Financial & Accounting

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Non-controllable expenses

Non controllable (sometimes termed uncontrollable) foodservice/restaurant expenses are costs that cannot be changed in the short term. Some fixed costs are considered non controllable since management staff is not able to effect change in them during the short term. Conversely all non controllable expenses are fixed costs. Examples of non controllable expenses in restaurants and foodservice enterprises include rent, mortgage interest, depreciation and amortization, insurance, license fees, legal and accounting fees, and taxes.

Night audit

The term, night audit actually describes itself. It is an activity that occurs at night and is financial in nature. A hotel is a 24 hour seven day a week operation. The front desk operates continuously with three shifts per day. The night audit occurs during the last shift that begins at night and ends in the early morning. This is called the grave shift and it is at this time when the financial day at the hotel ends and a new one begins. The night audit is an important part of the accounting function within a hotel.

Net present value method

The net present value (NPV) method belongs to the discounted cash flow (DCF) methods. These are methods to support the process of selection and evaluation between different courses of action, enabling decision makers to take financial decisions. DCF methods are normative approaches as they relate decisions to necessary conditions, for example, the existence of alternatives and existence of objectives, such as the long term goals of achieving streams of benefits in the future in return for current outlays. The use of DCF methods entails the representation of the different courses of action as current and future streams of money (or, more generally, of benefits, under the criterion of the wealth maximization). These techniques enable investment decision makers to take into account relevant variables such as time value of money, perception of risk, forecast of inflation, conditions for cost of capital (see ‘weighted average cost of capital WACC’), and opportunities for alternative investments.

Marginal costs

Marginal cost describes the cost of the last unit produced. There are often considerable differences between the average cost (calculated as the total cost divided by the volume) and the marginal cost. Marginal cost is an important concept in economic analysis. The optimal production volume is achieved when marginal cost equals the price of the product. The marginal cost is then normally much higher than the average cost which implies that the volume of the optimal result will not be the volume that minimizes the average cost.

Management accounting

Management accounting is used internally to a business and consists of a selection of methods and techniques that can be used to monitor and improve the profitability of a hospitality business. Systematic management reporting provides regular financial information covering short time periods (week or month) and which is analyzed to reflect the management of profit generating centers within a business (such as room, food and beverage departments in a hotel) and to permit a close control of those units.

Liquidity ratios

Liquidity ratios of a business measure how well such business is able to meet its short term obligations. In other words, liquidity ratios represent the ability of a business to pay obligations that are expected to become due with the next year or operating cycle. The two main liquidity ratios are the ‘current’ and ‘acid test’ ratios.

Labor costs

Labor costs for foodservice establishments include wages paid to hourly employees, salaries paid to management and supervisory staff, and employee benefits for all employees. In the US, average labor cost is typically 25 40%. Many foodservice employees are paid hourly wages and some also receive tips from customers. If hourly employees work more than 40 h per week in the US, they must be paid an overtime wage, which may vary between 11/2 and 3 times their normal hourly wage.

Inventory turnover analysis

One of the best tools to monitor inventory management is inventory turnover analysis. Inventory turnover can be calculated as:

For example, assume that a modest sized midscale restaurant has weekly retail sales of $47,000 with an associated food cost of $16,450. For the targeted week, assume the average physical inventory was $17,312 (i.e. the inventory’s beginning and ending valuations divided by two). The inventory turnover statistic for the period is:

International aspects of financial management

There are several issues that are not present in a domestic operating environment that must be addressed if a hotel operating or owning company is to manage its existing, or growth, portfolio, successfully. Amongst the most important are currency implications, tax, and legal jurisdiction issues, investment appraisal and how these issues impact reporting and performance benchmarking.

Internal Rate of Return method

The Internal Rate of Return (IRR), also known as the ‘discounted rate of return’ belongs to the Discounted Cash Flow methods and is the rate that, when used to discount the future cash flows of a project, results in an NPV (see ‘Net Present Value NPV method’) of zero. Either the ‘trial and error’ method, or a proper computer algorithm, or the interpolation method (graphic solution), may be used to calculate it.