Introduction of Managing Financial Performance Assignment Sample

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Introduction of Managing Financial Performance Assignment

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A company runs to earn a profit structure. At the same time, for conducting the business in a proper way it is necessary to look after the financial ratios that the particular companies are dealing with. Additionally, the present report helps to show the actual position that Mulholland Hotel is dealing with while conducting the calculation of the various ratios that are profitability ratio, liquidity ratio, and performance ratio respectively. The research also highlights the critical path that Mulholland Hotel is going through for achieving the expected outcomes. Additionally, this research also represents a few recommendations on areas of concern within the hotel that are necessary.

Critically analyzing the purpose of each of the eight ratios

Profitability Ratios

The Profitability ratios are the ratios that help in analyzing the ability of the business by looking at its financial position. As per the opinion of Husain and Sunardi, (2020), states that the profitability ratio "plays an important role in managing the financial position of company" respectively. At the same time, there are mainly "three types of profitability ratios that are "Gross Profit Ratio", net profit ratio, and return on capital employed (ROCE) ratio" respectively. At the same time, for understanding the financial position of Mulholland Hotel, this is located in the UK by calculating its profitability ratio as per the balance sheet of the financial year 2020 to 2021 respectively.

Gross profit percentage

The Gross profit percentage helps to show the selling position of the goods and commodities of a particular business. At the same time, the "Gross Profit Ratio" is calculated by “subtracting the cost of goods sold from total revenues and dividing the difference by total revenues” respectively.

Therefore, the formula of "Gross Profit Ratio" is

 "Gross Profit Ratio"/ Margin = "Gross Profit" x 100

"Net Revenue of Business operations"

For 31st December, 20

"Gross Profit Ratio"=

 1,55,000 2,25,000

x 100

68.88888889

"Gross Profit Percentage"=

69%

 Table 1: Gross Profit Percentage of Mulholland Hotel, December 2020

(Source: Created by the learner)

For 31st December, 21

"Gross Profit Ratio"=

 1,85,000 2,78,000

x 100

66.54676259

"Gross Profit Percentage"=

66.55%

Table 2: Gross Profit Percentage of Mulholland Hotel, December 2021

(Source: Created by the learner)

"Net profit ratio"

The "Net Profit ratio" helps in understanding the profit structure of Mulholland Hotel is calculated from the income statement of the business. At the same time, the net profit ratio is calculated by “subtracting the cost of goods sold (COGS), operating expenses, other expenses, interest (on debt), and taxes payable” respectively.

The formula of "Net Profit Ratio",

"Net Profit Ratio" = "Net Profit" x 100

"Net Revenue of Business operations"

For 31st December 2020

Net Profit Ratio=

 £ 45,000.00

£ 225,000.00

x 100

20

"Net Profit Ratio" =

20%

Table 3: Net Profit Ratio of Mulholland Hotel, December 2020

 (Source: Created by the learner)

For 31st December 2021

Net Profit Ratio=

 £ 68,000.00

x 100

 £ 278,000.00

24.46043165

"Net Profit Ratio"=

24%

Table 4: "Net Profit Ratio" of Mulholland Hotel, December 2021

 (Source: Created by the learner)

"Return on capital employed (ROCE)"

The "return on capital employed (ROCE)" is used to calculated to indicate the profitability structure of the Mulholland Hotel by taking in “efficiently it uses its capital in its business operations” respectively. At the same time, the "return on capital employed" is calculated “by dividing net operating profit or earnings before interest and taxes (EBIT), by capital employed” respectively.

Therefore, "the formula of return on capital employed" is

"Return on capital employed (ROCE)" = "Earnings before Interest and Tax (EBIT)"

Capital Employed

For 31st December 2020

Value

"Return on capital employed (ROCE)" =

 £ 45,000.00/£ 215,000.00 

0.209302326

"Return on capital employed (ROCE)" =

21%

Table 5: "Return on capital employed (ROCE)" of Mulholland Hotel, December 2020

 (Source: Created by the learner)

For 31st December 2021

Value

"Return on capital employed (ROCE)" =

 £ 68,000.00

 £ 313,000.00

0.217252396

"Return on capital employed (ROCE)" =

22%

Table 6: "Return on capital employed (ROCE)" of Mulholland Hotel, December 2021

 (Source: Created by the learner)

Therefore, the calculation of the liquidity ratio helps to understand and compare the financial position of Mulholland Hotel of the UK. At the same time, the calculator shows that the financial position of the business is improving slowly as compared to 2020.

Liquidity Ratios

The liquidity ratios help to analyze the available cash structure of the respected organization. At the same time, it also helps to "determine the short-term financial position of the company". "There are two types of ratios in liquidity those are current ratio and the acid test ratio".

Current Ratio

The current ratio is actually used by the creditors for evaluating the short-term debts of the company. Therefore, "the formula for calculating the current ratio is current assets divided by current liabilities".

Therefore, "Current Ratio = Current Assets"

Current Liabilities

Liquidity Ratio

31st Dec 2020

31st Dec 2021

1. Current Ratio

Formula

(Current assets/Current liabilities)

Current Asset

33,500.00

36,800.00

Current Liabilities

24,000.00

22,000.00

Ratio

1.395833333

1.672727273

Table 7: Current Ratio of Mulholland Hotel, December 2020 and 2021

 (Source: Created by the learner)

"Acid Test Ratio"

The "Acid test ratio" helps to indicate whether the company has “enough short-term assets on hand to cover its immediate liabilities” respectively. Therefore, the acid test ratio is calculated by current assets - inventory divided by current liabilities.

Therefore, the formula of "acid test ratio = Current Assets - Inventory"

"Current Liabilities"

2. Acid Ratio

31st Dec 2020

31st Dec 2021

Formula

(Current assets-inventory/Current liabilities)

Current Asset

33,500.00

36,800.00

Inventories

3500

5500

Current Liabilities

24,000.00

22,000.00

Ratio

1.25

1.422727273

Table 8: Acid Test Ratio of Mulholland Hotel, December 2020 and 2021

 (Source: Created by the learner)

Performance Ratios

As per the opinion of Bao et al. (2020), states that performance ratio helps in calculating and understanding the performing position of the respective company. At the same time, there are three types of performance ratios that are the rate of stock turnover, debtor’s collection, and creditor’s payment ratio are used for indicating the financial position of Mulholland Hotel. 

Rate of stock turnover

The rate of stock turnover ratio helps to indicate the demand for the products that the respective company is dealing with. Therefore, the rate of stock inventory ratio is calculated by the cost of goods sold divided by the average inventory.

1. Rate of stock turnover

31st Dec 2020

31st Dec 2021

Formula

Inventory/Cost of sales

Inventory

 £ 3,500.00

 £ 5,500.00

Cost of sales

 £ 70,000.00

 £ 93,000.00

Ratio

18.25

21.58602151

Table 9: Acid Test Ratio of Mulholland Hotel, December 2020 and 2021

 (Source: Created by the learner)

Debtor's collection period

The Debtor’s collection period helps in indicating and saluting the average time period of the service provided by Mulholland Hotel. Therefore, the debtor’s collection period of Mulholland Hotel is

2. Debtors collection period

31st Dec 2020

31st Dec 2021

Formula

Receivable/Sales turnover*365

Receivable

 £ 10,000.00

 £ 12,000.00

Sales turnover

 £ 225,000.00

 £ 2,780,000.00

Ratio

16.22

1.575539568

Table 10: Debtor’s Collection Period of Mulholland Hotel, December 2020 and 2021

 (Source: Created by the learner)

Creditor's payment period

The creditor’s payment period is used for understanding the advantages of trade credit available that are further used for identifying the position of cash flow problems that are faced by Mulholland Hotel.

2. Creditor's Payable period

31st Dec 2020

31st Dec 2021

Formula

Payables/Cost of sales*365

Payable

 £ 10,000.00

 £ 12,000.00

Cost of sales

 £ 70,000.00

 £ 93,000.00

Ratio

52.14

47.09677419

Table 11:Creditor’s Payable Period of Mulholland Hotel, December 2020 and 2021

 (Source: Created by the learner)

Therefore, the calculation of the ratio of turnover helps to understand the position of the company and that also helps in understanding the time period taken from the debtor’s payable and creditor’s payable is decreasing in 2021 financial position.

Critical analysis of the critical path of hotel management of Mulholland Hotel

The critical path of hotels management of Mulholland Hotel is undergoing a positive way that is found with the help of ratio calculation. Along with this, accounting ratios play an important role in communicating and investigating the problems that are faced by the respective company. The profitability ratio structure shows that the gross profit structure is being decreased by 2.45% from the 2020 to 2021 financial year. Whereas, the net profit has been increased by 4% in 2020 respectively. This shows that the hotel requires following the structure by creating early responsibilities among the employees by increasing the salary structure. Therefore, creating the job diversity is required to follow by the Mulholland hotel that would be included in the hotel management procedure.

Recommendations

The recommendations are provided for improving the debtor’s collection period that is done by implementing and improving the new techniques of collecting data. At the same time, improving the gross profit structure is also necessary and that could be done by increasing the average order value, which will help in managing the gross profit margin in an upcoming financial year. Therefore, avoiding the markdown is necessary that will be measured by “improving inventory visibility” of the hotel management structure of Mulholland Hotel respectively.

Conclusion

Hence, from the research on the report it can be concluded that hotel Mulholland is increasing and making progress day by day. This can be concluded by calculating various ratios by analyzing the income statement and position statements of Mulholland Hotel. At the same time, the report also focuses on the critical path of hotel management at Mulholland Hotel by providing a few recommendations for improving the "Gross Profit Ratio" and debtor is collecting ratio respectively.

References

Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review2(2), pp.13-26.

Bao, M.X., Cheng, X. and Smith, D., 2020. A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction. Advances in Accounting48, p.100457.

prospects, (2022), 6 reasons to get into hotel management, Available at: https://www.prospects.ac.uk/jobs-and-work-experience/job-sectors/leisure-sport-and-tourism/6-reasons-to-get-into-hotel-management [Accessed on: 25/04/2022]

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