constant in the third year. The company spent a substantial amount of resources in advertising with a notable one being $48000 in the second year. This had a huge impact in the third year as the demand for the hotel products increased. The hotel, therefore, increased the prices of its rooms to reflect this development. The firm did not achieve the best levels of sales as it was expected, hence there was the need for more aggressive advertising and promotional campaigns to enable the firm to achieve the best levels of revenue.

The firm projections on advertising were quite aggressive in the third year, and the first four months from January to April, the firm was to spend $1500 for advertising campaign that was targeted at promoting its rooms, meals and other services weekly. The firm would double this between May and November when it would spend $3000 in advertising. This would be followed by a massive $6500 in December. One of the major outstanding things was that the advertisements were spread across the different media houses to allow of easy spread of the message to the current and potential customers of the firm.

The hotel, therefore, used different media houses in its promotional mix. They included business press, local newspaper and Sunday newspaper. The targeted brands included conference facilities, weekend rooms, meals and weekday rooms among others. To ensure that its facilities remained at high quality, the firm was able to invest substantial amount of financial resources in building the hotel rooms and additional refurbishments, these were done in the second year. The facilities were, therefore, in the best condition during the third year, and no additional expenditure was required towards this.

Despite the key campaigns in the development of products, pricing, promotion and quality enhancements in marketing, the hotel did not receive positive results. The market image or the public perception indexes dropped from 19.4% to 14.4% between the second and the third year. This is a clear indication of the high level of competition in this industry. Competition was mainly posed by the established firms and the new entrants. The market share for the sale of rooms dropped from 3.5% to 2.8%, hence the firm could not realize the desired levels of revenues, especially from the sale of rooms. This was mainly attributed to the low quality of room facilities compared to those of the competitors. The advertisement campaigns are mainly aimed at creating public awareness in order to create the customers. The public awareness index of the firm dropped 9 points to record 15.9 lower compared to 24.9 recorded in the second year. This clearly shows that the advertising strategies employed by the hotel were not working in its favor, hence there is need for change of the marketing strategies (Woodside,2007 p.462).

The room occupancy which shows the number of guests utilizing the facilities at a particular time is an important indicator that can drive revenues. Despite making tremendous efforts to refurbish more than 405 units in the third year, the room occupancy drooped by more than 5% to record 20.3% compared to 25.7% achieved in the previous year.

The above results, therefore, provide an opportunity for the firm to change its marketing strategies totally and focus on progressive plans that can restore the firms glory backed by strong indicators, such as market share, public awareness, room occupancy and market index, among the others. This will go a long way in boosting the Hotels revenues. The management must have all its strategies in all the departments towards enhancing the firm’s revenues and earnings capabilities as they reduce costs of operation.

Human resource (staffing numbers and costs)

The hotel must ensure that it attracts the best talent in its pool of staff as this is the only way it will be able to successfully implement its strategies. Diversity is a key attribute that need to be seen in the human resource of hotel staff. Currently, the firm operates with 62 staff members. Due to the reduced level of activities as it is seen in the past discussions, the firm did not experience any increase in the number of staff. The heads of departments earn the highest salaries while the average salaries of rest of the staff are $ 489 per week. This scenario can allow the hotel management to plan for the human resource needs and reduce the staffing costs. The firm also has an elaborate training program for staff at all levels. This is also a major factor that will go along way in reducing costs.

The proper human resource strategies employed by the firm were able to realize positive results as the annual staff turn over rate reduced from 110.8% in the second year to 103.4% in the third year. This clearly signifies that the staffs are slowly motivated by the human resource and other organizational processes. High levels of staff retention will create stability and also reduce the costs related to acquisition of new staff members.

The training programs that cover staff members at all the levels are a major boost for the firm, and this will cut down on costs in the long run. The firm should, therefore, utilize the current staff members, but use them to increase their operational capacity as this will boosts the revenues.

Facilities (offer and conditions)

Currently, the hotel operates various facilities which must be properly maintained to ensure smooth operations. They include restaurant, rooms at level 1, 2 and 3, bar, conference room and front desk. All the facilities were done in the first two years of operation, and hence no new facility was done in the third year. It is, however, worth noting that a lot of resources were used in the refurbishment of these facilities, and this cost the firm more than $884135. The repairs done have, therefore, upgraded the condition of the facilities, and hence the firm will save more than $800000 in the next year as minimal refurbishment will be required in other facilities, such as restaurant and conference rooms.

Stock holders (ROI and Security)

The performance of the firm in the third year was not impressive, and this can be seen from the major financial ratios indicated below.

current ratio: computation value
current assets/current liabilities -713814
current liabilities 580745 -1.22913
Net profits -2109147
sales 4592906 -0.45922 -45.92%
profit after tax 1227993
total debt 580745 2.114513
total earnings -18.70%
debt 5865485 1.093261
long term debt 7279187
capitalization 11874613 0.613004 61.30%

Liquidity is one of the key indicators of the financial health of a firm, and as such, low or negative liquidity can be a cause of concern as it puts in doubt the ability of the firm to meet its short and long term needs. The firm has a liquidity of -1.2 which is too low for any business, and this signifies that the current liabilities outweigh the current assets. The firm must embark on a rigorous activity to restore back its liquidity to positive territory as the current situation might put the firm into receivership. It also becomes very difficult to acquire credit with negative liquidity ratio. The solvency ratio which provides an indication for long term financial soundness is so high at 2 times, and this means that the firm’s total debt is twice higher its total earnings, and hence it cannot raise any external funding. The firm’s long and short term liquidities must be enhanced (Gowthorpe, 2005 p.5).

There is also need for the firm to revert back to positive levels of earnings per share and profitability as the current situation does not create value for the shareholders and discourages potential investors.

SWOT analysis

SWOT analysis is one of the most powerful tools that organizations can use to identify their capabilities and weaknesses, so that it formulates strategies that can be used to enhance its position in the market. SWOT analysis is a result of thorough scrutiny of the internal and external environmental factors affecting a business. This hotel has been in operation in the last three years, and hence the analysis of the third year results has clearly demonstrated the position of the organization with regards to external and internal environments. The third year results can therefore be used to come up with the firms SWOT (Fine,2009 p.45).


These are the key internal advantages that a firm has to oppose to its peers in the market, and hence it can use such capabilities to enhance its position in the market. The analysis of the third year results has identified the following internal factors as the key strengths that will move this hotel from one level to another.

Human resource

The firm has strong human resource policies that will enable it to attract the best talented employees and retain them. This will enhance stability and continuity of business operations. The firm has elaborated training programs that ensure that all the staff members are equipped to deal with the challenging work environment at all the levels. The hotel has a properly harmonized wage structure, and this will be a key motivating factor to its staff members.


The firm has been putting up new facilities in the last two years, and this has significantly reduced its costs in the third year. The increased capacity allows it to absorb a large number of customers. This is major strength that will allow it to increase its volumes of sales.


The hotel also boosts of a very competitive pricing strategy that has seen its prices for rooms to remain fairly constant during the last year. The firm, therefore, stands out as a price leader and can use this strategy to reduce the level of competition.


Working capital is a financial term that is used to refer to the business liquidity and ability to meet short term financial needs when they fall because of the normal business operations, and therefore, only current assets which can easily be converted to cash within the shortest time constitute effectively. Net working capital is normally a surplus and shows how efficient a company is and its ability to meet short term financing needs.

The firm also boosts of adequate financial resources, and this can be seen from the numerous investments in facilities. The enormous financial resources are a great advantage that will allow the firm to facilitate the implementation of various strategies (Gibson,2008 p.126).


These are the internal operational disadvantages that tend to water down the firms strengths. Despite the massive investments made in the last three years, the firm has not been able to turn around and make profits. The following issues are some of the weaknesses of the hotel.

Quality of services

Hotel management is a very sensitive undertaking, and one of the key factors defining its success is the quality of service provided. The hotel has seen a rapid decline in its occupancy rate 25% to 20% despite efforts to refurbish more than 450 rooms.

Too much debt

A look at the debt Equity ratio shows that the firm has continuously operated on a high level of debt compared to Equity. A ratio of 1.09 that is still growing is too much for a company, and this has looked in too much liquidity which is used to repay the interest on debt. The firm needs to use more of equity at this stage as that is the only way of enhancing its liquidity position (Fullen & Brown,200 p.256).

Marketing strategies

Although the firm uses a lot of resources in its marketing initiatives, the impact of such expenditures has been too low, and this points out the use of a wrong marketing strategy. The firm has mostly concentrated on print media to create publicity, but it seems this is not working. The use of wrong marketing strategy has cost the firm substantial amounts of financial resources as it experiences low sales volumes.


These are untapped potentials that exist in the external environment and can be used by a firm to enhance its position and also make its strengths work better. These questions are discussed below.


This is one of the areas that the firm is not able to undertake. Diversification opportunities exist in product orientation and also marketing where the firm can use different alternatives. This will greatly enhance its marketing index, market share and publicity.

Human resource and staffing

The firms training programs will be very vital in the implementation of its new strategic orientation. It is, therefore, important that it utilizes the available staff in reorganizing the company.

Growth opportunities

The hotel industry is a highly progressive industry that supports tourism. The expansion and rapid growth of tourism industry present better opportunities for the firm, and hence it must enhance its capacity to prepare for the surging demand in the tourism sector.


The biggest threat to the success of this hotel is the competitive environment which is quite stiff, and this will make it hard for the firm to roll out its strategies.

Based on the report, the company is clearly in its low moments as the financial results have indicated with both the earnings and the value of assets that have been dropping during the last three years. These are signs of decline in the economic value of the company that could be attributed to the global financial crisis that hit the world. The company, therefore, needs a prudent financial management that can create value for the shareholders and inspire stability in earnings. The company, however, boosts of strong brands and ability to raise additional funds that it can use to further promotion, improvement of its products and their venture into the international market. It can also pursue mergers as strategies of bringing the right people in the management, so that it can solve the financial problems. The strategy that it can pursue is proper segmentation, so that it can cover the interest of all the generations in its customer base and further increase its market. With these, the company will be able to turn round its performance and return to a growth path.

Objectives to be reached by the end of year 1

The firm has just started and hence of the strategies is aimed at creating the customers and maintaining business stability. The firm also needs to keep in touch with the clients hence marketing will be core in achieving this.


The hotel management wishes to increase the market share from 7.2% to achieve 5% in second and 10% in the third year. It also seeks to enhance customer awareness and publicity of the products. In this regard, the market index image and awareness index are expected to reach 15 and 20 respectively. The firm is also expected to increase the room occupancy to 25% and also enhance its sales in all product segments by 5%.Product promotion strategy will be overhauled and additional 5% allocation will be provided.

Human resource (staffing numbers and costs)

The firm has done very well in terms of human resource management. This trend is expected to continue in the fourth year. The training program will be continued with its budgetary allocation remaining intact. The firm hopes to reap from this by reducing employee turnover to 100% by the end of third year.

Facilities (offer and conditions)

A lot of resources have been spent in the refurbishment of the hotel rooms. The firm will reduce the expenditure for the refurbishment of the rooms, but improve entertainment and complimentary facilities.

Stock holders

The firm did not perform well in the third year. This led to a loss of value for the shareholders. The company expected to break even in the fourth year. It would also strive to achieve a positive Return on Investments and also enhance its short term liquidity (Cowan & Jones,2005 p.10).

Operational plans and actions that have been undertaken.

Sales prices and product definition (rooms, F&B, extra services)

The firm stated off with a robust advertising budget of $200000 in the first year. This was reduced to $48000 in the second year and later increased to $102500 in the third year. The firm also tried to diversify on its advertisement strategies by engaging different newspapers. The firm also maintained a price leadership strategy where it reduced prices of its major products in the three years to attract more sales.

Staff: number of staff members, wages, training

The company maintained a stable human resource strategy over the three year period. The number of staff, the training program and the wages remained constant over that period.

Refurbishment decisions

All the facilities were done in the first and second years of operation. There was no addition of facilities in the third year, but refurbishment was done at levels 1 and 2. There was a significant reduction in the costs of providing facilities in the third year.

Investment decisions

The main investments in the first three years were mainly in the infrastructure where the firm was able to put up the hotel facilities. The firm also invested heavily in advertising and publicity campaigns which were aimed at enhancing the firm’s position. Due the large amounts of investments, the firm did not realise any profits, but the stakes were very high given the growth of the tourism sector, and the hotel was going to break even in the fourth year according to the current projections (Bolander & Snell, 2010 p.161).

Loan requests and reimbursements

The company was able to contract a total of $8000000 in loans in the third year. The credit facilities were sourced in April, May and June of the third year and were mainly used for operational support.

Budgets for Year 1, Year 2 and Year 3 including

Assumptions used to determine revenues and costs

The key assumptions in formulating the budget were the following ones.

The occupancy rate would go up by 5% in the fourth year and 10% in the fifth year.

It was also expected that the food and beverage sales would increase by 5% in the fourth year and 10% in the fifth year. This would push the revenues up by the same percentage points. It was also assumed that the revenues from room occupancy would go up by 20% in the sixth to the eighth year as a part of revenue recovery plan.

Operations Budget

It was also assumed that the costs attributed to rooms would increase at the rate of 5% from the 4th to the 8th year while that of food and beverages and others costs would increase at the rate of 30% and 15% respectively over the same period of time. Over the same period, the payroll costs would be allocated as the following, 25 % of room, 22% of other revenues and 30% of food and beverages. Other costs include refurbishment consisting of 10% of revenues, administrative costs at 6% of total payroll, training at $22100, advertising which is 5% of revenues and other costs amounting to 16.5% of revenues.

Financial Plan

Financial plan for the three years:
year 1 year 2 year 3
net operating cash flow -17241 -194253 -2109147
long term liabilities 19939 369339 4853281
total 26848 175086 2744134
Working capital -14021 -978425 -713814
variation in Working capital 26848 175086 2744134

Provisional Balance Sheets

Balance sheet for three years:
Provisional Balance Sheet:
year 1 year 2 year3
working capital -1402731 -978425 -713814
property and equipment 12588427 12588427 12588427
total assets: 11185696 11610002 11874613
capital stock 7500000 7500000 7500000
retained earnings -5245899 -4562142 -3485319
loans 5000000 6700000 7859932
liabilities and owners Equity 882406 5678838 11874613


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