Accounting for Managers

Managers frequently use CVP Analysis and Budgeting to screen business plans by evaluating a firm’s cost structure and sales volume needed to generate profit. Mountain Views Hotel is planning to open a â€Å"Boutique Hotel† accommodation in the Blue Mountains area that runs a Food and Beverage operation serving breakfast as part of the guest experience. Your team is expected to develop a successful business plan including making recommendations for improvement in future years. The Report will be written as if it were being presented to potential investors in the business. Use the Balanced Score Card approach to present key assumptions and justify them by research and analysis undertaken.  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Discuss critically key results that would impact on your future decision-making including a fully supported explanation of how you could improve this business by making any changes.  Ã‚  Ã‚   Make recommendations to the proposed investors including ideas for the next steps to progress the business concept. Prepare your analysis as an authentic business report.   The Australian tourism and hotel industry have significant contribution on GDP (Gross Domestic Product) of Australian. As per Price Water cooper house Report of 2009 it is estimated there are 6807 hotels employing almost 188000 people in Australia. The market outlook indicates that the hotel industry has matured because the numbers of hotels have declined over the years and also the income growth of the industry has been minimal.   But the situations are seen improving as the 2015 data suggests that both domestic and international visitors have increased. There has been 8.2% growth in international visitors and 7% growth in domestic visitors (Hall, 1991). In this report a business plan is developed for Mountain View Hotel analyzing the business opportunity of Boutique Hotel in Blue Mountains (Hardiman & Burgin, 2011).   For this purpose the hotel industry of Australia, tourism opportunity in Blue Mountains and the projected financial data of the proposed Boutique hotel are analyzed to develop an effective business plan and also to evaluate the investment decision. The objectives of the â€Å"Mount Boutique Hotel† for first few years are: The mission of Mount Boutique Hotel is to become the preferred choice of customers in Blue Mountain area. Mountain View is a well known hotel chain that is currently running a restaurant in Blue Mountain. It is planning to open a boutique hotel in Blue Mountain. The international and domestic visitors are expected to surge giving a positive outlook for the overall hotel industry. As per the economic forecasts data it is expected that international visitors will grow by 5.3% per annum for next three years. This growth in tourism numbers will have a positive impact on the Australian Hotel Industry. The demands for hotels are expected to grow by 3% per annum in next three years. There is an increasing demand supply disparity in hotel industry as a result it is expected that room rate will grow by 2.9% by 2018 (Anderson, 2006). It can be concluded that Hotel Industry of Australia is looking good and it is the opportune moment to make investment in this sector.   The Blue Mountains is just two hours away from Sydney and it is a perfect holiday destination for anyone looking for a break from hectic life style. The blue Mountain offers spectacular scenic beauties like Three Sisters at Echo point, dinning, shopping, spa, bush walking and other natural attraction (Hudson & Lang, 2002).   It is an ever growing tourist destination with tremendous growth potential. From an hotelier point of view the current market scenario offers an excellent investment opportunity in Blue Mountain. There is a growing optimism in hotel industry because of positive macro economic developments. Being in tune with the overall market sentiment Mount View hotel has decided to start a Boutique Hotel in Blue Mountain. Boutique hotels are much smaller in size but they are stylish and unique further it tries to provide separate experience than that of corporate run hotels (Presbury et. al., 2005). The advantages of a boutique hotel are: The above analysis shows that Mount View hotels decision to open a boutique hotel in Mount View is justified. The aim is to become the best in class boutique hotel in Blue Mountains (Bruner, 1998). It is estimated to have total eighty rooms out of which 30 rooms will be high end deluxe rooms and there will be 50 standard rooms.   The deluxe rooms will include king sized bed, a desk, a mirror and a color television. Further the bathroom of the deluxe room will be of four to five meters with a sink, toilet and shower. The total estimated cost for starting the Boutique hotel is $754800.00. The details are given in the table below. To fund the project a mortgage loan of Rs. 500,000.00 is to be obtained at 8% per annum.   The remaining fund of 254,800.00 is to be provided by Mountain Views hotel. The viability of any business plan is determined by analyzing its projected financial performance.   The business plans are often screened for determining their financial viability by using cost volume profit analysis (Scapens, 1985).   The CVP (Cost Volume Profit) analysis helps in determining the effect that costs and volume has on profit. The Cost Volume Profit (CVP) analysis are often performed to determine the future activity and to provide valuable insight on: There are certain assumptions that are made while performing CVP (Cost Volume Profit) analysis (Drury, 1992), they are: The cost function is a process of dividing the total costs into fixed costs and Variable Costs (Binswanger, 1974). The total cost can only be ascertained after the estimated financial statement is prepared. The projected financial statements are prepared on the basis of certain assumptions and they are: The first step of performing the Cost Volume Profit Analysis is to estimate the cost functions. On the basis of the projected financial statement each cost is determined as either fixed or variable costs.   In the projected financial statement of Mount Boutique Hotel the estimated variable costs is $ 2234605.00 which is $96.49 per unit and the estimated fixed cost is $3153904.00.   The estimated fixed costs include Direct Labor costs of $803,040.00; overhead costs of $1696084.00; selling expenses of $259850.00 and administrative expenses of $394950.00. The estimated variable costs include direct material of $88.49 per unit and over head of $8.00 per unit.   The contribution is calculated by deducting Variable costs from sales. So the contribution margin ratio is that part of the sales that exceeds variable costs (Garrison et. al., 2003). It can be used to pay fixed costs. The contribution margin ratio measures operational efficiency, a higher ratio suggests higher efficiency. In the projected financial statement of Boutique hotel estimated sales is $6995325.00 and estimated variable costs is $2234605.00. The contribution margin comes to $4,460,720.00 that is 66.60% which is very high. It suggests that only 33.40% of total sales cover the variable costs and the remaining 66.6% is used to meet the fixed costs and earn profit. It can be reasonably concluded that any sudden increase in cost will not affect the profitability of the hotel because it has high contribution margin ratio which is a very healthy sign for any business.   The break even sale represents that level of sales where the profit is zero. At this level total sales revenue is equals to total variable costs and the contribution margin is equal to fixed costs (Blocher et. al., 2008). The break even sale is an important level because sales below this level will result in losses and sales above this level will lead to profits. In the projected financial statements of Mount Boutique hotel total fixed costs are $3153904.00 and the variable cost per unit is 192.60 so the break even sale comes to $4733857.83. The total estimated sale is $6695325.00 and the 70.70% of it is Break even sales. This means that business needs to achieve at least 70% of the estimated sales to attain no profit no loss situation otherwise it will make losses. This is a very high percentage and implies that there is a very heavy burden of fixed costs on the business.   It is suggested that business should re estimate its fixed costs structure and try to reduce the Break even sales to 50%.   The hotel should cut down fixed costs by $4399091.00 to attain the targeted break even sales.   The margin of safety is that part of the total sales that is above Breakeven Sales. It is calculated by deducting breakeven sales from total sales. The Margin of safety is a valuable indicator of profitability of an organization (Shih, 1979). It also indicates to the management how reduction of revenue will affect the break even of the organization. The higher the Margin of safety the better it is for the business. Because a low Margin of safety suggests increase in fixed costs, extra discounts or increase in prices by suppliers. So it is important to monitor margin of safety ratios. In the projected financial data of Mount Boutique hotel the total expected sales is $6695325.00 and the break even sales is $4733857.38 so the margin of safety is $1961467.62. The margin of safety ratio comes to 29.30% of total sales. It is suggested that Margin of safety ratio should be improved. It can be done by improving sales or reducing breakeven point.  Ã‚   The Operating Leverage is the analysis of relationship between fixed costs and variable costs. It is calculated by dividing contribution margin by income from operations. The operating leverages are high for companies that have large fixed costs in their total operation costs. A higher operating leverage suggests that every increase in sales will multiply profits when the breakeven point is reached (Lev, 1974). But if breakeven sales are not reached then higher operating leverage will intensify losses. So with high operating leverage a high level of risk is involved. In the estimated financial statement of Mount Boutique hotel the contribution margin is $4460720.00 and Income from operations are $1306816.00 so the operating leverage comes to 3.4 times.   This means that Contribution is 3.4 times more than income from operation so it can be derived that fixed costs are 2.4 times of income from operation which is very high. So it is suggested to take necessary measures to reduce fixe d costs.   The overall projected financial statement of Mount Boutique hotel indicates that it is a high return low risk business opportunity for any investor. The high breakeven sales and low Margin of safety is due to higher fixed costs (Alexander, 2001). The burden of higher fixed costs is due to the amortization of start up costs in initial years as it gets completely amortized then fixed costs will certainly come down thus improving the margin of safety and break even sales figure. The market analysis has shown that it is an opportune moment for any investor to enter into tourism sector. The expected growth figures are very attractive and it is also estimated there will be a shortage of supply as the increase in demand is much higher than that of supply (Jennings, 2001). If the overall macroeconomic views are considered then globally major economies are improving so it is expected that international visitors will surge in coming years. The Mount Boutique hotel will be one of its kinds in Blue Mountains. It will offer a unique experience to its visitors because of its prominent location and customized services. Further the staffs and managements are also experienced and every one of them has a valuable insight in the Hotel industry. In the light of the above analysis it can be concluded with certainty that investment in Mount Boutique will be profitable.   Alexander, C. (2001).  Market models: A guide to financial data analysis. John Wiley & Sons. Anderson, B. A. (2006). Crisis management in the Australian tourism industry: Preparedness, personnel and postscript.  Tourism Management,27(6), 1290-1297. Binswanger, H. P. (1974). A cost function approach to the measurement of elasticities of factor demand and elasticities of substitution.  American Journal of Agricultural Economics,  56(2), 377-386. Blocher, E., Chen, K. H., & Lin, T. W. (2008).  Cost management: A strategic emphasis. McGraw-Hill/Irwin. Bruner, R. F., Eades, K. M., Harris, R. S., & Higgins, R. C. (1998). Best practices in estimating the cost of capital: survey and synthesis.  Financial Practice and Education,  8, 13-28. Drury, C. (1992). Cost-volume-profit analysis. In  Management and Cost Accounting  (pp. 205-235). Springer US. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2003).  Managerial accounting. New York: McGraw-Hill/Irwin. Hall, C. M. (1991).  Introduction to tourism in Australia: impacts, planning and development. Longman Cheshire. Hardiman, N., & Burgin, S. (2011). Canyoning adventure recreation in the Blue Mountains World Heritage Area (Australia): The canyoners and canyoning trends over the last decade.  Tourism Management,  32(6), 1324-1331. Hudson, S., & Lang, N. (2002). A destination case study of marketing tourism online: Banff, Canada.  Journal of vacation Marketing,  8(2), 155-165. Jennings, G. (2001).  Tourism research. John Wiley and sons Australia, Ltd. Lev, B. (1974). On the association between operating leverage and risk.Journal of financial and quantitative analysis,  9(04), 627-641. Presbury, R., Fitzgerald, A., & Chapman, R. (2005). Impediments to improvements in service quality in luxury hotels.  Managing Service Quality: An International Journal,  15(4), 357-373. Scapens, R. W. (1985). Cost—Volume—Profit Analysis. In  Management Accounting  (pp. 59-74). Macmillan Education UK. Shih, W. (1979). A general decision model for cost-volume-profit analysis under uncertainty.  Accounting Review, 687-706. Accounting for Managers Gola and Costa set for establishing a business of selling fruit juices. The location of the shop is inside Shopping Arcade and nearby a supermarket. Their plan is to provide fresh juices to their customers, earn a significant amount of profits and sell off the same in the future course of time.   They will follow just in time for inventory management. Gola is under the impression that they will be successful in earning profits by controlling their cost as he believes that for running a successful business, only profitability is the foremost criteria. Posta believes that their business will be successful due to their choice of location and due to the eating habits of the people. Since there has been a significant shift in the eating habits, people have become more conscious for their healthy well-being and this was one of the reasons why both the entrepreneurs had propagated such kind of idea of business. As an Aspiring MBA graduate studying accounting for managers and being there friend, I can make them understand and analyse many other aspects apart from profitability and location of business. Since I am specializing in the field of Management and Finance I can help them in some statistical analysis which they are significantly missing on their part. Before setting of the business, it is very important to discuss the kind of industry in which they are supposed to enter a detailed analysis is required to be done right from the point of financial investment to related cost both fixed and fluctuating , expected return in fair terms. It is also relevant that they search for their competitors and analyse their business as for how they are creating an impact in the business environment. The location of the business, which they have decided is quite favourable. However, to achieve the same, both of them have to make a significant investment in terms of leasing. It refers to borrowing the property against paying for its value for a significant period of time. For this, they have to enter into an agreement with the lessor of Shopping Arcade. It is equally important that they understand the terms and conditions of leasing properly and should have a lease term of 5 years so that they can cover all their cost during this period of time (BusinessDictionary.com, 2016). For the purpose of investment, they need to have availability of funds. It is required that they approach a bank who can arrange for their finance. They need to convince the bank regarding their potential profitability of business. For this, they should have the significant backup plan on paper which is able to prove with reasonable estimates and assumptions that their prospective business is a successful plan for the future. It is also important that they should be aware of the cost of capital which will be required in their leasing terms. After arranging the significant amount of loan and arranging the same for the lease the next part is to analyse various types of cost associated with their business. Cost can be divided into fixed and variable component. For example, fixed cost will be the lease amount which is to be spread for the period of 5 years cost. Blending machines, refrigerators, furniture, benches washing up sinks, falls into fixed cost.   Variable cost will be the cost of raw materials like all those fruits which will be purchased on a daily basis. Fixed costs remain the same irrespective of the level of output while variable cost changes as per the level of output. Variable cost can increase or decrease as per the level of production but fixed cost remains the same throughout the level of production (Boundless, 2016).   After analysing all the significant cost, the next component is the break-even analysis. Break even analysis refers to the function where it is required to determine what is required to sell on a monthly or annual basis in order to cover the cost of doing the business. Like, if fixed cost is $2, 00,000 and expected contribution will be $4, break even will be $50,000. This means they will earn profits after covering $50,000(Cleverism, 2016). Setting up of standards and its importance: It is also required to set a standard for sales. This will act as a benchmark for their business as how much is required to earn in order to cross the level of breakeven point and earn a significant share of profit. By setting up standard it can be later compared with the actual sales figure. Like, for first quarter sales expected is $15,000 but actual sales was $18,000. Thus, it is a favourable condition for them as actual has exceeded its standards. With the actual figure and standards, variances can be computed for the future relevance (AllBusiness.com, 2016). The reason behind the setting up of a standard is equivalent to setting up of short term goal which will be quite helpful in achieving a long-term goal for the business. For cost, monthly expected expenditure is $10,000 but actual came to $12,000. Reason for extra $2,000 will be analysed and corrective action to be adopted for the same. Budgeting helps us to identify unnecessary expenditures and in making us adaptable towards the frequent changing financial position of the business. Budgeting ensures that we will have sufficient amount of money in order to meet the requirement of the business. It will be advisable to Gola and Costa that they should understand the essence of budgeting and implement the same for the success of their business. The concept of budgeting will help Gola and Costa immensely. It is an important tool which will control the flow of money in their business. It will also ensure that their business will turn out to be very effective and efficient in the long run ( Mymoneycoach.ca, 2016). One of the main reasons behind the term of the lease is to cover all kind of fixed cost during that period. Since it is the plan of Gola and Costa to sell off their business in future, it is required that their business should run in scientific and profitable manner. For this, they need to understand the relevance of documentation in terms of recording finance, lease papers terms of bank loans etc. The prospective buyer will analyse the business in his own way. Unless and until he finds it’s economically viable, he will not take over the business. Now, economic viability can be analysed by way of proper maintenance of records, lease papers, bank loan’s terms, and conditions etc. He will analyse that whether the said business was profitable or not. Whether the bank loan taken has been paid off and all other statutory dues or complied with or not. Lease papers will also be verified. This needs to be understood by Gola and Costa since the beginning of their business. It is very important that they should keep in mind since the beginning regarding selling off their business in the future course of time. This will drive them more proactively to achieve their short term plan which is in the form of standards. By achieving the short-term standard, they will be able to achieve their ultimate aim, i.e. profitability. Unless and until the business is not profitable, it won't remain attractive for the prospective buyer to take over the same in future.   It is also important that the business gains popularity amongst the consumers. This will help in creating the brand image for Gola and Costa and will it yield in terms of goodwill while selling off the business. Both the buyer and seller will be in a profitable position if a business has developed a brand image of its own in the market. The whole process is beyond the concept of capital investment decisions. It involves the role of management accounting as in terms of setting targets and achieving the same, producing raw materials i.e. inventory management, handling the customers and creating a favourable image in front of them etc. So, apart from having the knowledge of finance, it is equally important that Gola and Costa should be aware regarding management accounting and other important aspects. With the help of the above-stated concept, it will help Gola and Costa to have the efficient and effective setup of business. To conclude, it is required that Gola and Costa should not only rely on the concept of profitability or location of business. They should be quite aware regarding the concept of break-even analysis, an estimate of sales and setting up of targets, different types of cost involved and their implications, importance of budgeting in their business, arrangement of investment with the help of a loan from bank and requirements for selling off their business in future. By following these above concepts of finance and management accounting, they will surely succeed in their attempt for a successful venture (Debitoor.com, 2016). AllBusiness.com. (2016). Creating a Budget and Sales Forecast | AllBusiness.com. [online] Available at: https://www.allbusiness.com/creating-a-budget-and-sales-forecast-977-1.html [Accessed 11 Dec. 2016]. Boundless. (2016). Types of Costs. [online] Available at: https://www.boundless.com/economics/textbooks/boundless-economics-textbook/production-9/production-cost-64/types-of-costs-240-12338/ [Accessed 11 Dec. 2016]. BusinessDictionary.com. (2016). What is a lease? definition and meaning. [online] Available at: https://www.businessdictionary.com/definition/lease.html [Accessed 11 Dec. 2016]. Cleverism. (2016). Break-Even Analysis: What, Why, and How. [online] Available at: https://www.cleverism.com/break-even-analysis/ [Accessed 11 Dec. 2016]. Debitoor.com. (2016). Management accounting - What is management accounting? | Debitoor. [online] Available at: https://debitoor.com/dictionary/management-accounting [Accessed 11 Dec. 2016]. Mymoneycoach.ca. (2016). What is Budgeting and Why is it Important? | My Money Coach. [online] Available at: https://www.mymoneycoach.ca/budgeting/what-is-a-budget-planning-forecasting [Accessed 11 Dec. 2016]. End your doubt 'should I pay someone to do my dissertation by availing dissertation writing services from