Online Tutoring on Vertical Analysis Magnolia Hotel

1. Overspending

Based on insights by Langviniene and Daunoraviþinjte (2015), there is a need to understand how the food & beverage department of a hotel earns revenue and incurs costs: While the revenue source for the department is food & beverage served to the guests at rooms, restaurants, bar, banquets, and coffee shop, however, the expenses can be divided into two categories: direct expenses and indirect expenses.  The direct expense in this context refers to the cost of materials that are used in preparing food & beverage. The indirect expense in this context refers to the costs that are incurred in procurement, storage, preparation, and serving of food & beverages.

On comparison of the performance of the food & beverage department with the benchmark, it can be inferred that while most of the expenses were almost equal to the benchmark, however, there were three main areas where overspending (in comparison to the benchmark) occurred:

First, is the salary and wages. While the benchmark is 30%, the cost (as a percentage of revenue) is 32.4%. However, since the figures for the previous year are not available (both in absolute as well as relative terms), so it cannot be inferred if the performance improved or worsened. For example, there is a possibility that this expense was 29% in the previous year, and therefore the expense (as a percentage of revenue) can be considered to have increased. However, if this expense was 35% in the previous year, then the expense can be considered to have reduced, which is a positive signal. While no conclusion can be drawn in comparison to the previous year, a conclusion can be drawn in the context of the benchmark. There are two main causes why this cost could have increased: The first cause is that it is usual for employees to get an annual salary increment as organization review and appreciate the employee performance. Another reason behind salary increment is the inflation that reduces the buying power of money.  The second cause could be that some new staff members have been hired in the food & beverage department. This is also a normal process as the business grows (in this case more guests are coming to the hotel and are placing more order). However, in the absence of detailed data, no conclusion can be drawn. There is another perspective that must be examined: if the salary increment is at the cooking and serving staff level or is it at the managerial staff level. If it is the former, then it can be inferred that the cause of salary and wages increase is staff expenses due to more orders by the customers. However, if it is at the managerial level, then there is a necessity for the hotel management to look at it (Fridson & Alvarez, 2011).

 

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The second aspect where overspending has occurred is the laundry. While the benchmark is 1.8%, the cost based on vertical analysis is 2.1%. The laundry cost in the food & beverages department could be related to the cleaning of clothes used in cooking and serving the food. This cost increase could have three potential causes: First, the food & beverage department has increased the quality of the service and is using more clothing to improve the preparation (in terms of hygiene) and serving (in terms of presentation). Second, the frequency of orders has increased that has resulted in more clothing being used. Third, the old clothes had to be disposed of and comparatively more clothes had to be purchased. If the underlying cause behind the increase in cost is improved service, then the management must analyze if improved service has resulted in increased revenue or not. A conclusion cannot be drawn as any information about any change in revenue (over the previous year) is unavailable. If the underlying cause behind the increase in cost is increased frequency, then the increased cost should not be a concern. If the underlying cause behind the increase in cost is the replacement of clothes, then there is not much that can be done as the hotel must ensure high-quality service and use of old clothes is not a good practice (Fridson & Alvarez, 2011).

 

The third aspect where overspending has taken place is uniforms. While the benchmark is 1.1%, the cost based on vertical analysis is 1.5%. There can be three causes of the increased costs of uniform: First, the supplier has increased the charges for providing uniforms. Second, to improve the presentation of staff, management ordered new uniforms. Third, new staff members have joined. While the first cause has a low probability as it can be assumed that if the supplier increased the cost, then the hotel might have looked for an alternative supplier. The second cause has an even lower probability as new uniforms (for all) would have increased the cost drastically. The third cause seems probable as the salary and wages increased that show some new employees have joined the hotel (Fridson & Alvarez, 2011).

 

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2. Role of Vertical Analysis

Vertical analysis of a financial statement can be considered to be a proportionate analysis of a financial statement that shows an item as a percentage of the main item (for the income statement, revenue is the main item and for the balance sheet, assets size is the main item). This analysis shows the relationship between different items of the financial statement. The main advantage this analysis provides is that it allows to compare the financial performance of different organizations as a comparison across the organization using absolute data does not generate any useful conclusion as the size of the operations vary.

The most common vertical analysis is for a single reporting period, where the relative proportion of accounting items can be evaluated. However, the analysis can be applied to multiple accounting periods as well to see the relative changes over a period of time. This helps in identifying a trend so that the cause behind the change can be investigated and measures can be taken to bring the percentage to its normal value. Another benefit of applying vertical analysis is that based on the identified trend, key insights about the financial performance can be drawn that may be used for making estimations for the future.

 

Fridson, M. S. & Alvarez, F.  (2011). Financial Statement Analysis: A Practice Guide. 4^th Ed. London: John Wiley & Sons.

Langviniene, N. & Daunoraviþinjte, I.  (2015). Factors Influencing the Success of Business Model in the Hospitality Service Industry. Procedia: Social and Behavioral Sciences. 213 (2015): 902-910.

 

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